UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

COMMISSION FILE NUMBER: 0-24312

VIRBAC CORPORATION

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:

      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.

Virbac Corporation

Table of Contents

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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:

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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.

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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

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and related cost of sales of any product shipped after midnight on the final day of the applicable quarter.

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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.

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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.

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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

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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

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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.

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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:

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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

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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.

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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:

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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;

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

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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.”)

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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.

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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

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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

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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.

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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

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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

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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

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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.

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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.

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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

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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,

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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.

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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.

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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.

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