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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 COMMISSION FILE NUMBER: 0-24312 VIRBAC CORPORATION  DELAWARE
    
    43-1648680(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3200 MEACHAM BOULEVARDFORT WORTH, TEXAS
    
    76137(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (817) 831-5030 Securities registered pursuant to Section 12(b) of the Act:
NONE Securities registered pursuant to Section 12(g) of the Act: Title of each Class:
    
    Name of each exchange on which registered:COMMON STOCK, PAR VALUE $0.01 PER SHARE
    
    NONE
   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 x Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES o NO x The aggregate market value of the voting and non-voting common equity of the registrant held
by non-affiliates, computed by reference to the closing sales price of such stock, as of June 30,
2003 was $49,900,000. (For purposes of determination of the aggregate market value, Interlab
S.A.S. and directors and executive officers of Virbac Corporation have been deemed affiliates.) The number of shares outstanding of the registrants common stock, par value $0.01, as of
March 31, 2005, was 22,325,406 shares.




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Virbac Corporation Table of Contents |Item Page ItemPart I
    
    
    Item1.
    
    Business
    
    
    62.
    
    Properties
    
    
    163.
    
    Legal Proceedings
    
    
    174.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Part II5.
    
    Market for Registrant's Common Equity and Related Stockholder Matters.
    
    
    206.
    
    Selected Consolidated Financial Data
    
    
    237.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    267A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    528.
    
    Financial Statements and Supplementary Data
    
    
    539.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    539A.
    
    Controls and Procedures
    
    
    539B.
    
    Other Information
    
    
    57Part III10.
    
    Directors and Executive Officers of the Registrant
    
    
    5811.
    
    Executive Compensation
    
    
    6112.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    6813.
    
    Certain Relationships and Related Transactions
    
    
    6914.
    
    Principal Accountant Fees and Services
    
    
    72Part IV15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    74Signatures
    
    
    811st Amendment to Credit AgreementAgreement for Temporary Management ServicesEmployment Termination, Release and Cooperation Agreement - Joseph RougraffEmployment Termination, Release and Cooperation Agreement - Thomas BellEmployment and Consulting Agreement - David EllerCode of Business Conduct and EthicsSubsidiariesCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906Charter of the Audit Committee of the Board of DirectorsSupplement A to the Charter of the Audit Committee of the Board of DirectorsIndependent Auditor's Report and StatementsUnaudited Pro Forma Condensed Combined Financial Statements




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Part I EXPLANATORY NOTE During the course of its regular review of the operating results for the third quarter of
2003, Virbac Corporations and its wholly owned subsidiaries (the Company or Virbac),
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 United States Securities and Exchange Commission (the SEC or the Commission) 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) and that its previously issued financial statements for these periods should no
longer be relied upon. 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 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 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 1




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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 product 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 manufacturing 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. Accordingly, Virbacs restated financial statements include adjustments for these items. The
effect of the Restatement reduced revenues by $3.5 million, $2.2 million and $2.3 million in 2001,
2002 and for the first six months of 2003, respectively, and reduced gross profit by $1.4 million,
$2.3 million and $1.9 million in 2001, 2002 and for the first six months of 2003, respectively. 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. The effect of this restatement adjustment
reduced gross profit by $1.6 million through 2000, and $0.6 million and $0.1 million for 2002, and
for the first six months of 2003, respectively, and increased gross profit by $0.1 million in 2001. 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. Accordingly, the Restatement includes adjustments to reflect the proper level
of inventory obsolescence 2




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reserves. The effect of the Restatement increased cost of sales by $0.7 million, $0.6 million
and $0.6 million, in 2001, 2002 and in the first six months of 2003, respectively. 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 Group Limited, a Delaware corporation (Agri-Nutrition), a predecessor of Virbac.
See Item 1. Business  Background for further information. The remaining amount was recorded as
income tax expense in 2000. 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. A non-cash charge for $2.3 million was therefore recorded 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 Statement of Financial
Accounting Standards (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 of one of the products. Prior to the adoption of SFAS No. 142,
the Company began to amortize this asset over its estimated 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. The effect of these restatement
adjustments increases research and development expenses by $1.0 million, $1.7 million and $0.4
million, in 1999, 2000 and 2001, respectively. 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 amounts that were
impaired or could not be identified and, therefore, should have been written off. Accordingly, the
restated financial statements include 3




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adjustments to correct these estimates and valuations. The effect these adjustments had on
the Restatement was to reduce net income by $0.5 million, $0.3 million and $0.2 million, in 2001,
2002 and in the first six months of 2003, respectively. 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 due to the Companys violations of various covenants.
Also, certain marketing related sales incentives 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. Therefore, with this Annual Report on Form 10-K, the Company is filing 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.
In addition, this filing also includes restated unaudited financial data for the years 1998 through
2000. The Company has not amended its Annual Reports on Form 10-K or Quarterly Reports on Form
10-Q for the quarterly periods affected by the Restatement. The information that has been
previously filed or otherwise reported for these periods is superseded by the information in this
Annual Report on Form 10-K, and the financial statements and related financial information
contained in such reports should no longer be relied upon. All financial information contained in this filing gives effect to the Restatement. See Item
6. Selected Consolidated Financial Data, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and Note 3. Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial Statements for additional information on the
effect of the Restatement. See Item 9A. Controls and Procedures for discussion related to the
identification of material weaknesses. DEVELOPMENTS RELATED TO THE RESTATEMENT OF FINANCIAL STATEMENTS 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. 4




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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. Putative Securities Class Action Lawsuit and Shareholder Derivative Lawsuit The Company has been named as a defendant in various lawsuits related to the effect the
Companys past accounting practices had on its financial statements. See Item 3. Legal
Proceedings, for further discussion. NASDAQ Delisting As a result of its inability to timely file its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, the Companys Common Stock, $0.01 par value per share (the Common
Stock) was delisted 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, including those
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, with the SEC. Although the Company
currently believes it will satisfy all relevant requirements for listing 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. Management Changes In connection with its internal investigation, Virbac requested and received the resignations
of Thomas L. Bell, formerly the President, Chief Executive Officer and a member of the Board of
Directors, and Joseph A. Rougraff, formerly Vice President, Chief Financial Officer and Secretary
of the Company, both of which were effective as of January 27, 2004. Mr. Bell was initially
replaced by David G. Eller, who served as President and Chief Executive Officer until October 1,
2004, when Dr. Erik R. Martinez was named as President and Chief Executive Officer. Effective June
14, 2004, Jean M. Nelson was named the Companys Executive Vice President and Chief Financial
Officer. 5




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Annual Meeting of Shareholders The Company did not hold its 2004 Annual Meeting of Shareholders due to the delay in the
filing of its 2003 financial statements. Failure to hold the 2004 Annual Meeting of Shareholders,
among other things, contributed to the continuing negative publicity related to the Company, which
may adversely affect its business and the market price of its Common Stock. The Company, however,
expects to hold its 2005 Annual Meeting of Shareholders during the last half of 2005. 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 Annual Report on Form 10-K 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 this Annual Report on Form 10-K. 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. 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. 
 ITEM 1. BUSINESS Background The business now operated by Virbac was initiated in 1993, when 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. On October 16, 1998, Agri-Nutrition entered into an Agreement and Plan of Merger, as amended
(the Merger Agreement) with Virbac S.A., a French corporation engaged in the veterinary
pharmaceutical manufacturing business (VBSA); Virbac, Inc., a Delaware corporation (Virbac
Inc.) 6




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and Interlab S.A.S., a French corporation (Interlab), pursuant to which Virbac Inc. was
merged with and into Agri-Nutrition (the Merger) with Agri-Nutrition being the surviving
corporation. At the effective date of the Merger, March 5, 1999, Virbac Inc. was a wholly-owned
subsidiary of Interlab and Interlab was a wholly-owned subsidiary of VBSA. Also, pursuant to a
contribution agreement between the Company and its wholly-owned Delaware subsidiary, Virbac AH
(Virbac AH), contemporaneous with the Merger, the Company transferred all of the operating assets
of Virbac Inc. to Virbac AH. Upon consummation of the Merger, Agri-Nutrition changed its name to Virbac Corporation.
Pursuant to the Merger, the issued and outstanding shares of Virbac Inc. common stock, then held by
Interlab, automatically converted into the right to receive 12,580,918 shares of Common Stock, or
approximately 58% of the outstanding Common Stock after the effectiveness of the Merger.
Moreover, the Merger Agreement required the Company to complete a tender offer to repurchase up to
1,000,000 shares of the Common Stock at a price of $3.00 per share, within 60 days after the
effective time of the Merger. The Company repurchased all 1,000,000 shares and, as a result, VBSA
indirectly owned approximately 60% of the outstanding Common Stock after the Merger; therefore,
Virbac, Inc. was considered the acquirer of Agri-Nutrition in a purchase business combination for
financial reporting purposes. The Merger Agreement further provides that in order to maintain Interlabs proportionate
ownership interest in the Company 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 options to
purchase Common Stock, 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
Company options and (b) 1.5. Consequently, VBSA, through Interlab, indirectly now owns
approximately 60% of the outstanding Common Stock. Business 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. 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 is operated by PM Resources, Inc., a Missouri corporation (PMR or the Contract
Manufacturing segment), which is a wholly-owned subsidiary of the Company. PMR is based in a
176,000 square-foot facility in Bridgeton, Missouri, which is registered with the U.S. Food and
Drug Administration, (FDA) and the U.S. Environmental Protection Agency (EPA) 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. Detailed operating
results for the Companys segments may be found in Note 17. Segment and Related Information of
the Notes to Consolidated Financial Statements. Virbac has developed its product portfolio through acquisitions, licensing arrangements and
internal development activities. Some of the Companys products are manufactured and distributed
under licenses granted by VBSA. Virbac has the exclusive North American manufacturing and
distribution rights to any new or existing products developed by VBSA that are intended for
companion animals and livestock, for which it pays royalties to VBSA ranging from 2.0% to 6.0% of
its sales of such products. In 2003 the royalties paid totaled $0.1 million. See Item 13.
Certain Relationships and Related Transactions for further information. The Company distributes
and sells its products throughout the United States and Canada, and, through a distribution
agreement with VBSA, in other foreign markets. 7




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Products The Companys products are used to promote the health and hygiene of companion animals -
primarily, dogs, cats, fish and certain livestock. The principal products manufactured by the
Company include:  
    Dermatological products for dogs and cats, including anti-itch, anti-microbial, and
anti-inflammatory lotions and shampoos;
    Oral hygiene products for dogs and cats, including toothpaste and toothbrushes,
sprays, oral rinses, enzymatic rawhide chews and chlorhexidine rawhide chews;
    Flea and tick products, including collars, shampoos and dip concentrates;
    Canine heartworm preventives;
    Ear cleaners;
    Endocrinology treatments, including canine thyroid replacements;
    Humane euthanasia drugs, for veterinary purposes only;
    Aquarium water conditioners, medications and test strips;
    Pest control products, including rodenticides;
    Nutritional supplements to promote healthy coat and skin;
    Anthelmintics, or de-wormers, to treat gastrointestinal worms in livestock;
    Gastrointestinal products for dogs and cats, including hairball remedies; and
    Specialty chemicals. Sales and Marketing Strategy The Companys product marketing strategy varies for each of its three segments. Following is
a discussion of each segment. Veterinary Segment The Company manufactures a significant amount of its pharmaceutical products that are sold to
the veterinary channel and also purchases finished product directly from outside third party
manufacturers. This segments marketing and sales promotions target veterinarians through education
and sampling to encourage veterinarians to prescribe and sell more of the Companys products. The
Companys principal veterinary line labels are ALLERDERM® dermatological products, C.E.T.® dental
products, IVERHART® PLUS canine heartworm preventive, SOLOXINE® endocrinology products and
PREVENTIC® tick collars. This segment generated 45% of the Companys revenue in 2003. See Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations -
Quarterly Effects and Seasonality for further information. Members of a veterinary distributor consortium, named Vedco, represent the Companys largest
group of customers and accounted for approximately 20% of net revenues in 2003. Before formation
of the Vedco consortium, individual members of the Vedco group purchased products directly from
Virbac, rather than through the consortium. In the event the Vedco consortium disbands or
discontinues purchasing Virbac products, there could be a material adverse effect on the operating
results of Virbacs Veterinary segment. However, the Company believes that individual members of
the consortium would have the ability to purchase directly from the Company, which would
substantially mitigate the loss of the purchases by the Vedco consortium. Consumer Brand Segment The Consumer Brand segment sells more than 300 product presentations to pet specialty retail
stores, superstores, mass merchandisers and farm and fleet stores. Under the Companys principal 8




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consumer brand labels of Petrodex®, Mardel®, Petromalt®, Francodexâ, Zema®, Healthy
Companion® and Pet Relief®, the Company sells health care products for dogs, cats, horses, tropical
fish, birds and various other animals. Some of these products are manufactured by Virbac, while
others are contract manufactured by third parties or purchased. The promotion of the Companys
Consumer Brand segment is focused on obtaining shelf space in store 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. As a result, in addition to
each of the over-the-counter products carrying their respective individual brand label, such
products now carry the Virbac label. In 2003, the Consumer Brand segment contracted with an
independent, nationwide team to provide store-detailing support at the retail level and conduct
monthly visits to chain stores. The segment generated 34% of the Companys net revenue in 2003.
See Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Quarterly Effects and Seasonality for further information. The Company also markets and sells its Veterinary and Consumer Brand segment products in
Canada and markets outside the U.S. The Company sells its products directly to its Canadian
customers. Canadian sales are invoiced in U.S. dollars and amounted to $1.1 million in 2003.
Virbacs products are sold in markets outside the U.S. and Canada directly to customers and through
a distribution agreement with VBSA and its affiliates. These export sales are invoiced in U.S.
dollars and amounted to $2.2 million in 2003. Contract Manufacturing Segment The Contract Manufacturing segment products are generally highly regulated pharmaceuticals and
pesticides manufactured for significant animal health and specialty chemical customers. This
segment distributes animal health products to the farm 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 segment 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 generated 21% of the Companys
revenue in 2003. See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Quarterly Effects and Seasonality for further information. Distribution The Company utilizes different distribution channels for its three segments. In the
Veterinary segment, which has its own sales force, the products are generally shipped from the
Company to distributors who sell principally to veterinarians. For the Consumer Brand segment,
which also has its own sales force, the Company sells primarily to large multi-chain retail stores
or large pet-store distributors who then sell to smaller retail pet and pet supply stores. The
Companys Contract Manufacturing segment either ships the product directly to the customer or to a
destination chosen by the customer. On December 3, 1999, the Company entered into an agreement appointing VBSA and its affiliates
as the sole and exclusive distributor of the Companys current and future range of specified pet
health care products for all channels of trade worldwide other than the United States and Canada.
Under the terms of the distribution agreement, the Company can distribute directly to certain
customers at the election of VBSA. Under the terms of the distribution agreement, the Company
agrees to manufacture certain pet healthcare products and VBSA agrees to use its best efforts to
promote, sell and distribute the Companys products internationally. On December 2, 2004, the
distribution agreement automatically renewed for a second 5-year term. Under the renewed terms of
the distribution agreement, the purchase prices of the products were set at 12.6% over the
Companys current cost. During 2003 Virbac recorded 9




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$1.2 million of product sales to VBSA and its affiliates under the terms of the distribution
agreement. See Item 13. Certain Relationships and Related Transactions for further information. Research and Development The Companys research and development strategy is focused on developing highly regulated
proprietary and generic products mainly for the pet and companion animal market. This strategy
also includes developing less regulated cosmetic products, mainly dermatological and oral hygiene
products, where the Company believes it has a market leadership position. The Company maintains a research and development staff for the purpose of developing both
registered and non-registered products. A regulatory department is responsible for filing the
required product dossiers with various regulatory agencies. The Company develops formulas adapted
to the needs of companion animals, either from off-patent compounds or proprietary compounds
licensed from others. Virbac believes it is an international leader in pet dermatology product
development. The Company frequently uses third parties to perform certain research studies and
developmental activities. The Company has collaborated, and continues to collaborate, not only
with a number of companies, but also with veterinary specialists and other practicing veterinarians
to test products in development and to validate the utility of the Companys existing products in
the marketplace. The costs of these services are expensed as incurred and are included as part of
the Companys research and development expense. In developing new or improved products, the Company considers a variety of factors, including
(i) existing or potential marketing opportunities for such products; (ii) the capability of the
Company to manufacture the products; (iii) whether such new or improved products complement its
existing products; and (iv) the possibility of leveraging such products with the development of
additional products. In 2003 the Company spent approximately $4.9 million on research and
development. Virbac also conducts research on VBSA products that have the potential to be
distributed in North America. Virbac also has the exclusive North American manufacturing and distribution rights to any new
or existing products that are developed by VBSA and intended for companion animals and livestock.
VBSA maintains research and development facilities, which are dedicated exclusively to researching
animal health products. These facilities have developed more than 1,000 products for the
prevention and treatment of animal health diseases. In many instances, the Companys manufacturing
and distribution rights to such products have served to reduce the time to market and cost of
regulator approval in North America. See Item 13. Certain Relationships and Related Transactions
for further information. In addition to developing its own products and obtaining North American manufacturing and
distribution rights to products developed by VBSA, the Company obtains North American and worldwide
manufacturing and distribution rights with respect to certain products developed by third parties. Registrations, Trademarks and Patents The Company considers its intellectual property protection to be material to its ability to
successfully commercialize its life-sciences innovations and to protect the capital investments
that the Company makes in those innovations. The Company owns or licenses a number of patents
relating to products, product uses, formulations and manufacturing processes. There is no
assurance that patents previously granted or patents that may be granted will be found valid if
challenged. Moreover, patents relating to particular products, uses, formulations, or processes
may not preclude other manufacturers from employing alternative processes or from marketing
alternative products or formulations that might successfully compete with the Companys patented
products. 10




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The Company holds numerous trademarks relating primarily to its Veterinary and Consumer Brand
products, including PetRelief®, Petrodex®, Petromalt®, Mardel®, Zema®, ALLERDERM®, SOLOXINE®,
Euthasol®, IVERHART® PLUS, and C.E.T.®. Virbac also has permission to use trademarks held by VBSA
including HealthyCompanions®, Francodex® and PREVENTIC®. The Company holds patents for technologies such as pet toothbrushes, pet shampoos and systemic
and topical control of parasites. The Company also has exclusive licenses to use other patents
including enzyme generation formulae for use in animal toothpaste and rawhide chews, insect growth
regulators, VBSAs Spherulite® technology  which provides for the prolonged delivery of active
ingredients contained in various products  and others. Procurement of Raw Materials and Finished Goods The active ingredients in the Companys products are generally purchased from large suppliers.
The Company generally purchases materials on an as-needed basis, as it is usually unnecessary for
the Company to maintain large inventories of such materials. The Company purchases certain raw
materials from multiple suppliers; some materials, however, are proprietary, and may only be
acquired from one source. The Company also purchases certain finished products from outside
manufacturers under supply agreements. The Company considers its relationship with its suppliers
to be good. The Company also purchases certain raw materials, the availability of which are
subject to EPA, FDA, or other regulatory approvals. Some of the Companys contract manufacturing
customers provide the Company with the raw materials used in the production of the customers
products. Competition The Companys competitors generally fall into four categories: (i) manufacturers, formulators
and blenders of animal health products; (ii) animal health product distributors; (iii) pet care
product producers and suppliers; and (iv) specialty chemical and pest control manufacturers. The Company faces intense competition in that many of its competitors are larger and have
significantly more financial resources than the Company. Moreover, regulatory surveillance and
enforcement are accelerating, which is likely to result in only a few competitors that individually
possess significantly greater resources than others in the market. Each of the Companys three segments competes in its respective market based on differing
criteria. Many of the Companys products in the Veterinary segment are highly regulated. While
there are a large group of competitors in the veterinary market, the Company believes its products
are of a high quality and that others are deterred from entering the market due to regulatory
requirements. The Veterinary segment competes based on high quality products with premium value and
pricing. For some product lines, such as dermatology and dentistry, the Company holds a
significant portion of the market share. For other product lines within the veterinary market,
such as heartworm medications and nutraceuticals, the Company holds only a small portion of the
market share. The Consumer Brand segment competes based on the markets expectation of consumer brand
awareness, price and quality. The Company does not hold a significant portion of the market in the
Consumer Brand segment but has strength in its consumer brand offerings. The Consumer Brand
segment has strong relations with stores nationwide. Competitors in this segment range from large
national companies to small regional companies. Competition in the Contract Manufacturing segment is based on price and service. Due to
capital demands and governmental requirements for certain products manufactured by the Company,
there are few significant competitors in this market. Price, along with the ability of the Company
to quickly adapt its facilities in order to provide service is a competitive advantage. The
Companys Bridgeton, Missouri 11




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facility 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. Regulatory and Environmental Matters The Companys operations subject it to federal, state, and local laws and regulations relating
to health and safety and environmental affairs. These laws and regulations are administered by the
EPA, the FDA, the Occupational Safety and Health Administration (OSHA), the Department of
Transportation, and various state and local regulatory agencies. Governmental authorities, and, in
some cases, third parties, have the power to enforce compliance with environmental and health and
safety laws and regulations, and violators may be subject to sanctions, including civil and
criminal action, fines or penalties, orders and injunctions. Although the Company has been
notified by state agencies from time to time of violations of these laws or regulations, the
Company believes it has taken action to respond appropriately in each instance. The Company does
not believe any of these violations has had or will have a material adverse effect on the Company.
While the Company believes that the procedures currently in effect and operations at its facilities
are consistent with industry standards, and that these are in substantial compliance with
applicable environmental and health and safety laws and regulations, failure to comply with such
laws and regulations or significant changes in such laws and regulations could have a material
adverse effect on the Company. Product Regulation The federal government has extensive enforcement powers over the activities of veterinary
pharmaceutical manufacturers, including authority to withdraw product approvals, commence actions
to seize and prohibit the sale of unapproved products or products which are not in compliance and
to halt any manufacturing operations that are not in compliance with applicable laws and
regulations. Any such restrictions or prohibitions on sales, or withdrawal of approval of products
marketed by Virbac, could have a material adverse effect on Virbacs business, financial condition,
and results of operation. While Virbac believes that all of its current pharmaceuticals are in compliance with
applicable FDA regulations and has received required government approvals for manufacture and sale,
approvals are subject to revocation by the applicable government agencies. In addition,
modifications or enhancements of approved products are, in many circumstances, subject to
additional approvals, which may be subject to a lengthy application process. Virbacs
manufacturing facilities are subject to continual inspection by regulatory agencies, and
manufacturing operations could be interrupted or halted in either such facility as a result of such
inspections. If previously received regulatory approvals were subsequently revoked, the revocation
could have a material adverse effect on Virbacs business, financial condition and results of
operation. The product development and approval process, within applicable regulatory frameworks, may
take a number of years to successfully complete and involves the expenditure of substantial
resources. Additional government regulation may be established that could prevent or delay
regulatory approval of any one or more of Virbacs products. Delays or rejections in obtaining
regulatory approvals would adversely affect Virbacs ability to commercialize any product Virbac
develops and would limit Virbacs ability to receive product revenues or royalties. If regulatory
approval of a product is granted, the approval may include limitations on the indicated uses for
which the product may be marketed. The Company has numerous EPA and FDA product registrations. Its EPA product registrations
permit it to sell pesticide and rodenticide products, as well as ectoparasiticide products for the
treatment of fleas and ticks on dogs and cats. While EPA registrations do not expire, registrants
are required periodically to re-register certain products with the EPA. The Companys Bridgeton,
Missouri facility is 12




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qualified as an EPA-registered manufacturing site, which permits the Company to manufacture
products not only under its own EPA product registrations, but also under the registrations of
other companies. The Companys FDA-approved new animal drug applications (NADAs) permit it to sell medicated
treatments, anthelmintics, feed additives, and other animal drug products. NADAs do not expire,
but are subject to modification or withdrawal by the FDA based upon the related drugs performance
in the market. The Company also has FDA manufacturing site approvals enabling the Company to
manufacture animal drugs covered by NADAs held by other companies. Environmental Matters The Companys operations are subject to numerous environmental laws and regulations
administered by the EPA, including the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Federal Water Pollution Control Act,
the Federal Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Toxic
Substances Control Act, as well as various state and municipal environmental laws and regulations. Although the Company believes it is in material compliance with applicable environmental laws,
regulations, and government approvals, and has a policy governing compliance, there can be no
assurance that the Company will not be exposed to significant environmental liability or will not
be required to incur significant costs of compliance. The Company also could be held liable for
property damage or personal injury caused by the release, spill, transport, disposal, or other
discharge of hazardous substances or materials, and could be held responsible for cleanup of any
affected sites. In addition, the Company could be liable for fines, penalties, orders or
injunctions, both civil and criminal. The Company has environmental compliance programs, which address environmental and other
regulatory compliance issues. Future developments, such as changes to environmental laws,
regulations, governmental approval requirements, or enforcement policies, could increase the
Companys environmental compliance costs. While the Company is not aware of any pending
legislation or proposed regulations that, if enacted, would have a material adverse effect on the
Company, there can be no assurance that future legislation or regulation will not have such effect. PMR is the subject of a Consent Order dated November 22, 1999, issued by the Circuit Court of
St. Louis County, Missouri (Consent Order), requiring investigation and remediation of historic
contamination at its Bridgeton, Missouri property. The majority of the costs to comply with the
Consent Order have already been incurred and reimbursed pursuant to third party indemnity
obligations from the previous owner of the facility. The Company has requested and received
reimbursement for costs incurred of $397,000 through 2003. 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 PMR is currently in substantial compliance with all applicable local,
state and federal environmental laws and regulations and resolution of the environmental issues
contained in the Consent Order will have no material effect on the Companys financial position,
cash flows, or income. Employees As of December 31, 2003, the Company had approximately 262 full-time employees, of which,
approximately 143 were engaged in manufacturing activities, 73 in sales and marketing activities,
and 46 employees employed in research and development or administrative functions. Sixty of the
full-time employees located at the Bridgeton, Missouri facility are covered by collective
bargaining agreements with international unions that were renewed in the fourth quarter of 2004
with no material changes. The 13




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Company also employs workers on a temporary basis, the number of which fluctuates during the
year because demand for the Companys products is seasonal. The Company considers its employee and
union relations to be good. Business Combinations and Recent Developments Delmarva Acquisition On August 15, 2003, the Company completed the acquisition of 100% of the outstanding shares of
the common stock of Delmarva Laboratories, Inc. (Delmarva), for a base purchase price of $2.5
million in cash and an additional contingent purchase price of up to $2.5 million, payable, if at
all, upon satisfaction of specified requirements related to the acquired business. These
conditions are described in the stock purchase agreement between the Company and 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 Delmarva acquisition was funded with
cash and with borrowings under its Credit Agreement. 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 and Pancrezyme®, Tumil-K®, Uroeze® and Ammonil® which
are pancreatic and nutritional supplements. The acquisition was funded with borrowings under the
Credit Agreement. Restatement of Financial Statements During the course of its regular review of the Company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. 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. The Audit Committee retained independent counsel to conduct the internal investigation and the
independent counsel retained a forensic accounting firm to assist in this effort. The independent
review included the performance of a number of forensic accounting procedures, a review of internal
documents and communications, as well as interviews with both current and former employees and
consultants. 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 quarterly financial statements for the quarters ended March 31, 2003 and June 30, 2003, and
that its previously issued financial statements for these periods should no longer be relied upon. 14




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The continuation of the internal investigation resulted in various adjustments to the
Companys financial statements for 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; (v) the impairment
of goodwill; (vi) the improper capitalization of research and
development expenses; and (vii) other
miscellaneous accounting corrections. With this Annual Report on Form 10-K, the Company is filing 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. This filing also
includes restated unaudited financial data for 1998 through 2000. The Companys previously
released financial statements for each of these periods should not be relied upon.
Contemporaneously with the filing of this Annual Report on Form 10-K, the Company is also filing
its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. 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. 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. 15




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Putative Securities Class Action Lawsuit and Shareholder Derivative Lawsuit The Company has been named as a defendant in various lawsuits related to the effect the
Companys past accounting practices had on its financial statements. See Item 3. Legal
Proceedings for further discussion. NASDAQ Delisting 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 delisted 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 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. Management Changes In connection with its internal investigation, Virbac requested and received the resignations
of Thomas L. Bell, formerly President, Chief Executive Officer and a member of the Board of
Directors, and Joseph A. Rougraff, formerly Vice President, Chief Financial Officer and Secretary
of the Company, both which were effective January 27, 2004. Mr. Bell was initially replaced by
David G. Eller, who served as President and Chief Executive Officer until October 1, 2004 when Dr.
Erik R. Martinez was named as President and Chief Executive Officer. Effective June 14, 2004, Jean
M. Nelson was named the Companys Executive Vice President and Chief Financial Officer. Available Information Shareholders may obtain, free of charge, copies of the Companys Annual Report on Form 10-K,
its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the Commission by a request in writing to Jean M. Nelson, Executive Vice President and
Chief Financial Officer, Virbac Corporation, 3200 Meacham Boulevard, Fort Worth, TX 76137. Copies
of all of these documents are also made available free of charge on the Companys website located
at www.virbaccorp.com. The documents that Virbac files with or furnishes to the SEC are also
available at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information may be obtained regarding operation of the Public Reference Room by calling
1-800-SEC-0330. The documents that Virbac files with or furnishes to the SEC are also available on
the SECs website at www.sec.gov. The information on the Companys website is not incorporated
into this Annual Report on Form 10-K. 
 ITEM 2. PROPERTIES The Company owns the Fort Worth, Texas and the Bridgeton, Missouri manufacturing facilities
where substantially all of the Companys products are produced. The Fort Worth facility is a
127,000 square foot manufacturing, warehousing, distribution and office facility. Most of the
Companys non-EPA regulated products are manufactured at the Fort Worth facility. The Bridgeton
facility, at which the Contract Manufacturing segments operations are conducted and most EPA and
FDA regulated products are produced, is an EPA and FDA registered facility and consists of a
176,000 square foot manufacturing 16




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and warehousing building located on 37 acres. Both the Fort Worth and Bridgeton facilities,
along with the land on which they are located, have been pledged as collateral under the Credit
Agreement. In the first quarter of 2003, the Company vacated its leased Harbor City, California
manufacturing facility and moved all of the production at that facility to its Fort Worth, Texas
facility. The Harbor City facility primarily manufactured 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. Management believes that the Companys facilities are adequate and suitable for its current
operations. 
 ITEM 3. 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, 17




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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 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. Virbac has until May 2, 2005 to file a responsive pleading. 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. 18




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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. 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. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders in the fourth quarter of 2003. 19




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Part II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock was historically traded on the NASDAQ National Market under the symbol
VBAC. On November 12, 2003, the Company publicly disclosed that it would not be able to timely
file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 on or before the
November 14, 2003 filing deadline. Based on the Companys disclosure, the NASDAQ National Market
halted trading in the Companys securities effective November 13, 2003, due to Virbacs failure to
comply with the filing requirements for continued listing set forth in Marketplace Rule
4310(c)(14). On January 21, 2004, NASDAQ notified the Company that the Common Stock would be
de-listed from the NASDAQ National Market, effective at the opening of business on January 23,
2004. The Common Stock is currently traded on the Pink Sheets under the symbol VBAC on an
unsolicited trading basis. The market for the Common Stock is subject to significant fluctuations
and only a limited and volatile trading market exists. Shareholders seeking to sell shares of the
Common Stock are not likely to find an active market and therefore may not be able to sell a
significant volume of the Common Stock. The following table sets forth the quarterly range of high and low closing sales prices per
share for the Common Stock during the periods indicated. The Common Stock was quoted in the Pink
Sheets after the Common Stock was de-listed from the NASDAQ National Market on January 22, 2004.
As a result, the Common Stock prices for 2004 are Pink Sheet prices. The Pink Sheet prices are bid
and ask prices which represent prices between broker-dealers and do not include retail mark-ups and
mark-downs or any commissions to the broker-dealer, and may not represent actual transactions. 20




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High
    
    
    LowYear ended December 31, 2001 (NASDAQ National Market)First Quarter
    
    
    4.56
    
    
    
    2.93Second Quarter
    
    
    5.24
    
    
    
    3.55Third Quarter
    
    
    5.17
    
    
    
    4.35Fourth Quarter
    
    
    5.04
    
    
    
    4.23Year ended December 31, 2002 (NASDAQ National Market)First Quarter
    
    
    5.65
    
    
    
    4.65Second Quarter
    
    
    6.86
    
    
    
    5.16Third Quarter
    
    
    6.47
    
    
    
    4.66Fourth Quarter
    
    
    6.32
    
    
    
    4.35Year ended December 31, 2003 (NASDAQ National Market)First Quarter
    
    
    5.90
    
    
    
    5.20Second Quarter
    
    
    6.17
    
    
    
    5.01Third Quarter
    
    
    8.22
    
    
    
    5.56Fourth Quarter (1)
    
    
    8.53
    
    
    
    6.50Year ended December 31, 2004 (Pink Sheets)First Quarter
    
    
    6.50
    
    
    
    2.26Second Quarter
    
    
    3.15
    
    
    
    2.50Third Quarter
    
    
    3.14
    
    
    
    2.45Fourth Quarter
    
    
    3.95
    
    
    
    2.70Year ending December 31, 2005 (Pink Sheets)First Quarter
    
    
    3.90
    
    
    
    3.32
 (1) The NASDAQ National Market halted trading in the Companys securities effective November
13, 2003. As of March 31, 2005, the Company had 222 record holders of Common Stock. The Company has never paid any dividends on the Common Stock. It presently intends to retain
its earnings for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. Further, under the terms of the Credit Agreement, the Company is prohibited
from paying dividends without the consent of the Companys lenders. Securities Authorized for Issuance under Equity Compensation Plans The Company has two equity compensation plans, the Virbac Corporation Incentive Stock Plan
(the Virbac Incentive Plan) and the PM Agri-Nutrition Group Limited 1994 Incentive Stock Plan
(the 1994 Plan) (collectively, the Equity Compensation Plans). The 1994 Plan expired prior to
December 31, 2003 and the Virbac Incentive Plan expired in the first quarter of 2005, however,
there are stock options outstanding under each of the Equity Compensation Plans that may still be
exercised. The following table sets forth information concerning stock options outstanding under
the Equity Compensation Plans as of December 31, 2003. The Equity Compensation Plans have been
approved by the Companys shareholders. 21




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Number of Securities
    
    
    Weighted Average
    
    
    Number of Securities Remainingto be Issued Upon
    
    
    Per Share Price of
    
    
    Available for Future IssuanceExercise of
    
    
    Outstanding
    
    
    Under Equity CompensationOutstanding Options,
    
    
    Options, Warrants
    
    
    Plans (Excluding SecuritiesPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    Reflected in the First Column)Equity Compensation Plans
    
    
    936,247
    
    
    $
    3.68
    
    
    
    270,021Approved by Security HoldersEquity Compensation PlansNot Approved by Security Holders
    
    None
    
    None
    
    NoneTotal
    
    
    936,247
    
    
    $
    3.68
    
    
    
    270,021
 Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities The Company did not sell any unregistered securities during 2003, the period covered by this
Annual Report on Form 10-K. 22




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data has been derived from the Companys
consolidated financial statements and related notes thereto that are included elsewhere in this
Annual Report on Form 10-K, except for the summarized unaudited financial information for 1999 and
2000. All financial information set forth below reflects the Restatement for 2001, 2002 and the
first two quarters of 2003 as discussed below in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 3. Restatement of Consolidated Financial
Statements of the Notes to Consolidated Financial Statements. The Restatement also affects
periods prior to 2001 and, accordingly, Virbac revised its selected consolidated financial data for
1999 and 2000. This data should be read in conjunction with the consolidated financial statements
and notes thereto, and Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations. Virbac has not amended its Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for
the quarterly periods affected by the Restatement. The information that has previously been filed
or otherwise reported for these periods is superseded by the information in this Annual Report on
Form 10-K, and the financial statements and related financial information contained in such reports
should no longer be relied upon. A significant portion of the Companys outstanding debt is due in May and October of 2005.
The continuity and viability of the Company is dependent on the extension or renewal of these
credit facilities. A discussion of the risks related to these credit facilities is located in the
general discussion of the factors that may affect the Companys future results in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations. For The Year Ended December 31,(In thousands, except per share data)
    
    2003 (1)
    
    
    2002 (5)
    
    
    2001 (2)
    
    
    2000 (2)(4)
    
    
    1999 (2)(3)(4)(As restated)
    
    
    (As restated)
    
    
    (As restated)
    
    
    (As restated)STATEMENT OF OPERATIONS DATANet revenues
    
    $
    67,077
    
    
    $
    60,923
    
    
    $
    56,944
    
    
    $
    51,486
    
    
    $
    43,341(Loss) income from operations
    
    
    (4,288
    )
    
    
    1,712
    
    
    
    (231
    )
    
    
    (135
    )
    
    
    (1,520
    )Income tax expense
    
    
    (84
    )
    
    
    (361
    )
    
    
    (16
    )
    
    
    
    
    
    
    (Loss) income before cumulative effect of
change in accounting principle
    
    
    (5,004
    )
    
    
    985
    
    
    
    (897
    )
    
    
    (575
    )
    
    
    (2,097
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (2,308
    )
    
    
    
    
    
    
    (469
    )
    
    
    Net loss
    
    
    (5,004
    )
    
    
    (1,323
    )
    
    
    (897
    )
    
    
    (1,044
    )
    
    
    (2,097
    )Basic loss per share
    
    $
    (0.23
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.11
    )Basic weighted average number of shares outstanding
    
    
    22,234
    
    
    
    22,115
    
    
    
    22,038
    
    
    
    21,376
    
    
    
    19,677Diluted loss per share
    
    $
    (0.23
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.11
    )Diluted weighted average number of
shares outstanding
    
    
    22,234
    
    
    
    22,774
    
    
    
    22,038
    
    
    
    21,376
    
    
    
    19,677BALANCE SHEET DATACash
    
    $
    4
    
    
    $
    865
    
    
    $
    477
    
    
    $
    272
    
    
    $
    231Working capital (deficit)
    
    
    (13,851
    )
    
    
    6,195
    
    
    
    6,844
    
    
    
    7,048
    
    
    
    1,895Goodwill, net
    
    
    5,571
    
    
    
    4,826
    
    
    
    7,445
    
    
    
    7,962
    
    
    
    8,239Other intangible assets, net
    
    
    21,089
    
    
    
    2,917
    
    
    
    316
    
    
    
    537
    
    
    
    572Total assets
    
    
    65,145
    
    
    
    45,245
    
    
    
    47,791
    
    
    
    44,983
    
    
    
    42,409Borrowings
under revolving lines of credit and notes payable
    
    
    25,357
    
    
    
    6,854
    
    
    
    10,300
    
    
    
    7,593
    
    
    
    10,912Notes payable, less current maturities
    
    
    7
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity
    
    
    16,145
    
    
    
    21,033
    
    
    
    22,104
    
    
    
    22,909
    
    
    
    23,376
 23




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(1)
    The balance sheet data at December 31, 2003, and statement of
operations data for the year ended December 31, 2003, include the operations of
Virbac plus results of Delmarva for the period from August 15, 2003 to December
31, 2003, and results for the period from September 8, 2003 to December 31,
2003, of the acquisition of assets relating to the animal health products of
King.  (2)
    On December 3, 1999, the SEC issued Staff Accounting Bulletin 101 (SAB
101), which became effective for the Company during the fourth quarter of
2000. This pronouncement required a change in the way in which the Company
records revenue. Prior to the implementation of SAB 101, the Company
recognized revenues when the product was shipped from the Companys
distribution facility, due to the transfer of the risk of loss to common
carriers. The net effect for 2000 of this change was to reduce sales by
$763,000, and diluted earnings per share by $0.02. The Company does not
believe that it is feasible to provide pro forma amounts for 1999 due to, among
other factors, the significant turnover in the Companys finance personnel,
changes in accounting systems, documentation weaknesses, and the passage of
time generally. During 2001, the Company changed its shipping terms with its
customers so that ownership transferred to the customer at the time of
shipment.  (3)
    The results for the year ended December 31, 1999, include the
operations of Virbac, Inc. plus the results of Agri-Nutrition for the period
from March 5, 1999 to December 31, 1999.  (4)
    The selected consolidated financial data for 1999 and 2000 have been
revised to reflect adjustments related to the Restatement described in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Note 3. Restatement of Consolidated Financial Statements of
the Notes to Consolidated Financial Statements. In the accompanying financial
statements for the year ended December 31, 2001, these net income adjustments
are reflected as opening adjustments to the Consolidated Statement of
Shareholders Equity. The table below reflects the amounts as originally
reported for 2000 and 1999, which are not otherwise disclosed in this Annual
Report on Form 10-K. For The Year Ended December 31,(In thousands, except per share data)
    
    2000
    
    
    1999(As reported)
    
    (As reported)STATEMENT OF OPERATIONS DATANet revenues
    
    $
    52,965
    
    
    $
    43,718Income from operations
    
    
    2,831
    
    
    
    33Income tax benefit
    
    
    1,021
    
    
    
    Income (loss) before cumulative effect of
change in accounting principle
    
    
    3,412
    
    
    
    (544
    )Cumulative effect of change in accounting principle
    
    
    (469
    )
    
    
    Net income (loss)
    
    
    2,943
    
    
    
    (544
    )Basic income (loss) per share
    
    $
    0.14
    
    
    $
    (0.03
    )Basic weighted average number of
shares outstanding
    
    
    21,376
    
    
    
    19,677Diluted income (loss) per share
    
    $
    0.13
    
    
    $
    (0.03
    )Diluted weighted average number of shares outstanding
    
    
    22,133
    
    
    
    19,677BALANCE SHEET DATACash
    
    $
    272
    
    
    $
    231Working capital
    
    
    19,622
    
    
    
    12,260Goodwill and other intangibles, net
    
    
    6,929
    
    
    
    9,953Total assets
    
    
    49,388
    
    
    
    43,633Current portion of debt and
notes payable
    
    
    698
    
    
    
    1,564Long-term debt, less current maturities
    
    
    6,895
    
    
    
    9,348Shareholders equity
    
    
    29,162
    
    
    
    25,641
  (5)
    In connection with the Restatement, the Company re-evaluated its
goodwill for impairment and determined that the goodwill allocated to its
Consumer Brand segment was impaired and accordingly, recorded a charge to
income. 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. 24




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25




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References to Notes within this Item 7. refer to the Notes to the Companys Consolidated
Financial Statements in Item 15. 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. 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, and that its
previously issued financial statements for these periods should no longer be relied upon. 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. With this Annual Report on Form 10-K, the Company is filing 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. This filing also
includes restated unaudited financial data for the 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, including those
Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, with the SEC. 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. 26




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##### Table of Contents



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. Detailed operating results for these segments may be found in Note 17.
Segment and Related Information of the Notes to Consolidated Financial Statements. See
introductory language to Item 6. Selected Financial Data for further information. 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. 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. 27




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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 internal Veterinary and Consumer Brand products. Virbac expects this transition to
continue in the future as it expands its product portfolio. 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 2003, 2002 and 2001, 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 28




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sales transactions during 2003, 2002 and 2001 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 certain other intangibles such as trademarks and certain licenses. 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 29




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##### Table of Contents



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, Inc. (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 4. 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 30




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##### Table of Contents



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. For additional information, see Note 13.
Income Taxes of the Notes to Consolidated Financial Statements. 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, Business Combinations (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
requires 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 5. Acquisitions of the Notes to Consolidated Financial
Statements. 31




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##### Table of Contents



Results of Operations The following table sets forth, for the periods presented, the Companys revenue and expenses
as a percentage of net revenue: For the Year Ended December 31,2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold
    
    
    62
    
    
    
    61
    
    
    
    60Gross profit
    
    
    38
    
    
    
    39
    
    
    
    40Operating expenses:Selling, general and administrative
    
    
    34
    
    
    
    27
    
    
    
    30Research and development
    
    
    7
    
    
    
    5
    
    
    
    6Warehouse and distribution
    
    
    3
    
    
    
    4
    
    
    
    4Total operating expenses
    
    
    44
    
    
    
    36
    
    
    
    40(Loss) income from operations
    
    
    (6
    )
    
    
    3
    
    
    
    Interest expense and other income
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )(Loss) income before income tax expense
    
    
    (7
    )
    
    
    2
    
    
    
    (2
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    Loss (income) before cumulative effect of
change in accounting principle
    
    
    (7
    )
    
    
    2
    
    
    
    (2
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (4
    )
    
    
    Net loss
    
    
    (7
    )%
    
    
    (2
    )%
    
    
    (2
    )%
 Comparison of the Years Ended December 31, 2003, 2002 and 2001 Net Revenues Net revenues increased from $56.9 million in 2001 to $60.9 million in 2002, an increase of 7%
from 2001, and increased to $67.1 million in 2003, an increase of 10% from 2002. The specific net
revenues by segment were as follows: For the year ended
    
    
    ChangeDecember 31,
    
    
    2003 vs 2002
    
    
    2002 vs 20012003
    
    
    2002
    
    
    2001
    
    
    Dollars
    
    
    %
    
    
    Dollars
    
    
    %(As restated)
    
    
    (As restated)Veterinary
    
    $
    29,831
    
    
    $
    28,726
    
    
    $
    24,377
    
    
    $
    1,105
    
    
    
    4
    %
    
    $
    4,349
    
    
    
    18
    %Consumer Brand
    
    
    22,850
    
    
    
    22,794
    
    
    
    24,034
    
    
    
    56
    
    
    
    0
    %
    
    
    (1,240
    )
    
    
    (5
    )%Contract Manufacturing
    
    
    14,396
    
    
    
    9,403
    
    
    
    8,533
    
    
    
    4,993
    
    
    
    53
    %
    
    
    870
    
    
    
    10
    %Totals
    
    $
    67,077
    
    
    $
    60,923
    
    
    $
    56,944
    
    
    $
    6,154
    
    
    
    10
    %
    
    $
    3,979
    
    
    
    7
    %
  
    Veterinary net revenues increased in 2002, as compared to 2001, due principally to
increased sales of the Companys heartworm preventative product, IVERHART® PLUS. IVERHART®
PLUS was launched in December 2001. Revenues for this product increased approximately $4.9   32




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##### Table of Contents



million in 2002, as compared to 2001. Other product categories which reported increased
revenues in 2002 over 2001, included dermatology products, which increased $2.1 million;
dental products, which increased $0.8 million; and nutraceuticals, which increased $0.1
million. Revenues in the dermatology category increased due to the introduction of GENESIS®
and ALLERMYL® during 2002. These two products expanded the Companys offerings to treat
chronic pruritus in dogs. Revenues in the nutraceutical product line increased due to the
launch of new products in Canada. The increased veterinary revenues were offset by decreased
revenues in the pesticide product category which includes the Companys tick collar product,
PREVENTIC®. The decrease was due to further competition in this product category. Net
revenues in 2002 were also negatively impacted by an increase in the sales return reserve
due to higher product return reserve requirements for IVERHART® PLUS. Veterinary net revenues increased in 2003, as compared to 2002, principally due to product
revenues related to the King and Delmarva acquisitions in August and September of 2003,
respectively. 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. The Delmarva product portfolio includes Euthasol® and
Pentasol®, both of which are humane euthanasia products and Clintabsä and
Clinsolä. These acquisitions contributed approximately $1.9 million in incremental
revenues in 2003. Existing product categories which reported an increase in revenues in
2003, as compared to 2002, included dental products. These increases were offset by
decreases in 2003 revenues, as compared to 2002 in the Companys pesticide, nutraceuticals,
dermatology and heartworm preventative products.  
    Consumer Brand net revenues decreased in 2002, as compared to 2001, due principally to
lower sales in its dermatology, pesticide, gastro-intestinal, and fish product categories.
Additionally, sales in 2003, as compared to 2002, were negatively affected by an increase
in sales related discounts and return reserve requirements. This segment is experiencing
extreme competitive pressure 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. Manufacturing operation revenues declined in 2002, due to decreased manufacturing for
certain key customers, one customers inability to obtain an approved source for an active
ingredient used in one of its products which is manufactured by the Company and the
discontinuation of another product by another customer, which negatively impacted revenues
by $1.9 million. Manufacturing operation revenues increased in 2003, as compared to the
preceding year due to the addition of two new customers and resolution of the active
ingredient sourcing issue, which affected 2002 revenues. The Companys strategy has been to
eliminate low margin contract manufacturing products and transfer the available production
capacity to internal veterinary products; thus the Company does not expect contract
manufacturing net revenues to continue to increase in the future. As previously mentioned, the Companys livestock de-wormer revenues are recorded at the time
of cash collection. This product was launched in the third quarter of 2001; thus net
revenues were minimal. In 2002, the Company reported $2.7 million in livestock de-wormer
revenues. This amount increased to $4.8 million in 2003. Equine product net revenues increased significantly in 2003 as compared to 2002 once the
Company obtained FDA approval for the second of two products in July 2003. The first
product was launched in the fourth quarter of 2002. Net revenues of this product category
increased from $0.4 million in 2002 to $1.8 million in 2003. The Company expects that 2004 revenues will be higher, principally as a result of increased
net 33




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##### Table of Contents



revenues from the King and Delmarva acquisitions completed by the Company in late 2003. For
additional information, see Note 5. Acquisitions of the Notes to Consolidated Financial
Statements. Gross Profit Gross profit increased by $1.2 million, or 5%, in 2002 compared with 2001 and decreased 1
percentage point of net revenues over the same period. Gross profit increased by $1.8 million, or
8%, in 2003 compared to 2002 and decreased 1 percentage point of net revenues over the same time
period. The specific gross profit by segment was as follows: For the year ended December 31,
    
    

   Change2003 vs. 2002
    
    
    2002 vs. 2001(In thousands)
    
    2003
    
    
    Gross Profit %
    
    2002
    
    
    Gross Profit %
    
    2001
    
    
    Gross Profit %
    
    $
    
    
    %
    
    
    $
    
    
    %(As restated)
    
    
    
    
    
    
    (As restated)Veterinary
    
    $
    16,337
    
    
    
    55
    %
    
    $
    15,318
    
    
    
    53
    %
    
    $
    14,058
    
    
    
    58
    %
    
    $
    1,019
    
    
    
    7
    %
    
    $
    1,260
    
    
    
    9
    %Consumer Brand
    
    
    6,274
    
    
    
    27
    %
    
    
    7,175
    
    
    
    31
    %
    
    
    8,684
    
    
    
    36
    %
    
    
    (901
    )
    
    
    (13
    )%
    
    
    (1,509
    )
    
    
    (17
    )%Contract Manufacturing
    
    
    3,042
    
    
    
    21
    %
    
    
    1,327
    
    
    
    14
    %
    
    
    (112
    )
    
    
    (1
    )%
    
    
    1,715
    
    
    
    129
    %
    
    
    1,439
    
    
    
    1285
    %Totals
    
    $
    25,653
    
    
    
    38
    %
    
    $
    23,820
    
    
    
    39
    %
    
    $
    22,630
    
    
    
    40
    %
    
    $
    1,833
    
    
    
    8
    %
    
    $
    1,190
    
    
    
    5
    %
  
    Veterinary segment gross profit margins decreased in 2002, as compared to 2001,
principally due to increased inventory obsolescence reserves and product replacement
reserves. On increased revenues in 2003, margins were only slightly higher as compared
to 2002, due principally to increased inventory obsolescence reserves and product
replacement reserves.
    Consumer Brand segment gross profit decreased year over year due principally to
lower revenues in 2002, as compared to 2001, and because margins declined in each of
the last three years due principally to increased inventory obsolescence reserves.
    Contract Manufacturing segment gross profit margins increased in 2002, as compared
to 2001, due principally to margins realized on the sale of the Companys livestock
de-wormer product. As previously mentioned, this product was launched in the third
quarter of 2001, however, the Company has recognized the sale and related cost of sale
of this product at the time of cash collection. Contract Manufacturing margins
continued to increase in 2003, as compared to 2002, due to increased net revenues of
the livestock de-wormer product and net revenues related to equine products sold to
Pfizer. The Company expects that gross profit margins will increase slightly in 2004, as a result of a
full year of product revenues from the two acquisitions made by the Company in late 2003. Both of
these product families, which include pharmaceutical products, have higher overall gross profit
margins compared to non pharmaceutical products such as the Companys dermatology and dental
product lines. Operating Expenses Total operating expenses decreased to $22.1 million in 2002 from $22.9 million in 2001. As a
percentage of revenues, operating expenses decreased to 36% in 2002 from 40% in 2001. Selling,
general and administrative expenses, as a percentage of revenues, were down in 2002 as compared to
2001 due to higher revenues and warehouse and distribution expenses remained essentially unchanged
year over year. Research and development expenses in 2002 and 2001 were 5% and 6%, respectively,
of net revenues. Total operating expenses increased to $29.9 million in 2003, from $22.1 million in 2002.
Operating expenses in 2003 include a potential non tax-deductible fine of $0.5 million to be paid
to the SEC in settlement of a civil money penalty claim. See Note 18. Subsequent Events in the
Notes to Consolidated Financial Statements for a further discussion of the SEC settlement fine. 34




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##### Table of Contents



As a percentage of revenues, operating expenses increased to 44% in 2003 as compared to 36% in
2002. Selling, general and administrative costs increased to $22.7 million in 2003, as compared to
$16.7 million in 2002. Principal reasons for the increase in selling, general and administrative
costs were due to legal and outside consulting costs incurred in the fourth quarter of 2003, in
connection with the Audit Committees internal investigation; higher marketing related costs
associated with the Companys two acquisitions in late 2003; and an estimated $0.5 million civil
money penalty with respect to potential violations of the federal securities laws. Research and
development expenses increased to $4.9 million in 2003, or 7% of revenues, as compared to $3.1
million, or 5% of revenues in 2002. The principal reason for the increase in research and
development expenses was 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 remained nearly flat year over year. The Company expects that operating expenses will increase significantly in 2004 due
principally to audit and legal fees incurred in connection with the Restatement. These increased
costs will be offset by slightly lower research and development costs due to lower costs for
clinical studies. Interest Expense and Other Income Interest expense and other income decreased $0.3 million, or 44%, in 2002 compared to 2001,
and remained approximately 1% of revenue over the same time period. Interest expense and other
income increased $0.3 million, or 74%, in 2003 compared to 2002, and remained approximately 1% of
revenue over the same time period. The principal reason for the increase was due to higher
borrowings in the fourth quarter of 2003 as a result of the acquisition of King and Delmarva. The Company expects that interest expense in 2004 will be significantly higher due to
increased borrowings and increased borrowing rates. See Liquidity section below for further
discussion. 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 2001 and 2003
principally represents state income tax expense. 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. See Note 13. Income Taxes of the Notes to
Consolidated Financial Statements for further discussion. 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. 35




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##### Table of Contents



Liquidity and Capital Resources In
2001, operating activities utilized approximately $1.0 million of cash. Cash utilization
was mainly due to increases in accounts receivable and consigned inventories totaling approximately
$4.8 million. These operating uses of cash were offset by inflows of cash from operations of
approximately $2.5 million after adjusting for non-cash charges to operating results, increases in
accounts payable, and inventories. In 2002, operating activities generated $7.8 million in cash. Principal operating sources of
cash flows included cash from operations of $5.1 million after adjusting for non-cash charges to
operations, product license right receipts, a decrease in inventories and accounts receivables and
an increase in accrued expenses. The non-cash charges to operations included a charge of $2.3
million for the write-off of goodwill related to the Consumer Brand segment that was recognized as
of January 1, 2002 as the cumulative effect of a change in
accounting principle. Operating sources
of cash flow were offset by a decrease in accounts payable and an increase in prepaid expenses and
other current assets. In 2003, operating activities utilized approximately $0.7 million in cash. Principal reasons
included an increase in inventories of $4.5 million and an increase in prepaid expenses and other
current assets and a decrease in sales related reserves. 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. The uses of cash were offset by inflows of cash from operations of
approximately $0.2 million after adjusting for non-cash charges, the receipt of $1.7 million for
product license rights under an agreement with Pfizer and a decrease in accounts receivable and an
increase in accrued expenses. Cash used in investing activities in 2001 and 2002, was primarily related to the acquisition
of equipment used in the Companys manufacturing operations and the acquisition of product licenses
and patents. In 2002, the Company made one significant product license acquisition and made lump
sum payments under an existing product license agreement thereby eliminating future royalty
payments. These product license arrangements are more fully discussed in Note 9. Goodwill and
Other Intangible Assets in the Notes to Consolidated Financial Statements. In 2003, cash used in
investing activities included the acquisitions 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 flows from financing activities in all years presented principally reflect the activity
under the Credit Agreement, which is used primarily to fund working capital needs. In 2003 the
Credit Agreement was also used to fund the Delmarva and King acquisitions. The Company had planned
to substitute the additional short-term borrowing 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. The increased availability was
used to fund the acquisition of Delmarva. See Item 1.
Business  Business Combinations and Recent
Developments for further information. 36




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##### Table of Contents



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. See Item 1.
Business  Business Combinations and Recent Developments for further information. 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 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. The standstill period has currently been extended to May 6, 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, in the first half of 2004, executed three secured subordinated
promissory notes with VBSA (the VBSA Notes), its indirect majority stockholder. 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 through the first quarter of 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 before May 6, 2005, once it has met
its reporting requirements with the SEC, however there can be no assurance the Companys lenders
will agree with 37




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##### Table of Contents



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. Contractual Obligations and Commitments The Company has future obligations for debt repayments, minimum rentals under operating leases
and other contractual purchase obligations. A summary of Virbacs contractual obligations and
commitments as of December 31, 2003, are as follows: (In thousands)
    
    
    
    
    
    Payments Due by PeriodTotal
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 YearsCredit Agreement
    
    $
    25,364
    
    
    $
    25,357
    
    
    $
    7
    
    
    $
    
    
    
    $
    Delmarva contingent payments
    
    
    2,500
    
    
    
    
    
    
    
    1,500
    
    
    
    750
    
    
    
    250Operating lease obligations
    
    
    334
    
    
    
    189
    
    
    
    132
    
    
    
    13
    
    
    
    Purchase commitment obligations
    
    
    292
    
    
    
    292
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    28,490
    
    
    $
    25,838
    
    
    $
    1,639
    
    
    $
    763
    
    
    $
    250
 In addition, the Companys borrowings under its Credit Agreement require the payment of
interest at the rate of prime plus 1% or 4.75% at December 31, 2003. On an outstanding balance of
$25.4 million, the interest approximates $1.2 million per year. As discussed in the Liquidity section above, in order to reduce the amount outstanding under
the Credit Agreement, the Company executed the VBSA Notes. The total borrowings under the VBSA
Notes is $9.0 million and each note expires on October 9, 2005. Interest accrues at 5.5%, adjusted
monthly and the VBSA Notes earn interest of approximately $0.5 million per year at the current
rate. 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 Effective July 1, 2001, the Company adopted certain provisions of SFAS No. 141 and effective
January 1, 2002, the Company adopted the full provisions of SFAS No. 141 and SFAS No. 142. SFAS No.
141 requires business combinations initiated after June 30, 2001, to be accounted for using the
purchase method of accounting, and broadens the criteria for recording intangible assets apart from
goodwill. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no
longer be amortized, but instead be tested for impairment at least annually. The Company evaluated
its intangible assets and determined that patents and certain product rights have determinable
lives and trademarks have indefinite lives. SFAS No. 142 requires a transitional goodwill impairment test and an annual goodwill
impairment test. The Company completed the first phase of the transitional goodwill impairment test
during the first quarter of 2002 and at that time found no instances of impairment of its recorded 38




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goodwill; accordingly, the second phase was not necessary. In connection with the Restatement,
the Company reevaluated its goodwill for impairment and determined that the goodwill allocated to
its Consumer Brand segment was impaired and accordingly, recorded a charge to income. 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. See Note 9. Goodwill and Other
Intangible Assets of Notes to Consolidated Financial Statements for further discussion. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived assets that result
from the acquisition, construction, development and/or normal use of the assets. The Company also
records a corresponding asset that is depreciated over the life of the asset. Subsequent to the
initial measurement of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of
SFAS No. 143 did not have a material effect on the Companys consolidated financial statements. In October 2001, the FASB issued SFAS No. 144 SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
by removing goodwill from its scope, by defining a probability-weighted cash flow estimation
approach and establishing a primary-asset approach to determine the cash flow estimation period
for a group of assets. It also replaces the provisions of APB Opinion 30, Reporting the Effects of
Disposal of a Segment of a Business for the disposal of segments of a business. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material
effect on the Companys consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment to FASB Statement No. 13, and Technical Corrections, (SFAS No. 145). SFAS No. 145
amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of such extinguishments have
become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No.
13, Accounting for Leases, (SFAS No. 13) to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions. The provisions of
the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning
after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the
Statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a material effect on the Companys consolidated financial
statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force
Issue (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. The provisions of this Statement require that a liability for costs
associated with an exit or disposal activity be recognized when the liability is incurred rather
than when a company commits to such an activity and also establishes fair value as the objective
for initial measurement of the liability. The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146
did not have a material effect on the Companys consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements 5, 57, and 107 and a rescission of FASB Interpretation No. 34.
The 39




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Interpretation elaborates on the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligation under guarantees issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified after December 31,
2002, and did not have a material effect on the Companys consolidated financial statements. The
disclosure requirements are effective for financial statements of interim and annual periods ending
after December 15, 2002 and did not have an impact on the Companys consolidated financial
statements. In November 2002, the FASB reached a consensus on EITF Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (the Issue). The guidance in the Issue is effective for
revenue arrangements entered into for fiscal periods beginning after June 15, 2003. The Issue
addresses certain aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine
whether an arrangement involving multiple deliverables contains more than one earnings process and,
if it does, how to divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. The Issue also addresses how
arrangement consideration should be measured and allocated to the separate units of accounting in
the arrangement. The adoption of the Issue did not have a material effect on the Companys
consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation 
Transition and Disclosure, an Amendment to FASB Statement No. 123, (SFAS No. 148). This
Statement amends SFAS No. 123, Accounting for Stock-based Compensation, (SFAS No. 123), to
provide alternative methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal years ending after
December 15, 2002, and are included in the notes to the consolidated financial statements. In December 2003, the FASB issued Interpretation No. 46R (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R or the Interpretation), which addresses
how a business enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate the entity. The
Interpretation replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46), which was issued in January 2003. The Interpretation is an effort to expand upon and
strengthen existing accounting guidance as to when a company should consolidate the financial
results of another entity. Interpretation 46R requires variable interest entities as defined to
be consolidated by a company if that company is subject to a majority of expected losses of the
entity or is entitled to receive a majority of expected residual returns of the entity, or both.
The company that is required to consolidate a variable interest entity is referred to as the
entitys primary beneficiary. The Interpretation also requires certain disclosures about variable
interest entities that a company is not required to consolidate, but in which it has a significant
variable interest. The consolidation and disclosure requirements apply immediately to variable
interest entities created after January 31, 2003. For all variable interest entities created prior
to February 1, 2003, FIN 46R is effective for periods ending after March 15, 2004, except for
entities that are considered Special Purpose Entities, to which the provisions apply as of December
31, 2003. The Company is not the primary beneficiary of any variable interest entities created
after February 1, 2003, nor does the Company expect the final adoption of FIN 46R to have a
material impact on its financial position or results of operations. 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 40




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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. Risks Relating to the Restatement of Certain Financial Statements and Related Matters The Restatement and related events have had, and will continue to have, a material adverse
effect on the Company. During the course of its regular review of the Companys 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. 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, and that its
previously issued financial statements for these periods should no longer be relied upon. 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. For more information on the Restatement, see the Explanatory Note under Part I and Item 9A of
this Annual Report on Form 10-K. 41




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As a result of these events, Virbac has become subject to the following key risks, each of
which is described in more detail below. Each of these risks could have a material adverse effect
on Virbacs business, results of operations, financial condition and liquidity.  
    The Company has not completed the implementation of its plan to improve internal
controls and remediate the material weaknesses as described in Item 9A of this
Annual Report on Form 10-K. If these material weaknesses are not remediated or
otherwise mitigated they could result in material misstatement of Virbacs
financial statements in the future, which would result in additional
restatements or impact the Companys ability to timely file financial statements
in the future.
    Virbac is subject to an ongoing SEC investigation in the U.S., which could
require it to pay substantial fines or other penalties.
    Virbac is subject to significant pending civil litigation, which if decided
against the Company, could require it to pay substantial judgments, settlements
or other penalties.
    Material adverse legal judgments, fines, penalties or settlements could have a
material adverse effect on Virbacs business, results of operations, financial
condition and liquidity, which could be very significant.
    Virbac and its registered public accounting firm have identified a number of
material weaknesses related to its internal control over financial reporting,
which unless corrected, could continue to impact its ability to report its
results of operations and financial condition accurately and in a timely manner.
    The delay in filing certain of Virbacs reports under the federal securities
laws caused the NASDAQ National Market to suspend and delist the Common Stock.
    Virbac may not be able to attract or retain the personnel necessary to achieve
its business objectives.
    The ongoing SEC review may require Virbac to amend its public disclosure further. Virbac is subject to an ongoing SEC investigation, which could require it to pay substantial
fines or other penalties. 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. 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.   42




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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. Virbacs senior management and Board of Directors have been required to devote significant
time to these investigations and related matters. The Company cannot predict when these
investigations will be completed, nor can it predict what the results of these investigations may
be. Expenses incurred in connection with these investigations (which include substantial fees of
lawyers, accountants, and other professional advisors and potential obligations to indemnify
officers and directors who may be parties to such actions) could adversely affect the Companys
cash position. The Company may be required to pay material fines, consent to injunctions on future
conduct or suffer other penalties, each of which could have a material adverse effect on its
business, results of operations, financial condition and liquidity. The investigations may
adversely affect Virbacs ability to obtain, and/or increase the cost of obtaining, directors and
officers liability insurance and/or other types of insurance, which could have a material adverse
effect on its business, results of operations and financial condition. In addition, the findings
and outcomes of the SEC investigation may affect the course of the civil litigation pending against
Virbac, which is more fully described below. The effects and results of the SEC investigation may have a material adverse effect on
Virbacs business, results of operations, financial condition and liquidity. Virbac is subject to significant pending civil litigation, which if decided against Virbac,
could require it to pay substantial judgments, settlements or other penalties. In addition to being subject to litigation in the ordinary course of business, Virbac
currently, and may in the future be, subject to class actions, other securities litigation and
other actions arising in relation to past accounting practices that resulted in the Restatement. 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 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) 43




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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 the
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. 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. 44




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Virbac has until May 2, 2005 to file a responsive pleading. 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 expects that these lawsuits will be time consuming, expensive, and distracting from the
conduct of its daily business. The adverse resolution of any specific lawsuit could have a
material adverse effect on Virbacs ability to resolve favorably other lawsuits and on its
financial condition and liquidity. Virbac is unable at this time to estimate what its ultimate
liability in these lawsuits may be, and it is possible that the Company will be required to pay
substantial judgments, settlements, or other penalties and incur expenses that could have a
material adverse effect on Virbacs business, results of operations, financial condition and
liquidity; such effects could be very significant. Expenses incurred in connection with these
lawsuits (which include substantial fees of lawyers and other professional advisors, plus potential
obligations to indemnify officers and directors who may be parties to such actions) could adversely
affect Virbacs cash position. Material adverse legal judgments, fines, penalties or settlements could have a material
adverse effect on Virbacs financial condition and liquidity. Even though its cash flow from operations has been sufficient to fund its normal cash
requirements, Virbac is subject to numerous uncertainties, including its ability to make future
payments in connection with its borrowings, pending civil litigation or investigations related to
the Restatement. Any material adverse legal judgments, fines, penalties or settlements arising from
the pending civil litigation and investigations could require additional funding which may not be
available on commercially reasonable terms, or at all. This could have a material adverse effect on
Virbacs business, results of operations, financial condition and liquidity, by:  
    requiring Virbac to dedicate a substantial portion of its cash and/or cash flow from
operations to payments of such judgments, fines, penalties or settlements, thereby
reducing the availability of its cash and/or cash flow to fund working capital,
capital expenditures, R&D efforts and other general corporate purposes, including
debt reduction;
    making it more difficult for Virbac to satisfy its payment obligations with respect
to its outstanding indebtedness;
    increasing the difficulty and/or cost to Virbac of refinancing its indebtedness,
including the Credit Agreement and VBSA Notes;
    increasing Virbacs vulnerability to general adverse economic and industry conditions;
    limiting Virbacs flexibility in planning for, or reacting to, changes in its
businesses and the industries in which it operates;
    making it more difficult for Virbac to make acquisitions and investments;
    limiting Virbacs ability to obtain, and/or increase the cost of obtaining,
directors and officers liability insurance and/or other types of insurance; and
    restricting Virbacs ability to introduce new technologies and products and/or
exploit business opportunities. Virbac and its independent registered public accounting firm have identified a number of
material weaknesses related to its internal control over financial reporting, which could continue
to impact the Companys ability to report its results of operations and financial condition
accurately and in a timely manner. Virbac currently expects to conclude that certain of the material weaknesses identified its
independent registered public accounting firm and management in their respective assessments of
Virbacs disclosure controls and procedures for the three years ended December 31, 2003, continued
to exist as of December 31, 2004. Management continues to identify, develop and implement remedial
measures 45




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to address these weaknesses. These material weaknesses, if not fully addressed, could
result in accounting errors such as those underlying the Restatement more fully discussed elsewhere
in this Annual Report on Form 10-K. Either the Board of Directors or the Audit Committee has
approved the adoption of all of the recommendations for remedial
measures described in Item 9A.
Controls and Procedures. Management also has adopted a number of measures to strengthen the
Companys internal control over financial reporting and address the material weaknesses that have
been identified. However, Virbac may be unable to address such material weaknesses in a timely
manner, which could adversely impact the accuracy and timeliness of future reports and filings it
makes with the SEC. The Common Stock has been delisted from the NASDAQ National Market, which could have a
material adverse impact on its stock price. The Common Stock was delisted from the NASDAQ National Market as of the opening of business on
January 23, 2004, because the Company was not able to file its periodic reports with the SEC in a
timely manner. The Common Stock has continued to be quoted on the Pink Sheets on an unsolicited
trading basis. As a result, there is currently no regular public trading market for the Common
Stock. Virbac is making every effort to complete its financial statements and make its required SEC
filings as soon as possible, but Virbac has not yet filed its Quarterly Reports on Form 10-Q for
the periods ended March 31, 2004, June 30, 2004 and September 30, 2004, nor has it filed its Annual
Report on Form 10-K for the year ended December 31, 2004. Virbac
expects that it will file its September 30, 2003 Quarterly
Report on Form 10-Q contemporaneously with this filing. Once Virbac has become current in its SEC
filings, it will explore the listing alternatives available to it. However, Virbac cannot assure
that an active trading market will exist for the Common Stock. Virbacs failure to relist the Common Stock on the NASDAQ National Market or an alternate
stock exchange could have an ongoing material adverse effect on the liquidity of the Common Stock
and result in a corresponding material reduction in the price of the Common Stock. Virbac has a limited trading market, which could affect investors ability to sell shares of
Common Stock and the price investors may receive for Common Stock. The Common Stock is currently quoted on the Pink Sheets on an unsolicited trading basis. As a
result, there is only limited trading activity in the Common Stock. Virbac does not know if a
market for the Common Stock will be re-established or that, if re-established, a market will be
sustained. Therefore, investors should realize that they may be unable to sell the Common Stock if
they purchase it. Accordingly, investors must be able to bear the financial risk of losing their
entire investment in the Common Stock. Even if the Common Stock were relisted on the NASDAQ National Market System or on a stock
exchange, Virbac would have a relatively small public float. Accordingly, Virbac cannot predict the
extent to which investors interest in the Common Stock will provide an active and liquid trading
market. Due to Virbacs limited public float, Virbac may be vulnerable to investors taking a short
position in the Common Stock, which would likely have a depressing effect on the price of the
Common Stock and add increased volatility to the Companys trading market. Furthermore, Virbac has
been, and in the future
may be subject to, class action lawsuits which further increase market volatility. The
volatility of the market for the Common Stock could have a materially adverse effect on its
business, results of operations and financial condition. Risks Related to Virbacs Business The future operating results of the Company may vary substantially from period to period due
to a number of factors, many of which are beyond the Companys control. The following discussion
highlights these factors and the possible impact of these factors on future results of operations.
If any of 46




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the following factors actually occur, the business, financial condition or results of
operations of the Company could be harmed. In that case, the price of the Common Stock could
decline and investors could experience losses in their investment. Virbac is in breach of the terms of its major credit facility and it may not be able to secure
an extension on such facility or under its debt to VBSA. Under the Companys Credit Agreement, it is required to comply with various financial and
non-financial covenants in order to borrow under that agreement to fund its operations. Among the
financial covenants are requirements that the Company maintain a minimum net worth and maintain
minimum operating cash flow to debt service cost ratios. Non-financial covenants include the
timely filing of all required reports with the SEC. The Company is presently in breach of its
Credit Agreement covenants because it did not meet its September 30, 2003 10-Q reporting period
covenant. In addition, the Company breached the Credit Agreement by failing to provide financial
statements prepared in accordance with generally accepted accounting principles. As a result of the Companys default on the Credit Agreement, the Company has entered into a
Forbearance Agreement with the lenders, in which the lenders have agreed not to; (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 under the terms of the Credit Agreement
by reason of any event of default. However, the standstill period under the Forbearance Agreement
will terminate if the Company breaches any provision of the Forbearance Agreement or any provision
of the Credit Agreement, which was not acknowledged in the Forbearance Agreement. Additionally,
the Forbearance Agreement also contains financial and non-financial covenants including a covenant
that the Company must deliver to the lenders by April 1, 2005, the audited December 31, 2003,
consolidated financial statements and disclosures, which are to include the restated financial
statements for the years ending December 31, 2002 and December 31, 2001, accompanied by an audit
opinion by its independent registered public accounting firm. The Forbearance Agreement has
recently been amended to extend the date for this covenant to April 18, 2005 and further amended to
extend the date for this covenant to May 2, 2005. There is no guarantee that a similar Forbearance
Agreement, if needed, would be available in the future. Failure to comply with covenants,
representations or warranties could result in the Companys default under the Credit Agreement and
Forbearance Agreement and could cause all outstanding amounts to become immediately due and payable
or impact the Companys ability to borrow under the Credit Agreement. Furthermore, pursuant to the
Forbearance Agreement, all amounts due under the Credit Agreement, equal to $13.0 million as of
December 31, 2004, mature on May 6, 2005. The Company also maintains the VBSA Notes totaling $9.0 million which mature on October 9,
2005. Moreover, all amounts owed under the VBSA Notes may immediately become due and payable upon
the occurrence or continuance of an event of default under the Credit Agreement. The Company
intends to rely on available borrowings under the Credit Agreement and the VBSA Notes to fund its
operations in 2005. If the Company is unable to borrow funds under the Credit Agreement, it will
need to raise additional capital from other sources to fund its cash needs and continue its
operations, and such
capital may not be available on acceptable terms, or at all. See Item 7.Management Discussion and
Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources. Virbac has a significant amount of debt that matures in 2005. On May 6, 2005, the Companys Credit Agreement matures and all borrowings under the agreement
become payable, and on October 9, 2005, the VBSA Notes mature and become payable. The Company does
not currently, nor does it expect to have sufficient cash or cash equivalents to pay these debts as
they mature. The Company currently expects that the Credit Agreement and the VBSA Notes 47




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will be
extended by the lenders, but there is a risk that the debts will not be extended and payment will
be required. In the event payment on the debt is required, the Company will seek additional
financing from other sources. There can be no assurance that the additional financing will be
available on terms favorable to Virbac, if at all. Factors beyond the Companys control may cause its revenue to fluctuate, and since many of
Virbacs expenses are fixed, this fluctuation could cause greater than expected losses, cash flow
and liquidity shortfalls and the Companys stock price to decline. Management believes that the Companys future operating results could fluctuate on a quarterly
basis due to a variety of factors which are generally beyond Virbacs control, including:  supply of products from third party suppliers or termination of such relationships;  the introduction of new products by the Companys competitors or by the Company;  competition and pricing pressures from competitive products;  Virbacs distribution strategy and its ability to maintain relationships with distributors;  large customers failing to purchase at historical levels;  fundamental shifts in market demand;  economic uncertainties;  significant increases in interest rates;  manufacturing delays;  shipment problems;  regulatory and other delays in product development;  product recalls;  changes in Virbacs reputation and/or market acceptance of its current or new products;  changes in the mix of products sold;  the results of certain strategic initiatives, including acquisitions,
divestitures, and restructurings; and  significant costs related to the compliance with newly issued SEC rules and
corporate governance initiatives. Virbac has high operating expenses for personnel, new product development and marketing. Many
of these expenses are fixed in the short term. If any of the factors listed above cause the
Companys revenues to decline, its operating results could be substantially harmed. The Company relies substantially on third-party suppliers. The loss of products or delays in
product availability from one or more third-party suppliers could substantially harm the Companys
business. To be successful, Virbac must contract for the supply of, or manufacture itself, current and
future products of appropriate quantity, quality and cost. Such products must be available on a
timely basis and be in compliance with any regulatory requirements. Failure to do so could
substantially harm Virbacs business. The Company currently relies on third party suppliers to manufacture those products that
Virbac does not manufacture itself. The Company often purchases products from its suppliers under
agreements that are of limited duration or can be terminated on an annual basis. Management
believes that the Company has agreements in place to ensure supply of its major product offerings
through at least the end of 2005 and believes that the Company is in full compliance with such
agreements. There can be no assurance, however, that Virbacs suppliers will be able to meet their
obligations under these agreements or that Virbac will be able to compel them to do so. 48




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Virbac receives significant support from its indirect majority stockholder, VBSA. The Company receives significant support from its indirect majority stockholder, VBSA,
including product development, research expenditures that benefit the Company, short-term
borrowings, and worldwide distribution of the Companys products. If VBSA were to reduce the
amount of support that it provides to the Company, the Companys results of operations could
potentially be adversely affected. Future results of operations could be negatively affected if
VBSA reduced the level of research and product development assistance it provides the Company. A
reduction in research and product development assistance provided by VBSA could decrease the number
of future products the Company expects to introduce and increase the time it takes to introduce
certain products into the market, thus decreasing the Companys expected future revenue. Finally,
if VBSA discontinues its short-term lending to the Company, the Company would be forced to find
alternative financing that may not be available on favorable terms, if at all. The Companys future revenues depend on the research, development, commercialization and
market acceptance of new products, any of which can be slower than expected. The future success of Virbacs business depends on its ability to develop a broad range of new
products addressing companion animal healthcare. The acceptance of Virbacs products by
veterinarians is critical to its success. The Company believes that its revenue growth and
profitability will substantially depend upon its ability to;   improve market acceptance of current products;   complete development of new and innovative products; and   successfully introduce and commercialize such products. The research, development and regulatory approval process for many of Virbacs products is
extensive and may take substantially longer than anticipated. New products the Company is
developing for the veterinary marketplace may not perform up to expectations. Because Virbac has
limited resources to devote to product development and commercialization, any delay in the research
or development of one product or reallocation of resources to product development efforts that
prove unsuccessful may delay or jeopardize the development of the Companys other product
candidates. If Virbac fails to successfully develop new products and bring them to market in a
timely manner, its ability to generate additional revenue will decrease. Virbac operates in a highly competitive industry, which could render its products obsolete or
substantially limit the volume of products that it sells. This could limit Virbacs ability to
compete and achieve profitability. The Company competes with independent animal health companies and major pharmaceutical
companies that have animal health divisions. Virbac also competes with independent, third party
distributors, including distributors who sell products under their own private labels. Virbacs
competitors may have substantially greater financial, technical, research and other resources and
larger, better-established marketing, sales, distribution and service organizations than it does.
Virbacs competitors may offer broader product lines and have greater name recognition than the
Company. The Companys competitors may develop or market technologies or products that are more
effective or commercially attractive than its current or future products or that would render its
technologies and products obsolete. Further, additional competition could come from new entrants to
the animal healthcare market. Moreover, Virbac may not have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete successfully. 49




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Virbac may face costly intellectual property disputes or, its technology or that of its
collaborators may become the subject of legal action. The Companys ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology and either to operate without infringing the
proprietary rights of others or to obtain rights to technology owned by third parties. Virbac has
United States and foreign-issued patents. Patents that Virbac has received may be challenged,
invalidated or circumvented in the future or the rights created by those patents may not provide a
competitive advantage. Virbac also relies on trade secrets, technical know-how and continuing
invention to develop and maintain its competitive position. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise gain access to the
Companys trade secrets. Virbac may become subject to patent infringement claims and litigation in the United States or
other countries or interference proceedings conducted in the United States Patent and Trademark
Office (the USPTO), to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings, and related legal and administrative
proceedings are costly, time-consuming and distracting. The Company may also need to pursue
litigation to enforce any patents issued to it or its collaborative partners, to protect trade
secrets or know-how owned by it or its collaborative partners, or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or interference proceeding
will result in substantial expense to the Company and significant diversion of the efforts of its
technical and management personnel. Any adverse determination in litigation or interference
proceedings could subject the Company to significant liabilities to third parties. Further, as a
result of litigation or other proceedings, Virbac may be required to seek licenses from third
parties that may not be available on commercially reasonable terms, if at all. Virbac must obtain and maintain costly regulatory approvals in order to market its products. Many of the products Virbac develops and markets are subject to extensive regulation by the
FDA, the EPA and foreign regulatory authorities. These regulations govern, among other things, the
development, testing, manufacturing, labelling, storage, pre-market approval, advertising,
promotion, sale, transport, disposal and distribution of the Companys products. Satisfaction of
these requirements can take several years and the time needed to satisfy them may vary
substantially, based on the type, complexity and novelty of the product. The effect of government regulation may be to delay or to prevent marketing of the Companys
products for a considerable period of time and to impose costly procedures upon its activities.
Regulatory approval of the Companys products may also impose limitations on the indicated or
intended uses for which its products may be marketed. Among the conditions for certain regulatory approvals is the requirement that the Companys
facilities and/or the facilities of its third party manufacturers conform to current good
manufacturing practices. The Companys manufacturing facilities and those of its third party
manufacturers must also conform to certain other manufacturing regulations, which include
requirements relating to quality control and quality assurance as well as maintenance of records
and documentation. If any regulatory authority determines that Virbacs manufacturing facilities or
those of its third party manufacturers do not conform to appropriate manufacturing requirements,
the Company or the manufacturers of its products may be subject to sanctions, including
manufacturing suspensions, product recalls or seizures, withdrawals of previously approved
marketing applications, civil fines and criminal prosecutions. 50




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Virbacs Bridgeton, Missouri facility is one of the only manufacturing facilities that produces
both FDA and EPA registered products. Virbac manufactures both FDA and EPA registered products in its Bridgeton, Missouri facility.
The Bridgeton facility has been developed over a number of years to comply with guidelines and
procedures set out by both the FDA and the EPA. In the past, the facility has not encountered any
regulatory issues resulting from manufacturing both types of products simultaneously. However, the
industry standard is to produce FDA and EPA registered products in separate facilities. In the
future, either the FDA or the EPA could decide that it will no longer allow products under its
supervision to be produced in a plant that also produces products registered with another agency.
If this were to occur, the Company would have to separate its facility or find another facility so
that the FDA or EPA registered products could be produced separately. There can be no assurance
that the Company could find an alternative facility or that it would have the funds needed in order
to make such facility compliant with either EPA or FDA requirements. Virbac may face product returns and product liability litigation and the extent of its
insurance coverage is limited. If Virbac becomes subject to product liability claims resulting from
defects in its products, Virbac may fail to achieve market acceptance of its products and its sales
could decline. The testing, manufacturing and marketing of the Companys current products as well as those
currently under development entail an inherent risk of product liability claims and associated
adverse publicity. Following the introduction of a product, adverse side effects may be discovered.
Adverse publicity regarding such effects could affect sales of the Companys other products for an
indeterminate time period. To date, the Company has not experienced any material product liability
claims, but any claim arising in the future could substantially harm its business. Potential
product liability claims may exceed the amount of the Companys insurance coverage or may be
excluded from coverage under the terms of the policy. Virbac may be held liable for the release of hazardous materials, which could result in
extensive clean up costs or otherwise harm its business. The Companys products and development programs involve the controlled use, management,
manufacture, storage, transport and disposal of hazardous and biohazardous materials, including
chemicals. Although Virbac believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by applicable local, state and federal regulations,
the Company cannot eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, Virbac could be held liable for any fines, penalties, remediation
costs or other damages that result, including damages for personal injury or property damage. The
Companys liability for the release of hazardous materials could exceed its resources, which could
lead to a shutdown of its operations. In addition, Virbac may incur substantial costs to comply
with environmental regulations if it chooses to expand its manufacturing capacity or if regulations
were to require significant operational changes. Changes in veterinary medical practices could negatively affect operating results. The market for the Companys veterinary products could be negatively impacted by the
introduction or broad market acceptance of newly developed or alternative preventatives or other
products for the diseases and conditions for which the Company sells products. Such a decline in
the market could have a material adverse effect on the results of operations. 51




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Virbac may be adversely affected by an economic downturn or economic uncertainty. The pet and companion animal product industry is sensitive to national and regional economic
conditions, particularly those that influence consumer confidence, spending and buying habits.
Economic downturns or uncertainty may not only adversely affect overall demand and intensify price
competition, but also cause consumers to trade down by purchasing lower priced, and often lower
margin, items. These consumer responses, coupled with the impact of general economic factors such
as prevailing interest rates, price inflation or deflation, employment trends in Virbacs markets,
and labor and energy costs, can also have a significant impact on the Companys operating results.
Increasing volatility in financial markets may cause these factors to change with a greater degree
of frequency and magnitude. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any derivative instruments that materially increase its exposure to
market risks for interest rates, foreign currency rates, commodity prices or other market price
risks. In addition, the Company does not use derivatives for speculative purposes. At December 31, 2003, the Companys exposure to market risks resulted from changes in interest
rates related to the Credit Agreement, which has a floating interest rate based on London Interbank
Offered Rate (LIBOR). At December 31, 2003 and 2002, the Company had $25.4 million and $6.9
million, respectively, of floating rate debt under the Credit Agreement. The weighted average
interest rate on the Credit Agreement was 4.16% and 5.01% in 2003 and 2002, respectively, which
resulted in interest expense on the Credit Agreement of $637,000 and $366,000 in 2003 and 2002,
respectively. The maturity date of the Credit Agreement is May 6, 2005, under the terms of the
Forbearance Agreement entered into by the Company and its lenders. The interest rate on the Credit
Agreement as of December 31, 2004 was 6.25%. 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 December 31, 2003 or December 31, 2002, the Company
would have experienced additional interest expense of $254,000 and $69,000, respectively, for these
twelve-month periods. This assumes no change in the principal or a reduction of such indebtedness
at December 31, 2003 or December 31, 2002. Moreover, under the Credit Agreement, for each 1%
incremental increase in the prime rate, the Companys annualized interest expense would increase by
approximately $254,000. Consequently, an increase in the prime rate of 5% would result in an
estimated annualized increase in interest expense for the Company of approximately $1.3 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. 52




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements prepared in accordance with Regulation S-X are included in a separate
section of this Annual Report on Form 10-K. See the index to Financial Statements at Item 15.
Exhibits, Financial Statements Schedules and Reports on form 8-K, for further information. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes in or disagreements with accountants during 2003. 
 ITEM 9A. 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 our 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 Annual
Report on Form 10-K, 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 3. Restatement of
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 December 31, 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 December 31, 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 53




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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 in 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 December 31, 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;   54




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
    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.   55




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
    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.
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
Annual Report on Form 10-K.
    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.   56




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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 December 31, 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. 
 ITEM 9B. OTHER
INFORMATION Not applicable. 57




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Part III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Officers and Directors The following table shows information as of March 31, 2005 with respect to each person who is
an executive officer or director of Virbac. Name
    
    Age
    
    PositionPascal Boissy (1)
    
    
    61
    
    
    Chairman of the Board of DirectorsErik R. Martinez, D.V.M.
    
    
    48
    
    
    President and Chief Executive OfficerJean M. Nelson
    
    
    45
    
    
    Executive Vice President and Chief
Financial OfficerEric Marée
    
    
    52
    
    
    DirectorPierre A. Pagès, D.V.M. (2)
    
    
    54
    
    
    DirectorRichard W. Pickert (1)
    
    
    63
    
    
    DirectorAlec L. Poitevint, II (1) (2)
    
    
    57
    
    
    DirectorJean N. Willk (1)
    
    
    47
    
    
    Director
 (1) Member of the Audit Committee
(2) Member of the Compensation Committee Pascal Boissyhas served as the Companys Chairman of the Board of Directors since March 1999.
Mr. Boissy served as President and Chairman of VBSA from 1992 until he retired at the end of 1999.
He was responsible for the Companys merger with Agri-Nutrition Group in March 1999. From 1973 to
April 1992, Mr. Boissy served VBSA in numerous management positions. VBSA is a French veterinary
pharmaceutical manufacturer that indirectly owns approximately 60% of the Companys outstanding
Common Stock. Mr. Boissy served on VBSAs Board of Directors from 1989 through 1999, and served as
President and Chairman of the Board of Directors of various subsidiaries of VBSA.Mr. Boissy
serves as a Rotarian and as an honorary member of the Advisory Board of the Banque de France in
Nice. Mr. Boissy also serves as a member of the Board of Directors of Panpharma Panmedica and
Group Balitrand. Erik R. Martinez, D.V.M., was appointed as the Companys President and Chief Executive Officer
on October 1, 2004. From 2003 until 2004, Dr. Martinez served as Area Director for VBSAs Pacific
Region and Managing Director of Virbac Pty. in Australia, where he was responsible for all aspects
of the Pacific Regions business. Dr. Martinez joined VBSA in 1994 as General Manager of the
Mexican division, and was promoted to Regional Director for Latin America in 1997. Dr. Martinez
served as the Regional Director for Latin America until 2003. Prior to joining VBSA, Dr. Martinez
served in various positions with Boehringer Ingelheim Vetmedica and Elanco. Jean M. Nelsonwas appointed as the Companys Executive Vice President and Chief Financial
Officer on June 14, 2004. Previously, she was Vice President and Chief Financial Officer of AMX
Corporation from 2001 until 2003. Prior to joining AMX, she served as Vice President and
Controller of Brinks Home Security from 2000 to 2001. Ms. Nelson served as Vice President and
Treasurer at Sensormatic Electronics Corporation from 1996 to 1999. Prior to 1996, Ms. Nelson
served in various senior level finance positions with W. R. Grace & Co. Ms. Nelson is a Certified
Public Accountant and began her career on the audit staff of Arthur Andersen & Co. 58




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Eric
Maréehas served as a Director since January 2000. Mr. Marée joined VBSA in October 1999
and was appointed its Chairman of the Board of Management, effective December 15, 1999. Previously,
he was Chairman and Chief Executive Officer of Laboratories Roche Nicholas and Vice President of
Roche Consumer Health, two subsidiaries of Hoffman La Roche, from 1994 through 1999. Mr. Marée is a
member of the Board of the International Federation for Animal Health. Pierre Pagès, D.V.M., has been a Director since March 1999. Dr. Pagès has served as the Chief
Operating Officer of VBSA since 1995. From 1992 to 1995, Dr. Pagès was Vice President of
International Operations. Prior to becoming Vice President, Dr. Pagès served as the Manager for
VBSAs French operations from 1984 through 1990 and the Marketing Manager for VBSAs French
operations from 1980 through 1984. Since December 1992, Dr. Pagès has been a member of the Board of
Management of Virbac S.A. Richard W. Pickertwas appointed to the Companys Board of Directors and as Audit Committee
Chair on January 19, 2005. Over the course of his career, Mr. Pickert has held numerous senior
level finance positions with several New York Stock Exchange (NYSE) companies and brings over 35
years of diversified financial management experience to the Board. Most recently, after serving in
several roles from 1986 until 1998, Mr. Pickert retired as Senior Vice President and Chief
Financial Officer of American Media Corporation, a NYSE listed company engaged in magazine
publication and distribution. In this capacity, he was responsible for the entire corporate
financial function, including treasury, financial planning and reporting, and investor relations.
Mr. Pickert was employed by American Media Corporation from 1986 until 1998. From 1985 until 1986,
Mr. Pickert served as Vice President of Finance and Chief Financial Officer of Union Corporation, a
NYSE company engaged in financial services and the manufacture of electronic components. Prior to
holding these positions, Mr. Pickert served as Vice President and Controller for Pechiney
Corporation, a $1.2 billion U.S. subsidiary of Pechiney Ugine Kuhlman of France, where he was
employed from 1972 until 1984. Earlier in his career, he held audit and financial positions with
General Foods Corporation and General Motors. Mr. Pickert received his certificate of public
accountancy from the State of New York. Alec L. Poitevint, IIhas been a Director since January 1996. Mr. Poitevint previously served
as the Companys Chairman from 1997 until 1999 and Chairman of the Audit Committee from 1999 until
2005. Mr. Poitevint is Chairman and President of Southeastern Minerals, Inc. and its affiliated
companies and has served in this capacity since 1970. Since May 1991, he has served as a director
of the American Feed Industry Insurance Company, Des Moines, Iowa, and he has served as Chairman
since December 2002. From May 1994 to April 1995, he served as Chairman of the American Feed
Industry Association. He is currently a director of the Georgia Agribusiness Council and a life
member of the Poultry Leader Round Table of the Georgia Poultry Federation. He also has served in
various capacities relating to Eastern European agricultural trade and market development,
including Director of the International Republican Institute since March 1992. In addition, Mr.
Poitevint currently serves as Republican National Committeeman for Georgia and served as
Co-chairman and Treasurer of the 2000 Republican National Convention and served as Treasurer of the
Republican National Committee from January 1997 to January 2001. Jean N. Willkhas served as a Director since April 26, 2001. Mr. Willk is a graduate of Hautes
Etude Comerciales and has a degree in International Law from the University of Paris-Assas. He is
currently Division Director for Dasault Falcon Jet Corporation. Mr. Willk was the President and
Chief Executive Officer of De Dietrich USA from 1994 to 2001 and Chairman of the Board of
Rosenmund, Inc. from 1999 to 2001. Virbacs Certificate of Incorporation and Bylaws provide that the number of Directors of the
Company shall be not less than five or more than thirteen. In addition, the Companys Certificate
of Incorporation and Bylaws provide for the division of the Board into three classes, designated
Class 1, Class 2 and Class 3, serving staggered three-year terms. Mr. Poitevint and Mr. Willk are
each serving a 59




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##### Table of Contents



three-year term expiring at the 2005 annual meeting. Mr. Pagès and Mr. Pickert are serving a
three-year term expiring at the 2006 annual meeting. The three year terms of Mr. Boissy and Mr.
Marée would have expired at the annual meeting in 2004, which was not held. In accordance with the
Certificate of Incorporation and Bylaws, Mr. Boissy and Mr. Marée continue to serve until their
successors are duly elected and qualified. The executive officers named herein have terms expiring
when their successors are duly appointed. Audit Committee The Board of Directors has established an Audit Committee in accordance with Section 3(a)(58)
of the Exchange Act. The Board of Directors has also adopted a charter for the Audit Committee,
which may be found on the Companys website at
www.virbaccorp.com. The Audit Committee is
primarily responsible for overseeing the services performed by the Companys independent auditors,
evaluating the Companys accounting policies and system, and reviewing significant financial
transactions. Members of the Audit Committee are Messrs. Pickert (Chairman), Boissy, Poitevint and
Willk. The Board of Directors has determined that all of the members of the Audit Committee are
independent (as that term is defined in Rule 4200 of the NASDAQ Marketplace Rules and the
Sarbanes-Oxley Act of 2002). The Board has also determined that Richard W. Pickert is independent
and an audit committee financial expert (as that term is defined under Item 401(h) of Regulation
S-K). The Board made the above determinations based on information that the Company requested from
Mr. Pickert regarding his experience with financial and accounting matters. The Audit Committee
held 11 meetings in 2003. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Companys directors, executive
officers and holders of more than 10% of the Common Stock to file with the SEC reports regarding
their ownership and changes in ownership of the Companys equity securities. Virbac believes
during 2003, that its directors, executive officers and 10% shareholders complied with all Section
16(a) filing requirements, with the following exceptions: (i) two late reports, disclosing three
transactions, filed by Pascal Boissy, the first of which is a report on Form 5 regarding his
acquisition of Common Stock on February 21, 2000, and his acquisition of Common Stock on December
31, 2000, and the second is a report on Form 4 regarding his acquisition of Common Stock on January
2, 2002; (ii) two late reports, disclosing one transaction, filed by Eric Marée, the first of which
is a Form 3 upon being appointed as a Director in January 2000, and the second is a Form 4
regarding his acquisition of a non-qualified option to purchase shares of Common Stock on April 24,
2003; (iii) two late reports, disclosing four transactions, filed by Pierre Pagès, the first of
which is a report on Form 5 regarding his acquisition of Common Stock on February 21, 2000, his
acquisition of a non-qualified option to purchase Common Stock on June 28, 2000, and his
acquisition of Common Stock on December 31, 2000, and the second is a report on Form 4 regarding
his acquisition of a non-qualified option to purchase Common Stock on April 24, 2003; (iv) five
late reports, disclosing ten transactions, filed by Alec Poitevint, the first of which is a report
on Form 3 upon his appointment as a Director in January 1996, the second is a report on Form 4
regarding his acquisition of Common Stock and a non-qualified option to purchase Common Stock on
March 7, 1996, the third is a report on Form 5 regarding his acquisition of Common Stock on March
29, 1999, his acquisition of an option to purchase Common Stock on April 16, 1999, and the sales of
Common Stock, indirectly beneficially owned by Mr. Poitevint, by Marshall Minerals, Inc. and
Mineral Associates, Inc. on April 18, 1999, the fourth is a report on Form 5 regarding his
acquisition of Common Stock on February 21, 2000, his acquisition of a non-qualified option to
purchase Common Stock on June 8, 2000, and his acquisition of Common Stock on December 31, 2000,
the fifth is a report on Form 4 regarding his acquisition of a non-qualified option to purchase
Common Stock on April 24, 2003; (v) two late reports, disclosing one transaction, filed by Jean
Willk, the first of which is a Form 3 upon being appointed as a Director in April 2001, and the
second is a Form 4 regarding his acquisition of a non-qualified option to purchase shares of Common
Stock on April 24, 2003; and (vi) two late reports, disclosing one transaction, filed by Interlab
SAS, the first of which is a Form 3 upon becoming a 10% stockholder on March 5, 1999, 60




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and the second is a Form 4 regarding its acquisition of Common Stock on September 28, 2000.
In making this statement, Virbac has relied upon examination of the copies of Forms 3, 4 and 5
provided to the Company and the written representations of its directors, officers and 10%
shareholders. Code of Ethics As of September 29, 2004, Virbac adopted the Code of Ethics which is applicable to all of
Virbacs directors, officers and employees, including the Companys Chief Executive Officer, Chief
Financial Officer, Principal Accounting Officer and other senior financial officers performing
similar functions. The Code of Ethics satisfies all of the requirements of the Sarbanes-Oxley Act
of 2002 and the rules and regulations promulgated by the SEC pursuant to the Sarbanes-Oxley Act.
The Code of Ethics also satisfies the listing standards established by the NASDAQ National Market,
the exchange on which the Companys stock was formerly listed. The Company has posted the Code of
Ethics on its web site at http://www.virbaccorp.com. The Company will furnish a copy of its Code
of Ethics to any person, without charge, upon written request directed to the Assistant Secretary
of the Company at the Companys principal executive offices at 3200 Meacham Boulevard, Fort Worth,
Texas, 76137. The Code of Ethics is attached hereto as Exhibit 14.1. Virbac intends to satisfy its obligation to disclose any amendment to or waiver of a provision
of its Code of Ethics that applies to the Companys Chief Executive Officer, Chief Financial
Officer, Principal Accounting Officer and other senior financial officers performing similar
functions by: (a) disclosing such information on Form 8-K filed with the SEC within five (5) days
of the date of such amendment or waiver; and (b) posting such information on its website at
http://www.virbaccorp.com. 
 ITEM 11. EXECUTIVE COMPENSATION. The following tables show (a) the compensation paid or accrued by Virbac to the Chief
Executive Officer, and each of the executive officers of Virbac, other than the CEO, serving on
December 31, 2003, whose individual remuneration exceeds $100,000 on an annual basis (the named
executive officers) for services rendered to Virbac in all capacities during 2001, 2002 and 2003,
(b) information relating to option grants made to the named executive officers in 2003 and (c)
certain information relating to options held by the named executive officers. Virbac made no
grants of freestanding stock appreciation rights (SARs) in 2003, 2002, or 2001, nor did Virbac
make any awards in 2003, 2002, or 2001 under any long-term incentive plan. Thomas Bell and Joseph Rougraff were the only named executive officers of the Company during
2003 with salaries exceeding $100,000. David Eller was appointed as the Companys CEO in December
2003 under an agreement with Executive Interim Management, an executive search firm. For a
description of the arrangement pursuant to which Executive Interim Management hired David Eller,
please see the Temporary Management Services Contract and Employment and Consulting Agreement
under this Item 11. 61




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SUMMARY COMPENSATION TABLE Annual Compensation
    
    
    Long Term CompensationAwards
    
    
    PayoutsSecuritiesRestricted
    
    
    Underlying
    
    
    
    
    
    
    All OtherSalary
    
    
    Bonus
    
    
    Other Annual
    
    
    Stock
    
    
    Options/
    
    
    LTIP
    
    
    CompensationName and Principal Position
    
    Year
    
    
    $
    
    
    $
    
    
    Compensation
    
    
    Awards
    
    
    SARS(1)
    
    
    Payouts
    
    
    $ (4)Thomas L. Bell (2)(5)
    
    
    2003
    
    
    $
    240,000
    
    
    None
    
    None
    
    None
    
    
    36,000
    
    
    None
    
    $
    12,535President and Chief
    
    
    2002
    
    
    $
    218,000
    
    
    $
    70,850
    
    
    None
    
    None
    
    
    18,000
    
    
    None
    
    $
    12,000Executive Officer
    
    
    2001
    
    
    $
    195,000
    
    
    $
    19,500
    
    
    None
    
    None
    
    
    18,000
    
    
    None
    
    $
    12,000Joseph A. Rougraff (3)(5)
    
    
    2003
    
    
    $
    143,340
    
    
    None
    
    None
    
    None
    
    
    8,000
    
    
    None
    
    $
    486Vice President,
    
    
    2002
    
    
    $
    139,165
    
    
    $
    34,791
    
    
    None
    
    None
    
    
    4,200
    
    
    None
    
    NoneChief Financial Officer
    
    
    2001
    
    
    $
    129,780
    
    
    $
    9,734
    
    
    None
    
    None
    
    
    4,000
    
    
    None
    
    Noneand Secretary
  (1)
    Amounts reflected in this column are for grants of stock options for the Common Stock
of Virbac. Virbac has issued no SARs.(2)
    Thomas L. Bell took a leave of absence from the Company beginning on December 18, 2003
and resigned his positions of President, Chief Executive Officer and Director of the
Company on January 27, 2004.(3)
    Joseph A. Rougraff resigned his positions of Vice President, Chief Financial Officer
and Secretary on January 27, 2004.(4)
    Includes a $12,000 per year car allowance for Mr. Bell for 2003, 2002, and 2001 and $535
and $486 toward long-term disability plans for Mr. Bell and Mr. Rougraff, respectively, for
2003.(5)
    All stock options granted to Mr. Bell and Mr. Rougraff automatically expired upon their
resignations that were effective January 27, 2004. The following table shows the number of options to purchase Common Stock granted to each of
the named executive officers (or persons acting in such capacity) during 2003. 2003 OPTION/STOCK APPRECIATION RIGHTS GRANTS (1) Potential RealizableValue at Assumed AnnualRates of Stock PricePercent of Total
    
    
    
    
    
    
    
    
    
    
    Appreciation for OptionOptions/SARS
    
    
    
    
    
    
    
    
    
    
    (Term 2)Number of Securities
    
    
    Granted to
    
    
    Exercise orUnderlying Options/SARS
    
    
    Employees in
    
    
    Base Price
    
    
    ExpirationName
    
    Granted
    
    
    2003
    
    
    ($/Sh)
    
    
    Date
    
    
    5% ($)
    
    
    10% ($)Thomas L. Bell
    
    
    3,531
    
    
    (Non-Qualified)
    
    
    1.2
    
    
    $
    5.85
    
    
    
    4/24/2013
    
    
    $
    33,647
    
    
    $
    53,57732,469
    
    
    (Incentive)
    
    
    10.7
    
    
    $
    5.85
    
    
    
    4/24/2013
    
    
    $
    309,398
    
    
    $
    492,665Joseph A. Rougraff
    
    
    8,000
    
    
    (Non-Qualified)
    
    
    2.6
    
    
    $
    5.85
    
    
    
    4/24/2013
    
    
    $
    76,232
    
    
    $
    121,387
  (1)
    The grant of a non-qualified option to purchase 3,531 shares of Common Stock to
Thomas Bell that expired on April 24, 2013, was granted on April 24, 2003, and had a two-year
vesting schedule, with 3,496 options vesting on April 24, 2004, and 35 options vesting on April
24, 2005. The grant of an incentive option to purchase 32,469 shares of Common Stock to Thomas
Bell that expired on April 24, 2013, was granted on April 24, 2003, and had a three-year vesting
schedule with 8,504 options 62




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vesting on April 24, 2004, 11,965 options vesting on April 24, 2005, and 12,000 options vesting on
April 24, 2006. The grant of a non-qualified option to purchase 8,000 shares of Common Stock
to Joseph Rougraff that expired on April 24, 2013, was granted on April 24, 2003, and had a
three-year vesting schedule, with 1/3 of the options vesting on the first three anniversaries
of the grant. All options granted to Mr. Bell and Mr. Rougraff expired upon their
resignation.(2)
    In satisfaction of applicable SEC regulations, the table shows the potential realizable
values of these options, upon their latest possible expiration date, at arbitrarily assumed
annualized rates of stock price appreciation of 5% and 10% over the term of the options. The
potential realizable value columns of the table illustrate values that might be realized upon
exercise of the options at the end of the ten-year period starting with their vesting
commencement dates, based on the assumptions shown above. Because actual gains will depend
upon the actual dates of exercise of the options and the future performance of the Common
Stock in the market, the amounts shown in this table may not reflect the values actually
realized. No gain to the named executive officers is possible without an increase in stock
price, which will benefit all shareholders proportionately. Actual gains, if any, on option
exercises and Common Stock holdings are dependent on the future performance of the Common
Stock and general stock market conditions. There can be no assurance that the potential
realizable values shown in this table will be achieved, or that the stock price will not be
lower or higher than projected at 5% and 10% assumed annualized rates of appreciation. AGGREGATED OPTION/STOCK APPRECIATION RIGHT EXERCISES IN 2003 AND
YEAR-END OPTION/STOCK APPRECIATION RIGHT VALUES Value of UnexercisedNumber of Unexercised
    
    
    In-the-Money Options/SARSOptions/SARS at Year-End(1)
    
    
    at Year-End (1) (2)Shares Acquired
    
    
    ValueName
    
    on Exercise
    
    
    Realized ($)
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableThomas L. Bell
    
    
    0
    
    
    
    0
    
    
    
    93,000
    
    
    
    54,000
    
    
    $
    78,750
    
    
    $
    0Joseph A. Rougraff
    
    
    0
    
    
    
    0
    
    
    
    12,067
    
    
    
    12,133
    
    
    $
    1,920
    
    
    $
    0
  (1)
    All information provided is with respect to stock options. Virbac has issued no stock
appreciation rights.  (2)
    These amounts have been determined by multiplying the aggregate number of options by the
difference between $2.80, the closing price on the Pink Sheets on January 26, 2004, and the
exercise price for that option. The trading of the Common Stock on NASDAQ was halted
beginning November 14, 2003. The $2.80 price per share represents the closing price of the
Common Stock on the Pink Sheets on January 26, 2004, which was the first day of trading after
the NASDAQ National Market suspended trading of the Common Stock on November 13, 2003. Compensation of Directors Directors of the Company are reimbursed for out-of-pocket expenses in connection with attendance at
meetings. During 2003, the Companys Chairman, Mr. Boissy, received $75,000 per year, $50,000 of
which was paid in cash and $25,000 of which was paid in Common Stock. During 2003, Messrs. Marée,
Pagès, Poitevint and Willk received an annual retainer of $14,000, $7,000 of which was paid in
Common Stock (the Director Stock Compensation) and $7,000 of which was paid in cash, plus $1,000
for each Board Meeting attended during the year. During 2003, Messrs. Marée, Pagès, Poitevint and
Willk each attended all four meetings of the Board of Directors. In addition, pursuant to the
Virbac Corporation Incentive Stock Plan, non-employee Directors are awarded options to purchase
5,000 shares of Common Stock upon election to the Board and options to purchase 1,000 shares of
Common Stock 63




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annually thereafter (the Director Stock Option Compensation). Each such option has an
exercise price of the market value of the Common Stock on the date of grant, and becomes
exercisable in three equal annual installments beginning on the first anniversary of the date of
grant. In addition to the compensation described above, Audit Committee members receive $1,000 for
each Audit Committee meeting attended, whether in person or via telephone. In his capacity as a member of the Companys Audit Committee, the Company paid Mr. Willk
$18,000 during 2003 for his attendance at meetings related to the internal investigation initiated
by the Audit Committee. Employment Agreements During 2003, there were not any employment agreements in place between the Company and any of
its executive officers. Temporary Management Services Contract and Employment and Consulting Agreement The Company entered into an agreement with Executive Interim Management (EIM), effective
from December 18, 2003 to June 18, 2004, whereby EIM agreed to provide Virbac with a temporary
manager to perform services in the capacity of Chief Executive Officer during the term of the
agreement. Under the terms of the EIM agreement, Virbac agreed to pay EIM at the rate of $2,000
for each working day for the first three month period (December 18, 2003 through March 18, 2004)
and $2,500 per working day for the second three month period (March 19, 2004 through June 18, 2004)
in which services were provided to the Company under the EIM agreement. The Company paid $64,000
and $306,000 to EIM in 2003 and 2004, respectively for services and expenses. EIM and David Eller
entered into a separate agreement pursuant to which EIM paid Mr. Eller for the services he provided
to the Company. Mr. Eller and the Company entered into an Employment and Consulting Agreement (the
Eller Agreement) dated as of June 18, 2004. Under the terms of the agreement, Mr. Eller held the
position of President and Chief Executive Officer. The employment period, as defined under the
agreement, was through December 31, 2004. Following the employment period, or sooner, at the
election of the Company, Mr. Eller agrees to make himself available as a consultant through
December 31, 2005 at a rate of $2,500 per day. Pursuant to the Eller Agreement, Virbac paid Mr.
Eller remuneration in the amount of $50,000 per month plus expenses through the employment period.
Virbac paid $403,000 to Mr. Eller in 2004 for services and expenses. In addition, Mr. Eller may
receive bonus payments of $300,000 in January 2005 and $300,000 in July 2005 if certain performance
objectives are met. As of March 31, 2005, these amounts had not been paid. Compensation Committee Interlocks and Insider Participation Messrs. Alec Poitevint and Pierre Pagès were members of the Companys Board of Directors and
members of the Compensation Committee during 2003. Mr. Pagès currently serves as the Chief
Operating Officer of VBSA and has served in that capacity since 1999. He has held various positions
within VBSA since 1980. Mr. Poitevint has never been an officer or employee of the Company or any
of its affiliates. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive officers serving
as a member of the Companys Board of Directors or Compensation Committee. Report of the Virbac Compensation Committee To: The Board of Directors and Shareholders of Virbac Corporation: The Compensation Committee is responsible for supervising the Companys executive compensation
policies, administering the employee incentive plans, reviewing officers salaries, 64




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approving significant changes in executive employee benefits, and recommending to the Board
such other forms of remuneration as it deems appropriate. Messrs. Poitevint and Pagès currently
serve on the Compensation Committee. The NASDAQ Marketplace Rules require listed companies to have
a compensation committee composed entirely of independent directors. However, the Marketplace Rules
provide that a Controlled Company is exempt from the requirement of having a compensation
committee composed entirely of independent directors. The Company is a Controlled Company as
defined in the Marketplace Rules because VBSA (through its affiliate Interlab S.A.S.), has the
power to vote more than a majority of the outstanding Common Stock. As a result, the Company would
be able to avail itself of the Controlled Company exemption and would therefore not be required to,
nor does it have a compensation committee composed entirely of independent directors. Compensation Philosophy The Companys compensation program is designed to attract, retain, and motivate a highly
qualified and experienced senior management team. The Compensation Committee believes that these
objectives can best be achieved by directly tying executive compensation to meeting annual and
long-term financial performance goals and appreciation in the Companys stock price. In accordance
with these objectives, the total compensation program for the executive officers of the Company and
its subsidiaries consists of three components:  
    Base salary;
    Annual incentive compensation consisting of bonuses based upon achievement of
financial performance objectives; and
    Long-term equity incentives composed of stock options, which may be conditioned
upon future events such as continued employment and/or the attainment of
performance objectives. Performance objectives may be measured by reference to the
earnings of the Company (or a subsidiary or division of the Company), return on
shareholders equity or to the market value of the Common Stock, among other
things. Base Salary The Compensation Committee determines the base salaries of the Companys executive officers by
evaluating the responsibilities of the positions, experience and performance. To assist in
establishing salary levels for 2003, the Compensation Committee performed an informal survey of
salary levels of executives at other companies in the animal health and agriculture industries.
The Compensation Committee utilizes the salary component of the executive compensation program
primarily to attract and retain qualified and experienced senior managers. Salary determinations
are made by analysis of comparable companies in the industry and achievement of internal company
goals. Long-term Incentives The Compensation Committee believes that it is important to provide executive officers
incentive compensation based upon the Companys stock price performance, thus aligning the
interests of its executive officers with those of its shareholders and encouraging them to
contribute to the Companys long-term success. Such incentive compensation also encourages
employees to remain in the service of the Company. During the year ended December 31, 2003, the Companys former Chief Executive Officer and former
Chief Financial Officer were granted options to purchase 36,000 and 8,000 shares, respectively, of
the Common Stock, which subsequently expired upon their termination on January 27, 2004. In
addition, several of the Companys vice presidents, managers and employees have been granted stock
options. The 65




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number of shares subject to such options are based upon position and performance, the exercise
price is the market value of the Common Stock on the date of grant, and the options generally
become exercisable in three equal installments beginning on the first anniversary of the date of
the grant. General Company Bonus Structure The Companys annual bonus program is intended to promote superior performance by making
incentive compensation an important part of the employees compensation. The annual performance
bonuses are based on the achievement of certain financial and performance goals set by the
Compensation Committee at the beginning of each year. Those goals may be qualitative or
quantitative in nature and may vary according to the individual employees personal goals. Certain
employees of the Company, including subsidiary and division heads, corporate and subsidiary vice
presidents and other managers, also are entitled to receive annual bonuses and/or stock options or
grants based upon a percentage of their base salaries and Company and/or individual performance.
For the year 2003, no bonuses were awarded. Compensation of the Chief Executive Officer The Compensation Committee determines the annual compensation of the Chief Executive Officer
according to the same guidelines followed when determining other employees compensation as
outlined above. Chief Executive Officer compensation aims to attract, retain and motivate a highly
qualified individual serving in the position. These goals are achieved through a combination of
base salary, an annual performance bonus and long-term incentive compensation in the form of stock
options or restricted stock grants. Annual performance bonus levels are determined each year and
are typically related to measurable financial targets and company performance objectives. Separate
from the annual performance bonus is the payment of long-term equity incentives composed of stock
options, which in contrast, has a longer time horizon for maturity and seeks to promote the
long-term retention of the Chief Executive Officer by applying a graded vesting schedule that
prevents the executive from exercising the options for two or more years. In 2003, Mr. Thomas L. Bell received a base salary of $240,000 for his services as President
and Chief Executive Officer of the Company. Mr. Bells salary was adjusted up from his 2002 base
salary of $218,000 in light of the then reported earnings and profit growth and satisfactory
performance of the Company during the 2002. The 2003 performance goals of the Chief Executive
Officer were tied to income and inventory achievement. Based on full achievement of all bonus
goals, seventy-five percent (75%) of the bonus total was related to income achievement and
twenty-five percent (25%) of the bonus total was related to inventory achievement, with a total
possible bonus of forty percent (40%) of Mr. Bells total base salary. Of the total possible bonus
of forty percent (40%) of base salary, thirty percent (30%) was based on achieving and exceeding
budgeted income before tax for the Company and ten percent (10%) was based on achieving and
exceeding specified inventory goals. The Company awarded Mr. Bell no performance bonus in 2003. Mr. Bell failed to meet the
financial and performance goals set for him by the Compensation Committee for 2003 and as a result,
was not awarded an annual performance bonus. The Compensation Committee determined and the Board of Directors approved the annual salary
paid to Mr. Bell.  COMPENSATION COMMITTEE
Pierre Pagès
Alec L. Poitevint, II 66




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Performance Graph The performance of the Common Stock presented in the following graph is through November 12,
2003, after which the NASDAQ National Market halted trading in the Companys securities due to
Virbacs failure to comply with filing requirements related to its Form 10-Q for the quarter ended
September 30, 2003. The Common Stock was subsequently de-listed from the NASDAQ National Market and
began trading on the Pink Sheets in late January 2004 and, thereafter, has traded in a range from
approximately $2.50 to $4.00 per share. The Company is filing restated audited financial statements for each of the years of 2001 and
2002 and restated unaudited interim financial statements for the quarters ended March 31, 2003 and
June 30, 2003. In addition, the Company is revising certain additional financial data for the
years 1998 through 2000. No Restatement data was available to investors making trades during the
time period depicted in the performance graph and the then available data for each of the restated
periods should not be relied upon. The following graph compares the performance of the Common Stock cumulative total return to
stockholders of (i) the stocks included in the NASDAQ National Market  United States Index and
(ii) a peer group of companies in the animal health industry. The Company believes that a peer
group of companies in the animal health industry is more representative than a peer group of
non-financial companies with market capitalization comparable to that of the Company. The companies
included in the animal health industry peer group are: Abaxis Inc., Heska Corp., IDEXX Laboratories
INC., Neogen Corp., and Synbiotics Corp, which the Company believes to be a representative sample
of comparable companies in the animal health industry. (TOTAL RETURN TO STOCKHOLDERS CHART) 67




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table shows, as of March 31, 2005, the number and percentage of shares of Common
Stock of the Company beneficially owned by:  
    each person known by Virbac to own beneficially more than 5% of the outstanding shares
of the Common Stock;
    each director of Virbac;
    each named executive officer or person serving in that capacity during 2003 of Virbac; and
    all directors and executive officers of Virbac as a group. Unless otherwise indicated in a footnote, each person possesses sole voting and investment
power with respect to the shares indicated as beneficially owned. Shares Beneficially OwnedAmount andNature ofBeneficialName of Beneficial Owner
    
    Ownership
    
    
    Percent of ClassInterlab S.A.S. (1) (3)
    
    
    13,435,474
    
    
    
    60.43
    %Pascal Boissy
    
    
    31,045
    
    
    
    *Erik R. Martinez, D.V.M.
    
    
    
    
    
    
    *Jean M. Nelson
    
    
    
    
    
    
    *Eric Marée
    
    
    4,518
    
    
    
    *Pierre A. Pagès, D.V.M.
    
    
    18,955
    
    
    
    *Richard W. Pickert
    
    
    
    
    
    
    *Alec L. Poitevint, II (2)
    
    
    391,040
    
    
    
    1.76
    %Jean N. Willk
    
    
    11,360
    
    
    
    *Thomas L. Bell
    
    
    50,000
    
    
    
    *Joseph A. Rougraff
    
    
    
    
    
    
    *All directors and executive officer as a group (10 persons)
    
    
    506,918
    
    
    
    2.28
    %
  *
    The percentage of shares beneficially owned does not exceed 1% of the Common Stock
outstanding.(1)
    Interlab S.A.S. is a wholly owned subsidiary of VBSA and the beneficial owner of
13,435,474 shares of Virbac Common Stock.(2)
    Included are 20,000 shares held by Mr. Poitevints adult children, over which Mr.
Poitevint has power of attorney. Mr. Poitevints beneficial ownership also includes 147,252
shares held by Marshall Minerals, Inc. and 162,339 shares held by Mineral Associates, Inc.
Mr. Poitevint is the President and Chairman of both Marshall Minerals, Inc. and Mineral
Associates, Inc., but is not a controlling stockholder of either corporation. Mr.
Poitevint disclaims beneficial ownership of the shares owned by Marshall Minerals, Inc.,
Mineral Associates, Inc. and the shares held by Mr. Poitevints adult children.(3)
    The business address for Interlab S.A.S. is: Interlab, BP 27, 06511 Carros, France. 68




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Securities Authorized for Issuance under Equity Compensation Plans See the discussion of securities authorized under the equity compensation plans in Item 5.
Market for Registrants Common Equity and Related Stockholder Matters-Securities Authorized for
Issuance under Equity Compensation Plans. Equity Compensation Plan Information Number of
    
    
    
    
    
    
    Number of SecuritiesSecurities to be
    
    
    
    
    
    
    Remaining Available forIssued Upon
    
    
    
    
    
    
    Future Issuance UnderExercise of
    
    
    Weighted Average
    
    
    Equity Compensation PlansOutstanding
    
    
    Per Share Price of
    
    
    (Excluding SecuritiesOptions, Warrants
    
    
    Outstanding Options,
    
    
    Reflected in the FirstPlan Category
    
    and Rights
    
    
    Warrants and Rights
    
    
    Column)Equity Compensation Plans
    
    
    936,247
    
    
    $
    3.68
    
    
    
    270,021Approved by Security HoldersEquity Compensation Plans
Not Approved by Security Holders
    
    None
    
    None
    
    NoneTotal
    
    
    936,247
    
    
    $
    3.68
    
    
    
    270,021
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Agreements with VBSA In the ordinary course of business the Company has engaged in various agreements with VBSA,
which indirectly owns approximately 60% of the Common Stock. The significant agreements with VBSA
and its related affiliates for the year ended December 31, 2003, are summarized below. The Audit
Committee has approved all of the agreements with VBSA. Loan Agreements On April 9, 2004, Virbac executed a secured subordinated promissory note in favor of VBSA, in
the amount of $3,000,000 (the $3.0 Million Note). On April 29, 2004, Virbac executed a secured
subordinated promissory note in favor of VBSA, in the amount of $4,000,000 (together with the $3.0
Million Note, the April Notes). The April Notes are subordinate to the indebtedness of Virbac
under the Credit Agreement. The interest rate on the April Notes has 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 April Notes. The April Notes originally had a stated maturity date
of July 9, 2004, but they have recently been amended to allow for an extended maturity date of
October 9, 2005. On June 3, 2004, Virbac executed a secured subordinated promissory note in favor of VBSA in
the amount of $2,000,000 (the June Note). The June Note is subordinate to the indebtedness of
Virbac under the Credit Agreement and ranks pari passu with the April Notes. The interest rate on
the June Note has 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 June Note. The
June Note had an original maturity date of October 9, 2004, but it has recently been amended to
allow for an extended maturity date of October 9, 2005. 69




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Distribution Agreement On December 3, 1999, the Company entered into an agreement appointing VBSA and its affiliates
as the sole and exclusive distributors of the Companys current and future range of specified pet
health care products for all channels of trade worldwide other than the United States and Canada.
Under the terms of the agreement the Company can distribute directly to certain customers at the
election of VBSA. On December 2, 2004, the distribution agreement automatically renewed for a
second 5-year term. Under the renewed terms of the distribution agreement, the Company agrees to
provide manufacturing services to VBSA and VBSA agrees to use its best efforts to promote, sell and
distribute Virbacs products internationally. The current agreed purchase prices of the products
are 12.6% over the Companys current cost. During 2003, Virbac recorded $1.2 million of product
sales to VBSA and its affiliates under the terms of the distribution agreement. Development and License Agreement On January 21, 2001, the Company entered into an agreement with VBSA to govern the
apportionment of research and development costs, grant certain licenses and require the payment of
royalties for existing and new products. This development and license agreement was in effect
until December 31, 2004, and thereafter automatically renews for additional one-year terms unless
terminated by written notice not less than 90 days prior to the beginning of any new one-year term.
Under the terms of the development and license agreement, VBSA provides the Company with the
exclusive rights, in the United States and Canada, to sell specified products that are currently in
development or that were previously developed by VBSA. As consideration for the grant of certain
licenses and the payment of research and development costs by VBSA, the Company shall pay VBSA a
royalty of 6% of the net sales of certain existing products sold by the Company in the United
States and Canada. In addition, the Company and VBSA provided each other with right of first
refusal with respect to the sale, manufacture and distribution of certain newly developed products.
The licensee, whether such licensee is the Company or VBSA, shall pay the licensor a royalty equal
to 3% of the licensees net sales of and licensing revenues from generic new products (as defined
in the agreement) and a royalty equal to 6% of the licensees net sales of and licensing revenues
from proprietary new products (as defined in the agreement). In 2003, the Company paid
approximately $61,000 in royalty payments to VBSA and VBSA made no royalty payments to the Company.
The development and license agreement was amended to provide that Virbac shall pay a royalty of
2.5% on the net sales of livestock de-wormer products beginning January 1, 2002. Supply Agreement On March 1, 2002, the Company entered into a supply agreement with VBSA pursuant to which VBSA
agreed to manufacture, register, supply and provide quality assurance for certain specified health
products containing regulated pesticides. This agreement is scheduled to remain in force until
February 28, 2007, unless terminated earlier by a written mutual consent of both parties. During
2003, the Company paid VBSA $1.5 million for products under the supply agreement. License Agreement  Pyriproxyfen On September 29, 2000, the Company entered into a license agreement with VBSA in order to grant
VBSA a license of the U.S. patent rights of the Company in the use of Pyriproxyfen (PPF) as an
ingredient in certain dog or cat foods. The Company granted to VBSA an exclusive license with the
right to grant sublicenses to manufacture, use, distribute, and sell PPF as an ingredient in dog
and cat foods under U.S. Patent numbers 5,439,924 and 5,728,719 in the United States. In
consideration for the license, VBSA agreed to pay the Company $80,000 upon its entrance into any
sublicense agreement and an additional 40% of all cash payments received from any such sublicensee
at the time of registration 70




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approval and launch of the PPF product. In addition, the license agreement requires VBSA to
pay the Company 1.2% of the PPF products net sales made through the Veterinary sales channel and
0.8% of the net sales made through the Consumer Brand sales channel. The license agreement remains
in effect until the expiration date of the last patent held in the United States, or until
terminated by either VBSA or the Company. No royalty payments were received by Virbac during 2003
under the terms of this agreement. Sub License Agreement On April 5, 1999, the Company and VBSA entered into a Sub License Agreement pursuant to which
VBSA granted Virbac the right to manufacture and market products that VBSA has licensed from
Capulis S.A., a French corporation. Products subject to this agreement include micro-encapsulation
processes applicable to veterinary products for dogs, cats, fish and veterinary dental care.
Pursuant to this agreement, Virbac pays a 2% royalty to VBSA on net sales of the products which
utilize this technology. During 2003, Virbac paid approximately $86,000 in royalty payments to
VBSA under the terms of this agreement. Consulting Agreement On April 15, 2003, the Company and VBSA entered into a Consulting Agreement pursuant to which
VBSA appointed Stephane Villemin (Villemin) of the Company to render certain consulting services
to VBSA. Such consulting services primarily included the negotiation with third parties on behalf
of VBSA of licensing rights relating to VBSAs feline leukemia vaccine for the U.S. and Canadian
territories. VBSA paid the Company $10,000 for the consulting services. The Consulting Agreement
terminated on July 31, 2004. Employment Agreement From time to time, the Company enters into employment agreements with certain VBSA employees.
Effective August 1, 2003, Villemin entered into an employment agreement with the Company pursuant
to which Villemins annual salary is $51,100. Villemin is also entitled to an annual bonus of
$7,000 which is to be paid by VBSA. As part of this employment agreement with the Company, Villemin
receives up to $36,000 per year for the lease of an apartment, monetary compensation for the lease
and expenses of an automobile and monetary compensation for tuition for his children. Trademark Agreement On April 2, 2003, the Company and VBSA agreed to allow each other, at no charge, the first
right of refusal for use of their respective trademarks. The Companies have agreed to keep each
other informed of any trademarks they maintain. While the companies are currently honoring the
terms of this arrangement, a formal written agreement has not yet been entered into. The Company
expects to execute a formal written agreement prior to the end of 2005. Directors and Officers Insurance Procurement Agreement VBSA acquired a 2004 Directors and Officers insurance policy for VBSA and the Company (the
D&O Policy). The coverage limit of the D&O Policy is $5.0 million and the annual premium for such
policy is $629,000. The Audit Committee has approved that 75% of this annual premium is to be paid
by the Company. 71




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Secrecy Agreements The Company has entered into various Secrecy Agreements with VBSA whereby the Company agrees
to keep confidential any information disclosed to it by VBSA with regard to certain products and
applications made known to VBSA by third parties. The agreement terms are indefinite or expire
when the confidential information is made available by the owner to the public. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Set forth below is a summary of certain fees paid to the Companys independent registered
public accounting firm, PricewaterhouseCoopers (PwC) for services rendered in the years ended
December 31, 2003 and December 31, 2002. (In
thousands)
    
    2003
    
    
    2002Audit fees
    
    $
    280
    
    
    $
    197Tax fees
    
    
    102
    
    
    
    71All other fees
    
    
    49
    
    
    
    23Total
    
    $
    431
    
    
    $
    291
 (a) Audit Fees. The aggregate fees, including reimbursement of expenses, paid for audit
services rendered by PwC in 2003 were $279,500. The aggregate fees, including reimbursement of
expenses, paid for audit services rendered by PwC in 2002 were $196,994. Audit services performed
in 2003 and 2002 included audits of the Companys annual financial statements. (b) Tax Fees. The aggregate fees, including reimbursement of expenses, paid for tax services
rendered by PwC in 2003 were $101,540. The aggregate fees, including reimbursement of expenses,
paid for tax services rendered by PwC in 2002 were $70,656. Tax services performed in 2002 and
2003 included preparation of federal and state tax returns as requested. (c) All Other Fees. The aggregate fees, including reimbursement of expenses, paid for other
professional services rendered by PwC in 2003 were $48,937. The aggregate fees, including
reimbursement of expenses, paid for other professional services rendered by PwC in 2002 were
$23,282. Other professional services include payment for products and services provided by PwC,
other than the services reported above, as well as property tax services, tax software, and
responses to government letters. Audit Committee Administration of the Engagement  Procedures for Pre-Approval of Audit and
Permissible Non-Audit Services of the Companys Independent Auditors The Audit Committee has the exclusive authority and responsibility to engage, direct,
pre-approve and oversee the Companys independent auditors with respect to all audit or non-audit
services and has the exclusive authority and responsibility to either retain or terminate the
Companys independent auditors. The Audit Committees exclusive authority and responsibility with
respect to these matters is set forth in the Virbac Charter of the Audit Committee of the Board of
Directors. The Audit Committee has approved the engagement of PwC to perform all of the services
listed above. 72




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On September 29, 2004, the Audit Committee adopted a formal procedure for the approval of all
non-audit related services provided by the Companys independent auditor. This procedure is set
forth in Supplement A to the Virbac Charter of the Audit Committee of the Board of Directors which
is attached as Exhibit 99.2 to this Form 10-K. Any request for the Companys independent auditor to
perform non-audit related services must be made pursuant to this procedure. The policy is to
pre-approve all permissible all non-audit services provide by the independent auditors. 73




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PART IV 
 ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements commences on page F-1: The following is a list of the financial statements included at pages F-3 through F-54 in
this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets for the years ended December 31, 2003 and 2002 (As restated) Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 (As
restated) and 2001 (As restated) Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 (As
restated) and 2001 (As restated) Consolidated Statements of Shareholders Equity for Years Ended December 31, 2003, 2002
(As restated) and 2001 (As restated) Notes to Consolidated Financial Statements (2) List of Financial Statement Schedules for each of the Three Years Ended December
31, 2003, 2002 (As restated) and 2001 (As restated) on page F-55: Schedule II  Valuation and Qualifying Accounts and Reserves. All other schedules have been omitted because they are either not applicable or not required,
or the required information is provided in the financial statements or notes thereto. (3) Exhibits  refer to (c) below. (b) Reports on Form 8-K The current report of Virbac on Form 8-K, dated May 6, 2003, furnished to the SEC on May 6,
2003. The Form 8-K reported that the Company had issued a press release providing a commentary on
its first quarter 2003 financial results. The current report of Virbac on Form 8-K, dated September 8, 2003, filed with the SEC on
September 18, 2003. The Form 8-K reported that the Company had completed the acquisition of assets
relating to the animal health products of King. The current report of Virbac on Form 8-K, dated November 26, 2003, filed with the SEC on
November 26, 2003. The Form 8-K reported that Virbac announced that it would delay the release of
its results for the quarter and nine months ended September 30, 2003, as well as the filing of its
corresponding quarterly report on Form 10-Q with the SEC pending completion of an internal inquiry
being conducted by the Audit Committee. The Form 8-K also announced that, based upon information
developed to date, Virbac expected to issue revised financial statements for the years ended
December 31, 2001 and 2002 and for the quarters ended March 31 and June 30, 2003 and that its
previously issued financial statements for these periods should no longer be relied upon. 74




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The current report of Virbac on Form 8-K, dated December 18, 2003, furnished to the SEC on
December 18, 2003. The Form 8-K reported that Virbac had issued a press release announcing its
preliminary estimates of results for the period ended September 30, 2003, and restated prior period
results and that its President and Chief Executive Officer, Thomas Bell, has taken a voluntary
leave of absence pending completion of the Audit Committees internal inquiry. The current report of Virbac on Form 8-K, dated January 22, 2004, filed with the SEC on
January 23, 2004. The Form 8-K reported that Virbac had issued a press release attaching a press
release issued by VBSA announcing certain operating results and the fact that Virbac had received
notice from the NASDAQ Stock Market that a determination has been made to de-list the Common Stock
from the NASDAQ National Market. The current report of Virbac on Form 8-K, dated February 6, 2004, filed with the SEC on
February 11, 2004. The Form 8-K reported that Virbac had issued a press release announcing the
resignation of Thomas L. Bell, a former director, President and Chief Executive Officer of the
Company, and Joseph A. Rougraff, the former Vice President, Chief Financial Officer and Secretary
of the Company. The current report of Virbac on Form 8-K, dated February 19, 2004, filed with the SEC on
February 20, 2004. The Form 8-K reported that Virbac was contacted by the SEC and advised that the
SEC had issued a formal order of investigation captioned In the Matter of Virbac Corporation and,
on February 19, 2004, Virbac issued a press release disclosing the initiation of the SEC
investigation and related information. The current report of Virbac on Form 8-K, dated April 30, 2004, filed with the SEC on April
30, 2004. The Form 8-K reported that Virbac had issued a press release announcing a statement made
by VBSA that Virbac would restate its 2001, 2002 and the first half of 2003 earnings as a result of
the inquiry conducted by the Audit Committee in November 2003. The current report of Virbac on Form 8-K, dated June 3, 2004, filed with the SEC on June 3,
2004. The Form 8-K reported that Virbac had issued a press release announcing the hiring of Jean
M. Nelson as its Chief Financial Officer. The current report of Virbac on Form 8-K, dated October 1, 2004, filed with the SEC on October
4, 2004. The Form 8-K reported that Virbac had issued a press release announcing the hiring of Dr.
Erik R. Martinez as the Companys President and Chief Executive Officer. The current report of Virbac on Form 8-K, dated November 8, 2004, filed with the SEC on
November 9, 2004. The Form 8-K reported that prior statements regarding the Companys estimated or
projected performance and the estimated or projected effects of the Companys previously announced
restatement of prior period results should be disregarded. The current report of Virbac on Form 8-K, dated January 13, 2005, filed with the SEC on
January 13, 2005. The Form 8-K reported that the Company had issued a press release announcing the
Company has been informed by the staff of the SEC that the staff is considering recommending that
the SEC bring a civil action against the Company alleging violations of the federal securities
laws. 75




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(c)
    Exhibits required by Item 601 of Regulation S-K. (Note: Management contracts and
compensatory plans or arrangements are identified with an asterisk in the following list.) IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)2.4
    
    Warehousing and Distribution Agreement between Purina
Mills, Inc. and PM Resources, Inc. dated September 9,
1993.
    
    (1); Ex. 2.42.5
    
    Indemnity Agreement between Purina Mills, Inc. and PM
Resources, Inc. dated September 9, 1993.
    
    (1); Ex. 2.52.11
    
    Agreement and Plan of Merger, dated October 16, 1998,
by and among Agri-Nutrition Group Limited, Virbac
S.A., and Virbac, Inc.
    
    (7); Ex. 2.12.12
    
    Stock Purchase Agreement by and between Virbac
Corporation and Delmarva Laboratories, Inc. dated as
of August 15, 2003.
    
    (14); Ex. 2.22.13
    
    Asset Purchase Agreement by and among Virbac
Corporation, Jones Pharma Incorporated and JMI-
Daniels Pharmaceuticals, Inc. dated as of September 5,
2003.
    
    (13); Ex. 2.13.1
    
    Restated Certificate of Incorporation.
    
    (2); Ex. 3.13.3
    
    Amended and Restated By-Laws, dated as of January 27,
2004.
    
    (14); Ex. 3. 24
    
    Specimen Stock Certificate.
    
    (1); Ex. 410.11
    
    Form of Indemnification Agreement.
    
    (1); Ex. 10.1010.12
    
    Reload Option and Exchange Exercise Plan.
    
    (3); Ex. 4.210.13
    
    1996 Incentive Stock Plan, as amended.
    
    (4); Ex. 10.1510.14
    
    Credit Agreement by and among Agri-Nutrition Group
Limited, PM Resources, Inc., St. JON Laboratories,
Inc., and First Bank, dated May 14, 1998.
    
    (5); Ex. 10.2410.15
    
    Amended Credit Agreement by and among Agri-Nutrition
Group Limited, PM Resources, Inc., St. JON
Laboratories, Inc., and First Bank, dated August 6,
1998.
    
    (6); Ex. 10.2510.16
    
    Second Amendment to Credit Agreement by and among
Agri-Nutrition Group Limited, PM Resources, Inc., St.
JON Laboratories, Inc., and First Bank, dated October
2, 1998.
    
    (8); Ex. 10.2610.17
    
    Second 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 May 1, 2000.
    
    (9); Ex. 10.2710.18
    
    Third 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 April 4, 2001.
    
    (10); Ex. 99.1
 76




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.19
    
    Fourth 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 7, 2002.
    
    (11); Ex. 10.2910.20
    
    Credit Agreement by and among Virbac Corporation, PM
Resources, Inc., St. JON Laboratories, Inc., Francodex
Laboratories, Inc., Virbac AH, Inc., and First Bank,
dated September 7, 1999.
    
    (12); Ex. 10.2710.21
    
    First 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 December 30,
1999.
    
    +10.22
    
    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.
    
    (14); Ex. 10.1010.23
    
    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.
    
    (13); Ex. 10.110.24
    
    Waiver of September 30, 2003 10-Q Reporting Period
from First Bank, dated November 12, 2003.
    
    (14); Ex. 10.1210.25
    
    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.
    
    (14); Ex. 10.1310.26
    
    Agreement for Temporary Management Services between
Virbac Corporation and Executive Interim Management
dated December 16, 2003.
    
    +10.27
    
    Employment Termination, Release and Cooperation
Agreement by and between Virbac Corporation and Joseph
Rougraff dated March 24, 2004.
    
    +10.28
    
    Employment Termination, Release and Cooperation
Agreement by and between Virbac Corporation and Thomas
Bell dated April 15, 2004.
    
    +10.29
    
    Employment and Consulting Agreement by and between
Virbac Corporation and David Eller, dated as of June
18, 2004.
    
    +10.30
    
    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.
    
    (14); Ex. 10.14
 77




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.31
    
    
    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.
    
    (14); Ex. 10.1510.32
    
    
    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.
    
    (14); Ex. 10.1610.33
    
    
    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.
    
    (14); Ex. 10.1710.34
    
    
    Acknowledgment of Extended Maturity Date by Virbac
S.A., dated June 3, 2004.
    
    (14); Ex. 10.1810.35
    
    
    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 3, 2004.
    
    (14); Ex. 10.1910.36
    
    
    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.
    
    (14); Ex. 10.2010.37
    
    
    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.
    
    (14); Ex. 10.2110.38
    
    
    Acknowledgment of 2005 Extended Maturity Date by
Virbac S.A., dated February 8, 2005.
    
    (14); Ex. 10.2210.39
    
    
    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.
    
    (14); Ex. 10.2310.40
    
    
    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.
    
    (14); Ex. 10.2410.41
    
    
    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.
    
    (14); Ex. 10.25
 78




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.42
    
    
    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.
    
    (14); Ex. 10.2610.43
    
    
    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.
    
    (14); Ex. 10.2714.1
    
    
    Virbac Corporation Code of Business Conduct and Ethics.
    
    +21.1
    
    
    Subsidiaries of Virbac Corporation.
    
    +31.1
    
    
    Certification of the President and 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 President and Chief Executive
Officer pursuant to 18. U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
    
    +32.2
    
    
    Certification of the Chief Financial Officer pursuant
to 18. U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    +99.1
    
    
    Virbac Corporation Charter of the Audit Committee of
the Board of Directors
    
    +99.2
    
    
    Supplement A to the Virbac Corporation Charter of the
Audit Committee of the Board of Directors.
    
    +99.3
    
    
    Independent Auditors Report and Statements of Net
Assets Sold and Statements of Revenues and Direct
Expenses of the Animal Health Product Lines of King
Pharmaceuticals, Inc.
    
    +99.4
    
    
    Unaudited Pro Forma Condensed Combined Financial
Statements of Virbac Corporation.
    
    +
   +
    
    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) 79




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##### Table of Contents



(3) Incorporated herein by reference to the Companys Registration Statement on Form S-8 filed
November 29, 1994 (S-8) (File No. 33-86892) (4) Incorporated herein by reference to the Companys Registration Statement on Form S-8 filed
April 3, 1996 (S-8) (File No. 33-3192) (5) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 1998. (File No. 000-24312) (6) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q/A for the
quarterly period ended July 31, 1998. (File No. 000-24312) (7) Incorporated herein by reference to the Companys Current Report on Form 8-K, dated
October 16, 1998, filed November 17, 1998. (File No. 000-24312) (8) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended October 31, 1998. (File No. 000-24312) (9) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 1999. (File No. 000-24312) (10) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2001. (File No. 000-24312) (11) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002. (File No. 000-24312) (12) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999. (File No. 000-24312) (13) Incorporated herein by reference to the Companys current report on Form 8-K, dated as of
September 8, 2003. (File No. 000-24312) (14) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003. (File No. 000-24312) 80




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##### Table of Contents



SIGNATURES Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. VIRBAC CORPORATIONBy:
    
    /s/ Erik R. MartinezErik R. MartinezPresident and Chief Executive OfficerDate:
    
    April 29, 2005
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Erik R. Martinez

Erik R. Martinez
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    April 29, 2005/s/ Jean M. Nelson

Jean M. Nelson
    
    Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    April 29, 2005/s/ Pascal Boissy
    
    Chairman of the Board
    
    April 29, 2005Pascal Boissy/s/ Eric Marèe
    
    Director
    
    April 29, 2005Eric Marèe/s/ Pierre A. Pagès
    
    Director
    
    April 29, 2005Pierre A. Pagès/s/ Richard W. Pickert
    
    Director
    
    April 29, 2005Richard W. Pickert/s/ Alec L. Poitevint, II
    
    Director
    
    April 29, 2005Alec L. Poitevint, II/s/ Jean Noël Willk
    
    Director
    
    April 29, 2005Jean Noël Willk
 81




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##### Table of Contents



Index to Exhibits IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)2.4
    
    
    Warehousing and Distribution Agreement between Purina
Mills, Inc. and PM Resources, Inc. dated September 9,
1993.
    
    (1); Ex. 2.42.5
    
    
    Indemnity Agreement between Purina Mills, Inc. and PM
Resources, Inc. dated September 9, 1993.
    
    (1); Ex. 2.52.11
    
    
    Agreement and Plan of Merger, dated October 16, 1998,
by and among Agri-Nutrition Group Limited, Virbac
S.A., and Virbac, Inc.
    
    (7); Ex. 2.12.12
    
    
    Stock Purchase Agreement by and between Virbac
Corporation and Delmarva Laboratories, Inc. dated as
of August 15, 2003.
    
    (14); Ex. 2.22.13
    
    
    Asset Purchase Agreement by and among Virbac
Corporation, Jones Pharma Incorporated and JMI-
Daniels Pharmaceuticals, Inc. dated as of September 5,
2003.
    
    (13); Ex. 2.13.1
    
    
    Restated Certificate of Incorporation.
    
    (2); Ex. 3.13.3
    
    
    Amended and Restated By-Laws, dated as of January 27,
2004.
    
    (14); Ex. 3.24
    
    
    Specimen Stock Certificate.
    
    (1); Ex. 410.11
    
    
    Form of Indemnification Agreement.
    
    (1); Ex. 10.1010.12
    
    
    Reload Option and Exchange Exercise Plan.
    
    (3); Ex. 4.210.13
    
    
    1996 Incentive Stock Plan, as amended.
    
    (4); Ex. 10.1510.14
    
    
    Credit Agreement by and among Agri-Nutrition Group
Limited, PM Resources, Inc., St. JON Laboratories,
Inc., and First Bank, dated May 14, 1998.
    
    (5); Ex. 10.2410.15
    
    
    Amended Credit Agreement by and among Agri-Nutrition
Group Limited, PM Resources, Inc., St. JON
Laboratories, Inc., and First Bank, dated August 6,
1998.
    
    (6); Ex. 10.2510.16
    
    
    Second Amendment to Credit Agreement by and among
Agri-Nutrition Group Limited, PM Resources, Inc., St.
JON Laboratories, Inc., and First Bank, dated October
2, 1998.
    
    (8); Ex. 10.2610.17
    
    
    Second 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 May 1, 2000.
    
    (9); Ex. 10.2710.18
    
    
    Third 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 April 4, 2001.
    
    (10); Ex. 99.110.19
    
    
    Fourth 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 7, 2002.
    
    (11); Ex. 10.29
 82




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.20
    
    
    Credit Agreement by and among Virbac Corporation, PM
Resources, Inc., St. JON Laboratories, Inc., Francodex
Laboratories, Inc., Virbac AH, Inc., and First Bank,
dated September 7, 1999.
    
    (12); Ex. 10.2710.21
    
    
    First 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 December 30,
1999.
    
    +10.22
    
    
    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.
    
    (14); Ex. 10.1010.23
    
    
    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.
    
    (13); Ex. 10.110.24
    
    
    Waiver of September 30, 2003 10-Q Reporting Period
from First Bank, dated November 12, 2003.
    
    (14); Ex. 10.1210.25
    
    
    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.
    
    (14); Ex. 10.1310.26
    
    
    Agreement for Temporary Management Services between
Virbac Corporation and Executive Interim Management
dated December 16, 2003.
    
    +10.27
    
    
    Employment Termination, Release and Cooperation
Agreement by and between Virbac Corporation and Joseph
Rougraff dated March 24, 2004.
    
    +10.28
    
    
    Employment Termination, Release and Cooperation
Agreement by and between Virbac Corporation and Thomas
Bell dated April 15, 2004.
    
    +10.29
    
    
    Employment and Consulting Agreement by and between
Virbac Corporation and David Eller, dated as of June
18, 2004.
    
    +10.30
    
    
    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.
    
    (14); Ex. 10.1410.31
    
    
    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.
    
    (14); Ex. 10.15
 83




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.32
    
    
    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.
    
    (14); Ex. 10.1610.33
    
    
    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.
    
    (14); Ex. 10.1710.34
    
    
    Acknowledgment of Extended Maturity Date by Virbac
S.A., dated June 3, 2004.
    
    (14); Ex. 10.1810.35
    
    
    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 3, 2004.
    
    (14); Ex. 10.1910.36
    
    
    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.
    
    (14); Ex. 10.2010.37
    
    
    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.
    
    (14); Ex. 10.2110.38
    
    
    Acknowledgment of 2005 Extended Maturity Date by
Virbac S.A., dated February 8, 2005.
    
    (14); Ex. 10.2210.39
    
    
    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.
    
    (14); Ex. 10.2310.40
    
    
    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.
    
    (14); Ex. 10.2410.41
    
    
    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.
    
    (14); Ex. 10.25
 84




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##### Table of Contents



IncorporationExhibit
    
    
    
    by ReferenceNumber
    
    Description of Document
    
    (if applicable)10.42
    
    
    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.
    
    (14); Ex. 10.2610.43
    
    
    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.
    
    (14); Ex. 10.2714.1
    
    
    Virbac Corporation Code of Business Conduct and Ethics.
    
    +21.1
    
    
    Subsidiaries of Virbac Corporation.
    
    +31.1
    
    
    Certification of the President and 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 President and Chief Executive
Officer pursuant to 18. U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
    
    +32.2
    
    
    Certification of the Chief Financial Officer pursuant
to 18. U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    +99.1
    
    
    Virbac Corporation Charter of the Audit Committee of
the Board of Directors
    
    +99.2
    
    
    Supplement A to the Virbac Corporation Charter of the
Audit Committee of the Board of Directors.
    
    +99.3
    
    
    Independent Auditors Report and Statements of Net
Assets Sold and Statements of Revenues and Direct
Expenses of the Animal Health Product Lines of King
Pharmaceuticals, Inc.
    
    +99.4
    
    
    Unaudited Pro Forma Condensed Combined Financial
Statements of Virbac Corporation.
    
    +
   +
    
    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 Registration Statement on Form S-8 filed
November 29, 1994 (S-8) (File No. 33-86892) (4) Incorporated herein by reference to the Companys Registration Statement on Form S-8 filed
April 3, 1996 (S-8) (File No. 33-3192) 85




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##### Table of Contents



(5) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended April 30, 1998. (File No. 000-24312) (6) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q/A for the
quarterly period ended July 31, 1998. (File No. 000-24312) (7) Incorporated herein by reference to the Companys Current Report on Form 8-K, dated
October 16, 1998, filed November 17, 1998. (File No. 000-24312) (8) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended October 31, 1998. (File No. 000-24312) (9) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the year
ended December 31, 1999. (File No. 000-24312) (10) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2001. (File No. 000-24312) (11) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002. (File No. 000-24312) (12) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999. (File No. 000-24312) (13) Incorporated herein by reference to the Companys current report on Form 8-K, dated as of
September 8, 2003. (File No. 000-24312) (14) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003. (File No. 000-24312) 86




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS Virbac Corporation
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002 (As restated)
    
    
    F-3Consolidated Statements of Operations for the Three Years Ended
December 31, 2003, 2002 (As restated) and 2001 (As restated)
    
    
    F-4Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2003, 2002 (As restated) and 2001 (As restated)
    
    
    F-5Consolidated Statements of Shareholders Equity for the Three
Years Ended December 31, 2003, 2002 (As restated) and 2001 (As restated)
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors and
Shareholders of Virbac Corporation: In our opinion, the consolidated financial statements listed in the index appearing under
Item 15(a)(1) present fairly, in all material respects, the financial position of Virbac
Corporation and its subsidiaries at December 31, 2003 and 2002 (As restated), and the results of
their operations and their cash flows for each of the years ended December 31, 2003, 2002 (As
restated), and 2001 (As restated) in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial statement schedules
listed in the index appearing under Item 15(a)(2) present fairly, in all material
respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial statement schedules
are the responsibility of the Companys management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. As discussed in Note 4 to the consolidated financial statements, the Company is party to
various claims and litigation related to alleged violations of federal securities laws. The
outcome of these matters cannot be predicted and could have a material adverse effect on the
Company. The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 10 to the consolidated financial statements, the
Company has entered into a forbearance agreement with its lenders which expires May 6, 2005. There
can be no assurance the Companys lenders will agree to either a further extension of the
forbearance agreement or a new credit agreement. In addition, as discussed in Notes 10 and 18 to
the consolidated financial statements, in 2004 the Companys majority shareholder advanced the
Company $9.0 million under secured subordinated notes due on October 9, 2005. The Company does not
currently have sufficient cash on hand nor does it anticipate it will have sufficient cash to repay
its borrowings to its majority shareholder at the current maturity date of October 9, 2005.
Furthermore, the Company has suffered recurring losses from operations. These matters raise
substantial doubt about its ability to continue as a going concern. Managements plans in regard
to these matters are also described in Note 10 to the consolidated financial statements. The
financial statements do not include any adjustments that might result from the outcome of these
uncertainties. As described in Note 3 to the consolidated financial statements, the Company has restated its
previously issued consolidated financial statements. As discussed in Note 9 to the consolidated financial statements, the Company changed its
method of accounting for goodwill and other intangibles effective January 1, 2002. PricewaterhouseCoopers LLP
Fort Worth, Texas
April 29, 2005 F-2




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##### Table of Contents



VIRBAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data) December 31,2003
    
    
    2002(As restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    4
    
    
    $
    865Accounts receivable  trade (net of reserves of $129 and $135, respectively)
    
    
    7,105
    
    
    
    8,448Accounts receivable  Virbac S.A. and subsidiaries
    
    
    314
    
    
    
    289Inventories (net of reserves of $3,894 and $1,798, respectively)
    
    
    13,178
    
    
    
    10,833Inventories on consignment
    
    
    2,173
    
    
    
    2,064Prepaid expenses
    
    
    2,109
    
    
    
    1,339Other current assets
    
    
    950
    
    
    
    643Total current assets
    
    
    25,833
    
    
    
    24,481Property, plant and equipment, net
    
    
    12,498
    
    
    
    12,812Goodwill, net
    
    
    5,571
    
    
    
    4,826Intangibles, net
    
    
    21,089
    
    
    
    2,917Other assets
    
    
    154
    
    
    
    209Total assets
    
    $
    65,145
    
    
    $
    45,245Liabilities and Shareholders EquityCurrent liabilities:Borrowings under revolving lines of credit and notes payable
    
    $
    25,357
    
    
    $
    6,854Checks outstanding in excess of funds on deposit
    
    
    2,107
    
    
    
    1,157Accounts payable  trade
    
    
    3,697
    
    
    
    3,331Accounts payable  Virbac S.A. and subsidiaries
    
    
    446
    
    
    
    119Sales related and product replacement reserves
    
    
    2,602
    
    
    
    2,728Accrued expenses
    
    
    5,475
    
    
    
    4,097Total current liabilities
    
    
    39,684
    
    
    
    18,286Notes payable
    
    
    7
    
    
    
    10Unearned product license fees
    
    
    7,136
    
    
    
    5,916Liability related to contingent consideration
    
    
    2,173
    
    
    
    Total liabilities
    
    
    49,000
    
    
    
    24,212Commitments and contingencies (Note 4)Shareholders equity:Preferred
Stock  2,000,000 authorized and zero issued and outstanding
    
    
    
    
    
    
    Common stock ($.01 par value; 38,000,000 shares
authorized; 22,256,906 and 22,212,804 issued
and outstanding in 2003 and 2002, respectively)
    
    
    223
    
    
    
    222Additional paid-in capital
    
    
    34,926
    
    
    
    34,891Treasury stock at cost (15,941 shares in 2002)
    
    
    
    
    
    
    (80
    )Accumulated deficit
    
    
    (19,004
    )
    
    
    (14,000
    )Total
shareholders equity
    
    
    16,145
    
    
    
    21,033Total
liabilities and shareholders equity
    
    $
    65,145
    
    
    $
    45,245
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share) For the Year Ended December 31,2003
    
    

2002
    
    

2001(As restated)
    
    
    (As restated)Net revenues
    
    $
    67,077
    
    
    $
    60,923
    
    
    $
    56,944Cost of goods sold
    
    
    41,424
    
    
    
    37,103
    
    
    
    34,314Gross profit
    
    
    25,653
    
    
    
    23,820
    
    
    
    22,630Operating expenses:Selling, general and administrative
    
    
    22,744
    
    
    
    16,737
    
    
    
    17,164Research and development
    
    
    4,947
    
    
    
    3,057
    
    
    
    3,477Warehouse and distribution
    
    
    2,250
    
    
    
    2,314
    
    
    
    2,220Total operating expenses
    
    
    29,941
    
    
    
    22,108
    
    
    
    22,861(Loss) income from operations
    
    
    (4,288
    )
    
    
    1,712
    
    
    
    (231
    )Interest expense
    
    
    (637
    )
    
    
    (366
    )
    
    
    (653
    )Other income
    
    
    5
    
    
    
    
    
    
    
    3Loss before income tax expense
    
    
    (4,920
    )
    
    
    1,346
    
    
    
    (881
    )Income tax expense
    
    
    (84
    )
    
    
    (361
    )
    
    
    (16
    )(Loss) income before cumulative effect of
change in accounting principle
    
    
    (5,004
    )
    
    
    985
    
    
    
    (897
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    (2,308
    )
    
    
    Net loss
    
    $
    (5,004
    )
    
    $
    (1,323
    )
    
    $
    (897
    )Basic (loss) income per share before cumulative effect of
change in accounting principle
    
    $
    (0.23
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    (0.10
    )
    
    $
    Basic loss per share
    
    $
    (0.23
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )Basic shares outstanding
    
    
    22,234
    
    
    
    22,115
    
    
    
    22,038Diluted (loss) income per share before cumulative effect of
change in accounting principle
    
    $
    (0.23
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    (0.10
    )
    
    $
    Diluted loss per share
    
    $
    (0.23
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )Diluted shares outstanding
    
    
    22,234
    
    
    
    22,774
    
    
    
    22,038
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the Year Ended December 31,2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Operating activitiesNet loss
    
    $
    (5,004
    )
    
    $
    (1,323
    )
    
    $
    (897
    )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
    
    
    2,353
    
    
    
    1,004
    
    
    
    880Depreciation and amortization
    
    
    2,009
    
    
    
    1,385
    
    
    
    1,779Provision for doubtful accounts
    
    
    80
    
    
    
    145
    
    
    
    212Recognition of unearned product license fees
    
    
    (434
    )
    
    
    (129
    )
    
    
    Provision for sales related reserves
    
    
    536
    
    
    
    1,319
    
    
    
    175Deferred tax provision
    
    
    
    
    
    
    311
    
    
    
    Provision for impairment
    
    
    234
    
    
    
    
    
    
    
    290Issuance of stock to directors as compensation
    
    
    52
    
    
    
    63
    
    
    
    21Loss on disposal of assets
    
    
    401
    
    
    
    26
    
    
    
    67Receipt of product license fees
    
    
    1,654
    
    
    
    650
    
    
    
    145Changes in operating assets and liabilities, net of acquisitions:Decrease (increase) in accounts receivable
    
    
    1,463
    
    
    
    864
    
    
    
    (2,489
    )(Increase) decrease in inventories
    
    
    (4,451
    )
    
    
    1,301
    
    
    
    515(Increase) decrease in consigned inventories
    
    
    (109
    )
    
    
    374
    
    
    
    (2,313
    )Increase in prepaid expenses and other assets
    
    
    (459
    )
    
    
    (596
    )
    
    
    (93
    )Increase (decrease) in accounts payable
    
    
    391
    
    
    
    (1,445
    )
    
    
    1,099Decrease in sales related reserves
    
    
    (662
    )
    
    
    (129
    )
    
    
    (195
    )Increase (decrease) in accrued expenses
    
    
    1,293
    
    
    
    1,684
    
    
    
    (210
    )Net cash (used in) provided by operating activities
    
    
    (653
    )
    
    
    7,812
    
    
    
    (1,014
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (1,323
    )
    
    
    (1,504
    )
    
    
    (1,331
    )Proceeds from sale of property, plant & equipment
    
    
    64
    
    
    
    
    
    
    
    3Acquisition of businesses
    
    
    (17,806
    )
    
    
    
    
    
    
    Acquisition of product license rights
    
    
    (657
    )
    
    
    (2,683
    )
    
    
    (123
    )Net cash used in investing activities
    
    
    (19,722
    )
    
    
    (4,187
    )
    
    
    (1,451
    )Financing activitiesNet borrowings (repayments) under revolving line of credit
    
    
    18,503
    
    
    
    (3,446
    )
    
    
    2,805Proceeds from notes payable
    
    
    
    
    
    
    10
    
    
    
    Repayment of notes payable
    
    
    (3
    )
    
    
    
    
    
    
    (98
    )Change in outstanding checks in excess of funds on deposit
    
    
    950
    
    
    
    10
    
    
    
    (109
    )Issuance of common stock
    
    
    64
    
    
    
    189
    
    
    
    40Issuance of treasury shares
    
    
    
    
    
    
    
    
    
    
    32Net cash provided by (used in) financing activities
    
    
    19,514
    
    
    
    (3,237
    )
    
    
    2,670(Decrease) increase in cash and cash equivalents
    
    
    (861
    )
    
    
    388
    
    
    
    205Cash and cash equivalents, beginning of period
    
    
    865
    
    
    
    477
    
    
    
    272Cash and cash equivalents, end of period
    
    $
    4
    
    
    $
    865
    
    
    $
    477Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    580
    
    
    $
    347
    
    
    $
    598Cash paid for income taxes
    
    $
    69
    
    
    $
    126
    
    
    $
    78
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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Supplemental schedule of noncash investing and financing activities: For the Year Ended December 31,2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Delmarva AcquisitionProduct 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 AcquisitionFair value of assets acquired
    
    $
    14,479
    
    
    $
    
    
    
    $
    Goodwill
    
    
    745
    
    
    
    
    
    
    
    Cash consideration
    
    $
    15,224
    
    
    $
    
    
    
    $
    
 Supplemental Disclosure of Non-Cash Activities: In order to maintain VBSAs approximate indirect ownership interest in the Company through
Interlab, until the expiration, termination or exercise of all options to purchase the Companys
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 Company options and (b) 1.5. No shares were
due or issued to Interlab in 2001, and 52,061 shares were issued to Interlab in 2002 under such
anti-dilution provisions. Due to the issuance of approximately 40,000 shares of Common Stock from
the exercise of pre-merger options during 2003, the Company is to issue approximately 60,000 shares
of Common Stock to Interlab. These shares are to be issued to Interlab 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. The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands) Common Stock
    
    
    Additional
    
    
    
    
    
    
    Treasury StockNumber
    
    
    Par
    
    
    Paid In
    
    
    Accumulated
    
    
    Numberof Shares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    of Shares
    
    
    Amount
    
    
    TotalBalance at
December 31, 2000
(As reported)
    
    
    22,029
    
    
    $
    220
    
    
    $
    34,670
    
    
    $
    (5,527
    )
    
    
    54
    
    
    $
    (201
    )
    
    $
    29,162Effect of restatement on periods ended on
or before December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,253
    )
    
    
    
    
    
    
    
    
    
    
    (6,253
    )Balance at
December 31, 2000
(As restated)
    
    
    22,029
    
    
    
    220
    
    
    
    34,670
    
    
    
    (11,780
    )
    
    
    54
    
    
    
    (201
    )
    
    
    22,909Shares issued to directors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    21
    
    
    
    21Issuance for stock compensation plans
    
    
    26
    
    
    
    1
    
    
    
    (5
    )
    
    
    
    
    
    
    (20
    )
    
    
    75
    
    
    
    71Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (897
    )
    
    
    
    
    
    
    
    
    
    
    (897
    )Balance at December 31, 2001
(As restated)
    
    
    22,055
    
    
    
    221
    
    
    
    34,665
    
    
    
    (12,677
    )
    
    
    28
    
    
    
    (105
    )
    
    
    22,104Shares issued to directors
    
    
    6
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    (5
    )
    
    
    20
    
    
    
    64Issuance for stock compensation plans
    
    
    100
    
    
    
    1
    
    
    
    182
    
    
    
    
    
    
    
    (23
    )
    
    
    85
    
    
    
    268Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    (80
    )
    
    
    (80
    )Shares issued to Interlab under anti-dilution
provisions of merger agreement
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,323
    )
    
    
    
    
    
    
    
    
    
    
    (1,323
    )Balance at December 31, 2002
(As restated)
    
    
    22,213
    
    
    
    222
    
    
    
    34,891
    
    
    
    (14,000
    )
    
    
    16
    
    
    
    (80
    )
    
    
    21,033Shares issued to directors
    
    
    9
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Issuance for stock
compensation plans
    
    
    35
    
    
    
    1
    
    
    
    (17
    )
    
    
    
    
    
    
    (16
    )
    
    
    80
    
    
    
    64Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,004
    )
    
    
    
    
    
    
    
    
    
    
    (5,004
    )Balance at December 31, 2003
    
    
    22,257
    
    
    $
    223
    
    
    $
    34,926
    
    
    $
    (19,004
    )
    
    
    
    
    
    $
    
    
    
    $
    16,145
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 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 and the Consumer Brand segment, which sells over-the-counter products for
companion animal health national accounts, distributors and wholesalers. PM Resources, Inc., a
Missouri corporation (PMR or the Contract Manufacturing segment), is a wholly owned subsidiary
of the Company that operates the Companys Contract Manufacturing segment. 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. As described in Note 3. Restatement of Consolidated Financial Statements, the consolidated
balance sheets, consolidated statements of operations, consolidated statements of cash flows,
consolidated statements of shareholders equity and the applicable notes have been restated for the
periods ended December 31, 2002 and 2001 as well as its previously released financial data for all
quarters in 2001 and 2002 and the quarters ended March 31, 2003 and June 30, 2003 (the
Restatement). Note 2. Summary of Significant Accounting Policies (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority
owned subsidiaries. All significant inter-company transactions have been eliminated. (b) Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and judgments that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and reported amounts of
revenue and expense during the reporting period. Actual results could vary from those estimates.
The principle areas of estimation in the financial statements include sales related reserves for
product related credits and replacement product, inventory obsolescence reserves, impairment
analysis of long-lived and intangible assets, credit losses on accounts receivable, income taxes,
contingencies and litigation. F-8




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (c) Revenue recognition and accounts receivable 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 whereby 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 appropriate to recognize
revenue for certain of its product sales, principally the livestock de-wormer product sales, during
2003, 2002 and 2001 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 2003, 2002 and 2001 for which there was a warehousing arrangement
in connection with the delivery. The total consignment sale transactions during 2003, 2002 and 2001
were $2.3 million, $2.6 million and $0.6 million, respectively. The Company has received payments on two products related to its distribution agreement with
Pfizer, Inc. (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
based upon estimates of when the sales of each of these products will occur over the period covered
by the licenses. The allowance for doubtful accounts is estimated based on historical charge-off experiences,
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 and actual losses to date
have not exceeded expectations; 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. (d) 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 their 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 lives have longer return periods which make determination of their ultimate return rate
more difficult. The amount recorded as a reduction to revenues for 2003, 2002, and 2001 was $3.9
million, $2.7 million, and $3.4 million, respectively. F-9




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, Virbacs distribution agreements provide that the Company can elect to replace
expired product in lieu of issuing a credit. Virbac records the estimated cost for product
replacement as a charge to cost of sales in the period the sale occurs. The amount recorded for
product replacement expense for 2003, 2002 and 2001 was $406,000, $757,000 and $18,000,
respectively. 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 amount recorded for
marketing related sales incentives for 2003, 2002, and 2001 was $300,000, $263,000, and $246,000,
respectively. (e) Cash and cash equivalents The Company considers all highly liquid investments with an original or remaining maturity of
three months or less when acquired to be cash equivalents. At any given point in time, the Company
has checks outstanding that have not been presented to the bank for payment. (f) 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 20%, 16% and 9% of net revenues in 2003, 2002 and 2001, respectively. These revenues
are reflected in the Veterinary and Contract Manufacturing segments. Accounts receivable
outstanding from this same buying group at the years ended December 31, 2003 and 2002 was
approximately $4.0 million and $6.0 million, respectively. (g) Fair value of financial instruments The carrying amount of cash and cash equivalents approximates fair value because of the short
maturity of those instruments. The Company has determined that the fair value of the Companys
debt approximates book value at December 31, 2003 and 2002, based on terms currently available to
the Company in financial markets. (h) 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 by 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. (i) Valuation of long-lived and intangible assets and goodwill In 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangibles, (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. 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 F-10




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. For additional information see Note 9. Goodwill and Other Intangible Assets. (j) Property, plant and equipment Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs
are charged to operations as incurred; acquisitions, major renewals and improvements are
capitalized. When property is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any profit or loss on disposition is credited or
charged to income. The Company provides for depreciation by charging amounts sufficient to amortize the cost of
the properties over their estimated useful lives. The straight-line method of depreciation is
utilized for substantially all asset categories. A summary of estimated useful lives used in computing depreciation for financial statement
reporting is as follows: EstimatedUseful LifeBuilding and leasehold improvements
    
    5-39 yearsProduction equipment
    
    5-7 yearsFurniture, computer equipment and software, and fixtures
    
    3-7 yearsVehicles
    
    4 years
 F-11




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (k) Advertising expense Advertising costs are expensed the first time the advertisement occurs. Advertising expense
for 2003, 2002 and 2001, was $2.4 million, $1.7 million and $2.6 million, respectively. Prepaid
expenses at December 31, 2003 and December 31, 2002 included deferred advertising costs of $0.2
million and $0.2 million, respectively, which will be expensed during the quarterly period the
advertisement occurs. (l) Freight to customers Freight and handling expense for 2003, 2002 and 2001, was $1.2 million, $1.3 million and $1.5
million, respectively, and is classified as warehouse and distribution expense in accordance with
EITF 00-10 Accounting for Shipping and Handling Costs. (m) Research and development expenses Research and development costs are charged to expense when incurred. These costs principally
consist of labor and third party consulting fees. Research and development expenses for 2003, 2002
and 2001 were approximately $4.9 million, $3.1 million and $3.5 million, respectively. (n) 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 those 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. The Company has had
cumulative losses for the three years ending December 31, 2003 and accordingly has retained a full
provision for its deferred tax assets. 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. Virbac has provided valuation allowances aggregating $1.1 million and
$1.9 million at December 31, 2003 and 2002, respectively, against such net operating loss
carryforwards because management believes that it is more likely than not that such benefits will
not be realized. (o) Loss per share Basic loss per share is calculated using the weighted average number of outstanding common
shares during the period. Diluted loss per share includes the effect of all potential issuances of
common shares arising from the effect of outstanding stock options and under the anti-dilution
provisions of the merger agreement with VBSA. Dilutive potential common shares arising from the
effect of outstanding stock options are computed using the treasury stock method if dilutive. F-12




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years 2003, 2002 and 2001, the number of weighted average shares and potential common
shares is as follows: For the year ended December 31,(In thousands)
    
    2003
    
    
    2002
    
    
    2001Weighted average shares  basic
    
    
    22,234
    
    
    
    22,115
    
    
    
    22,038Potential common sharesStock options
    
    
    390
    
    
    
    351
    
    
    
    144VBSA under antidilution provisions of
merger agreement
    
    
    272
    
    
    
    308
    
    
    
    376Total weighted average common and
potential common shares  diluted
    
    
    22,896
    
    
    
    22,774
    
    
    
    22,558
 Net loss per diluted share for the years ended December 31, 2003 and 2001 exclude the effect
of 662,000 and 520,000 options, respectively. The impact of such common stock equivalents are
excluded from the calculation of net loss per share on a dilutive basis as their effect is
anti-dilutive. There were 635 anti-dilutive options in 2003 and no anti-dilutive options in 2002
and 2001. (p) Preferred stock The Companys Board of Directors may, without further action by shareholders, from
time-to-time, direct the issuances of shares of preferred stock in series and may, at time of
issuance, determine the rights, preferences and limitations of each series. No shares of preferred
stock have been issued as of December 31, 2003. (q) Environmental policy Environmental expenditures that relate to current operations are expensed or capitalized as
appropriate. Expenditures that relate to existing conditions caused by past operations, and which
do not contribute to current or future revenue are expensed. Liabilities are recorded when it is
probable that environmental assessments and/or remedial effort costs will be incurred and the costs
can be reasonably estimated. (r) Employee stock-based compensation 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 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 and net loss per
share would have changed to the pro forma amounts listed below using the weighted average fair
values indicated. F-13




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31,(In thousands, except per share data)
    
    2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Net loss as reported
    
    $
    (5,004
    )
    
    $
    (1,323
    )
    
    $
    (897
    )Less: Compensation expense for equity awards determined
       by the fair value based method, net of related tax effects
    
    
    (761
    )
    
    
    (453
    )
    
    
    (396
    )Pro forma net loss
    
    $
    (5,765
    )
    
    $
    (1,776
    )
    
    $
    (1,293
    )Basic loss per share as reported
    
    $
    (0.23
    )
    
    $
    (0.06
    )
    
    $
    (0.04
    )Diluted loss per share as reported
    
    
    (0.23
    )
    
    
    (0.06
    )
    
    
    (0.04
    )Pro forma basic loss per share
    
    
    (0.26
    )
    
    
    (0.08
    )
    
    
    (0.06
    )Pro forma diluted loss per share
    
    
    (0.26
    )
    
    
    (0.08
    )
    
    
    (0.06
    )Weighted average fair value of options granted measured
at the original date of grant
    
    $
    5.84
    
    
    $
    3.91
    
    
    $
    2.83
 (s) Reclassifications Certain prior period financial statement balances have been reclassified to conform to current
periods presentation. These reclassifications are not related to the Restatement and had no
effect on the net loss or shareholders equity as previously reported. (t) Recent accounting pronouncements Effective July 1, 2001, the Company adopted certain provisions of SFAS No. 141 Business
Combinations (SFAS No. 141), and effective January 1, 2002, the Company adopted the full
provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 141 requires business combinations initiated
after June 30, 2001, to be accounted for using the purchase method of accounting, and broadens the
criteria for recording intangible assets apart from goodwill. SFAS No. 142 requires that purchased
goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for
impairment at least annually. The Company evaluated its intangible assets and determined that
patents and product rights have determinable lives and trademarks have indefinite lives. SFAS No. 142 requires a transitional goodwill impairment test and an annual goodwill
impairment test. The Company completed the first phase of the transitional goodwill impairment test
during the first quarter of 2002 and at that time found no instances of impairment of its recorded
goodwill; accordingly, the second phase was not necessary. In connection with the Restatement, the
Company re-evaluated its goodwill for impairment and determined that the goodwill allocated to its
Consumer Brand segment was impaired and accordingly, recorded a charge to income The impairment, a
$2.3 million non-cash charge to income, 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.in the
first quarter of 2002. See Note 9. Goodwill and Other Intangible Assets for a further
discussion. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived assets that result
from the acquisition, construction, development and/or normal use of the assets. The Company also
records a F-14




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS corresponding asset that is depreciated over the life of the asset. Subsequent to the
initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows underlying the
obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did
not have a material effect on the Companys consolidated financial statements. In October 2001, the FASB issued SFAS No. 144. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
by removing goodwill from its scope, by defining a probability-weighted cash flow estimation
approach and establishing a primary-asset approach to determine the cash flow estimation period
for a group of assets. It also replaces the provisions of APB Opinion 30, Reporting the Effects of
Disposal of a Segment of a Business for the disposal of segments of a business. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not have a material
effect on the Companys consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64,
Amendment to FASB Statement No. 13, and Technical Corrections, (SFAS No. 145). SFAS No. 145
amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit
the classification of the gain or loss as extraordinary, as the use of such extinguishments have
become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No.
13, Accounting for Leases, (SFAS No. 13) to require sale-leaseback accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions. The provisions of
the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning
after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the
Statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a material effect on the Companys consolidated financial
statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, (SFAS No. 146). SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force
Issue (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. The provisions of this Statement require that a liability for costs
associated with an exit or disposal activity be recognized when the liability is incurred rather
than when a company commits to such an activity and also establishes fair value as the objective
for initial measurement of the liability. The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146
did not have a material effect on the Companys consolidated financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements 5, 57, and 107 and a rescission of FASB Interpretation No. 34.
The Interpretation elaborates on the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligation under guarantees issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified after December 31,
2002, and did not have a material effect on the Companys consolidated financial statements. The
disclosure requirements are effective for financial statements of interim and annual periods ending
after December 15, 2002 and did not have an impact on the Companys consolidated financial
statements. F-15




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2002, the FASB reached a consensus on EITF Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables (the Issue). The guidance in the Issue is effective
for revenue arrangements entered into for fiscal periods beginning after June 15, 2003. The
Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine
whether an arrangement involving multiple deliverables contains more than one earnings process and,
if it does, how to divide the arrangement into separate units of accounting consistent with the
identified earnings processes for revenue recognition purposes. The Issue also addresses how
arrangement consideration should be measured and allocated to the separate units of accounting in
the arrangement. The adoption of the Issue did not have a material effect on the Companys
consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation 
Transition and Disclosure, an Amendment to FASB Statement No. 123, (SFAS No. 148). This
Statement amends SFAS No. 123, Accounting for Stock-based Compensation, (SFAS No. 123), to
provide alternative methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS no. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal years ending after
December 15, 2002, and are included in the notes to the consolidated financial statements. In December 2003, the FASB issued Interpretation No. 46R (revised December 2003),
Consolidation of Variable Interest Entities (FIN 46R or the Interpretation), which addresses
how a business enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate the entity. The
Interpretation replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46), which was issued in January 2003. The Interpretation is an effort to expand upon and
strengthen existing accounting guidance as to when a company should consolidate the financial
results of another entity. Interpretation 46R requires variable interest entities as defined to
be consolidated by a company if that company is subject to a majority of expected losses of the
entity or is entitled to receive a majority of expected residual returns of the entity, or both.
The company that is required to consolidate a variable interest entity is referred to as the
entitys primary beneficiary. The Interpretation also requires certain disclosures about variable
interest entities that a company is not required to consolidate, but in which it has a significant
variable interest. The consolidation and disclosure requirements apply immediately to variable
interest entities created after January 31, 2003. For all variable interest entities created prior
to February 1, 2003, FIN 46R is effective for periods ending after March 15, 2004, except for
entities that are considered Special Purpose Entities, to which the provisions apply as of December
31, 2003. The Company is not the primary beneficiary of any variable interest entities created
after February 1, 2003, nor does the Company expect the final adoption of FIN 46R to have a
material impact on its financial position or results of operations. 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. F-16




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Note 3. Restatement of Consolidated 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. 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 U.S. Securities and Exchange Commission (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 and that its
previously issued financial statements for these periods should no longer be relied upon. 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 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 F-17




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  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 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
revenue to exclude the sale 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 product 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 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 the 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 revenue and the related
cost of sales at the time the product was shipped. The effect of this restatement reduced net revenues by $3.5 million and $2.2 million in 2001,
2002, respectively and reduced gross profit by $1.4 million and $2.3 million in 2001 and 2002,
respectively. 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 customers. 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 its 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 F-18




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of estimated sales related and product replacement reserves at the time of sale. The effect of this
restatement reduced gross profit by $1.6 million through 2000 and $0.6 million in 2002 and
increased gross profit by $0.1 million in 2001. 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. Accordingly, the Restatement includes adjustments to reflect the proper level
of inventory obsolescence reserves. The effect of this restatement increased cost of sales by $0.7
million and $0.6 million in 2001 and 2002, respectively. 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 periods 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 reevaluated its goodwill for impairment and determined that as a result of the
adjustment to goodwill related to the valuation allowance for the Agri-Nutrition deferred tax
assets described above 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 this 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. 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 of one of the products. Prior to the adoption of SFAS No. 142,
the Company began to amortize this asset over its estimated 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. The effect of these restatement
adjustments increases research and development expenses by $1.0 million, $1.7 million and $0.4
million, in 1999, 2000 and 2001, respectively. F-19




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 each 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. The effect that these
adjustments had on the Restatement was to reduce net income by $0.5 million and $0.3 million in
2001 and 2002, respectively. Additionally, the Company determined that its borrowings under its 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 due to the Companys violations of 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, in connection
with 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. Therefore, with this Annual Report on Form 10-K, the Company is filing 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. The effect of these changes on the Consolidated Balance Sheets, Consolidated Statement of
Operations and Consolidated Statements of Cash Flows, are set forth below: F-20




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands) December 31, 2002
    
    
    December 31, 2001As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    865
    
    
    $
    
    
    
    $
    865
    
    
    $
    477
    
    
    $
    
    
    
    $
    477Accounts receivable  trade (1)
    
    
    14,970
    
    
    
    (6,522
    )
    
    
    8,448
    
    
    
    12,905
    
    
    
    (4,329
    )
    
    
    8,576Accounts receivable -
Virbac S.A. and subsidiaries
    
    
    289
    
    
    
    
    
    
    
    289
    
    
    
    1,170
    
    
    
    
    
    
    
    1,170Inventories (2)
    
    
    12,022
    
    
    
    (1,189
    )
    
    
    10,833
    
    
    
    13,932
    
    
    
    (793
    )
    
    
    13,139Inventories on consignment (1)
    
    
    
    
    
    
    2,064
    
    
    
    2,064
    
    
    
    
    
    
    
    2,437
    
    
    
    2,437Deferred income taxes (3)
    
    
    662
    
    
    
    (662
    )
    
    
    
    
    
    
    2,535
    
    
    
    (2,535
    )
    
    
    Prepaid expenses
    
    
    1,479
    
    
    
    (140
    )
    
    
    1,339
    
    
    
    1,233
    
    
    
    (57
    )
    
    
    1,176Other current assets
    
    
    656
    
    
    
    (13
    )
    
    
    643
    
    
    
    105
    
    
    
    56
    
    
    
    161Total current assets
    
    
    30,943
    
    
    
    (6,462
    )
    
    
    24,481
    
    
    
    32,357
    
    
    
    (5,221
    )
    
    
    27,136Property, plant and equipment, net
    
    
    12,841
    
    
    
    (29
    )
    
    
    12,812
    
    
    
    12,659
    
    
    
    (23
    )
    
    
    12,636Goodwill, net (3)
    
    
    3,266
    
    
    
    1,560
    
    
    
    4,826
    
    
    
    3,266
    
    
    
    4,179
    
    
    
    7,445Intangibles, net (4)
    
    
    6,497
    
    
    
    (3,580
    )
    
    
    2,917
    
    
    
    3,886
    
    
    
    (3,570
    )
    
    
    316Deferred income taxes (3)
    
    
    1,886
    
    
    
    (1,886
    )
    
    
    
    
    
    
    1,885
    
    
    
    (1,885
    )
    
    
    Other assets
    
    
    278
    
    
    
    (69
    )
    
    
    209
    
    
    
    315
    
    
    
    (57
    )
    
    
    258Total assets
    
    $
    55,711
    
    
    $
    (10,466
    )
    
    $
    45,245
    
    
    $
    54,368
    
    
    $
    (6,577
    )
    
    $
    47,791Liabilities and Shareholders EquityCurrent liabilities:Borrowings under revolving lines
of creditand notes
payable
    
    $
    4
    
    
    $
    6,850
    
    
    $
    6,854
    
    
    $
    600
    
    
    $
    9,700
    
    
    $
    10,300Checks outstanding in excess of
funds on deposit
    
    
    1,157
    
    
    
    
    
    
    
    1,157
    
    
    
    1,146
    
    
    
    
    
    
    
    1,146Accounts payable  trade
    
    
    3,330
    
    
    
    1
    
    
    
    3,331
    
    
    
    3,913
    
    
    
    (1
    )
    
    
    3,912Accounts payable  Virbac S.A.
and subsidiaries
    
    
    119
    
    
    
    
    
    
    
    119
    
    
    
    982
    
    
    
    
    
    
    
    982Sales related and product replacement reserves (5)
    
    
    363
    
    
    
    2,365
    
    
    
    2,728
    
    
    
    50
    
    
    
    1,488
    
    
    
    1,538Accrued expenses (7)
    
    
    3,368
    
    
    
    729
    
    
    
    4,097
    
    
    
    1,745
    
    
    
    669
    
    
    
    2,414Total current liabilities
    
    
    8,341
    
    
    
    9,945
    
    
    
    18,286
    
    
    
    8,436
    
    
    
    11,856
    
    
    
    20,292Notes payable (6)
    
    
    6,862
    
    
    
    (6,852
    )
    
    
    10
    
    
    
    9,700
    
    
    
    (9,700
    )
    
    
    Unearned product license fees
    
    
    5,916
    
    
    
    
    
    
    
    5,916
    
    
    
    5,395
    
    
    
    
    
    
    
    5,395Total liabilities
    
    
    21,119
    
    
    
    3,093
    
    
    
    24,212
    
    
    
    23,531
    
    
    
    2,156
    
    
    
    25,687Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    222
    
    
    
    
    
    
    
    222
    
    
    
    221
    
    
    
    
    
    
    
    221Additional paid-in capital
    
    
    35,287
    
    
    
    (396
    )
    
    
    34,891
    
    
    
    34,938
    
    
    
    (273
    )
    
    
    34,665Treasury stock at cost
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )
    
    
    (105
    )
    
    
    
    
    
    
    (105
    )Accumulated deficit
    
    
    (837
    )
    
    
    (13,163
    )
    
    
    (14,000
    )
    
    
    (4,217
    )
    
    
    (8,460
    )
    
    
    (12,677
    )Total shareholders equity
    
    
    34,592
    
    
    
    (13,559
    )
    
    
    21,033
    
    
    
    30,837
    
    
    
    (8,733
    )
    
    
    22,104Total liabilities and
shareholders equity
    
    $
    55,711
    
    
    $
    (10,466
    )
    
    $
    45,245
    
    
    $
    54,368
    
    
    $
    (6,577
    )
    
    $
    47,791
 F-21




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (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. F-22




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share) Year ended December 31, 2002
    
    
    Year ended December 31, 2001As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues (1)
    
    $
    63,752
    
    
    $
    (2,829
    )
    
    $
    60,923
    
    
    $
    60,628
    
    
    $
    (3,684
    )
    
    $
    56,944Cost of goods sold (2)(3)
    
    
    36,317
    
    
    
    786
    
    
    
    37,103
    
    
    
    35,898
    
    
    
    (1,584
    )
    
    
    34,314Gross profit
    
    
    27,435
    
    
    
    (3,615
    )
    
    
    23,820
    
    
    
    24,730
    
    
    
    (2,100
    )
    
    
    22,630Operating expenses:Selling, general and
administrative (3)
    
    
    16,380
    
    
    
    357
    
    
    
    16,737
    
    
    
    16,404
    
    
    
    760
    
    
    
    17,164Research and development (3)
    
    
    2,950
    
    
    
    107
    
    
    
    3,057
    
    
    
    2,997
    
    
    
    480
    
    
    
    3,477Warehouse and distribution (3)
    
    
    2,297
    
    
    
    17
    
    
    
    2,314
    
    
    
    2,215
    
    
    
    5
    
    
    
    2,220Total operating expenses
    
    
    21,627
    
    
    
    481
    
    
    
    22,108
    
    
    
    21,616
    
    
    
    1,245
    
    
    
    22,861Income (loss) from operations
    
    
    5,808
    
    
    
    (4,096
    )
    
    
    1,712
    
    
    
    3,114
    
    
    
    (3,345
    )
    
    
    (231
    )Interest expense (3)
    
    
    (329
    )
    
    
    (37
    )
    
    
    (366
    )
    
    
    (596
    )
    
    
    (57
    )
    
    
    (653
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Income (loss) before income tax
expense
    
    
    5,479
    
    
    
    (4,133
    )
    
    
    1,346
    
    
    
    2,521
    
    
    
    (3,402
    )
    
    
    (881
    )Income tax expense (4)
    
    
    (2,099
    )
    
    
    1,738
    
    
    
    (361
    )
    
    
    (1,211
    )
    
    
    1,195
    
    
    
    (16
    )Income (loss) before cumulative effect of
change in accounting principle
    
    
    3,380
    
    
    
    (2,395
    )
    
    
    985
    
    
    
    1,310
    
    
    
    (2,207
    )
    
    
    (897
    )Cumulative effect of change in accounting
principle (5)
    
    
    
    
    
    
    (2,308
    )
    
    
    (2,308
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    3,380
    
    
    $
    (4,703
    )
    
    $
    (1,323
    )
    
    $
    1,310
    
    
    $
    (2,207
    )
    
    $
    (897
    )Basic income
(loss) per share before
cumulative effect of change in
accounting principle
    
    $
    0.15
    
    
    
    
    
    
    $
    0.04
    
    
    $
    0.06
    
    
    
    
    
    
    $
    (0.04
    )Cumulative effect of change in
accounting principle
    
    $
    
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    
    
    
    
    
    
    
    $
    Basic income (loss) per share
    
    $
    0.15
    
    
    
    
    
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    
    
    
    
    $
    (0.04
    )Basic shares outstanding
    
    
    22,115
    
    
    
    
    
    
    
    22,115
    
    
    
    22,038
    
    
    
    
    
    
    
    22,038Diluted
income (loss) per share before
cumulative effect of change in
accounting principle
    
    $
    0.15
    
    
    
    
    
    
    $
    0.04
    
    
    $
    0.06
    
    
    
    
    
    
    $
    (0.04
    )Cumulative effect of change in
accounting principle
    
    $
    
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    
    
    
    
    
    
    
    $
    Diluted income (loss) per share
    
    $
    0.15
    
    
    
    
    
    
    $
    (0.06
    )
    
    $
    0.06
    
    
    
    
    
    
    $
    (0.04
    )Diluted shares outstanding
    
    
    22,774
    
    
    
    
    
    
    
    22,774
    
    
    
    22,558
    
    
    
    
    
    
    
    22,038
  (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, correct miscellaneous
accounting accruals, and to restate research and development expenses improperly treated as an
indefinite lived asset.(4)
    Restated to reflect the deferred tax valuation allowance related to the Agri-Nutrition
merger in 2000.(5)
    Restated to reflect the impairment of goodwill. F-23




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the Year Ended December 31, 2002As reported
    
    
    Adjustments
    
    
    As restatedOperating activitiesNet income (loss)(1)
    
    $
    3,380
    
    
    $
    (4,703
    )
    
    $
    (1,323
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Cumulative effect of change in accounting principle (6)
    
    
    
    
    
    
    2,308
    
    
    
    2,308Provision for excess and obsolete inventories (4)
    
    
    364
    
    
    
    640
    
    
    
    1,004Depreciation and amortization
    
    
    1,383
    
    
    
    2
    
    
    
    1,385Provision for doubtful accounts
    
    
    125
    
    
    
    20
    
    
    
    145Recognition of unearned product license fees
    
    
    (129
    )
    
    
    
    
    
    
    (129
    )Provision for sales related reserves (5)
    
    
    
    
    
    
    1,319
    
    
    
    1,319Deferred tax provision
    
    
    
    
    
    
    311
    
    
    
    311Recognition of deferred tax expense (2)
    
    
    1,994
    
    
    
    (1,994
    )
    
    
    Issuance of stock to directors as compensation
    
    
    63
    
    
    
    
    
    
    
    63Loss on disposal of assets
    
    
    12
    
    
    
    14
    
    
    
    26Receipt of product license fees
    
    
    650
    
    
    
    
    
    
    
    650Changes in operating assets and liabilities, net of acquisitions:(Increase) decrease in accounts receivable (3)
    
    
    (1,309
    )
    
    
    2,173
    
    
    
    864Decrease in inventories (7)
    
    
    1,546
    
    
    
    (245
    )
    
    
    1,301Decrease in consigned inventories (7)
    
    
    
    
    
    
    374
    
    
    
    374Increase in prepaid expenses and other assets (10)
    
    
    (797
    )
    
    
    201
    
    
    
    (596
    )Decrease in accounts payable
    
    
    (1,445
    )
    
    
    
    
    
    
    (1,445
    )Decrease in sales related reserves (5)
    
    
    
    
    
    
    (129
    )
    
    
    (129
    )Increase in accrued expenses (10)
    
    
    1,936
    
    
    
    (252
    )
    
    
    1,684Net cash provided by operating activities
    
    
    7,773
    
    
    
    39
    
    
    
    7,812Investing activitiesPurchase of property, plant and equipment
    
    
    (1,504
    )
    
    
    
    
    
    
    (1,504
    )Acquisition of product license rights
    
    
    (2,683
    )
    
    
    
    
    
    
    (2,683
    )Other
    
    
    38
    
    
    
    (38
    )
    
    
    Net cash used in investing activities
    
    
    (4,149
    )
    
    
    (38
    )
    
    
    (4,187
    )Financing activitiesNet repayments under revolving line of credit (9)
    
    
    
    
    
    
    (3,446
    )
    
    
    (3,446
    )Proceeds from revolving line of credit and notes payable (9)
    
    
    11,921
    
    
    
    (11,911
    )
    
    
    10Repayment of revolving line of credit and notes payable (9)
    
    
    (15,356
    )
    
    
    15,356
    
    
    
    Change in outstanding checks in excess of funds on deposit
    
    
    10
    
    
    
    
    
    
    
    10Issuance of common stock
    
    
    189
    
    
    
    
    
    
    
    189Net cash used in financing activities
    
    
    (3,236
    )
    
    
    (1
    )
    
    
    (3,237
    )Increase in cash and cash equivalents
    
    
    388
    
    
    
    
    
    
    
    388Cash and cash equivalents, beginning of period
    
    
    477
    
    
    
    
    
    
    
    477Cash and cash equivalents, end of period
    
    $
    865
    
    
    $
    
    
    
    $
    865Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    347
    
    
    
    
    
    
    $
    347Cash paid for income taxes
    
    $
    126
    
    
    
    
    
    
    $
    126
 F-24




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) For the Year Ended December 31, 2001As reported
    
    
    Adjustments
    
    
    As restatedOperating activitiesNet income (loss)(1)
    
    $
    1,310
    
    
    $
    (2,207
    )
    
    $
    (897
    )Adjustments to reconcile net income (loss) to net cash
used in operating activities:Provision for excess and obsolete inventories (4)
    
    
    364
    
    
    
    516
    
    
    
    880Depreciation and amortization
    
    
    1,640
    
    
    
    139
    
    
    
    1,779Provision for doubtful accounts
    
    
    312
    
    
    
    (100
    )
    
    
    212Provision for sales related reserves (5)
    
    
    
    
    
    
    175
    
    
    
    175Provision for impairment (8)
    
    
    
    
    
    
    290
    
    
    
    290Deferred tax provision (2)
    
    
    1,189
    
    
    
    (1,189
    )
    
    
    Issuance of stock to directors as compensation
    
    
    21
    
    
    
    
    
    
    
    21Loss on disposal of assets
    
    
    103
    
    
    
    (36
    )
    
    
    67Receipt of product license fees
    
    
    150
    
    
    
    (5
    )
    
    
    145Changes in operating assets and liabilities, net of acquisitions:Increase in accounts receivable (3)
    
    
    (6,161
    )
    
    
    3,672
    
    
    
    (2,489
    )Decrease in inventories (7)
    
    
    194
    
    
    
    321
    
    
    
    515Increase in consigned inventories (7)
    
    
    
    
    
    
    (2,313
    )
    
    
    (2,313
    )Decrease (increase) in prepaid expenses and other current assets (10)
    
    
    104
    
    
    
    (197
    )
    
    
    (93
    )Increase in accounts payable (10)
    
    
    992
    
    
    
    107
    
    
    
    1,099Decrease in sales related reserves (5)
    
    
    
    
    
    
    (195
    )
    
    
    (195
    )Decrease in accrued expenses (10)
    
    
    (430
    )
    
    
    220
    
    
    
    (210
    )Net cash used in operating activities
    
    
    (212
    )
    
    
    (802
    )
    
    
    (1,014
    )Investing activitiesPurchase of property, plant and equipment
    
    
    (1,331
    )
    
    
    
    
    
    
    (1,331
    )Acquisition of product license rights
    
    
    (628
    )
    
    
    505
    
    
    
    (123
    )Proceeds from the sale of property, plant and equipment
    
    
    (294
    )
    
    
    297
    
    
    
    3Net cash used in investing activities
    
    
    (2,253
    )
    
    
    802
    
    
    
    (1,451
    )Financing activitiesNet borrowings under revolving line of credit (9)
    
    
    
    
    
    
    2,805
    
    
    
    2,805Proceeds from revolving line of credit and notes payable (9)
    
    
    13,816
    
    
    
    (13,816
    )
    
    
    Repayment of revolving line of credit and notes payable (9)
    
    
    (11,109
    )
    
    
    11,011
    
    
    
    (98
    )Change in outstanding checks in excess of funds on deposit
    
    
    (109
    )
    
    
    
    
    
    
    (109
    )Issuance of common stock
    
    
    40
    
    
    
    
    
    
    
    40Issuance of treasury stock
    
    
    32
    
    
    
    
    
    
    
    32Net cash provided by financing activities
    
    
    2,670
    
    
    
    
    
    
    
    2,670Increase in cash and cash equivalents
    
    
    205
    
    
    
    
    
    
    
    205Cash and cash equivalents, beginning of period
    
    
    272
    
    
    
    
    
    
    
    272Cash and cash equivalents, end of period
    
    $
    477
    
    
    $
    
    
    
    $
    477Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    598
    
    
    
    
    
    
    $
    598Cash paid for income taxes
    
    $
    78
    
    
    
    
    
    
    $
    78
 F-25




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (1)
    Restated as discussed in the consolidated statements of operations.(2)
    Restated due to a 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 the impairment of intangibles.(9)
    Restated to classify the Credit Agreement as current and reflect net borrowing activity.(10)
    Restated to reflect corrections of miscellaneous accounting accruals. F-26




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. 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. F-27




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. Virbac has until May 2, 2005 to file a responsive pleading. 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. F-28




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Future lease payments under non-cancelable operating
leases as of December 31, 2003 are as follows: (In thousands)2004
    
    $
    1892005
    
    
    1052006
    
    
    272007
    
    
    112008
    
    
    2Total minimum lease payments
    
    $
    334
 Total rent expense under operating leases was $338,000, $374,000 and $442,000 in 2003, 2002
and 2001, respectively. Acquisition of Licensing Rights In 1999, the Company acquired the rights to manufacture and sell products under development by
a third party for a period of 15 years. The Company has made milestone payments 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
Food and Drug Administration at 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 F-29




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 are recorded as research and
development expense in the periods in which they are incurred. Of the expected $1.4 million,
approximately $954,000 had been incurred through December 31, 2003. Pfizer Agreement In 2000, the Company entered into an agreement with 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 approximately $434,000 and $34,000 of
revenue during 2003 and 2002, respectively. Environmental PM Resources, Inc. 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 has requested and received reimbursement for costs incurred of
$397,000 through 2003. 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,
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 December 31, 2003, 181,500 pre-Merger options were F-30




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Delmarva Acquisition As more fully described below in Note 5, the Company purchased 100% of the outstanding shares
of the common stock of Delmarva Laboratories, Inc. (Delmarva) for a base purchase price of $2.5
million in cash and an 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 December 31, 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. Note 5. Acquisitions During 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. 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, 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 December 31, 2003 for the excess of the estimated fair value of
the acquired net assets over the initial cash payment. 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. F-31




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The acquisition has been accounted for as a purchase business combination. 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 cash and with borrowings under Virbacs Credit Agreement with
First Bank, dated as of September 7, 1999, as amended (the Credit Agreement). 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
    
    $
    4,760Working capital
    
    
    (5
    )Estimated fair value of acquired net assets
    
    
    4,755Liability related to contingent consideration
    
    
    2,173Cash 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 Companys 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
    
    $
    133Unfilled customer orders
    
    
    520Product rights
    
    
    13,630Property, plant and equipment
    
    
    196Goodwill
    
    
    745Cash 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. F-32




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 are considered not significant
and are 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 acquisition
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 Year Ended December 31,2003
    
    
    2002Net revenue
    
    $
    69,827
    
    
    $
    66,566Cost of goods sold
    
    
    42,704
    
    
    
    38,855Gross profit
    
    
    27,123
    
    
    
    27,711Operating expenses
    
    
    31,002
    
    
    
    24,153(Loss) income from operations
    
    
    (3,879
    )
    
    
    3,558Interest and other expense
    
    
    (1,351
    )
    
    
    (1,085
    )Income tax expense
    
    
    (84
    )
    
    
    (361
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    (2,308
    )Net loss
    
    $
    (5,313
    )
    
    $
    (196
    )Loss per share:Basic loss per share
    
    $
    (0.24
    )
    
    $
    (0.01
    )Diluted loss per share
    
    $
    (0.24
    )
    
    $
    (0.01
    )Basic shares outstanding
    
    
    22,234
    
    
    
    22,115Diluted shares outstanding
    
    
    22,234
    
    
    
    22,774
 Note 6. 2003 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. F-33




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##### Table of Contents



Note 7. Inventories Inventories consist of the following: December 31,(In thousands)
    
    2003
    
    
    2002(As restated)Raw materials
    
    $
    7,544
    
    
    $
    5,161Finished goods
    
    
    9,528
    
    
    
    7,47017,072
    
    
    
    12,631Less  reserve for excess and obsolete inventories
    
    
    (3,894
    )
    
    
    (1,798
    )$
    13,178
    
    
    $
    10,833
 Note 8. Property, Plant and Equipment Property, plant and equipment consist of the following: December 31,(In thousands)
    
    2003
    
    
    2002(As restated)Land
    
    $
    3,330
    
    
    $
    3,380Building and leasehold improvements
    
    
    7,333
    
    
    
    7,897Production equipment
    
    
    7,213
    
    
    
    6,159Vehicles
    
    
    15
    
    
    
    15Furniture and fixtures
    
    
    898
    
    
    
    871Computer equipment and software
    
    
    1,179
    
    
    
    1,19819,968
    
    
    
    19,520Less  accumulated depreciation
    
    
    (7,470
    )
    
    
    (6,708
    )$
    12,498
    
    
    $
    12,812
 In 2003, 2002 and 2001, depreciation expense was $1.4 million, $1.3 million and $1.2 million,
respectively. Note 9. Goodwill and Other Intangible Assets Effective July 1, 2001, the Company adopted certain provisions of SFAS No. 141 and effective
January 1, 2002 the Company adopted the full provisions of SFAS No. 141 and SFAS No. 142. SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording intangible assets apart from
goodwill. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no
longer be amortized, but instead be tested for impairment at least annually. The Company evaluated
its intangible assets and determined that patents and certain product rights have determinable
lives, while trademarks have indefinite lives. F-34




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with SFAS No. 142, the effect of this accounting change is reflected
prospectively. Supplemental comparative disclosure, as if the change had been retroactively applied
to the prior year period, is as follows: Year Ended(In thousands, except per share amounts)
    
    December 31, 2001(As restated)Net loss:Reported net loss
    
    $
    (897
    )Goodwill amortization
    
    
    631Adjusted net (loss) income
    
    $
    (266
    )Basic loss per share:Reported loss per share
    
    $
    (0.04
    )Goodwill amortization
    
    
    0.03Adjusted net (loss) income per share
    
    $
    (0.01
    )Diluted loss per share:Reported loss per share
    
    $
    (0.04
    )Goodwill amortization
    
    
    0.03Adjusted net (loss) income per share
    
    $
    (0.01
    )
 Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. The Companys reporting units are generally
consistent with the operating segments identified in Note 17. Segment and Related Information.
This methodology differs from the Companys previous policy, as provided under accounting standards
existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if
goodwill was recoverable. 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 a cumulative effect of accounting change in the accompanying
consolidated statements of operations. In calculating the impairment charge, the fair value of the
impaired reporting units underlying the segments was estimated using a discounted cash flow
methodology. The Company performed its annual impairment tests on the remaining goodwill during the fourth
quarter of 2003 and 2002 and found no evidence of impairment. 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. For the years 2003, 2002, and 2001, the
Company charged $9,000, $3,000 and zero, respectively, to expense related to impaired patents and
product rights with determinable lives and $36,000, zero and $15,000, respectively, to expense
related to impaired trademark rights with indefinite lives. The impairment charges by segment were
$12,000 in the Consumer Brand segment and $51,000 in the Veterinary segment. The impairment amounts
were recorded to selling, general and administrative expenses in the Consolidated Statements of
Operations. F-35




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill and other intangibles, net consist of the following: Goodwill, net: (In thousands)
    
    VeterinarySegmentDecember 31, 2002 (As restated)
    
    $
    4,826King acquisition
    
    
    745December 31, 2003
    
    $
    5,571
 Acquired Intangible Assets: As of December 31,2003
    
    
    2002(In thousands)
    
    
    
    
    
    
    
    
    
    (As restated)Accumulated
    
    
    Gross carrying
    
    
    AccumulatedGross carrying amount
    
    
    amortization
    
    
    amount
    
    
    amortizationIntangible assets subject to amortization:Patents
    
    $
    92
    
    
    $
    (36
    )
    
    $
    175
    
    
    $
    (30
    )Product rights
    
    
    21,069
    
    
    
    (596
    )
    
    
    2,399
    
    
    
    (50
    )Intangible assets not subject to
amortization:Trademarks
    
    
    692
    
    
    
    (132
    )
    
    
    553
    
    
    
    (130
    )Total intangible assets
    
    $
    21,853
    
    
    $
    (764
    )
    
    $
    3,127
    
    
    $
    (210
    )
 During 2002, the Company acquired the rights to a new anti-puritic product for $1.5 million.
The product is patented, and, accordingly, is being amortized over the expected period of benefit,
15 years. In addition, the Company modified its agreement with the patent holder of its oral
hygiene products. The original agreement required the Company to pay a royalty for each unit of
product sold. The Company satisfied all future royalty payments by making a lump sum payment of
$0.7 million which will be amortized over the expected period of benefit, 15 years. Other
additions to intangible assets included approximately $0.5 million for various trademark related
expenditures. In connection with the acquisitions described in Note 5, the Company acquired $18.4 million of
product rights, all of which have finite lives and are subject to amortization. The Company also
recorded contingent consideration of $2.2 million in connection with the Delmarva 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. F-36




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense for the year ended December 31, 2003 was $641,000. Amortization expense
for each of the next five years is expected to be (in thousands): 2004
    
    $
    9282005
    
    
    9282006
    
    
    9282007
    
    
    9282008
    
    
    928Total amortization
    
    $
    4,640
 Note 10. Borrowings Under Revolving Lines of Credit and Notes Payable (In thousands)
    
    December 31,2003
    
    
    2002(As restated)Credit Agreement with a financial
institution up to $30.0 million, varying
interest rate based on covenant ratios
(see below)
    
    $
    25,354
    
    
    $
    6,850Installment credit loan due September 2006
    
    
    10
    
    
    
    14Total debt
    
    
    25,364
    
    
    
    6,864Less current portion
    
    
    (25,357
    )
    
    
    (6,854
    )Notes payable
    
    $
    7
    
    
    $
    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. As of December 31, 2003 and 2002 the interest rate on the loans under the Credit
Agreement is 4.75% and 3.25%, respectively and there was $470,000 in letters of credit outstanding
under the Credit Agreement at December 31, 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. 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 F-37




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The standstill period has currently been extended to May 6, 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 February 28, 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 stockholder. 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 before May 6,
2005, once it has corrected its reporting requirements with the SEC, however there can be no
assurance the Companys lenders will agree to either of these arrangements. F-38




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Common Stock Transactions In 2002, under certain anti-dilution provisions of the Merger Agreement, the Company issued
52,061 shares of Common Stock to Interlab. Due to the issuance of approximately 40,000 shares of
Common Stock from the exercise of pre-Merger options during 2003, the Company is to issue
approximately 60,000 shares of Common Stock to Interlab. These shares are to be issued in 2005.
No shares were due or issued to Interlab in 2001 under such anti-dilution provisions. During 2003,
2002 and 2001, the Company also issued 9,000, 6,000 and 12,000 shares, respectively, of Common
Stock to certain directors as part of their compensation for serving on the Companys Board of
Directors. The Company charges as expense the closing value of the shares on the date they are
granted to the directors. The shares granted to the directors will dilute earnings per share. The
Company had several treasury stock transactions related to the issuance and purchase of shares of
stock associated with the activity of its Incentive Stock Option Plan and for compensation to
directors. Note 12. Stock Options As of December 31, 2003 the Company has stock options outstanding under two option plans. The
two plans include the 1994 Incentive Stock Plan, which has options outstanding but is inactive with
respect to new option grants, and the Virbac Corporation Incentive Stock Plan (collectively, the
Incentive Stock Plans), which became inactive with respect to new option grants on March 7, 2005. Under the terms of the Companys Incentive Stock Plans, officers and certain other employees
were granted options to purchase the Common Stock at the closing market price on the date that the
option was granted. For the years ended December 31, 2003, 2002 and 2001, options granted under
the plans were 305,000, 113,000 and 203,000, respectively. Options generally vest over three years
and have a maximum term of ten years. At December 31, 2003, a total of 270,000 shares were reserved
for issuance under the plans. A summary of the Incentive Stock Plans activity for the years shown is as follows: Weighted Average ExerciseOptions
    
    
    PriceBalance, December 31, 2000
    
    
    636,265
    
    
    $
    1.86Granted
    
    
    202,500
    
    
    
    3.44Exercised
    
    
    (46,066
    )
    
    
    1.60Forfeited and canceled
    
    
    (44,100
    )
    
    
    2.77Balance, December 31, 2001
    
    
    748,599
    
    
    
    2.25Granted
    
    
    112,841
    
    
    
    5.02Exercised
    
    
    (121,475
    )
    
    
    2.25Forfeited and canceled
    
    
    (38,219
    )
    
    
    3.61Balance, December 31, 2002
    
    
    701,746
    
    
    
    2.63Granted
    
    
    304,858
    
    
    
    5.85Exercised
    
    
    (57,857
    )
    
    
    2.00Forfeited and canceled
    
    
    (12,500
    )
    
    
    4.89Balance, December 31, 2003
    
    
    936,247
    
    
    
    3.68
 F-39




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: 2003
    
    
    2002
    
    
    2001Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    88.4
    %
    
    
    91.5
    %
    
    
    95.8
    %Risk-free interest rate
    
    
    4.3
    %
    
    
    3.9
    %
    
    
    5.2
    %Expected life (in years)
    
    
    6.9
    
    
    
    6.4
    
    
    
    7.0
 The following table summarizes information for stock options outstanding and exercisable at
December 31, 2003: Weighted Average
    
    
    ExercisableWeightedRange of Exercise
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AveragePrice
    
    Number Outstanding
    
    
    Remaining Life
    
    
    Exercise Price
    
    
    Number Outstanding
    
    
    Exercise Price$1.25 - $1.59
    
    
    297,500
    
    
    
    3.7
    
    
    $
    1.45
    
    
    
    297,500
    
    
    $
    1.45$2.03 - $2.94
    
    
    95,500
    
    
    
    5.9
    
    
    
    2.71
    
    
    
    95,500
    
    
    
    2.71$3.25 - $3.91
    
    
    131,666
    
    
    
    7.1
    
    
    
    3.40
    
    
    
    84,835
    
    
    
    3.41$4.45 - $5.00
    
    
    107,723
    
    
    
    8.2
    
    
    
    4.98
    
    
    
    48,639
    
    
    
    4.97$5.20 - $7.35
    
    
    303,858
    
    
    
    9.3
    
    
    
    5.84
    
    
    
    1,836
    
    
    
    5.27936,247
    
    
    
    
    
    
    
    
    
    
    
    528,310
 Note 13. Income Taxes The Company has recognized a net income tax provision as follows: December 31,(In thousands)
    
    2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Current
Federal
    
    $
    50
    
    
    $
    
    
    
    $
    16State
    
    
    34
    
    
    
    50
    
    
    
    Total current
    
    
    84
    
    
    
    50
    
    
    
    16Deferred
Federal
    
    
    
    
    
    
    283
    
    
    
    State
    
    
    
    
    
    
    28
    
    
    
    Total deferred
    
    
    
    
    
    
    311
    
    
    
    Total
    
    $
    84
    
    
    $
    361
    
    
    $
    16
 F-40




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VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the tax provision recorded for all periods to the amount computed using
the applicable federal statutory income tax rate, as follows: Year ended December 31,(In thousands)
    
    2003
    
    
    2002
    
    
    2001(As restated)
    
    
    (As restated)Tax benefit (expense) at federal statutory rate
    
    $
    (1,673
    )
    
    $
    458
    
    
    $
    (300
    )Adjustment due to:Non-deductible goodwill amortization
    
    
    
    
    
    
    
    
    
    
    175Non-deductible intangible amortization
    
    
    21
    
    
    
    
    
    
    
    State income taxes net of federal benefit
    
    
    (153
    )
    
    
    50
    
    
    
    (2
    )Valuation allowance
    
    
    1,651
    
    
    
    (175
    )
    
    
    152Fines and penalties
    
    
    192
    
    
    
    
    
    
    
    Other
    
    
    46
    
    
    
    28
    
    
    
    (9
    )Income tax expense
    
    $
    84
    
    
    $
    361
    
    
    $
    16
 Currently, and in the foreseeable future as the Company incurs tax expense or benefit, an
offsetting decrease or increase is generally 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 2001 and 2003 principally represents state income tax expense.
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. The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities are presented below: December 31,(In thousands)
    
    2003
    
    
    2002(As restated)Deferred tax assets:Tax in excess of book goodwill
    
    $
    2,663
    
    
    $
    2,907Net operating loss carryforwards
    
    
    1,069
    
    
    
    1,934Inventory
    
    
    1,975
    
    
    
    1,021Deferred income
    
    
    2,188
    
    
    
    603Other accruals and reserves
    
    
    1,273
    
    
    
    1,272Federal tax credits
    
    
    163
    
    
    
    112Total deferred tax assets
    
    
    9,331
    
    
    
    7,849Valuation allowance
    
    
    (8,807
    )
    
    
    (7,156
    )Net deferred tax assets
    
    
    524
    
    
    
    693Deferred tax liabilities:Tax in excess of book depreciation
    
    
    396
    
    
    
    503Prepaid expenses
    
    
    128
    
    
    
    190Total deferred tax liabilities
    
    
    524
    
    
    
    693Total net deferred tax assets
    
    $
    
    
    
    $
    
 F-41




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Generally accepted accounting principles require that historical operating performance weigh
heavily in assessing the realizability of deferred tax assets. The Company has had cumulative
losses for the three years ended December 31, 2003 and accordingly has established a full valuation
allowance for its deferred tax assets. The Company will assess 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. Of the $8.8 million valuation allowance at December 31,
2003, approximately $2.0 million related to the Companys purchase of Agri-Nutrition and $0.4
million related to stock options. If the Company subsequently recognizes tax benefits associated
with this $8.8 million valuation allowance, approximately $2.0 million will be released as a
reduction of goodwill and $0.4 million will be released through paid-in capital and the remainder
will represent an income tax benefit. The Company has available federal net operating loss carryforwards totaling approximately $2.8
million, which expire in the years 2018 to 2021. The Company also has available general business
tax credit and alternative minimum tax credit carryforwards totaling approximately $0.2 million.
The general business tax credits expire in the years 2005 to 2021; the alternative minimum tax
carryforwards may be carried forward indefinitely. Note 14. Employee Savings Plan The Company sponsors two 401(k) savings plans (the Plans). Former employees of Virbac, Inc.
and non-union former employees of Agri-Nutrition participate in one plan, while union employees of
PMR participate in a second plan. Substantially all employees of the Company may participate in
one of the Plans, subject to certain eligibility and entry requirements. Contributions to the
Plans result primarily from voluntary contributions from employees in the form of deferrals of up
to 15% or 20% of the employees salaries, depending upon the Plan. The Plans permit various
employer contributions. Employer contributions were $479,000, $452,000 and $283,000 for 2003, 2002
and 2001, respectively. Note 15. Selected Quarterly Data (unaudited) The following selected quarterly data should be read in conjunction with the Consolidated
Financial Statements. This information has been derived from unaudited consolidated financial
statements of Virbac that, in managements opinion, reflect all recurring adjustments necessary to
fairly present the Companys financial information when read in conjunction with the Consolidated
Financial Statements and notes thereto. This selected quarterly information has been restated for
the first and second quarters of 2003 from previously reported information filed in its Quarterly
Reports on Form 10-Q, and for all quarters of 2002 and 2001 from previously reported information
filed in its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, as a result of the
Restatement as discussed in Note 3. The results of operations for any quarter are not necessarily indicative of the results to be
expected for any future period. Additionally, under accounting principles generally accepted in the
U.S., quarterly computation of earnings per share are computed on a discrete period basis, and
therefore, the sum of the basic and fully diluted earnings per share number for each of the four
quarters of a year does not equal full-year basic and diluted earnings per share. The table below details restated unaudited quarterly results for each quarter for the last
three years: F-42




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Quarterly Period Ended(In thousands, except
    
    March 31, 2003
    
    
    June 30, 2003per share amounts)
    
    As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues
    
    $
    15,437
    
    
    $
    (1,154
    )
    
    $
    14,283
    
    
    $
    19,077
    
    
    $
    (1,543
    )
    
    $
    17,534Cost of goods sold
    
    
    9,404
    
    
    
    (435
    )
    
    
    8,969
    
    
    
    10,128
    
    
    
    447
    
    
    
    10,575Gross profit
    
    
    6,033
    
    
    
    (719
    )
    
    
    5,314
    
    
    
    8,949
    
    
    
    (1,990
    )
    
    
    6,959Operating expenses:Selling, general and
administrative
    
    
    5,340
    
    
    
    187
    
    
    
    5,527
    
    
    
    4,887
    
    
    
    221
    
    
    
    5,108Research and development
    
    
    1,177
    
    
    
    (43
    )
    
    
    1,134
    
    
    
    1,386
    
    
    
    (150
    )
    
    
    1,236Warehouse and distribution
    
    
    514
    
    
    
    24
    
    
    
    538
    
    
    
    664
    
    
    
    53
    
    
    
    717Total operating expenses
    
    
    7,031
    
    
    
    168
    
    
    
    7,199
    
    
    
    6,937
    
    
    
    124
    
    
    
    7,061(Loss) income from operations
    
    
    (998
    )
    
    
    (887
    )
    
    
    (1,885
    )
    
    
    2,012
    
    
    
    (2,114
    )
    
    
    (102
    )Interest expense
    
    
    (66
    )
    
    
    (9
    )
    
    
    (75
    )
    
    
    (86
    )
    
    
    (13
    )
    
    
    (99
    )(Loss) income before income tax
expense
    
    
    (1,064
    )
    
    
    (896
    )
    
    
    (1,960
    )
    
    
    1,926
    
    
    
    (2,127
    )
    
    
    (201
    )Income tax (expense) benefit
    
    
    405
    
    
    
    (405
    )
    
    
    
    
    
    
    (733
    )
    
    
    733
    
    
    
    Net (loss) income
    
    $
    (659
    )
    
    $
    (1,301
    )
    
    $
    (1,960
    )
    
    $
    1,193
    
    
    $
    (1,394
    )
    
    $
    (201
    )(Loss) earnings per share:Basic (loss) income per share
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.09
    )
    
    $
    0.05
    
    
    
    
    
    
    $
    (0.01
    )Diluted (loss) income per share
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.09
    )
    
    $
    0.05
    
    
    
    
    
    
    $
    (0.01
    )Basic shares outstanding
    
    
    22,216
    
    
    
    
    
    
    
    22,216
    
    
    
    22,228
    
    
    
    
    
    
    
    22,228Diluted shares outstanding
    
    
    22,216
    
    
    
    
    
    
    
    22,216
    
    
    
    22,833
    
    
    
    
    
    
    
    22,228
 F-43




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS UnauditedQuarterly Period Ended(In thousands, except
    
    September 30,
    
    
    December 31,per share amounts)
    
    2003
    
    
    2003Net revenues
    
    $
    18,008
    
    
    $
    17,252Cost of goods sold
    
    
    11,475
    
    
    
    10,405Gross profit
    
    
    6,533
    
    
    
    6,847Operating expenses:Selling, general and
administrative
    
    
    4,814
    
    
    
    7,295Research and development
    
    
    1,015
    
    
    
    1,562Warehouse and distribution
    
    
    657
    
    
    
    338Total operating expenses
    
    
    6,486
    
    
    
    9,195Income (loss) from operations
    
    
    47
    
    
    
    (2,348
    )Interest expense
    
    
    (155
    )
    
    
    (308
    )Other income
    
    
    
    
    
    
    5Loss before income tax
expense
    
    
    (108
    )
    
    
    (2,651
    )Income tax expense
    
    
    
    
    
    
    (84
    )Net loss
    
    $
    (108
    )
    
    $
    (2,735
    )Loss per share:Basic loss per share
    
    $
    
    
    
    $
    (0.12
    )Diluted loss per share
    
    $
    
    
    
    $
    (0.12
    )Basic shares outstanding
    
    
    22,244
    
    
    
    22,249Diluted shares outstanding
    
    
    22,244
    
    
    
    22,249
 F-44




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Quarterly Period Ended(In thousands, except
    
    March 31, 2002
    
    
    June 30, 2002per share amounts)
    
    As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues
    
    $
    15,889
    
    
    $
    (1,440
    )
    
    $
    14,449
    
    
    $
    15,649
    
    
    $
    (122
    )
    
    $
    15,527Cost of goods sold
    
    
    9,081
    
    
    
    (308
    )
    
    
    8,773
    
    
    
    8,767
    
    
    
    364
    
    
    
    9,131Gross profit
    
    
    6,808
    
    
    
    (1,132
    )
    
    
    5,676
    
    
    
    6,882
    
    
    
    (486
    )
    
    
    6,396Operating expenses:Selling, general and
administrative
    
    
    4,119
    
    
    
    135
    
    
    
    4,254
    
    
    
    4,354
    
    
    
    59
    
    
    
    4,413Research and development
    
    
    658
    
    
    
    (25
    )
    
    
    633
    
    
    
    779
    
    
    
    3
    
    
    
    782Warehouse and distribution
    
    
    625
    
    
    
    43
    
    
    
    668
    
    
    
    554
    
    
    
    (4
    )
    
    
    550Total operating expenses
    
    
    5,402
    
    
    
    153
    
    
    
    5,555
    
    
    
    5,687
    
    
    
    58
    
    
    
    5,745Income (loss) from operations
    
    
    1,406
    
    
    
    (1,285
    )
    
    
    121
    
    
    
    1,195
    
    
    
    (544
    )
    
    
    651Interest expense
    
    
    (100
    )
    
    
    (13
    )
    
    
    (113
    )
    
    
    (98
    )
    
    
    (12
    )
    
    
    (110
    )Other income
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    3
    
    
    
    
    
    
    
    3Income (loss) before income tax
expense
    
    
    1,310
    
    
    
    (1,298
    )
    
    
    12
    
    
    
    1,100
    
    
    
    (556
    )
    
    
    544Income tax expense
    
    
    (524
    )
    
    
    513
    
    
    
    (11
    )
    
    
    (440
    )
    
    
    299
    
    
    
    (141
    )Income (loss) before cumulative effect of
change in accounting principle:
    
    
    786
    
    
    
    (785
    )
    
    
    1
    
    
    
    660
    
    
    
    (257
    )
    
    
    403Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    (2,308
    )
    
    
    (2,308
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    786
    
    
    $
    (3,093
    )
    
    $
    (2,307
    )
    
    $
    660
    
    
    $
    (257
    )
    
    $
    403Basic income per share before
cumulative effect of change in
accounting principle
    
    $
    0.04
    
    
    
    
    
    
    $
    
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02Cumulative effect of change in
accounting principle
    
    $
    
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    
    
    
    
    
    
    
    $
    Diluted income (loss) per share
    
    $
    0.04
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02Basic shares outstanding
    
    
    22,073
    
    
    
    
    
    
    
    22,073
    
    
    
    22,106
    
    
    
    
    
    
    
    22,106Diluted income per share before
cumulative effect of change in
accounting principle
    
    $
    0.03
    
    
    
    
    
    
    $
    
    
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02Cumulative effect of change in
accounting principle
    
    $
    
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    
    
    
    
    
    
    
    $
    Diluted income (loss) per share
    
    $
    0.03
    
    
    
    
    
    
    $
    (0.10
    )
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02Diluted shares outstanding
    
    
    22,667
    
    
    
    
    
    
    
    22,667
    
    
    
    22,905
    
    
    
    
    
    
    
    22,905
 F-45




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Quarterly Period Ended(In thousands, except
    
    September 30, 2002
    
    
    December 31, 2002per share amounts)
    
    As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues
    
    $
    15,883
    
    
    $
    199
    
    
    $
    16,082
    
    
    $
    16,331
    
    
    $
    (1,466
    )
    
    $
    14,865Cost of goods sold
    
    
    9,153
    
    
    
    770
    
    
    
    9,923
    
    
    
    9,316
    
    
    
    (40
    )
    
    
    9,276Gross profit
    
    
    6,730
    
    
    
    (571
    )
    
    
    6,159
    
    
    
    7,015
    
    
    
    (1,426
    )
    
    
    5,589Operating expenses:Selling, general and
administrative
    
    
    3,949
    
    
    
    63
    
    
    
    4,012
    
    
    
    3,958
    
    
    
    100
    
    
    
    4,058Research and development
    
    
    630
    
    
    
    111
    
    
    
    741
    
    
    
    883
    
    
    
    18
    
    
    
    901Warehouse and distribution
    
    
    527
    
    
    
    (27
    )
    
    
    500
    
    
    
    591
    
    
    
    5
    
    
    
    596Total operating expenses
    
    
    5,106
    
    
    
    147
    
    
    
    5,253
    
    
    
    5,432
    
    
    
    123
    
    
    
    5,555Income from operations
    
    
    1,624
    
    
    
    (718
    )
    
    
    906
    
    
    
    1,583
    
    
    
    (1,549
    )
    
    
    34Interest expense
    
    
    (80
    )
    
    
    (7
    )
    
    
    (87
    )
    
    
    (51
    )
    
    
    (5
    )
    
    
    (56
    )Other expense
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Income (loss) before income tax
expense
    
    
    1,543
    
    
    
    (725
    )
    
    
    818
    
    
    
    1,526
    
    
    
    (1,554
    )
    
    
    (28
    )Income tax expense
    
    
    (596
    )
    
    
    388
    
    
    
    (208
    )
    
    
    (539
    )
    
    
    538
    
    
    
    (1
    )Net income (loss)
    
    $
    947
    
    
    $
    (337
    )
    
    $
    610
    
    
    $
    987
    
    
    $
    (1,016
    )
    
    $
    (29
    )Earnings per share:Basic income (loss) per share
    
    $
    0.04
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.04
    
    
    
    
    
    
    $
    Diluted income (loss) per share
    
    $
    0.04
    
    
    
    
    
    
    $
    0.03
    
    
    $
    0.04
    
    
    
    
    
    
    $
    Basic shares outstanding
    
    
    22,116
    
    
    
    
    
    
    
    22,116
    
    
    
    22,164
    
    
    
    
    
    
    
    22,164Diluted shares outstanding
    
    
    22,886
    
    
    
    
    
    
    
    22,886
    
    
    
    22,813
    
    
    
    
    
    
    
    22,164
 F-46




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Quarterly Period Ended(In thousands, except
    
    March 31, 2001
    
    
    June 30, 2001per share amounts)
    
    As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues
    
    $
    14,987
    
    
    $
    (396
    )
    
    $
    14,591
    
    
    $
    15,974
    
    
    $
    393
    
    
    $
    16,367Cost of goods sold
    
    
    9,027
    
    
    
    44
    
    
    
    9,071
    
    
    
    9,424
    
    
    
    100
    
    
    
    9,524Gross profit
    
    
    5,960
    
    
    
    (440
    )
    
    
    5,520
    
    
    
    6,550
    
    
    
    293
    
    
    
    6,843Operating expenses:Selling, general and
administrative
    
    
    3,614
    
    
    
    140
    
    
    
    3,754
    
    
    
    4,098
    
    
    
    138
    
    
    
    4,236Research and development
    
    
    609
    
    
    
    (9
    )
    
    
    600
    
    
    
    840
    
    
    
    460
    
    
    
    1,300Warehouse and distribution
    
    
    523
    
    
    
    (3
    )
    
    
    520
    
    
    
    628
    
    
    
    
    
    
    
    628Total operating expenses
    
    
    4,746
    
    
    
    128
    
    
    
    4,874
    
    
    
    5,566
    
    
    
    598
    
    
    
    6,164Income from operations
    
    
    1,214
    
    
    
    (568
    )
    
    
    646
    
    
    
    984
    
    
    
    (305
    )
    
    
    679Interest expense
    
    
    (167
    )
    
    
    (20
    )
    
    
    (187
    )
    
    
    (173
    )
    
    
    (13
    )
    
    
    (186
    )Other income (expense)
    
    
    (29
    )
    
    
    
    
    
    
    (29
    )
    
    
    69
    
    
    
    
    
    
    
    69Income before income tax
expense
    
    
    1,018
    
    
    
    (588
    )
    
    
    430
    
    
    
    880
    
    
    
    (318
    )
    
    
    562Income tax expense
    
    
    (437
    )
    
    
    437
    
    
    
    
    
    
    
    (383
    )
    
    
    383
    
    
    
    Net income
    
    $
    581
    
    
    $
    (151
    )
    
    $
    430
    
    
    $
    497
    
    
    $
    65
    
    
    $
    562Earnings per share:Basic income per share
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    
    
    
    
    $
    0.03Diluted income per share
    
    $
    0.03
    
    
    
    
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    
    
    
    
    $
    0.02Basic shares outstanding
    
    
    22,029
    
    
    
    
    
    
    
    22,029
    
    
    
    22,031
    
    
    
    
    
    
    
    22,031Diluted shares outstanding
    
    
    22,673
    
    
    
    
    
    
    
    22,673
    
    
    
    22,773
    
    
    
    
    
    
    
    22,773
 F-47




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS VIRBAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Quarterly Period Ended(In thousands, except
    
    September 30, 2001
    
    
    December 31, 2001per share amounts)
    
    As reported
    
    
    Adjustments
    
    
    As restated
    
    
    As reported
    
    
    Adjustments
    
    
    As restatedNet revenues
    
    $
    14,695
    
    
    $
    (780
    )
    
    $
    13,915
    
    
    $
    14,972
    
    
    $
    (2,901
    )
    
    $
    12,071Cost of goods sold
    
    
    8,518
    
    
    
    (464
    )
    
    
    8,054
    
    
    
    8,929
    
    
    
    (1,264
    )
    
    
    7,665Gross profit
    
    
    6,177
    
    
    
    (316
    )
    
    
    5,861
    
    
    
    6,043
    
    
    
    (1,637
    )
    
    
    4,406Operating expenses:Selling, general and
administrative
    
    
    4,335
    
    
    
    77
    
    
    
    4,412
    
    
    
    4,357
    
    
    
    405
    
    
    
    4,762Research and development
    
    
    791
    
    
    
    (21
    )
    
    
    770
    
    
    
    757
    
    
    
    50
    
    
    
    807Warehouse and distribution
    
    
    544
    
    
    
    
    
    
    
    544
    
    
    
    520
    
    
    
    8
    
    
    
    528Total operating expenses
    
    
    5,670
    
    
    
    56
    
    
    
    5,726
    
    
    
    5,634
    
    
    
    463
    
    
    
    6,097Income (loss) from operations
    
    
    507
    
    
    
    (372
    )
    
    
    135
    
    
    
    409
    
    
    
    (2,100
    )
    
    
    (1,691
    )Interest expense
    
    
    (150
    )
    
    
    (12
    )
    
    
    (162
    )
    
    
    (106
    )
    
    
    (12
    )
    
    
    (118
    )Other income (expense)
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Income (loss) before income tax
expense
    
    
    360
    
    
    
    (384
    )
    
    
    (24
    )
    
    
    263
    
    
    
    (2,112
    )
    
    
    (1,849
    )Income tax expense
    
    
    (154
    )
    
    
    154
    
    
    
    
    
    
    
    (237
    )
    
    
    221
    
    
    
    (16
    )Net income (loss)
    
    $
    206
    
    
    $
    (230
    )
    
    $
    (24
    )
    
    $
    26
    
    
    $
    (1,891
    )
    
    $
    (1,865
    )Earnings per share:Basic income (loss) per share
    
    $
    0.01
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    (0.08
    )Diluted income (loss) per share
    
    $
    0.01
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    (0.08
    )Basic shares outstanding
    
    
    22,040
    
    
    
    
    
    
    
    22,040
    
    
    
    22,052
    
    
    
    
    
    
    
    22,052Diluted shares outstanding
    
    
    22,645
    
    
    
    
    
    
    
    22,040
    
    
    
    22,588
    
    
    
    
    
    
    
    22,052
 F-48




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16. Related Party Transactions Transactions with VBSA In the ordinary course of business, the Company has engaged in various transactions with VBSA,
which indirectly owns approximately 60% of the Common Stock. The significant transactions with VBSA
and its related affiliates as of and for the three year period ended December 31, 2003, are
summarized below. Distribution Agreement On December 3, 1999, the Company entered into an agreement appointing VBSA and its affiliates
as the sole and exclusive distributors of the Companys current and future range of specified pet
health care products for all channels of trade worldwide other than the United States and Canada.
Under the terms of the distribution agreement, the Company can distribute directly to certain
customers at the election of VBSA. On December 2, 2004, the distribution agreement automatically
renewed for a second 5-year term. Under the renewed terms of the distribution agreement, the
Company agrees to provide manufacturing services to VBSA and VBSA agrees to use its best efforts to
promote, sell and distribute Virbacs products internationally. The current agreed purchase prices
of the products are 12.6% over the Companys current cost. During 2003, 2002 and 2001 Virbac
recorded $1.2 million, $1.4 million and $1.1 million, respectively of product sales to VBSA and its
affiliates under the terms of the distribution agreement. Development and License Agreement On January 21, 2001, the Company entered into an agreement with VBSA to govern the
apportionment of research and development costs, grant certain licenses and require the payment of
royalties for existing and new products. This development and license agreement was in effect
until December 31, 2004, and thereafter automatically renews for additional one-year terms unless
terminated by written notice not less than 90 days prior to the beginning of any new one-year term.
Under the terms of the development and license agreement, VBSA provides the Company with the
exclusive rights, in the United States and Canada, to sell specified products that are currently in
development or that were previously developed by VBSA. As consideration for the grant of certain
licenses and the payment of research and development costs by VBSA, the Company shall pay VBSA a
royalty of 6% of the net sales of certain existing products sold by the Company in the United
States and Canada. In addition, the Company and VBSA provided each other with mutual licenses with
respect to the sale, manufacture and distribution of certain newly developed products. The
licensee, whether such licensee is the Company or VBSA, shall pay the licensor a royalty equal to
3% of the licensees net sales of and licensing revenues from generic new products (as defined in
the agreement) and a royalty equal to 6% of the licensees net sales of and licensing revenues from
proprietary new products (as defined in the agreement). In 2003, 2002 and 2001 the Company paid
approximately $61,000, $179,000 and zero, respectively in royalty payments to VBSA and VBSA and
made no royalty payments to the Company. The development and license agreement was amended to
provide that Virbac pay a royalty of 2.5% on the net sales of livestock de-wormer products
beginning January 1, 2002. Supply Agreement On March 1, 2002, the Company entered into a supply agreement with VBSA pursuant to which VBSA
agreed to manufacture, register, supply and provide quality assurance for certain specified health
products containing regulated pesticides. This agreement is scheduled to remain in force until
February F-49




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28, 2007, unless terminated earlier by a written mutual consent of both parties. During
2003, 2002 and 2001 the Company paid VBSA $1.5 million, $0.6 million and $2.5 million, respectively for
products under the supply agreement. License Agreement  Pyriproxyfen On September 29, 2000, the Company entered into a license agreement with VBSA in order to
grant VBSA a license of the U.S. patent rights of the Company in the use of Pyriproxyfen (PPF) as
an ingredient in certain dog or cat foods. The Company granted to VBSA an exclusive license with
the right to grant sublicenses to manufacture, use, distribute and sell PPF as an ingredient in dog
and cat foods under U.S. Patent numbers 5,439,924 and 5,728,719 in the United States. In
consideration for the license, VBSA agreed to pay the Company $80,000 upon its entrance into any
sublicense agreement and an additional 40% of all cash payments received from any such sublicensee
at the time of registration approval and launch of the PPF product. In addition, the license
agreement requires VBSA to pay the Company 1.2% of the PPF products net sales made through the
ethical sales channel and 0.8% of the net sales made through the over-the-counter sales channel.
The license agreement remains in effect until the expiration date of the last patent held in the
United States, or until terminated by either VBSA or the Company. During 2003, 2002 and 2001 the
Company received no royalty payments from VBSA. Sub License Agreement On April 5, 1999, the Company and VBSA entered into a Sub License Agreement pursuant to which
VBSA granted Virbac the right to manufacture and market products that VBSA has licensed from
Capulis S.A., a French corporation. Products subject to this agreement include micro-encapsulation
processes applicable to veterinary products for dogs, cats, fish and veterinary dental care.
Pursuant to this agreement, Virbac pays a 2% royalty to VBSA on sales. During 2003, 2002 and 2001
Virbac made approximately $86,000, $77,000 and $131,000 in royalty payments to VBSA under the terms
of this agreement. Trademark Agreement On April 2, 2003, the Company and VBSA agreed to allow each other, at no charge, the right of
first refusal for use of their respective trademarks. The Companies have agreed to keep each other
informed of any trademarks they maintain. While the Companies are currently honoring the terms of
this arrangement, a formal written agreement has not yet been entered into. The Company expects to
execute a formal written agreement prior to the end of 2005. Directors and Officers Insurance Procurement Agreement VBSA acquired a 2004 Directors and Officers insurance policy for VBSA and the Company (the
D&O Policy). The coverage limit of the D&O Policy is $5.0 million and the annual premium for such
policy is $629,000. The Audit Committee has approved that 75% of this annual premium is to be paid
by the Company. Secrecy Agreements The Company has entered into various Secrecy Agreements with VBSA whereby the Company agrees
to keep confidential any information disclosed to it by VBSA with regard to certain products and
applications. The agreement terms are indefinite or expire when the confidential information is
made available by its owner to the public. F-50




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. 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 and 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. 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: F-51




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consumer
    
    
    Contract(In thousands)
    
    Veterinary
    
    
    Brand
    
    
    Manufacturing
    
    
    Unallocated
    
    
    ConsolidatedAs of and for the year ended
December 31, 2003Revenues from external
customers
    
    $
    29,831
    
    
    $
    22,850
    
    
    $
    14,396
    
    
    $
    
    
    
    $
    67,077Depreciation and amortization
    
    
    613
    
    
    
    68
    
    
    
    925
    
    
    
    403
    
    
    
    2,009Income (loss) from operations
    
    
    4,273
    
    
    
    1,080
    
    
    
    2,930
    
    
    
    (12,571
    )
    
    
    (4,288
    )Interest
expense and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    (632
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84
    )
    
    
    (84
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,004
    )Total assets
    
    
    3,870
    
    
    
    2,240
    
    
    
    13,906
    
    
    
    45,129
    
    
    
    65,145Capital expenditures
    
    
    
    
    
    
    
    
    
    
    725
    
    
    
    598
    
    
    
    1,323As of and for the year ended
December 31, 2002 (As
restated)Revenues from external
customers
    
    $
    28,726
    
    
    $
    22,794
    
    
    $
    9,403
    
    
    $
    
    
    
    $
    60,923Depreciation and amortization
    
    
    56
    
    
    
    59
    
    
    
    898
    
    
    
    372
    
    
    
    1,385Income (loss) from operations
    
    
    6,342
    
    
    
    206
    
    
    
    1,043
    
    
    
    (5,879
    )
    
    
    1,712Interest
expense and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (366
    )
    
    
    (366
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (361
    )
    
    
    (361
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,323
    )Total assets
    
    
    12,620
    
    
    
    1,973
    
    
    
    15,752
    
    
    
    14,900
    
    
    
    45,245Capital expenditures
    
    
    
    
    
    
    
    
    
    
    830
    
    
    
    674
    
    
    
    1,504As of and for the year ended
December 31, 2001 (As
restated)Revenues from external
customers
    
    $
    24,377
    
    
    $
    24,034
    
    
    $
    8,533
    
    
    $
    
    
    
    $
    56,944Depreciation and amortization
    
    
    220
    
    
    
    77
    
    
    
    886
    
    
    
    596
    
    
    
    1,779Income (loss) from operations
    
    
    6,127
    
    
    
    4,124
    
    
    
    (1,467
    )
    
    
    (9,015
    )
    
    
    (231
    )Interest
expense and other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650
    )
    
    
    (650
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (897
    )Total assets
    
    
    6,286
    
    
    
    2,481
    
    
    
    12,357
    
    
    
    26,667
    
    
    
    47,791Capital expenditures
    
    
    
    
    
    
    
    
    
    
    652
    
    
    
    679
    
    
    
    1,331
 F-52




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 2003, 2002 and 2001, the Company sold its products in the U.S. and Canada. The Company
also recognizes export sales for product sold to VBSA affiliates outside of North America. All
property owned by the Company is located in the United States. The following table presents
revenue by country based on location of the customer: (In thousands)
    
    2003
    
    
    2002
    
    
    2001(As restated)
    
    (As restated)United States
    
    $
    63,747
    
    
    $
    57,026
    
    
    $
    53,551Canada
    
    
    1,118
    
    
    
    1,892
    
    
    
    1,631Export
    
    
    2,212
    
    
    
    2,005
    
    
    
    1,762Total revenue
    
    $
    67,077
    
    
    $
    60,923
    
    
    $
    56,944
 Note 18. Subsequent Events On November 24, 2003, the Company announced that it 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. See Note 3.
Restatement of Consolidated Financial Statements. Related to this announcement, on February 13, 2004, the SEC notified Virbac that it had
commenced a formal investigation of the Company. Upon completion of its investigation the SEC
informed the Company on January 10, 2005 that the staff intends to recommend to the Commission that
it authorize an enforcement action against the Company alleging that the Company violated certain
provisions of the federal securities laws. 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. The Company has been named as a defendant in various lawsuits related to the effect the
Companys past accounting practices had on its financial statements. See Note 4. Commitments and
Contingencies for a further discussion with regard to legal proceedings. F-53




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##### Table of Contents



VIRBAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As a result of its inability to timely file its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, the Companys Common Stock was delisted from the NASDAQ National Market,
effective January 23, 2004. The Company intends to file a new listing application with NASDAQ once it has filed all
necessary reports under the federal securities laws, including those on Form 10-Q and Form 10-K,
with the SEC. Although the Company currently believes it will satisfy all relevant requirements
for listing of its 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. 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 under its Credit Agreement facility.
Subsequently, as a result of this default, on April 9, 2004 the Company entered into a Forbearance
Agreement with its lenders. Under the terms of the Forbearance Agreement, the Company has reduced
its borrowings outstanding, has been required to pay a higher rate of interest and has been subject
to certain operating and reporting covenants. The Company continues to operate under the terms of
the Forbearance Agreement. In order to reduce the amount outstanding under the Credit Agreement,
the Company executed three promissory notes with VBSA in April and June of 2004. The total
borrowings under the VBSA notes is $9.0 million and currently mature on October 9, 2005. See Note
10 Borrowings Under Revolving Lines of Credit and Notes Payable for a further discussion of these
items. In 2004 and into 2005, the Companys ongoing cash requirements and operating expenses have
been unusual due to elevated legal and accounting fees associated with the investigation launched
by the Audit Committee, 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. F-54




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##### Table of Contents



VIRBAC CORPORATION
SCHEDULE II  RULE 12-09
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2001, 2002 and 2003 VIRBAC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2001, 2002 and 2003 (In thousands)Column A
    
    Column B
    
    
    Column C
    
    Column D
    
    
    
    Column EAdditionsBalance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    
    Costs and
    
    
    other
    
    
    
    
    
    
    
    
    
    
    End ofDescription
    
    of Year
    
    
    Expenses
    
    
    accounts
    
    
    Deductions
    
    
    
    
    
    
    YearYear ended December 31, 2001 (As restated)Inventory reserve
    
    $
    583
    
    
    $
    880
    
    
    $
    39
    
    
    
    
    
    
    
    
    
    
    $
    1,502Allowance for doubtful accounts
    
    
    101
    
    
    
    212
    
    
    
    
    
    
    
    191
    
    
    
   (2)
    
    
    
    122Sales related reserves
    
    
    1,558
    
    
    
    103
    
    
    
    
    
    
    
    180
    
    
    
    (3)
    
    
    
    1,481Product replacement reserves
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    15
    
    
    
    (4)
    
    
    
    57Deferred tax valuation reserve
    
    
    7,355
    
    
    
    
    
    
    
    181
    (5)
    
    
    
    
    
    
    
    
    
    
    7,536Year ended December 31, 2002 (As restated)Inventory reserve
    
    $
    1,502
    
    
    $
    1,004
    
    
    $
    
    
    
    $
    708
    
    
    
    (1)
    
    
    $
    1,798Allowance for doubtful accounts
    
    
    122
    
    
    
    145
    
    
    
    
    
    
    
    132
    
    
    
    (2)
    
    
    
    135Sales related reserves
    
    
    1,481
    
    
    
    877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,358Product replacement reserves
    
    
    57
    
    
    
    442
    
    
    
    
    
    
    
    129
    
    
    
    (4)
    
    
    
    370Deferred tax valuation reserve
    
    
    7,536
    
    
    
    
    
    
    
    
    
    
    
    380
    
    
    
    (5)
    
    
    
    7,156Year ended December 31, 2003Inventory reserve
    
    $
    1,798
    
    
    $
    2,353
    
    
    $
    
    
    
    $
    257
    
    
    
   (1)
    
    
   $
    3,894Allowance for doubtful accounts
    
    
    135
    
    
    
    80
    
    
    
    
    
    
    
    86
    
    
    
    (2)
    
    
    
    129Sales related reserves
    
    
    2,358
    
    
    
    127
    
    
    
    
    
    
    
    117
    
    
    
    (3)
    
    
    
    2,368Product replacement reserves
    
    
    370
    
    
    
    409
    
    
    
    
    
    
    
    545
    
    
    
    (4)
    
    
    
    234Deferred tax valuation reserve
    
    
    7,156
    
    
    
    
    
    
    
    1,651
    (5)
    
    
    
    
    
    
    
    
    
    
    8,807
 (1) During the year inventory was removed from stock and destroyed. (2) Accounts receivable were written off during the year because they were deemed to be uncollectible. (3) Rebates, discounts or refunds for customer returns were allowed against customer receivable amounts. (4) Customer product replaced upon expiration. (5) Change in the deferred tax valuation. F-55