S-1 1 ds1.htm FORM S-1 FORM S-1
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As filed with the Securities and Exchange Commission on September 28, 2006

Registration No. 333-            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


ANIMAL HEALTH INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   5047   71-0982698
(State of Incorporation)   (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer
Identification Number)

7 Village Circle, Suite 200

Westlake, Texas 76262

(817) 859-3000

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 


James C. Robison

Chairman, Chief Executive Officer and President

Animal Health International, Inc.

7 Village Circle, Suite 200

Westlake, Texas 76262

(817) 859-3000

(Name, Address, Including Zip Code, and Telephone Number,

Including Area Code, of Agent For Service)

 


Copies to:

 

Stuart M. Cable, Esq.

John M. Mutkoski, Esq.

Michael S. Turner, Esq.

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

(617) 570-1000

 

Michael Kaplan, Esq.

Davis Polk & Wardwell

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 


Approximate date of commencement of proposed sale to the public:    As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 


CALCULATION OF REGISTRATION FEE

 


Title of Each Class of

Securities to be Registered

   Proposed Maximum
Aggregate Offering Price(1)
  

Amount of

Registration Fee(2)

Common Stock, $0.01 par value per share

   $155,250,000    $16,612

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(2)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price and includes the offering price of additional shares that the underwriters have the option to purchase.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

 



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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated                     , 2006

Prospectus

                     shares

LOGO

Animal Health International, Inc.

 

Common stock

This is our initial public offering of common stock. We are offering              shares of common stock and the selling stockholders identified in this prospectus are offering              shares of common stock. We will not receive any proceeds from the sale of the shares by the selling stockholders. The estimated initial public offering price is between $             and $             per share.

Prior to this offering, there has been no public market for our common stock. We have applied for quotation of our common stock on the Nasdaq Global Market under the symbol “AHII.”

 

      Per share    Total

Initial public offering price

   $                 $                         

Underwriting discounts and commissions

   $      $  

Proceeds to us, before expenses

   $      $  

Proceeds to selling stockholders, before expenses

   $      $  
 

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to                  additional shares of common stock if the underwriters sell more than                  shares of common stock in this offering.

Investing in our common stock involves a high degree of risk. See “ Risk factors” beginning on page 8.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

JPMorgan

 

William Blair & Company   
     Piper Jaffray     
          Robert W. Baird & Co.

                    , 2006


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Table of contents

 

    Page

Summary

  1

Risk factors

  8

Special note regarding forward-looking statements

  22

Use of proceeds

  23

Dividend policy

  24

Capitalization

  25

Dilution

  26

Selected consolidated financial data

  27

Management’s discussion and analysis of financial condition and results of operations

  29

Business

  39

Management

  54

Certain transactions

  69

Principal and selling stockholders

  71

Description of capital stock

  73

Shares eligible for future sale

  78

Material U.S. federal tax consequences for non-U.S. holders

  81

Underwriting

  84

Legal matters

  88

Experts

  88

Where you can find more information

  88

Index to consolidated financial statements

  F-1

“Animal Health International, Inc.,” “Walco International” and “Mineral Max” are unregistered trademarks of Animal Health International, Inc. and its subsidiaries. “RXV Products,” “AGRIpharm,” “First Companion” and “Ivermax” are registered trademarks of Animal Health International, Inc. and its subsidiaries. This prospectus also includes references to registered service marks and trademarks of other entities.

 

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Summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk factors” and our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus, before making an investment decision. We use “Animal Health International,” the “Company,” “we,” “us” and “our” in this prospectus to refer to Animal Health International, Inc. and its subsidiaries. Our fiscal year ends on June 30. Accordingly, a reference to “fiscal 2006” means the 12-month period ended June 30, 2006. Unless otherwise indicated, all statistical information provided about our business in this prospectus speaks as of June 30, 2006.

Our business

Based upon net sales, we believe we are the largest distributor of animal health products in the United States. We sell more than 35,000 products sourced from over 1,500 manufacturers to over 62,000 customers, as well as provide consultative services to our customers in the highly fragmented animal health products industry. Products we distribute include pharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment, sanitizers, devices and supplies. Our principal customers are veterinarians, production animal operators and animal health product retailers. We believe our customers purchase from us due to our longstanding relationships with them, knowledge of their businesses, excellent service and ability to assist them in their operations. We have a 287 person sales force, including 218 field sales representatives. We process daily shipments from our central replenishment and distribution facility in Memphis, Tennessee and 67 distribution locations strategically located across the United States and Canada.

For our fiscal year ended June 30, 2006, our net sales and operating income were $571.2 million and $23.8 million, respectively. Approximately 45% of our net sales were to veterinarians, with the remaining 55% principally to production animal operators and animal health product retailers.

Our industry

According to the Animal Health Institute, an industry group representing animal health products manufacturers, animal health product sales in the United States for 2005 totaled approximately $5.3 billion, an increase from approximately $4.8 billion in 2003, representing a compounded annual growth rate of approximately 5.5%. The animal health products market is divided into two markets: production animals and companion animals. The production animal market primarily consists of beef and dairy cattle, poultry and swine, while the companion animal market primarily consists of horses, dogs and cats. The Animal Health Institute estimates that in 2005 the market for production animal health products was approximately $2.4 billion and the market for companion animal health products was approximately $2.9 billion.

Distributors are critical to the animal health products supply chain. They provide thousands of multi-product manufacturers with cost-effective access to millions of geographically diverse customers. Distributors also provide customers with access to a broad selection of products through a single channel, thereby helping them efficiently manage inventory levels.

 

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Our strengths

We believe that our strengths include:

Leading distributor of animal health products.    Based upon net sales, we believe we are the leading animal health products distributor in the United States. We believe we are the largest distributor in the production animal health products market and a leader in the companion animal health products market. We believe that we have a cost advantage over many of our competitors due to our leading market position and strong relative local market share, enabling us to negotiate more favorable terms with our manufacturers and more effectively serve our customers.

Broad product offering to a fragmented and geographically dispersed market.    We believe that we add significant value to both customers seeking a single source solution for their product and service needs as well as manufacturers seeking cost-effective access to a fragmented and geographically dispersed customer base. As the animal health products industry is fragmented throughout the supply chain, we believe that we can drive market share for our manufacturers by matching our vast product offerings with the needs of more than 26,000 customers served directly by our sales force.

Longstanding relationships with our customers and manufacturers.    We have developed longstanding strategic relationships with many of our customers and manufacturers. Our diverse customer base consists of veterinarians, production animal operators and animal health product retailers. We have over 26,000 accounts served directly by our sales force and approximately 36,000 additional accounts that are served by Internet and catalog sales. Approximately 90% of our top 500 customers that placed orders with us in 2002 still order from us today. We believe manufacturers establish strategic relationships with us to access our extensive customer base and because we are able to effectively place and accelerate demand for products with our highly trained consultative sales force. While manufacturers often have relationships with multiple distributors, our 10 largest manufacturers have been working with us for over 20 years.

Consultative sales approach.    Our 287 person sales force is extensively trained in and has expansive knowledge of the animal health products industry. On average, they have worked with us for approximately nine years, live in the local communities in which they serve and have a deep understanding of our customers’ needs. As trusted consultants, they actively advise customers in areas such as product selection, treatment regimens and technology applications. In a primarily relationship-driven industry, we believe our highly trained, consultative sales organization distinguishes us from our competitors.

Sophisticated, highly scaleable and customized information technology platform.    We have spent approximately $19.0 million over the past five years developing an industry leading, highly scaleable and customized information technology platform. We believe our technology platform’s comprehensive real-time information affords us a competitive advantage in product pricing, inventory control and customer management, and has the capacity to support a doubling of our product sales, with minimal incremental investment.

Experienced management team.    We have a strong, experienced and disciplined management team with significant animal health products industry expertise. Our team has successfully managed geographically dispersed operations by effectively utilizing our centralized

 

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infrastructure. Our management team has an average of over 15 years of experience in the animal health products industry, which has been instrumental to growing our business, both organically and through acquisitions.

Our strategy

Our mission is to become the leading worldwide provider of animal health products and services in the production animal and companion animal health products markets. Our strategy to achieve this mission is outlined below.

Continue to grow our business organically.    We intend to increase our share of animal health product purchases by optimizing our sales efforts and expanding our consultative services. We will continue to sell additional products needed by our customers, add distribution locations to better serve our customer base, increase our focus on corporate accounts and recruit and train sales representatives to successfully penetrate new territories. We also believe that we can continue to extend our strong manufacturer relationships from our production animal health products business to our companion animal health products customers.

Expand sales of proprietary products.    We believe that the quality of our proprietary branded products in conjunction with our competitive pricing strategy has generated a loyal customer base that is highly confident in our branded products. We believe we can partner with domestic and international manufacturers to continue to grow our proprietary branded products business by marketing new specialty niche products. We selectively target product areas to expand our proprietary branded products portfolio while maintaining our strategic manufacturer relationships. A significant number of products will be coming off patent in the next several years, providing us with a strong pipeline of proprietary branded product opportunities.

Continue to improve operational efficiencies.    We have made significant investments in our distribution infrastructure and information technology platform over the past several years. In order to maximize profitability and maintain a competitive position in the marketplace, we will continue to focus on improving our operations and distribution processes.

Make selective acquisitions.    The global market for animal health products distribution is highly fragmented with many national, regional and local distributors. We believe that our experienced and disciplined management team, together with our organizational platform built on scaleable information management systems and processes, position us to play a leading role in the consolidation of the industry.

Our history

Our business commenced operations in 1954 as part of a family-owned drug store business. Following a series of business combinations, we were renamed Walco International, Inc. in 1972. On June 30, 2005, investment funds affiliated with Charlesbank Capital Partners LLC, or Charlesbank, acquired the Company. In September 2006, we changed our name to Animal Health International, Inc.

Corporate information

Our principal executive offices are located at 7 Village Circle, Suite 200, Westlake, Texas 76262, and our telephone number at that address is (817) 859-3000. We maintain a website at www.ahii.com. Information contained on our website does not constitute a part of this prospectus.

 

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Recent developments

Debt refinancing.    In September 2006, we entered into a new $45.0 million first lien term loan and with borrowings thereunder paid in full the outstanding balance on our then existing $30.0 million first lien term loan and reduced borrowings under our revolving credit facility. The $45.0 million first lien term loan bears interest at an annual rate equal to the London inter-bank offer rate, or LIBOR, plus 3.0% and matures on May 31, 2011. Borrowings are collateralized by a first priority interest in and lien on all of our assets.

In September 2006, we also entered into a new $45.0 million second lien term loan with the same lender of our existing $40.0 million second lien term loan, which remains outstanding. We used the entire $45.0 million second lien term loan to reduce borrowings under our revolving credit facility. The $45.0 million second lien term loan bears interest at an annual rate equal to LIBOR plus 7.0% and matures on September 26, 2012. Borrowings are collateralized by a second priority interest in and lien on all of our assets.

Cash dividend.    In September 2006, we paid an aggregate cash dividend of approximately $53.3 million to the holders of shares of our preferred stock and an aggregate cash dividend of approximately $1.2 million to the holders of shares of our common stock, financed by the debt refinancing described above. A portion of the dividend on the preferred stock reduced the aggregate liquidation amount that is due to holders of our outstanding preferred stock upon the liquidation, dissolution or winding up of the Company, or, at the election of at least a majority of the shares of preferred stock, upon the closing of an extraordinary transaction.

Charter amendment.    In September 2006, our stockholders committed to file an amendment to our certificate of incorporation that will become effective and is conditioned upon the closing of any initial public offering prior to April 30, 2007 and which will provide that all shares of our preferred stock will immediately convert on a 1-for-10 basis into shares of our common stock.

 

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The offering

Common stock offered by Animal Health International, Inc.:              shares

Common stock offered by the selling stockholders:              shares

Common stock to be outstanding after this offering:              shares

Proposed Nasdaq Global Market symbol: AHII

The number of shares of our common stock to be outstanding following this offering and after giving effect to the adjustments below, is based on 3,696,870 shares of our common stock outstanding as of June 30, 2006.

Unless otherwise indicated, the share information in this prospectus is as of June 30, 2006 and has been adjusted to reflect or assumes the following:

 

  the conversion of each share of our preferred stock into 10 shares of common stock immediately prior to the completion of this offering, for an aggregate of 21,224,310 shares of common stock on an as-converted basis;

 

  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately prior to the effectiveness of this offering; and

 

  no exercise of the underwriters’ option to purchase additional shares.

Use of proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of $             million, or $             million if the underwriters exercise their option to purchase additional shares in full, after deducting underwriting discounts and commissions and estimated fees and expenses payable by us. We intend to use the net proceeds of this offering as follows:

 

  $40.0 million will be used to repay amounts owed under our $40.0 million second lien term loan;

 

  $45.0 million will be used to repay amounts owed under our $45.0 million second lien term loan; and

 

  the balance will be used for working capital and general corporate purposes, including potential acquisitions.

Dividend policy

We currently do not anticipate paying cash dividends on our capital stock. For further information, see “Dividend policy.”

Risk factors

See “Risk factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before investing in shares of our common stock.

 

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Summary consolidated financial data

The following summary consolidated financial data should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and notes to those consolidated financial statements and “Management’s discussion and analysis of financial condition and results of operations,” included elsewhere in this prospectus.

Consolidated statement of operations data:

 

      Year ended June 30,  
     Predecessor     Successor  
(in thousands, except per share data and number of
representatives)
   2004     2005     2006  
   

Net sales

   $ 502,686     $ 535,693     $ 571,192  

Direct cost of products sold

     408,105       436,955       459,173  
        

Gross profit

     94,581       98,738       112,019  

Selling, general, and administrative expenses(1)

     70,238       72,954       81,428  

Acquisition costs(2)

     496       7,759        

Depreciation and amortization(3)

     3,156       3,149       6,767  
        

Operating income

     20,691       14,876       23,824  

Other income (expense)

      

Interest expense

     (4,984 )     (5,071 )     (13,726 )

Other income

     982       672       478  
        

Income before income taxes

     16,689       10,477       10,576  

Income tax expense

     (6,507 )     (3,203 )     (3,407 )
        

Net income

   $ 10,182     $ 7,274     $ 7,169  
        

Per share data:

      

Earnings per common share

      

Basic

     NM (4)     NM (4)   $ 1.79  

Dilutive

     NM (4)     NM (4)   $ 1.79  

Shares used in computing earnings per share:

      

Basic

     NM (4)     NM (4)     3,478  

Dilutive

     NM (4)     NM (4)     3,478  

Consolidated balance sheet data:

      

Working capital(5)

   $ 59,618     $ 57,398     $ 55,960  

Total assets

     176,202       197,449       305,879  

Total current and long-term debt

     73,766       61,633       137,634  

Total stockholders’ equity

   $ 30,612     $ 38,087     $ 6,228  

Other data:

      

Adjusted EBITDA(6)

   $ 25,325     $ 26,456     $ 31,069  

Field sales representatives(7)

     195       220       218  

Inside sales representatives(7)

     54       61       69  
        

Total sales representatives

     249       281       287  
   

 

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(1)   Selling, general, and administrative expenses include salary, wages, commissions, and related benefits of approximately $38,464, $39,022 and $43,958 for the years ended June 30, 2004, 2005 and 2006, respectively. Also, includes management and advisory service fees paid to Bain Capital Partners V, L.P. totaling $750 for each fiscal year ended June 30, 2004, and 2005. Also includes management and advisory service fees and reimbursement of out-of-pocket expenses paid to Charlesbank totaling $575 and $664 for the years ended June 30, 2005 and 2006, respectively. Refer to note 10 of our consolidated financial statements included in this prospectus for further information.

 

(2)   Represents costs incurred in connection with the sale of Predecessor on June 30, 2005. Refer to note 3 of our consolidated financial statements included in this prospectus for further information.

 

(3)   Depreciation expense was $3,156, $3,149 and $3,079 for the years ended June 30, 2004, 2005 and 2006, respectively.

 

(4)   “NM,” as used in the table above, is defined as not meaningful because of substantial changes to our capital structure resulting from the sale of Predecessor on June 30, 2005.

 

(5)   Defined as current assets minus current liabilities, exclusive of borrowings under our revolving credit facility.

 

(6)   Adjusted EBITDA represents net income before interest expense, income tax expense, depreciation and amortization and acquisition costs. We present adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses), the age and book depreciation of fixed assets (affecting relative depreciation expense), the impact of purchase accounting and SFAS No. 142 (affecting depreciation and amortization expense) and the impact of non-recurring acquisition costs. Because adjusted EBITDA facilitates internal comparisons of our historical financial position and operating performance on a more consistent basis, we also use adjusted EBITDA in measuring our performance relative to that of our competitors and in evaluating acquisition opportunities. Adjusted EBITDA is not a measurement of our financial performance under generally accepted accounting principles in the United States, or GAAP, and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

    Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

    Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

 

    Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

    Other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following table reconciles adjusted EBITDA to net income as determined in accordance with GAAP for the periods indicated:

 

     Predecessor    Successor
(in thousands)    2004    2005    2006
                      

Net income

   $ 10,182    $ 7,274    $ 7,169

Interest expense

     4,984      5,071      13,726

Income tax expense

     6,507      3,203      3,407

Depreciation and amortization

     3,156      3,149      6,767

Acquisition costs

     496      7,759      —  
                    

Adjusted EBITDA

   $ 25,325    $ 26,456    $ 31,069
                    

 

(7)   Number of sales representatives is measured at the end of the period. Field sales representatives typically service our customers in their surrounding geographical area on a weekly basis. Inside sales representatives typically service our customers by taking customer orders over the telephone and Internet and providing customer support.

 

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Risk factors

You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently think are immaterial, actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your investment.

Risks related to our business

The outbreak of an infectious disease within an animal population could have a significant adverse effect on our business and results of operations.

An outbreak of disease affecting animals, such as foot-and-mouth disease, avian flu and bovine spongiform encephalopathy, commonly referred to as “mad cow disease,” could result in the widespread destruction of affected animals and consequently result in a reduction in demand for animal health products. In addition, outbreaks of or concerns about these or other diseases could create unfavorable publicity that may have a material adverse effect on consumer demand for meat, dairy and poultry products, and, as a result, on our customers’ demand for the products we distribute. The outbreak of a disease among the companion animal population could cause a reduction in the demand for companion animals, which, in turn, could adversely affect our business.

Our inability to maintain relationships with manufacturers could have a material adverse effect on our business, financial condition and results of operations.

We distribute more than 35,000 products sourced from more than 1,500 manufacturers. We currently do not manufacture any of our products and are dependent on manufacturers for our supply of products. Our top 10 manufacturers supplied products that accounted for approximately 60% of our purchases in fiscal 2006, and one manufacturer, Pfizer, Inc., or Pfizer, accounted for approximately 26% of our purchases.

Our ability to sustain our gross margins has been, and will continue to be, dependent in part upon our ability to obtain favorable terms and access to new and existing products from our manufacturers. These terms may be subject to changes from time to time by manufacturers. Any such changes could adversely affect our net sales and operating results. We do not have long-term written agreements with our manufacturers. Most of our agreements with manufacturers are for one-year periods, and in some cases, we do not have any contract with our manufacturers. Upon expiration, we may not be able to renew our existing agreements on favorable terms, or at all. If we lose the right to distribute products under such agreements, we may lose access to certain products and thus lose a competitive advantage. Potential competitors could sell products from manufacturers that we fail to continue with and erode our market share. The loss of one or more of our large manufacturers, a material reduction in their supply of products to us or material changes in the payment or pricing terms we obtain from them could have a material adverse effect on our business, financial condition and results of operations.

Some of our manufacturers may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These manufacturers could sell their products at lower prices and maintain a higher gross margin on their product

 

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sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these manufacturers. Increased competition from any manufacturer of animal health products could significantly reduce our market share and adversely impact our financial results.

In addition, we may not be able to establish or maintain relationships with key manufacturers in the animal health products industry if we have established relationships with competitors of these key manufacturers. Our inability to establish or maintain such relationships could have a material adverse effect on our business, financial condition and results of operations.

An adverse change in manufacturer rebates or our inability to meet applicable rebate targets could materially and negatively affect our business.

The terms under which we purchase products from many manufacturers of animal health products entitle us to receive a rebate based on the attainment of various goals, including certain growth goals and sales targets. Rebates have a material impact on our profitability. We cannot assure you as to the amount of rebates that we will receive in any given year. Factors outside of our control, such as customer preferences or manufacturer supply issues, can have a material impact on our ability to achieve the growth goals established by our manufacturers, which may reduce the amount of rebates we receive. Many rebates apply at a rate determined in the contract (based on the goals set out in the contract) from the first dollar, so that if we materially miss a sales estimate it could cause us to reverse prior rebate accruals from prior quarters.

Manufacturers may adversely change the terms of some or all of these rebate programs. Changes to any rebate program initiated by our manufacturers may have a material adverse effect on our gross profit and operating results in any given quarter or year. Manufacturers may reduce or eliminate the amount of rebates offered under their programs, or increase the growth goals or other conditions we must meet to earn rebates to levels that we are unable to achieve. The occurrence of any of these events could have an adverse impact on our results of operations.

Our quarterly operating results may fluctuate due to factors outside of management’s control.

Our quarterly operating results may significantly fluctuate, and you should not rely on them as an indication of our future results. Our future net sales and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management’s control. The most important of these factors include:

 

  manufacturer rebates based upon attaining certain growth goals;

 

  changes in the way manufacturers introduce products to market;

 

  the recall of a significant product by one of our manufacturers;

 

  seasonality;

 

  changes in customer demands;

 

  changes in climate (e.g., droughts);

 

  fluctuations in commodity prices;

 

  the impact of general economic trends on our business;

 

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  increases in reserves for bad debts; and

 

  competition.

For example, our rebates have historically been highest during the quarter ended December 31, since most of the manufacturers’ rebate programs were designed to include targets to be achieved during the calendar year. In addition, our net sales have historically been seasonal, with peak sales in our second and fourth fiscal quarters.

We may be unable to reduce operating expenses quickly enough to offset any unexpected shortfall in net sales. If we have a shortfall in net sales without a corresponding reduction to our expenses, operating results may suffer. Our operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of our future performance.

Loss of key personnel could adversely affect our operations.

We are currently dependent to a significant degree upon the ability and experience of our senior executives, including President and Chief Executive Officer James Robison, Senior Vice President and Chief Operating Officer Greg Eveland and Senior Vice President and Chief Financial Officer William Lacey. We currently have employment agreements with these executives that contain non-competition restrictions following termination of employment. The loss of any of these senior executives could adversely affect our ability to conduct our operations or to achieve growth through acquisitions. See “Management.”

In addition, we are dependent upon division presidents and our sales representatives to market and sell our products and provide our services. These individuals develop relationships with our customers that could be damaged if these employees are not retained. Any failure on our part to hire, train and retain a sufficient number of qualified sales representatives would harm our business.

The loss of products or delays in product availability from one or more manufacturers could substantially harm our business.

We generally purchase products from our manufacturers through purchase orders rather than through long-term supply agreements. There can be no assurance, however, that our manufacturers will be able to meet their obligations under these purchase orders or that we will be able to compel them to do so. Risks of relying on manufacturers include:

 

  Some of our manufacturers are subject to ongoing periodic unannounced inspection by regulatory authorities, including the FDA, the USDA, the EPA, the DEA and other federal and state agencies for compliance with strictly enforced regulations. We do not have control over our manufacturers’ compliance with these regulations and standards. Violations could potentially lead to interruptions in supply that could lead to lost sales to competitive products that are more readily available.

 

  If a purchase order cannot be filled or a certain product line is discontinued or recalled, then we would not be able to continue to offer our customers the same breadth of products. Our sales and operating results would likely suffer unless we were able to find an alternate supply of a similar product.

 

  Agreements may commit us to certain minimum purchase levels or other spending obligations. It is possible we will not be able to meet such obligations, which would create an increased drain on our financial resources and liquidity.

 

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Index to Financial Statements
  If market demand for our products increases suddenly, our current manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements or find new sources of supply and may result in substantial delays in meeting market demand. If we generate more demand for a product than a given manufacturer is capable of handling, it could lead to large backorders and potentially lost sales to competitive products that are more readily available.

 

  We may not be able to control or adequately monitor the quality of products we receive from our manufacturers. Poor quality products could damage our reputation with our customers or subject us to potential legal liability to such customers.

Potential problems with manufacturers such as those discussed above could substantially decrease sales of our products, lead to higher costs and damage our reputation with our customers.

Our market is highly competitive. Failure to compete successfully could have a material adverse effect on our business, financial condition and results of operations.

The sale and distribution of animal health products is highly competitive, continually evolving and subject to technological change. We compete directly with both geographically diverse and regional, broad-line animal health products distributors, as well as companies that specialize in distributing primarily ethical drug products to veterinarians and over-the-counter drugs directly to animal owners and other end users. Additionally, certain manufacturers currently compete through the direct marketing of products, and other manufacturers may decide to do so in the future. We compete with numerous manufacturers and distributors based on customer relationships, service and delivery, product selection, price and e-commerce capabilities. Some of our competitors may have greater financial and other resources than we do. Many of our competitors have comparable product lines or distribution strategies that directly compete with ours. Our competitors could obtain exclusive rights to distribute certain products, eliminating our ability to distribute those products. Most of our products are available from several sources, including other distributors and manufacturers, and our customers typically have relationships with several distributors and manufacturers. Because we generally do not have long-term contracts with our customers, our customers could buy products from our competitors. If we do not compete successfully against these organizations, it could have a material adverse effect on our business, financial condition and results of operations. Our primary competitors, excluding manufacturers, include the following and other national, regional, local and specialty distributors: Butler Animal Health Supply, LLC, IVESCO, LLC (Iowa Veterinary Supply), Lextron, Inc., MWI Veterinary Supply, Inc., Professional Veterinary Products, Ltd. and Webster Veterinary Supply, a division of Patterson Companies, Inc.

Changes in consumer preferences could adversely affect our business.