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Animal Health Holdings, Inc. · IPO:  S-1/A · On 1/26/07

Filed On 1/26/07, 2:33pm ET   ·   Accession Number 1193125-7-14110   ·   SEC File 333-137656

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 1/26/07  Animal Health Holdings, Inc.      S-1/A                  2:2.3M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amendment #5 to Form S-1                            HTML   1.47M 
 2: EX-23.1     Consent of Kpmg LLP                                 HTML      7K 


S-1/A   —   Amendment #5 to Form S-1
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Summary
"Risk factors
"Special note regarding forward-looking statements
"Use of proceeds
"Dividend policy
"Capitalization
"Dilution
"Selected consolidated financial data
"Management's discussion and analysis of financial condition and results of operations
"Business
"Management
"Certain transactions
"Principal and selling stockholders
"Description of capital stock
"Shares eligible for future sale
"Material U.S. federal tax consequences for non-U.S. holders
"Underwriting
"Legal matters
"Experts
"Where you can find more information
"Index to consolidated financial statements
"Index to Financial Statements
"Report of independent registered public accounting firm
"Consolidated balance sheets as of June 30, 2005 and 2006
"Consolidated statements of operations for the years ended June 30, 2004, 2005 and 2006
"Consolidated statements of stockholders' equity for the years ended June 30, 2004, 2005 and 2006
"Consolidated statements of cash flows for the years ended June 30, 2004, 2005 and 2006
"Notes to consolidated financial statements
"Condensed consolidated balance sheets as of June 30, 2006 and September 30, 2006 (unaudited)
"Condensed consolidated statements of operations (unaudited) for the three months ended September 30, 2005 and 2006
"Condensed consolidated statements of cash flows (unaudited) for the three months ended September 30, 2005 and 2006
"Notes to condensed consolidated financial statements

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  AMENDMENT #5 TO FORM S-1  
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on January 26, 2007

Registration No. 333-137656

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


AMENDMENT NO. 5

to

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.  ¨

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.

 



Table of Contents
Index to Financial Statements

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 January 26, 2007

Prospectus

11,800,000 shares

LOGO

Animal Health International, Inc.

 

Common stock

This is our initial public offering of common stock. We are offering 9,100,000 shares of common stock and the selling stockholders identified in this prospectus are offering 2,700,000 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 $10.00 and $12.00 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 1,770,000 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 9.

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.

                    , 2007


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

Table of contents

 

    Page

Summary

  1

Risk factors

  9

Special note regarding forward-looking statements

  23

Use of proceeds

  24

Dividend policy

  25

Capitalization

  26

Dilution

  27

Selected consolidated financial data

  28

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

  32

Business

  45

Management

  60

Certain transactions

  75

Principal and selling stockholders

  77

Description of capital stock

  79

Shares eligible for future sale

  84

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

  87

Underwriting

  90

Legal matters

  94

Experts

  94

Where you can find more information

  94

Index to consolidated financial statements

  F-1

“Animal Health International, Inc.,” “DVM Resources,” “Hawaii Mega-Cor.,” “Holt Products,” “Mineral Max,” “Walco International,” “Walco Canada Animal Health,” “Walco Technologies” and “SunWest Industries” are unregistered trademarks of Animal Health International, Inc. and its subsidiaries. “American Livestock Supply,” “AGRIpharm,” “First Companion,” “Ivermax,” “Paragon” and “RXV Products” 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.

 

i


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Index to Financial Statements

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 September 30, 2006.

Our business

Based upon net sales, we are one of the largest distributors 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, service and ability to assist them in their operations. We have a 278 person sales force, including 223 field sales representatives. We process daily shipments from our central replenishment and distribution facility in Memphis, Tennessee and 68 distribution locations strategically located across the United States and Canada.

For our fiscal year ended June 30, 2006, our net sales, operating income and net income were $571.2 million, $24.2 million and $7.4 million, respectively. For the three months ended September 30, 2006, our net sales, operating income and net income were $145.7 million, $5.4 million and $0.9 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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Index to Financial Statements

Our strengths

We believe that our strengths include the following:

 

  Based upon net sales, we are one of the largest animal health products distributors in the United States.

 

  We believe that we add 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.

 

  We have developed longstanding strategic relationships with many of our customers and manufacturers.

 

  Members of our 278 person sales force have worked with us for an average of nine years and generally live in the local communities in which they serve and have a comprehensive understanding of our customers’ needs.

 

  We have spent approximately $19.0 million over the past five years developing a highly scaleable and customized information technology platform.

 

  We have an experienced management team with significant animal health products industry expertise.

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 includes the following:

 

  Continue to grow our business organically.

 

  Expand sales of proprietary products.

 

  Continue to improve operational efficiencies.

 

  Make selective acquisitions.

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, which include the following:

 

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

 

  Our inability to maintain relationships with manufacturers 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.

 

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

 

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

 

2


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Index to Financial Statements

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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Index to Financial Statements

The offering

Common stock offered by Animal Health International, Inc.: 9,100,000 shares

Common stock offered by the selling stockholders: 2,700,000 shares

Common stock to be outstanding after this offering: 24,333,033 shares

Estimated initial public offering price range: $10.00 to $12.00 per share

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 2,257,851 shares of our common stock and 2,122,431 shares of our preferred stock (which will be converted to common stock as described below) outstanding as of September 30, 2006.

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

 

  a 1-for-1.63576 reverse stock split of our common stock which became effective on January 12, 2007;

 

  the conversion of each share of our preferred stock into 6.11337 shares of common stock immediately prior to the completion of this offering, for an aggregate of 12,975,182 shares of common stock underlying the preferred 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 and no exercise of options to purchase our common stock, 750,000 of which are expected to be issued on the date of this offering.

Use of proceeds

We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of $90.9 million, assuming an initial public offering price of $11.00 per share, which is the midpoint of the range listed on the cover page of this prospectus, and 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.

A $1 increase (decrease) in the price per share will increase (decrease) our net proceeds by approximately $8.5 million. Any decrease in net proceeds will reduce the amount we use to repay the second lien term facilities; any increase will increase our cash available for general corporate purposes.

Dividend policy

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

 

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Index to Financial Statements

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.

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

Consolidated statement of operations data:

 

     Year ended June 30,    Three months ended
September 30,
    
      Predecessor         Successor     (unaudited)  
                      (as restated)        
(in thousands, except per share data and number of
representatives)
   2004     2005         2006     2005     2006  
                         

Net sales

   $ 502,686     $ 535,693       $ 571,192     $ 127,740     $ 145,702  

Direct cost of products sold

     408,105       436,955         459,173       102,973       118,648  
                                

Gross profit

     94,581       98,738         112,019       24,767       27,054  

Selling, general, and administrative expenses(1)

     70,238       72,954         81,428       18,918       20,120  

Acquisition costs(2)

     496       7,759                      

Depreciation and amortization(3)

     3,156       3,149         6,414       1,581       1,540  
                                

Operating income

     20,691       14,876         24,177       4,268       5,394  
 

Other income (expense)

            

Interest expense

     (4,984 )     (5,071 )       (13,726 )     (3,250 )     (4,090 )

Other income

     982       672         478       84       140  
                                

Income before income taxes

     16,689       10,477         10,929       1,102       1,444  

Income tax expense

     (6,507 )     (3,203 )       (3,542 )     (360 )     (543 )
                                

Net income

   $ 10,182     $ 7,274       $ 7,387     $ 742     $ 901  
                                
 

Per share data (as restated):

            
Earnings (loss) per common share                                   

Basic

            

Common

         $ 0.43 (4)   $ 0.05     $ (23.22 )(4)

Class A

   $ 4.80     $ 3.38          

Class L

   $ 4.80     $ 3.38          

Class W

   $ 4.80     $ 3.38          

Dilutive

            

Common

         $ 0.43 (4)   $ 0.05     $ (23.22 )(4)

Class A

   $ 4.09     $ 2.82          

Class L

   $ 4.09     $ 2.82          

Class W

   $ 4.09     $ 2.82          

Shares used in computing earnings per share:

            

Basic

            

Common

           2,084       1,571       2,258  

Class A

     1,869       1,900          

Class L

     182       182          

Class W

     72       72          

Dilutive

            

Common

           2,084       1,571       2,258  

Class A

     2,221       2,307          

Class L

     197       197          

Class W

     72       72          

 

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Index to Financial Statements
     Year ended June 30,    Three months ended
September 30,
      Predecessor        Successor     (unaudited)  
                    (as restated)  
(in thousands, except per share data and number of
representatives)
   2004    2005        2006     2005     2006  
                                            
 

Consolidated balance sheet data:

              

Total assets

     176,202      197,449        294,337       313,048       326,500  

Total current and long-term debt

     73,766      61,633        137,634       154,454       204,835  

Total stockholders’ equity (deficit)

     30,612      38,087        (3,179 )     (8,984 )     (56,776 )

Cash dividend declared per common share

   $    $      $     $     $ 0.52  
 

Other data:

              

Adjusted EBITDA(5)

   $ 25,325    $ 26,456      $ 31,069     $ 5,933     $ 7,074  

Field sales representatives(6)

     195      220        218       218       223  

Inside sales representatives(6)

     54      61        69       66       55  
                                

Total sales representatives

     249      281        287       284       278  
                         

 

(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, and $10,694 and $11,533 for the three months ended September 30, 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, respectively. 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 and $63 and $63 for the three months ended September 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 includes the depreciation of property, plant and equipment and other assets and was $3,156, $3,149 and $3,039 for the years ended June 30, 2004, 2005 and 2006, respectively, and $738 and $697 for the three months ended September 30, 2005 and 2006, respectively.

 

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Index to Financial Statements
(4)   On a pro forma basis, after giving effect to our sale of shares offered hereby at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, the proceeds of which are reflected first, to fund the payment of $55,441 in dividends, in excess of earnings of $7,387 for the year ended June 30, 2006 and $901 for the three months ended September 30, 2006, and second, to pay down debt with the remaining proceeds in the amount of $43,756; the conversion of our preferred stock; and a deemed dividend on the conversion of the preferred stock for the excess of the fair value received over the recorded value of the preferred shares, as if each of these events had been completed on July 1, 2005, our earnings (loss) per common share on a basic and dilutive basis would have been $(3.50) and $0.07 for the year ended June 30, 2006 and the three months ended September 30, 2006, respectively. The preferred stock dividends and participation in undistributed earnings of $941 and $5,554, respectively, for the year ended June 30, 2006 and $53,323 and $0, respectively, for the three months ended September 30, 2006 have also been eliminated for purposes of this pro forma computation. The amount of reduction of interest expense is based on the pay down of debt outstanding and related interest rates in effect for the periods presented. The components of the pro forma earnings per share computation are as follows:

 

      Year ended
June 30, 2006
    Three months ended
September 30, 2006
                
     (unaudited)

Net income (as restated)

   $ 7,387     $ 901

Reduction in interest expense, net of related tax effects

     3,306       902

Deemed dividend upon conversion of preferred stock

     (95,227 )     0
              

Pro forma net income (loss) available to common shareholders

   $ (84,534 )   $ 1,803
              

Basic weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma basic weighted average shares outstanding

     24,159       24,333

Diluted weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma diluted weighted average shares outstanding

     24,159       24,333

Pro forma basic earnings (loss) per share

   $ (3.50 )   $ 0.07

Pro forma diluted earnings (loss) per share

   $ (3.50 )   $ 0.07

 

(5)   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.

 

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Index to Financial Statements

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

 

      Year ended June 30,     
      Predecessor    Successor    Three months ended
September 30,
                     (unaudited)
               

(as restated)

(in thousands)    2004    2005    2006    2005    2006
                                    

Net income

   $ 10,182    $ 7,274    $ 7,387    $ 742    $ 901

Interest expense

     4,984      5,071      13,726      3,250      4,090

Income tax expense

     6,507      3,203      3,542      360      543

Depreciation and amortization

     3,156      3,149      6,414      1,581      1,540

Acquisition costs

     496      7,759               
                                    

Adjusted EBITDA

   $ 25,325    $ 26,456    $ 31,069    $ 5,933    $ 7,074
                                    

 

(6)   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, such as our pharmaceuticals, biologicals, and medicated additives, which represent a significant portion of our fiscal 2006 net sales. 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 net sales or gross profit.

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 profitability.

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. We face the following risks by relying on manufacturers:

 

  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 by our manufacturers could potentially lead to interruptions in our 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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  If market demand for our products increases suddenly, our current manufacturers might not be able to fulfill our commercial needs, which may result in substantial delays in meeting market demand. If we generate more demand for a product than one of our manufacturers is capable of handling, we could experience 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.

The demand for production animal health products is heavily dependent upon consumer demand for beef, dairy, poultry and swine. The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often and our failure to anticipate, identify or react to changes in these trends could lead to, among other things, reduced demand and price reductions for our animal health products, and could have a material adverse effect on our business. Moreover, even if we do anticipate and identify these trends, we may be unable to react effectively. For example, changes in consumer diets may negatively affect consumer demand for beef, dairy, poultry and/or swine, and therefore reduce the demand for our production animal health products. During previous downturns in these markets, we experienced prolonged declines in sales and profitability.

 

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Consolidation in the animal health products industry may decrease our net sales and profitability.

Consolidation in the animal health products industry could result in existing competitors increasing their market share, which could give them greater pricing power, decrease our net sales and profitability and increase the competition for our customers. Consolidation of the highly fragmented customer base in the animal health products market could also make it easier for manufacturers to sell their products directly to customers, which would decrease our net sales and profitability. In addition, as individual customers grow in size through consolidation, the loss of any one of them would have an increasingly adverse effect on our net sales and profitability. Furthermore, as our current customers consolidate, their management teams are more likely to change, which could result in changes in purchase practices and potentially result in the loss of such customers’ business.

Our substantial indebtedness could adversely affect our financial condition and ability to fulfill our debt obligations and otherwise adversely impact our business and growth prospects.

As of September 30, 2006, and after giving effect to the anticipated use of the net proceeds from this offering, we had outstanding indebtedness under our credit agreements of approximately $113.9 million. Our substantial indebtedness could have important consequences to you. For example, it could:

 

  make it more difficult for us to satisfy our obligations with respect to our revolving credit facility, term loan indebtedness and other current and future indebtedness;

 

  increase our vulnerability to adverse economic and industry conditions;

 

  require us to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the availability of cash to fund working capital and capital expenditures and for other general corporate purposes;

 

  restrict us from making strategic acquisitions and exploiting business opportunities;

 

  place us at a disadvantage compared to our competitors that have less debt; and

 

  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

Furthermore, all of our indebtedness bears interest at floating rates. We do not currently hedge exposure related to our floating rate debt. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify.

Our ability to make payments on and refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. We cannot assure you that our business will generate sufficient cash flow or that future borrowings will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs. If we do not generate sufficient cash flow, and additional borrowings or refinancings or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.

 

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In addition, the agreements governing our indebtedness include certain covenants that, among other things, restrict our ability to incur additional indebtedness, make certain payments, sell assets, enter into certain transactions with affiliates and create liens. Moreover, certain of these agreements require us to maintain specified financial ratios. These and other covenants in our current and future agreements may restrict our ability to fully pursue our business strategies and adversely affect our growth prospects. Our ability to comply with such covenants may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events beyond our control. The breach of any of these covenants could result in a default under our indebtedness, which could cause those and other obligations to become due and payable.

We could face considerable business and financial risk in implementing our acquisition strategy.

As part of our growth strategy, from time to time we consider acquiring complementary businesses. We regularly engage in discussions with respect to possible acquisitions. We cannot assure you that we will be successful in consummating future acquisitions on favorable terms or at all. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization expenses related to intangible assets, which could have a material adverse effect upon our business.

Acquisitions involve a number of risks relating to our ability to integrate an acquired business into our existing operations. The process of integrating the operations of an acquired business, particularly its personnel, could cause interruptions to our business. Some of the risks we face include:

 

  the need to spend substantial operational, financial and management resources in integrating new businesses, technologies and products, and difficulties management may encounter in integrating the operations, personnel or systems of acquired businesses;

 

  retention of key personnel, customers and manufacturers of the acquired business;

 

  the occurrence of a material adverse effect on our existing business relationships with customers or manufacturers, or both, resulting from future acquisitions or business combinations could lead to a termination of or otherwise affect our relationships with such customers or manufacturers;

 

  impairments of goodwill and other intangible assets; and

 

  contingent and latent risks associated with the past operations of, and other unanticipated costs and problems arising in, an acquired business.

The risks associated with acquisitions could have a material adverse effect upon our business.

If we fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.

The animal health products industry is subject to changing political and regulatory influences. Both state and federal government agencies regulate the distribution of certain animal health products and we are subject to regulation, either directly or indirectly, by the Food and Drug

 

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Administration, or FDA, the United States Department of Agriculture, or USDA, the Environmental Protection Agency, or EPA, the Drug Enforcement Administration, or DEA, the Department of Transportation and state boards of pharmacy as well as comparable state and foreign agencies. The regulatory stance these agencies take could change. In addition, our manufacturers are subject to regulation by the FDA, the USDA, the EPA, the DEA as well as other federal and state agencies, and material changes to the applicable regulations could affect our manufacturers’ ability to manufacture certain products, which could adversely impact our product supply. In addition, some of our customers may rely, in part, on farm and agricultural subsidy programs. Changes in the regulatory positions that impact the availability of funding for such programs could have an adverse impact on our customers’ financial positions, which could lead to decreased sales of our products to them.

We strive to maintain compliance with these laws and regulations. If we are unable to maintain or achieve compliance with these laws and regulations, we could be subject to substantial fines or other restrictions on our ability to provide competitive distribution services, which could have an adverse impact on our financial condition.

We cannot assure you that existing laws and regulations will not be revised or that new, more restrictive laws will not be adopted or become applicable to us or the products that we distribute. We cannot assure you that the manufacturers of products that may become subject to more stringent laws will not try to recover any or all increased costs of compliance from us by increasing the prices at which we purchase products from them, or, that we will be able to recover any such increased prices from our customers. We also cannot assure you that our business and financial condition will not be materially and adversely affected by future changes in applicable laws and regulations. See “Business—Government regulation.”

We may be subject to product liability and other claims in the ordinary course of business.

We distribute products that are manufactured exclusively by third parties. As a result, we have no control over the manufacturing process and face the risk of product liability and other claims in the ordinary course of business. We maintain insurance policies, and in many cases we have indemnification rights against such claims from the manufacturers of the products we distribute. However, our ability to recover under insurance or indemnification arrangements is subject to the terms of such arrangements and the financial viability of the insurers and manufacturers. We cannot assure you that our insurance coverage or the manufacturers’ indemnity will be available or sufficient in any future cases brought against us.

Failure to manage growth could have a material adverse effect on our business.

Over the past six years, our net sales have grown by approximately 9.7% annually from $359.1 million in fiscal 2001 to $571.2 million in fiscal 2006. During that same period we have significantly expanded our operations in the United States. Our number of full-time employees increased by approximately 144 individuals during that period.

Our continued future success depends on, among other things, our ability to implement and/or maintain:

 

  sales and marketing programs;
  customer service levels;

 

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  current and new product and service lines;
  manufacturer relationships;

 

  technological support which equals or exceeds our competitors;

 

  recruitment and training of new personnel; and

 

  operational and financial control systems.

Our ability to successfully offer products and services and implement our business plan requires an effective planning and management process. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures and to expand the training of our employees. While we believe our current systems have sufficient capacity to meet our projected needs, we may need to increase the capacity of our current systems to meet additional or unforeseen demand.

If we are not able to manage our growth, our customer service quality could deteriorate, which could result in decreased sales or profitability. Also, the cost of our operations could increase faster than growth in our net sales, negatively impacting our profitability.

Operational problems at our central replenishment and distribution facility or any of our distribution locations could have a material adverse effect on our business, financial condition and results of operations.

Approximately 56% of the dollar volume of our product sales flow through our central replenishment and distribution facility in Memphis, Tennessee. Unforeseen or recurring operational problems at this facility or any of our other distribution facilities could impair or disrupt our ability to deliver our products to our customers in a timely manner, and could have a material adverse effect upon our customer relationships, business, financial condition and results of operations. Although we do carry property insurance, which may protect us in the event of certain inventory losses, we do not carry business interruption insurance. Therefore, we will not be compensated for certain losses that may occur as a result of a major disruption to our facilities. Disruptions at any of our facilities could be caused by:

 

  maintenance outages;

 

  prolonged power failures or reductions;

 

  disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads;

 

  fires, floods, earthquakes or other catastrophic disasters;

 

  labor difficulties; or

 

  other operational problems.

If third parties claim that we infringe upon their intellectual property rights, our operating profits could be adversely affected.

We face the risk of claims that we have infringed third parties’ intellectual property rights, including trademarks, trade dress, and patents. Third parties may claim that our proprietary branded products infringe their trademarks and/or trade dress; that our consultative services infringe a patented machine, process, or business method; and/or that our products infringe such third parties’ patented animal health products. We have not conducted an independent review

 

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of trademarks or patents issued to third parties. The large number of trademarks and patents, the rapid rate of new trademark and patent issuances, the complexities of the technology involved in patents and uncertainty of litigation increase the risk of business assets and management’s attention being diverted to intellectual property litigation.

Any claims of patent or other intellectual property infringement, even those without merit, could:

 

  be expensive and time consuming to defend;

 

  cause us to cease making, licensing or using products or services that incorporate the challenged intellectual property;

 

  require us to redesign, reengineer, or rebrand our products or packaging, if feasible;

 

  divert management’s attention and resources; or

 

  require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.

Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our operating profits and harm our future prospects.

Our intellectual property rights may be inadequate to protect our business.

We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.

We rely on our trademarks, trade names, and brand names to distinguish our proprietary branded products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our proprietary branded products and services, which could result in loss of brand recognition, and could require us to devote resources to advertise and market new brands. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

 

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If we are unable to maintain the proprietary nature of our technologies, we could be materially adversely affected.

The patent we own could be challenged, invalidated or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Further, we cannot assure you that competitors will not infringe upon our patent, or that we will have adequate resources to enforce our patent.

If our proprietary branded products infringe on the intellectual property rights of others, we may be required to indemnify our customers for any damages they suffer.

Third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.

We are subject to significant environmental regulation and environmental compliance expenditures and liabilities.

We are subject to environmental, health and safety laws and regulations concerning, among other things, air and wastewater discharges, the generation, handling, storage, transportation and disposal of pesticides, hazardous waste and toxic substances. Pursuant to some of these laws and regulations, we are required to obtain permits from governmental authorities for certain operations. We incur costs to comply with such laws, regulations and permits, and we cannot assure you that we have been or will be at all times in complete compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also be responsible for costs incurred relating to contamination at our third party waste disposal sites or relating to damages incurred as a result of human exposure to such substances or other environmental damage caused by our operations or our disposal of waste. In addition, our past and present ownership or operation of real property that is contaminated with hazardous or toxic substances could also result in an obligation to perform or pay for a clean-up or other damages, regardless of whether we knew of or were responsible for such contamination.

Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. We cannot assure you that our costs and liabilities relating to these current and future laws will not adversely affect our business or profitability.

Performance problems with our information systems could damage our business.

We currently process all customer transactions and data at our facilities in Westlake, Texas. Although we have safeguards for emergencies, including, without limitation, back-up systems, the occurrence of a major catastrophic event or other system failure at any of our distribution facilities could interrupt data processing or result in the loss of stored data. This may result in the loss of customers or a reduction in demand for our services. Only some of our systems are fully redundant and we do not carry business interruption insurance. If a disruption occurs, our profitability and results of operations could suffer. Our information systems are dependent on third party software, global communications providers, telephone systems and other aspects of technology and Internet infrastructure that are susceptible to failure. While we have

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implemented security measures and some redundant systems, our customer satisfaction and our business could be harmed if we or our manufacturers experience any system delays, failures, loss of data, outages, computer viruses, break-ins or similar disruptions.

We may be required to record a charge to earnings if our goodwill or other intangible assets become impaired.

Our balance sheet includes goodwill and other intangible assets. As of September 30, 2006, such amounts totaled approximately $120.9 million. A significant decline in the fair value of the Company could cause impairment of goodwill and other intangible assets. Under generally accepted accounting principles in the United States, if impairment of our goodwill or other intangible assets is determined, we will be required to record a charge to earnings in the period of such determination.

We and our chief executive officer are subject to an SEC cease-and-desist order.

On June 28, 2006, we and our chief executive officer, James Robison, agreed to a settlement with the SEC. Without admitting or denying the allegations, we and Mr. Robison each agreed to consent to the entry of an order to cease and desist from committing or causing any violations and any future violations of certain antifraud provisions set forth in Section 17(a) of the Securities Act, violation of the Exchange Act’s reporting, recordkeeping and internal accounting controls provisions and violation of the Exchange Act’s financial record falsification and internal accounting controls circumvention prohibitions, set forth in Sections 13(a) and 13(b) of the Exchange Act and the rules and regulations thereunder. See “Management—Supplemental disclosure.”

Risks related to the common stock, the offering and our capital structure

We cannot assure you that a market will develop for our common stock or what the market price for our common stock will be in the future and, in the event that an active trading market does not develop, you may be unable to resell your shares.

Prior to this offering there has been no public market for our common stock. We cannot predict the extent to which investor interest will lead to the development of an active trading market in our common stock or whether that market will be sustained. The lack of a trading market may result in limited research coverage by securities analysts. The initial public offering price for our common stock has been determined by negotiations between the representative of the underwriters and us, and may not reflect the market price for shares of our common stock after this offering. Prices for the shares of our common stock after this offering will be determined in the market and may be influenced by many factors, including the depth and liquidity of the market for our common stock, investor perception of our business, profit margins in the animal health products industry generally and general economic and market conditions. In the event an active trading market does not develop for our common stock, you may be unable to resell your shares at or above the initial price to the public or at all.

In addition, the stock market in general, and the Nasdaq Global Market in particular, have experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class-action litigation has been instituted

 

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against these companies. Such litigation, if instituted against us, could adversely affect our business and results of operations.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research reports and opinions that securities or industry analysts publish about our business. We do not currently have and may never obtain research coverage by these analysts. Investors have numerous investment opportunities and may limit their investments to publicly traded companies that receive thorough research coverage. If no analysts commence coverage of us or if one or more analysts cease to cover us or fail to publish reports in a regular manner, we could lose visibility in the financial markets, which could cause a significant and prolonged decline in our stock price due to lack of investor awareness.

In the event that we do not obtain analyst coverage, or if one or more of the analysts downgrade our stock or comment negatively about our prospects or the prospects of other companies operating in our industry, our stock price could decline significantly. There is no guarantee that the equity research organizations affiliated with the underwriters of this offering will elect to initiate or sustain research coverage of us, nor whether such research, if initiated, will be positive towards our stock price or our business prospects.

Future sales of our shares could adversely affect the market price of our common stock.

After this offering, our current stockholders will hold approximately 51.5% of our outstanding shares (or 44.2% if the underwriters exercise their option to purchase additional shares in full). No stockholder will be contractually prohibited from selling these shares following the 180-day lock-up period after this offering. This lock-up period is subject to extension under certain circumstances, as described in “Underwriting.” The stockholders may also transfer these shares prior to the expiration of the lock-up period pursuant to the limited circumstances described in “Underwriting,” including with the consent of the underwriters. In addition, after the expiration of the lock-up period, we will not be contractually prohibited from issuing and selling additional shares of our common stock. Any sale by us or our current stockholders of our common stock in the public market, or the perception that sales could occur, could adversely affect the prevailing market price for our common stock.

After this offering, substantially all of the holders of our common stock prior to the offering will have rights, subject to some limited conditions, to demand that we file a registration statement on their behalf to register their shares or that we include their shares in a registration statement that we file on our behalf or on behalf of other stockholders. If such demand rights are exercised pursuant to the terms and conditions of the registration rights agreement and we are required to file an additional registration statement, we will incur significant expenses in connection with the filing of such registration statement. Additionally, the filing of an additional registration statement at the request of the stockholders may divert the attention of our senior management from our business operations. See “Description of capital stock—Registration rights.”

As a new investor, you will immediately experience substantial dilution as a result of this offering.

The purchasers of our common stock in this offering will experience immediate and substantial dilution of $12.74 per share, based on an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus. This

 

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dilution represents the amount by which the per share purchase price of the common stock offered in this offering exceeds the pro forma net tangible book value per share of our common

stock immediately following this offering. We may raise additional funds through future sales of our common stock. Any such financing may result in additional dilution to our stockholders. See “Dilution.”

Our directors and certain significant stockholders will exercise significant control over us.

After this offering, our directors and significant stockholders, including Charlesbank, will collectively control approximately 42.7% of our outstanding common stock, or 35.4% if the underwriters exercise their option to purchase additional shares in full. As a result, these stockholders will be able to influence our management and affairs and all matters requiring stockholder approval in ways that may not align with your interest as a stockholder, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of us even if beneficial to you as a stockholder and might affect the market price of our common stock.

We may require additional capital in the future, which may not be available to us. Issuances of our equity securities to provide this capital may dilute your ownership in us.

We may need to raise additional funds through public or private debt or equity financings in order to:

 

  take advantage of expansion opportunities;

 

  acquire complementary businesses or technologies;

 

  develop new services and products; or

 

  respond to competitive pressures.

Any additional capital raised through the issuance of our equity securities may dilute your percentage ownership interest in us. Furthermore, any additional financing we may need may not be available on terms favorable to us or at all. The unavailability of needed financing could adversely affect our ability to execute our growth strategy.

It is unlikely that we will pay dividends, and therefore you may not receive any return on your investment without selling your shares.

We currently intend to retain any future earnings for funding the growth of our business and repayment of existing indebtedness, and therefore, we do not currently anticipate declaring or paying cash dividends on our common stock. In addition, our credit agreements restrict us from paying such dividends.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time and expense to various compliance issues.

After we become a publicly-traded company, we will incur substantial additional legal, accounting and other expenses that we did not incur as a private company as a result of the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, the Sarbanes-Oxley Act of 2002, along with rules promulgated by the Securities and Exchange Commission, or SEC, and the Nasdaq Global Market, where our stock will trade, have

 

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imposed significant new requirements on public companies, including many changes involving corporate governance. Management and other company personnel will be required to devote a substantial amount of time to ensuring our compliance with these regulations. Accordingly, our legal and accounting expenses will significantly increase, and certain corporate actions will become more time-consuming and costly. For example, these regulations may make it more difficult to attract and retain qualified members of our board of directors and various corporate committees, and obtaining director and officer liability insurance will be more expensive.

Provisions in our certificate of incorporation and by-laws may deter third parties from acquiring us.

Our certificate of incorporation and by-laws contain provisions that may make the acquisition of us more difficult without the approval of our board of directors, including the following:

 

  our board of directors is divided into three classes serving staggered three-year terms;

 

  only our board of directors may call special meetings of our stockholders;

 

  our stockholders may take action only at a meeting of our stockholders and not by written consent;

 

  we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 

  stockholder approval of amendments of our certificate of incorporation or by-laws require a vote of 75% of our outstanding shares;

 

  vacancies on the board of directors may be filled only by the directors;

 

  our directors may be removed only for cause by the affirmative vote of the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and

 

  we require advance notice for stockholder proposals.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of us. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions that you desire.

Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control that our stockholders might consider to be in their best interests.

We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock, for a three-year period following the date that such stockholder became an interested stockholder absent prior approval of our board of directors. Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

This prospectus also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, financial condition and results of operations and the market price of our common stock.

 

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Use of proceeds

We will receive net proceeds of approximately $90.9 million from the sale of 9,100,000 shares of common stock at the assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting underwriting commissions and discounts of approximately $7.0 million and estimated expenses of $2.2 million. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by approximately $8.5 million. We will not receive any proceeds from the sale of shares by the selling stockholders, including shares sold to the underwriters if they exercise their option to purchase additional shares.

Of the net proceeds from this offering:

 

  $40.0 million will be used to repay amounts owed under our $40.0 million second lien term loan, which has a stated interest rate equal to LIBOR plus 8.25% per annum and which matures on June 30, 2011;

 

  $45.0 million will be used to repay amounts owed under our $45.0 million second lien term loan, which has a stated interest rate equal to LIBOR plus 7.0% per annum and which matures on September 25, 2012; and

 

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

We borrowed the entire $45.0 million second lien term loan in September 2006 and used the proceeds to reduce borrowings under our revolving credit facility.

Any decrease in net proceeds will reduce the amount we use to repay the second lien term facilities, and any increase will increase our cash available for general corporate purposes.

 

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Dividend policy

Our board of directors will have discretion in determining whether to declare or pay dividends, which will depend upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. Moreover, our credit agreements relating to our revolving credit facility, first lien term loan and second lien term loans impose restrictions on our ability to declare and pay dividends. While we intend to repay all of our borrowings under our second lien term loans and extinguish the governing credit agreements with a portion of the net proceeds from this offering, our remaining credit agreements will continue to limit our ability to declare and pay dividends. See “Risk factors—Risks related to the common stock, the offering and our capital structure—It is unlikely that we will pay dividends, and therefore you may not receive any return on your investment without selling your shares.”

In January 2006, we paid an aggregate dividend of approximately $0.9 million to the holders of shares of our preferred stock. In September 2006, we paid an aggregate dividend of approximately $53.3 million to the holders of shares of our preferred stock and an aggregate dividend of approximately $1.2 million to the holders of shares of our common stock. 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. These dividends to our stockholders were special dividends and we do not currently anticipate that we will declare any dividends on our common stock in the future.

 

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Capitalization

The following table sets forth our consolidated cash and consolidated capitalization as of September 30, 2006:

 

  on an actual basis; and

 

  on a pro forma as adjusted basis to give effect to the conversion of each share of our preferred stock into 6.11337 shares of common stock, which is conditioned upon and will occur simultaneously with the closing of this offering, and to give effect to our sale of shares offered hereby at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus and the anticipated use of the net proceeds thereof as if these events had been completed on September 30, 2006.

Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by approximately $8.5 million. See “Use of proceeds” for more information regarding our use of the net proceeds of this offering to repay debt. This table should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations,” “Selected consolidated financial data” and our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus.

 

      As of September 30,
2006
 
           (Unaudited)  
(in thousands, except share amounts)    Actual     Pro forma
as adjusted
 
                  
     (as restated)        

Cash

   $ 4,541     $ 4,541  

Long-term debt:

    

Revolving credit facility

     74,831       68,931  

Term loan debt including current portion

     130,004       45,004  
                

Total long term debt

     204,835       113,935  

Preferred stock, par value $0.01 per share. 3,500,000 shares authorized, 2,122,431 shares issued and outstanding on an actual basis; 10,000,000 shares authorized, no shares issued or outstanding on a pro forma as adjusted basis

     47,500        

Stockholders’ equity:

    

Common Stock, par value $0.01 per share. 15,000,000 shares authorized, 2,257,851 shares issued and outstanding on an actual basis; 90,000,000 shares authorized, 24,333,033 shares issued and outstanding on a pro forma as adjusted basis

     23       243  

Additional paid in capital

     (9,405 )     128,775  

Retained earnings

     (47,152 )     (48,289 )

Accumulated other comprehensive income

     (242 )     (242 )
                

Total stockholders’ equity

     (56,776 )     80,487 (1)
                

Total capitalization (excluding cash)

   $ 195,559     $ 194,422  
                  

The outstanding share information in the table above is based upon the number of shares outstanding as of September 30, 2006.

 

(1)   Reflects a reduction of $1,137 in equity to reflect a charge, net of taxes, that will be incurred to write off all deferred financing fees in connection with the debt being repaid with the proceeds of the offering

 

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Dilution

Our pro forma net tangible book value as of September 30, 2006 was $(133.3) million, or $(8.75) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of common stock outstanding, as of September 30, 2006, after giving effect to the conversion of all of our preferred stock into shares of our common stock upon the closing of this offering.

After giving effect to this offering and the receipt of $90.9 million of net proceeds from this offering, based on an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, the pro forma net tangible book value of our common stock as of September 30, 2006, would have been $(42.4) million, or $(1.74) per share. This amount represents an immediate increase in net tangible book value of $7.01 per share to the existing stockholders and an immediate dilution in net tangible book value of $(12.74) per share to purchasers of common stock in this offering. Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the amount of cash paid by a new investor for a share of common stock. The new investors will have paid $11.00 per share even though the per share value of our assets after subtracting our liabilities is only $(1.74). In addition, the total consideration from new investors will be $100.1 million, which is 67.8% of the total of $147.7 million paid for all shares of common stock outstanding, but new investors will own only 48.5% of our outstanding shares of common stock. The following table illustrates such dilution:

 

Assumed initial public offering price per share

     $ 11.00  

Pro forma net tangible book value per share as of September 30, 2006

   $ (8.75 )  

Increase per share attributable to new investors

   $ 7.01    
          

Pro forma net tangible book value per share after this offering

     $ (1.74 )
          

Dilution per share to new investors

     $ (12.74 )
          

Each $1 increase (decrease) in the public offering price per share would increase (decrease) the pro forma net tangible book value by $0.35 per share (assuming no exercise of the underwriters’ option to purchase additional shares) and the dilution to investors in this offering by $0.35 per share, assuming that the number of shares offered in this offering as set forth on the front cover of this prospectus remains the same.

The following table sets forth, as of September 30, 2006, on the pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the underwriting discounts and commissions and estimated offering expenses.

 

      Shares Purchased    Total Consideration   

Average

Price

Per Share*

     Number    Percentage    Amount    Percentage   
 

Existing stockholders

   15,233,033    62.6%    $ 47,583,000    32.2%    $ 3.12

New investors

   9,100,000    37.4%    $ 100,100,000    67.8%    $ 11.00
    

Total

   24,333,033    100.0%    $ 147,683,000    100.0%    $ 6.07
 

 

*   The total consideration paid by existing stockholders has not been reduced to reflect dividends paid to such stockholders in the amount of $3.64, and does not take into account the sale by certain existing stockholders of 2,700,000 shares (4,470,000 shares if the overallotment option is exercised in full) at the price set out on the cover of this prospectus, which will increase the number of shares owned by new stockholders and reduce ownership by the existing stockholders.

 

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Selected consolidated financial data

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

The following selected 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. The consolidated statement of operations data for the years ended June 30, 2004, 2005 and 2006, and the consolidated balance sheet data as of June 30, 2005 and 2006, are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended June 30, 2002 and 2003, and the consolidated balance sheet data as of June 30, 2002, 2003 and 2004, are derived from our audited consolidated financial statements, which are not included in this prospectus.

The consolidated statement of operations data for the three months ended September 30, 2005 and 2006 and the consolidated balance sheet data as of September 30, 2005 and 2006, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and notes thereto, which include, in the opinion of management, all adjustments (consisting of normal recurring adjustments), necessary for a fair statement of the information for the unaudited interim period. Our historical results for any prior or interim period are not necessarily indicative of results to be expected for a full fiscal year or for any future period.

 

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Consolidated statement of operations data:

 

      Year ended June 30,     Three months ended
September 30,
 
      Predecessor      Successor     (unaudited)  
             (as restated)  
(in thousands, except per
share data and number of
representatives)
   2002      2003      2004      2005      2006     2005      2006  
                                                               

Net sales

   $ 403,422      $ 450,611      $ 502,686      $ 535,693      $ 571,192     $ 127,740      $ 145,702  

Direct cost of products sold

     326,023        366,464        408,105        436,955        459,173       102,973        118,648  
                                                               

Gross profit

     77,399        84,147        94,581        98,738        112,019       24,767        27,054  

Selling, general, and administrative expenses(1)

     57,916        66,047        70,238        72,954        81,428       18,918        20,120  

Acquisition costs(2)

     73        262        496        7,759                      

Depreciation and amortization(3)

     4,129        3,570        3,156        3,149        6,414       1,581        1,540  
                                                               

Operating income

     15,281        14,268        20,691        14,876        24,177       4,268        5,394  

Other income (expense)

                         

Interest expense

     (7,952 )      (5,758 )      (4,984 )      (5,071 )      (13,726 )     (3,250 )      (4,090 )

Other

     475        678        982        672        478       84        140  
                                                               

Income before income taxes

     7,804        9,188        16,689        10,477        10,929       1,102        1,444  

Income tax expense

     (3,129 )      (3,732 )      (6,507 )      (3,203 )      (3,542 )     (360 )      (543 )
                                                               

Net income

   $ 4,675      $ 5,456      $ 10,182      $ 7,274      $ 7,387     $ 742      $ 901  
                                                               
 

Per share data (as restated):

 

                      
 

Earnings (loss) per common share

 

                      

Basic

                         

Common

               $ 0.43 (4)   $ 0.05      $ (23.22 )(4)

Class A

   $ 2.24      $ 2.58      $ 4.80      $ 3.38                

Class L

   $ 2.24      $ 2.58      $ 4.80      $ 3.38                

Class W

   $ 2.24      $ 2.58      $ 4.80      $ 3.38                

Dilutive

                         

Common

               $ 0.43 (4)   $ 0.05      $ (23.22 )(4)

Class A

   $ 2.23      $ 2.56      $ 4.09      $ 2.82                

Class L

   $ 2.23      $ 2.56      $ 4.09      $ 2.82                

Class W

   $ 2.23      $ 2.56      $ 4.09      $ 2.82                
 

Shares used in computing earnings per share:

 

                

Basic

                         

Common

                 2,084       1,571        2,258  

Class A

     1,830        1,862        1,869        1,900                

Class L

     183        183        182        182                

Class W

     72        72        72        72                

Dilutive

                         

Common

                 2,084       1,571        2,258  

Class A

     1,830        1,862        2,221        2,307                

Class L

     199        199        197        197                

Class W

     72        72        72        72                
 

Consolidated balance sheet data:

                         

Total assets

     201,917        164,415        176,202        197,449        294,337       313,048        326,500  

Total current and long-term debt

     105,715        81,389        73,766        61,633        137,634       154,454        204,835  

Total stockholders’ equity (deficit)

     15,088        20,663        30,612        38,087        (3,179 )     (8,984 )      (56,776 )

Cash dividend declared per common share

   $      $      $      $      $     $      $ 0.52  
 

Other data:

                         

Adjusted EBITDA(5)

   $ 19,958      $ 18,778      $ 25,325      $ 26,456      $ 31,069     $ 5,933      $ 7,074  

Field sales representatives(6)

     208        204        195        220        218       218        223  

Inside sales representatives(6)

     60        59        54        61        69       66        55  
                                                               

Total sales representatives

     268        263        249        281        287       284        278  
                                                               

 

(1)  

Selling, general, and administrative expenses include salary, wages, commissions, and related benefits of approximately $35,609, $31,276, $38,464, $39,022 and $43,958 for the years ended June 30, 2002, 2003, 2004, 2005 and 2006, respectively, and $10,694 and $11,533 for the three months ended September 30, 2005 and 2006, respectively. Also, includes management

 

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and advisory service fees paid to Bain Capital Partners V, L.P. totaling $750 for each fiscal year ended June 30, 2002, 2003, 2004, and 2005, respectively. 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, and $63 and $63 for the three months ended September 30, 2005 and 2006, respectively. Refer to note 10 of our consolidated financial statements included in this prospectus for further information.

 

(2)   $7,759 and $496 represent 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. $73 and $262 represent costs of failed acquisitions.

 

(3)   Depreciation expense includes the depreciation of property, plant and equipment and other assets and was $3,156, $3,149 and $3,039 for the years ended June 30, 2004, 2005 and 2006, respectively; and $738 and $697 for the three months ended September 30, 2005 and 2006, respectively.
(4)   On a pro forma basis, after giving effect to our sale of shares offered hereby at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, the proceeds of which are reflected first, to fund the payment of $55,441 in dividends, in excess of earnings of $7,387 for the year ended June 30, 2006 and $901 for the three months ended September 30, 2006, and second, to pay down debt with the remaining proceeds in the amount of $43,756; the conversion of our preferred stock; and a deemed dividend on the conversion of the preferred stock for the excess of the fair value received over the recorded value of the preferred shares, as if each of these events had been completed on July 1, 2005, our earnings (loss) per common share on a basic and dilutive basis would have been $(3.50) and $0.07 for the year ended June 30, 2006 and the three months ended September 30, 2006, respectively. The preferred stock dividends and participation in undistributed earnings of $941 and $5,554, respectively, for the year ended June 30, 2006 and $53,323 and $0, respectively, for the three months ended September 30, 2006 have also been eliminated for purposes of this pro forma computation. The amount of reduction of interest expense is based on the pay down of debt outstanding and related interest rates in effect for the periods presented. The components of the pro forma earnings per share computation are as follows:

 

      Year ended
June 30, 2006
    Three months ended
September 30, 2006
                
     (unaudited)

Net income (as restated)

   $ 7,387     $ 901

Reduction in interest expense, net of related tax effects

     3,306       902

Deemed dividend upon conversion of preferred stock

     (95,227 )     0
              

Pro forma net income (loss) available to common shareholders

   $ (84,534 )   $ 1,803
              

Basic weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma basic weighted average shares outstanding

     24,159       24,333

Diluted weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma diluted weighted average shares outstanding

     24,159       24,333

Pro forma basic earnings (loss) per share

   $ (3.50 )   $ 0.07

Pro forma diluted earnings (loss) per share

   $ (3.50 )   $ 0.07

 

 

(5)   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, our calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies. 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;

 

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    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:

     Year ended June 30,    Three months
ended
September 30,
     Predecessor    Successor   

(unaudited)

          (as restated)
(in thousands)    2002    2003    2004    2005    2006   

2005

  

2006

                                                  

Net income

   $ 4,675    $ 5,456    $ 10,182    $ 7,274    $ 7,387    $ 742    $ 901

Interest expense

     7,952      5,758      4,984      5,071      13,726      3,250      4,090

Income tax expense

     3,129      3,732      6,507      3,203      3,542      360      543

Depreciation and amortization

     4,129      3,570      3,156      3,149      6,414      1,581      1,540

Acquisition costs

     73      262      496      7,759               
                                                

Adjusted EBITDA

   $ 19,958    $ 18,778    $ 25,325    $ 26,456    $ 31,069    $ 5,933    $ 7,074
                                                

 

(6)   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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Management’s discussion and analysis of financial condition and results of operations

The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this prospectus. The following discussion of our historical consolidated financial statements covers periods before consummation of this offering and the application of the proceeds. Accordingly, the discussion does not reflect the impact that this offering will have on us. See the information provided in “Risk factors,” “Capitalization,” “—Liquidity and capital resources” and elsewhere in this prospectus for further discussion relating to the impact of this offering on us. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Risk factors” and elsewhere in this prospectus.

Overview

Based upon net sales, we are one of the largest distributors 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.

Our growth has primarily been derived from internal growth initiatives supported by select strategic acquisitions. Key factors and trends that have affected and we believe will continue to affect our operating results include:

 

  Overall growth in the dairy industry.    According to the United States Department of Agriculture (USDA) over the last several years the demand for dairy products has increased. As a result, the demand for production animal health products in the dairy market has increased. We have capitalized on this demand with increased sales of our dairy related production animal health products. We anticipate that this trend of growth in the dairy market will continue in the future and that we will be able to fulfill the corresponding demand for related production animal health products, resulting in increased sales and profitability.

 

  Consolidation by our customers in the dairy industry.    The dairy market is undergoing significant consolidation resulting in a shift towards larger operations. According to the USDA dairies with 500 or more cattle currently account for 45% of the milk producing cow population in the United States, as compared to 24% in 1997. Over the last several years we have leveraged our relationships with larger dairies and our national footprint to gain market share in the dairy related production animal health products market. We anticipate that this trend of dairy consolidation will continue and we will seek to continue to gain market share.

 

  Our ability to negotiate favorable terms from our manufacturers.    Based upon net sales, we are one of the largest distributors in the production animal health products market. We believe that due to our market position and local market share, we have been able to negotiate, in many instances, better prices and more favorable terms, including rebates and sales and placement incentives, from our manufacturers than our competitors.

 

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  Increased focus on companion animal customers.    According to the Animal Health Institute, over the last several years the market for companion animal health products has increased to approximately $2.9 billion. We believe this growth has been and will continue to be driven by the following trends:

 

    widespread ownership of companion animals;

 

    increased importance of companion animals in households;

 

    growing awareness of companion animal health and wellness;

 

    technology migration from the human life science product sector into the practice of veterinary medicine;

 

    increased marketing programs sponsored by large pharmaceutical and companion animal nutrition companies; and

 

    prolonged companion animal life spans creating demand for geriatric companion animal care products.

Over the past three years we have begun to penetrate the urban and suburban veterinarian markets. We believe that by leveraging our centralized procurement and inventory management model we are well positioned to develop a leading cost-to-serve position in the companion animal health products market and to continue to capture market share, resulting in increased sales and profitability. While we believe we are a leader in the companion animal health product market, the market is highly fragmented with numerous national, regional and local distributors, and a few of our competitors with bigger market share have greater financial and other resources than we do.

 

  Changes in consumer preferences. The demand for production animal health products is heavily dependant upon consumer demand for beef, dairy, poultry and swine. The food industry in general is subject to changing consumer trends, demands and preferences. For example, changes in consumer diets may negatively affect consumer demand for beef, dairy, poultry or swine, and therefore reduce the demand for our production animal health products. During the previous downturns in these markets, we experienced declines in sales and profitability.

We generate revenue from our customers in three ways. Over 99% of our revenue is generated through “buy/sell” transactions. The remainder comes from consignment and agency transactions. In the “buy/sell” transactions, we take title to inventory from our manufacturers. We sell products to customers and invoice them. “Buy/sell” transactions are advantageous to us over other sales methods because we take title to the inventory and are able to promote these products on behalf of manufacturers and effectively manage the pricing and distribution of these products. For our consignment sales, we do not take title to the product, but we do stock and ship product to and invoice the customer. For our agency sales, we transmit orders from our customers to our manufacturers. The manufacturer ships the product directly to our customers and compensates us with a commission payment for handling the order from our customer and providing customer service. Manufacturers may occasionally switch between the “buy/sell” and agency methods for particular products. Currently and for the past three fiscal years, only one product with material sales has required treatment as a consignment sale.

Contracts with manufacturers are generally negotiated annually on a calendar year basis. Sales growth goals are negotiated and used to determine rebate achievement. Manufacturer rebates are classified in our accompanying consolidated statements of operations as a reduction of direct cost of products sold. Manufacturer rebates that are based on quarterly or annual goals have sales performance tracked continually versus the goal and rebate income adjusted accordingly.

 

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Results of operations

The following tables summarize historical results of operations for the period from July 1, 2003 to September 30, 2006, on an actual basis and as a percentage of net sales.

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

Our gross profit may not be comparable to those of other entities, since some entities include all of the costs related to their distribution network in cost of goods sold and others, like us, exclude a portion of these costs from direct cost of products sold and include them instead in selling, general, and administrative expenses, and salaries, wages, commissions, and related benefits.

Summary consolidated results of operations table

 

     
     Year Ended June 30,    Three months ended
September 30,
      Predecessor     Successor    

(unaudited)

 
            (as restated)  
(in thousands)    2004     2005     2006     2005     2006  
   

Net sales

   $ 502,686     $ 535,693     $ 571,192     $ 127,740     $ 145,702  
 

Direct cost of products sold

     408,105       436,955       459,173       102,973       118,648  
                          

Gross profit

     94,581       98,738       112,019       24,767       27,054  
 

Selling, general, and administrative expenses (includes salary, wages, commission, and related benefits)

     70,238       72,954       81,428       18,918       20,120  

Acquisition costs

     496       7,759                    

Depreciation and amortization

     3,156       3,149       6,414       1,581       1,540  
                          

Operating income

     20,691       14,876       24,177       4,268       5,394  
 

Other income (expense):

          

Interest expense

     (4,984 )     (5,071 )     (13,726 )     (3,250 )     (4,090 )

Other income

     982       672       478       84       140  
                          

Income before income taxes

     16,689       10,477       10,929       1,102       1,444  
 

Income tax expense

     (6,507 )     (3,203 )     (3,542 )     (360 )     (543 )
                          

Net income

   $ 10,182     $ 7,274     $ 7,387     $ 742     $ 901  
 

Net sales

     100.0%       100.0%       100.0%       100.0%       100.0%  
 

Direct cost of products sold

     81.2%       81.6%       80.4%       80.6%       81.4%  
                          

Gross profit

     18.8%       18.4%       19.6%       19.4%       18.6%  
 

Selling, general, and administrative (includes salary, wages, commission, and related benefits)

     14.0%       13.6%       14.3%       14.8%       13.8%  

Acquisition costs

     0.1%       1.4%       0.0%       0.0%       0.0%  

Depreciation and amortization

     0.6%       0.6%       1.1%       1.3%       1.1%  
                          

Operating income

     4.1%       2.8%       4.2%       3.3%       3.7%  
 

Other income (expense)

          

Interest expense

     (1.0)%       (0.9)%       (2.4)%       (2.5)%       (2.8)%  

Other income

     0.2%       0.1%       0.1%       0.1%       0.1%  
                          

Income before income taxes

     3.3%       2.0%       1.9%       0.9%       1.0%  
 

Income tax expense

     (1.3)%       (0.6)%       (0.6)%       (0.3)%       (0.4)%  
                          

Net income

     2.0%       1.4%       1.3%       0.6%       0.6%  
                   

 

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Three months ended September 30, 2006 compared to three months ended September 30, 2005

Net sales.    Net sales increased $18.0 million, or 14.1%, to $145.7 million for the three months ended September 30, 2006, from $127.7 million for the three months ended September 30, 2005. This increase in net sales was primarily attributable to continued expansion into new territories, the addition of new customers and increased sales to existing customers. In addition, vendor initiated price increases that occurred in June 2005 accelerated approximately $6 million of customer purchases, which might otherwise have occurred in the quarter ended September 30, 2005, into the quarter ended June 30, 2005. No similar vendor price increases occurred in June 2006. The number of field sales representatives increased to 223 as of September 30, 2006, from 218 as of September 30, 2005, while the number of inside sales representatives decreased to 55 as of September 30, 2006, from 66 as of September 30, 2005. The increase in field sales representatives allowed us to expand into additional territories and attract new customers.

Gross profit.    Gross profit increased by $2.3 million, or 9.2%, to $27.1 million for the three months ended September 30, 2006, from $24.8 million for the three months ended September 30, 2005. Gross profit as a percentage of sales was 18.6% for the three months ended September 30, 2006, compared to 19.4% for the three months ended September 30, 2005. Our gross profit increased as a result of sales growth but was offset by an unfavorable shift in product mix to more sales of lower gross margin products.

Selling, general and administrative expenses.    Selling, general and administrative expenses, excluding depreciation and amortization, increased by $1.2 million, or 6.4%, to $20.1 million for the three months ended September 30, 2006, from $18.9 million for the three months ended September 30, 2005. This increase resulted primarily from an increase in variable expenses, including $0.6 million in commissions and $0.4 million in warehouse expenses, related to sales volume. Expenses that are more fixed in nature remained steady. This resulted in a decrease in selling, general and administrative expenses as a percent of sales from 14.8% for the three months ended September 30, 2005, to 13.8% for the three months ended September 30, 2006.

Depreciation and amortization.    Depreciation and amortization decreased by $0.1 million, or 2.6%, to $1.5 million for the three months ended September 30, 2006, from $1.6 million for the three months ended September 30, 2005. The decrease resulted from slightly more assets becoming fully depreciated in the three months ended September 30, 2006 than in the three months ended September 30, 2005.

Other expenses.    Other expenses increased $0.8 million, or 24.8%, to $4.0 million for the three months ended September 30, 2006, from $3.2 million for the three months ended September 30, 2005. The increase in other expense was due to an increase in interest expense of $0.8 million to $4.1 million in the three months ended September 30, 2006, as compared to $3.3 million in the three months ended September 30, 2005. This increase resulted from $50.4 million of additional debt related to the September 2006 debt refinancing.

Income tax expenses.    Income tax expense increased $0.1 million, or 50.8%, to $0.5 million for the three months ended September 30, 2006, from $0.4 million for the three months ended September 30, 2005. The effective tax rate was 37.6% and 32.7% for the three months ended September 30, 2006 and 2005, respectively. The increase in the effective tax rate was attributable to the lowering of a state tax rate during the three months ended September 30, 2005, which reduced deferred tax liabilities, thereby reducing the effective tax rate for that period.

 

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Fiscal 2006 compared to fiscal 2005

Net sales.    Net sales increased $35.5 million, or 6.6%, to $571.2 million for the fiscal year ended June 30, 2006, from $535.7 million for the fiscal year ended June 30, 2005. This increase in net sales was primarily attributable to new products and our expansion into new territories offset by the impact of increased sales of approximately $6 million to our customers in late 2005 in advance of a price increase. We believe net sales attributable to new products were approximately $34.4 million and net sales attributable to the expansion of our products into new territories were approximately $5.5 million. The number of field sales representatives decreased to 218 as of June 30, 2006 from 220 as of June 30, 2005, while the number of inside sales representatives increased to 69 as of June 30, 2006 from 61 as of June 30, 2005. This increase in inside sales representatives allowed us to better utilize and support our field sales representatives in order to expand into additional territories and extend our geographic reach.

Gross profit.    Gross profit increased by $13.3 million, or 13.5%, to $112.0 million for the fiscal year ended June 30, 2006, from $98.7 million for the fiscal year ended June 30, 2005. Gross profit as a percentage of net sales was 19.6% for the fiscal year ended June 30, 2006, compared to 18.4% in the prior year. Our gross profit benefited by approximately $6.5 million from an increase in net sales and by approximately $6.0 million in manufacturer rebates, which were based on the attainment of pre-specified growth goals.

Selling, general and administrative expenses.    Selling, general and administrative expenses, excluding depreciation and amortization, increased by $8.4 million, or 11.6%, to $81.4 million for the fiscal year ended June 30, 2006, from $73.0 million for the fiscal year ended June 30, 2005. This primarily resulted from an increase in variable expenses related to sales volume totaling $3.4 million, a non-cash reserve for potential litigation of $2.5 million, an increase in salaries and wages totaling $2.4 million and an increase in fuel costs of $1.1 million. The variable expenses which increased due to sales volume were predominately commissions. Salaries and wages were affected by merit adjustments of $0.9 million and additions of $1.0 million, primarily in the companion animal health products area.

Acquisition costs.    There were no acquisition costs in the fiscal year ended June 30, 2006. Acquisition costs totaled $7.8 million in the fiscal year ended June 30, 2005, which primarily included legal costs and transaction bonuses associated with the acquisition of the Company by Charlesbank, which occurred on June 30, 2005.

Depreciation and amortization.    Depreciation and amortization increased by $3.3 million, or 103.7%, to $6.4 million for the fiscal year ended June 30, 2006, from $3.1 million for the fiscal year ended June 30, 2005. The increase resulted from the amortization of intangible assets created in the June 30, 2005 acquisition of the Company by Charlesbank.

Other expenses.    Other expenses increased $8.8 million, or 201.2%, to $13.2 million for the fiscal year ended June 30, 2006, from $4.4 million for the fiscal year ended June 30, 2005. The increase in other expenses was due to an increase in interest expense of $8.7 million to $13.7 million in the fiscal year ended June 30, 2006, as compared to $5.1 million in the prior year. This increase resulted from $85.9 million of additional debt incurred in the June 30, 2005 acquisition of the Company.

Income tax expenses.    Income tax expense increased $0.3 million, or 10.6%, to $3.5 million for the fiscal year ended June 30, 2006, from $3.2 million for the fiscal year ended June 30, 2005. The

 

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effective tax rate was 32.4% and 30.6% for the fiscal years ended June 30, 2006 and 2005, respectively. The increase in our effective tax rate was attributable to the non-deductible amortization of intangible assets, beginning on July 1, 2005.

Fiscal 2005 compared to fiscal 2004

Net sales.    Net sales increased $33.0 million, or 6.6%, to $535.7 million for the fiscal year ended June 30, 2005, from $502.7 million for the fiscal year ended June 30, 2004. This increase in net sales was primarily attributable to new products and an expansion into new territories and an acceleration of purchases of approximately $6 million in late 2005 by our customers in advance of price increases at the start of 2006. We increased the number of field sales representatives to 220 as of June 30, 2005 from 195 as of June 30, 2004, and the number of inside sales representatives to 61 as of June 30, 2005 from 54 as of June 30, 2004. This increase in sales representatives allowed us to expand into additional territories and extend our geographic reach.

Gross profit.    Gross profit increased by $4.1 million, or 4.4%, to $98.7 million for the fiscal year ended June 30, 2005, from $94.6 million for the fiscal year ended June 30, 2004. Gross profit as a percentage of net sales was 18.4% for our fiscal year ended June 30, 2005, compared to 18.8% in the prior year. This decrease was driven primarily by higher freight costs resulting largely from rising fuel prices.

Selling, general and administrative expenses.    Selling, general and administrative expenses, excluding depreciation and amortization, increased by $2.8 million, or 3.9%, to $73.0 million for the fiscal year ended June 30, 2005, from $70.2 million for the fiscal year ended June 30, 2004. The increase was primarily due to a $1.1 million increase in sales volume-related commissions, liquidity challenges for certain dairy customers that led to a $0.7 million increase in bad debt expense during the year, a $0.4 million increase in advertising costs and a $0.4 million increase in credit card fees.

Acquisition costs.    Acquisition costs totaled $7.8 million in the fiscal year ended June 30, 2005, which primarily consisted of legal costs and transaction bonuses associated with the acquisition of the Company, which occurred on June 30, 2005. There were nominal acquisition costs in the fiscal year ended June 30, 2004.

Depreciation and amortization.    Depreciation and amortization was $3.1 million for the fiscal year ended June 30, 2005, compared to $3.2 million for the fiscal year ended June 30, 2004.

Other expenses.    Other expenses increased $0.4 million, or 9.9%, to $4.4 million for the fiscal year ended June 30, 2005, from $4.0 million for the fiscal year ended June 30, 2004. The increase in other expenses was primarily due to a decline in financing fees received from customers for late payments.

Income tax expenses.    Income tax expense decreased $3.3 million, or 50.8%, to $3.2 million for the fiscal year ended June 30, 2005, from $6.5 million for the fiscal year ended June 30, 2004. The effective tax rate was 30.6% and 39.0% for the fiscal years ended June 30, 2005 and 2004, respectively. The decrease in our effective tax rate was attributable to reductions in state income taxes and a favorable change in permanent differences between book and tax income reflected in deferred taxes on the balance sheet.

 

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Seasonality of operating results

Historically, our quarterly sales and operating results have varied significantly, and will likely continue to do so in the future. Seasonality has been caused by product usage, climate changes, promotions and announced price increases. Historically, sales have been higher during the spring and fall months due to increased sales of production animal health products. The transportation of production animals during the spring and fall months drives seasonal product usage. The transportation of production animals occurs during various times in the animal’s life cycle. The cycle begins with the cow-calf stage where the calf is born and raised to six to eight months of age. At that point the calf moves to pasture for three to five months. The last movement occurs when the animal is placed in the feedyard. Movement and climate changes cause stress upon the animal, which increases the risk of disease. Thus, prior to each of these moves, the animal is typically treated for disease prevention. These buying patterns can also be affected by manufacturers’ and distributors’ marketing programs launched during the summer months, particularly in June, which can cause customers to purchase production animal health products in advance of actual usage. This kind of early purchasing may reduce the sales in the months these purchases would have typically been made. In the companion animal health products market, sales of flea, tick and heartworm products drive sales during the spring and summer months. See “Risk factors—Our quarterly operating results may fluctuate due to factors outside of management’s control.” Additionally, while we accrue rebates as they are earned, our rebates have historically been highest during the quarter ended December 31, since some of our manufacturers’ rebate programs are designed to include targets to be achieved on calendar year sales. We anticipate that this trend with respect to manufacturers’ rebate programs will continue.

For the reasons and factors discussed above, our quarterly operating results may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year, and our sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. If this occurs, the price of our stock would likely decrease.

Consolidated statements of operations for the quarter ended

 

(in thousands)    September 30,
2005
    December 31,
2005
    March 31,
2006
    June 30,
2006
    September 30,
2006
 
                                          
     (as restated)  

Net sales

   $ 127,740     $ 156,763     $ 139,843     $ 146,846     $ 145,702  

Direct cost of products sold

     102,973       121,842       114,111       120,247       118,648  
                                        

Gross profit

     24,767       34,921       25,732       26,599       27,054  

Selling, general, and administrative expenses(1)

     18,918       22,777       19,258       20,475       20,120  

Acquisition costs

                              

Depreciation and amortization

     1,581       1,632       1,593       1,608       1,540  
                                        

Operating income

     4,268       10,512       4,881       4,516       5,394  

Other income (expense):

          

Other income

     84       167       159       68       140  

Interest expense

     (3,250 )     (3,545 )     (3,415 )     (3,516 )     (4,090 )
                                        

Income before income taxes

     1,102       7,134       1,625       1,068       1,444  

Income tax expense

     (360 )     (2,304 )     (529 )     (349 )     (543 )
                                        

Net income

   $ 742     $ 4,830     $ 1,096     $ 719     $ 901  
                                          
(1)   Includes salaries, wages, commissions, and related benefits.

 

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Liquidity and capital resources

Our primary sources of liquidity are cash flows generated from operations and borrowings under our revolving credit facility that was established on June 30, 2005. Funds are expended to provide working capital that enables us to maintain adequate inventory levels to promptly fulfill customer needs and expand operations. We expect our capital resources to be sufficient to meet our anticipated cash needs for at least the next twelve months, and we expect cash flows from operations to be sufficient for us to reduce outstanding borrowings under our revolving credit facility.

Operating activities.    For the three months ended September 30, 2006, net cash used for operating activities was $8.8 million, and was primarily attributable to a $19.3 million increase in inventories partially offset by a $24.0 million increase in accounts payable, combined with an $11.2 million increase in accounts receivable. The increase in inventory is in anticipation of fall sales and is offset directly by increased accounts payable. The increase in accounts receivable results from strong sales at the close of the quarter that converted to cash early in the following quarter. For the three months ended September 30, 2005, net cash used for operating activities was $7.5 million, and was primarily attributable to $7.8 million of increased inventory that resulted from lower than anticipated sales for the quarter. For the fiscal year ended June 30, 2006, net cash provided by operating activities was $12.9 million, and was primarily attributable to net income of $7.4 million and non-cash costs of $7.3 million, consisting principally of depreciation and amortization. For the fiscal year ended June 30, 2005, net cash provided by operating activities was $8.6 million. Net income generated of $7.3 million and $3.8 million of non-cash costs (depreciation and amortization) were offset by an increase in working capital of $2.9 million. The change in working capital included increases in accounts receivable of $13.5 million and inventory of $7.8 million, offset by increases in accounts payable of $9.8 million and accrued liabilities of $9.7 million. The increase in accounts receivable resulted from an increase in sales during the last two weeks of June 2005 that was driven by customers buying product in advance of July 2005 vendor initiated price increases. The increase in accounts payable resulted from a rise in inventory purchases and the improvement of payables terms with larger vendors. The increase in accrued liabilities was primarily the result of accruals established for acquisition costs. For the fiscal year ended June 30, 2004, net cash provided by operating activities was $12.0 million, and was primarily attributable to net income of $10.2 million.

Investing activities.    For the three months ended September 30, 2006, net cash used for investing activities was $1.8 million, and was primarily attributable to purchases of property, plant and equipment totaling $1.0 million and purchase of other assets totaling $0.8 million. For the three months ended September 30, 2005, net cash used for investing activities was $0.9 million, and was primarily attributable to purchases of property, plant and equipment totaling $0.7 million. For the fiscal year ended June 30, 2006, net cash used for investing activities was $3.9 million, and was primarily attributable to purchases of property, plant and equipment totaling $3.3 million. For the fiscal year ended June 30, 2005, net cash used for investing activities was $1.9 million. These funds were used to purchase $2.1 million of property, plant and equipment. For the fiscal year ended June 30, 2004, net cash used for investing activities totaled $2.7 million, and was primarily used to purchase $2.4 million of property, plant and equipment. In each of these periods, property, plant and equipment purchases consisted primarily of additions of computer equipment and vehicles.

Financing activities.    For the three months ended September 30, 2006, net cash provided by financing activities was $12.1 million, and was primarily attributable to borrowings received from

 

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a new $45.0 million first lien term loan and a new $45.0 million second lien term loan, offset by

funding through the revolving credit facility of a $54.5 million dividend to common and preferred stockholders, and the payment in full of the outstanding $26.5 million balance of the previous first lien term loan. For the three months ended September 30, 2005, net cash provided by financing activities was $10.1 million, and was primarily attributable to $7.0 million of net borrowings from the revolving credit facility and a favorable change in overdraft balances of $3.4 million. For the fiscal year ended June 30, 2006, net cash used for financing activities was $13.6 million, and was primarily used to pay down the balances of the revolving credit facility and the $30.0 million first lien term loan. For the fiscal year ended June 30, 2005, net cash used for financing activities was $6.3 million, and was primarily attributable to repayments on the revolving credit facility and other long-term debt, as well as a change in overdraft balances. For the fiscal year ended June 30, 2004, net cash used for financing activities totaled $8.9 million and was primarily used to pay down the balances of the revolving credit facility and other long-term debt.

Capital resources.    On June 30, 2005, in conjunction with the acquisition of the Company, we and a group of financial institutions entered into certain credit agreements, which included a $110.0 million revolving credit facility, a $30.0 million first lien term loan and a $40.0 million second lien term loan. Initial borrowings under the credit agreements were used to pay off prior debt, fund the acquisition of the Company and provide working capital. As of June 30, 2006, outstanding borrowings under the credit agreements were $137.6 million.

Available borrowings under our revolving credit facility are determined based on eligible accounts receivable, inventory, equipment and real estate. Borrowings are collateralized by a first priority interest in and lien on all of our assets and certain other guarantees and pledges. As of June 30, 2006, unused availability under our revolving credit facility totaled $26.9 million. Our revolving credit facility matures on June 30, 2010.

Our $30.0 million first lien term loan required the payment of four quarterly installments of $1.75 million each, commencing on December 31, 2005, four quarterly installments of $2.375 million each, commencing on December 31, 2006, and quarterly installments of $3.375 million each commencing on December 31, 2007 and ending before the term loan maturity date, which is three years from our first drawdown. Borrowings were collateralized by the same first priority interest that collateralizes our revolving credit facility.

The $40.0 million second lien term loan matures in one installment on June 30, 2011. Borrowings are collateralized by a second priority interest in and lien on all of our assets and certain other guarantees and pledges.

The outstanding borrowings under the credit agreements bear interest, at our option, as follows: (1) an interest rate per annum equal to the sum of (a) the greater of (i) the Prime Rate (as defined in the credit agreements) in effect on such day, and (ii) the Federal Funds Effective Rate (as defined in the credit agreements) in effect for such day plus  1/2 of 1% and (b) the applicable margin or (2) an interest rate per annum equal to the sum of (a) the product of (i) the LIBOR Rate (as defined in the credit agreements) in effect for an interest period (as defined in the credit agreement) and (ii) the statutory reserves and (b) the applicable margin.

Interest rates ranged from 6.88% to 13.60% as of June 30, 2006 and from 6.75% to 11.58% as of June 30, 2005. We are also required to pay a commitment fee on the daily unused amount of our

 

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revolving credit facility at a per annum rate of 0.375%. Our credit agreements contain certain affirmative and negative covenants, which require, among other things, that we meet certain financial ratio covenants and limit certain capital expenditures. The most restrictive covenant relates to the creation or assumption of additional indebtedness. We were in compliance with all covenants as of June 30, 2006 and 2005.

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 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. 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 25, 2012. Borrowings are collateralized by a second priority interest in and lien on all of our assets. With the net proceeds we receive from this offering, we intend to repay in full the borrowings under our existing $40.0 million second lien term loan and our new $45.0 million second lien term loan. See “Use of proceeds.”

Upon consummation of this offering assuming an initial public offering price of $11.00 per share, we will have approximately $113.9 million of indebtedness outstanding under our term loans and revolving credit facility and approximately $52.8 million of availability under our revolving credit facility. See “Capitalization.”

 

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On a pro forma basis, after giving effect to our sale of shares offered hereby at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, the proceeds of which are reflected first, to fund the payment of $55,441 in dividends, in excess of earnings of $7,387 for the year ended June 30, 2006 and $901 for the three months ended September 30, 2006, and second, to pay down debt with the remaining proceeds in the amount of $43,756; the conversion of our preferred stock; and a deemed dividend on the conversion of the preferred stock for the excess of the fair value received over the recorded value of the preferred shares, as if each of these events had been completed on July 1, 2005, our earnings (loss) per common share on a basic and dilutive basis would have been $(3.50) and $0.07 for the year ended June 30, 2006 and the three months ended September 30, 2006, respectively. The preferred stock dividends and participation in undistributed earnings of $941 and $5,554, respectively, for the year ended June 30, 2006 and $53,323 and $0, respectively, for the three months ended September 30, 2006 have also been eliminated for purposes of this pro forma computation. The amount of reduction of interest expense is based on the pay down of debt outstanding and related interest rates in effect for the periods presented. The components of the pro forma earnings per share computation are as follows:

 

      Year ended
June 30,
2006
   

Three months ended
September 30,

2006

                
     (unaudited)

Net income (as restated)

   $ 7,387     $ 901

Reduction in interest expense, net of related tax effects

     3,306       902

Deemed dividend upon conversion of preferred stock

     (95,227 )     0
              

Pro forma net income (loss) available to common shareholders

   $ (84,534 )   $ 1,803
              

Basic weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma basic weighted average shares outstanding

     24,159       24,333

Diluted weighted average shares outstanding

     2,084       2,258

Number of shares issued to fund the dividend in excess of earnings

     4,720       4,720

Number of shares issued to pay down debt

     4,380       4,380

Common shares issued to convert preferred shares

     12,975       12,975
              

Pro forma diluted weighted average shares outstanding

     24,159       24,333

Pro forma basic earnings (loss) per share

   $ (3.50 )   $ 0.07

Pro forma diluted earnings (loss) per share

   $ (3.50 )   $ 0.07
                

All of our indebtedness bears interest at floating interest rates. We do not currently hedge exposure related to our floating rate debt. If these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify.

 

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Off-Balance Sheet Arrangements

As of September 30, 2006, we did not have any off-balance sheet arrangements other than the operating lease commitments in the contractual obligations table below.

Contractual obligations

Our contractual obligations as of September 30, 2006 mature as follows:

 

      Payments Due by Period
(in thousands)    Total    1 Year or
Less
   2-3 Years    4-5 Years    More
than 5
Years
 

Line-of-credit to banks

   $ 74,831    $    $    $ 74,831    $

Operating lease commitments

     15,290      3,060      5,250      3,679      3,301

Long-term debt obligations (including current portion)(1)

     130,000      563      900      83,537      45,000

Interest on long-term debt and line-of-credit(2)

     99,102      20,135      40,518      32,449      5,820
                                  

Total contractual obligations(3)(4)

   $ 319,223    $ 23,938    $ 46,668    $ 194,496    $ 54,121
 

 

(1)   We expect to repay a portion of our outstanding indebtedness with the proceeds from this offering. Upon such repayment, we expect to have long-term debt obligations of $45.0 million and line-of-credit to bank obligations of $68.9 million. See “Use of proceeds.”

 

(2)   Future interest payments are calculated based on the assumption that all debt is outstanding until maturity. For debt instruments with variable interest rates, interest has been calculated for all future periods using the rates in effect as of September 30, 2006.

 

(3)   Does not include fees payable under the management and consulting services agreement, which will be terminated upon the closing of this offering.

 

(4)   There are some purchase obligations under purchase contracts, but management does not believe that they are material.

Inflation

Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations. During the past three years, the most significant effects of inflation have been on freight and fuel costs, employee wages and costs of products. Historically, we have been proactive in addressing inflation in attempts to limit its effects through the enactment of cost control initiatives.

Critical accounting policies

The SEC recently issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Our significant accounting policies are described in note 2 to our consolidated financial statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, our management is required to make certain estimates and assumptions during the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial

 

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statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. The following are descriptions of some of our critical accounting policies that are impacted by such judgments, assumptions and estimates:

Revenue recognition.    Revenues are recognized when title passes according to shipping terms. Provision for sales returns is recorded at the time of sale for estimated products returned by customers. Provision for sales discounts is recorded at the time of sale.

Manufacturer rebates.    Inventory rebates are recognized when estimable and probable and include inventory purchase rebates and sales-related rebates. Inventory purchase rebates received are capitalized into inventory while sales-related rebates are recorded as a reduction of cost of products sold. Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our future estimates will continue to be reasonable as our rebates are based upon specific vendor program goals and are recorded each month based principally upon achievement of sales performance measures.

Goodwill and other intangible assets.    As of June 30, 2006, the Company performed its annual impairment test, and no impairment was noted. As of June 30, 2005, the Predecessor was acquired, and correspondingly, no impairment test was necessary at that date. The impairment test is performed by comparing the Company’s estimated fair value to the carrying amount of its goodwill and other nonamortizing intangible assets. If the carrying amount exceeds the fair value, an impairment loss would be recognized in an amount equal to the excess. The Company will continue to evaluate goodwill and other nonamortizing intangible assets consisting of trademarks and trade names for potential impairment based upon any changes to the Company’s operations or its operating business environment. Amortizing intangible assets including customer relationships and noncompete agreements are being amortized over their estimated useful lives of twelve and eight years, respectively.

Quantitative and qualitative disclosure about market risk

The interest payable on borrowings under our credit agreements is based on variable interest rates and is therefore affected by changes in market interest rates. If the weighted average interest rate on our variable rate indebtedness rose 76 basis points (a 10.0% change from the calculated weighted average interest rate as of June 30, 2006, after giving effect to the refinancing of our credit agreements as described in “—Liquidity and capital resources—Capital resources,” the cash dividend we paid in September 2006 as described in “Certain transactions—Cash dividend” and the use of proceeds from this offering as described in “Use of proceeds,” or collectively, the Transactions), assuming no change in our outstanding balance under our revolving credit facility and $45.0 million first lien term loan (approximately $45.0 million as of June 30, 2006, after giving effect to the consummation of the Transactions), our annualized income before taxes and cash flows from operating activities would decline by approximately $0.9 million. If the weighted average interest rate on our variable rate indebtedness decreased 76 basis points (a 10.0% change from the calculated weighted average interest rate as of June 30, 2006, after giving effect to the consummation of the Transactions), assuming no change in our outstanding balance under our revolving credit facility and $45.0 million first lien term loan (approximately $45 million as of June 30, 2006, after giving effect to the consummation of the Transactions), our annualized income before taxes and cash flows from operating activities would increase by approximately $0.9 million. We do not engage in financial transactions for trading or speculative purposes.

 

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Business

Our business

Based upon net sales, we are one of the largest distributors 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, service and ability to assist them in their operations. We have a 278 person sales force, including 223 field sales representatives. We process daily shipments from our central replenishment and distribution facility in Memphis, Tennessee and 68 distribution locations strategically located across the United States and Canada.

For our fiscal year ended June 30, 2006, our net sales, operating income and net income were $571.2 million, $24.2 million and $7.4 million, respectively. For the three months ended September 30, 2006, our net sales, operating income and net income were $145.7 million, $5.4 million and $0.9 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 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. Over the last five years, we have had consistent growth and completed several acquisitions. We believe this growth is attributable to consolidation by our customers, the proliferation of generic animal health products, and our increased focus on sales and marketing. On June 30, 2005, we were acquired by investment funds affiliated with Charlesbank. In September 2006, we changed our name to Animal Health International, Inc.

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.

We believe that production animal health product sales are largely driven by:

 

  increased awareness and education of animal health issues resulting in broader use of animal health products;

 

  greater focus on improving production animal yield;

 

  new technologies and product formulations;

 

 

increased demand for animal protein due to shifts in consumer nutritional trends; and

 

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  the recent re-establishment of beef export markets to Japan and South Korea that had been closed since 2003.

We believe that companion animal health product sales are largely driven by:

 

  widespread ownership of companion animals;

 

  increased importance of companion animals in households;

 

  growing awareness of companion animal health and wellness;

 

  technology migration from the human life science product sector into the practice of veterinary medicine;

 

  increased marketing programs sponsored by large pharmaceutical and companion animal nutrition companies; and

 

  prolonged companion animal life spans creating demand for geriatric companion animal care products.

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.

Our strengths

We believe that our strengths include:

Leading distributor of animal health products.     Based upon net sales, we are one of the largest distributors 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 market position and local market share, enabling us to negotiate more favorable terms with our manufacturers and more effectively serve our customers. We source products globally from a diverse base of manufacturers and have a large sales force that can effectively place products for our manufacturers in an industry of highly substitutable products. We believe that our relationships throughout the supply chain, product fulfillment and other consultative services enable us to be the leading animal health products distributor.

Broad product offering to a fragmented and geographically dispersed market.    We believe that we add 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. We stock in excess of 35,000 products, including a number of proprietary branded products, which we source from over 1,500 manufacturers. We also offer our customers additional products through special order. 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 our knowledge of the needs of the 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. Accounts served directly by our sales force comprised approximately 98% of our net sales in fiscal 2006 and approximately

 

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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 well-trained consultative sales force. These relationships have also led to the outsourcing of distribution to us by manufacturers who previously distributed their own products. While manufacturers often have relationships with multiple distributors, our 10 largest manufacturers have been working with us for over 20 years.

Consultative sales approach.    Members of our 278 person sales force have worked with us for an average of nine years and generally live in the local communities in which they serve and have a comprehensive 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 well-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 a highly scaleable and customized information technology platform. Our centralized replenishment systems detail product ordering and shipping histories, track order status and monitor product requests from sales representatives. In addition, our Internet ordering system allows customers to review product descriptions, access customer-specific product pricing, view current vendor promotions, download detailed product usage history and place orders. 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 an experienced management team with significant animal health products industry expertise. Our team has successfully managed geographically dispersed operations by effectively utilizing our centralized 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 challenges

We believe that our challenges include:

 

  Hiring, training and retaining a sufficient number of sales representatives;

 

  Satisfying the changes in customer demands;

 

  Attaining sales goals to secure manufacturer rebates;

 

  Overcoming industry competition in the animal health products market; and

 

  Maintaining compliance with frequently changing government regulation.

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 significantly increase our share of animal health product purchases by optimizing our sales efforts and expanding our consultative

 

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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 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 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 actively screen, target, contact and evaluate potential acquisitions. Our acquisition strategy is to target complementary businesses in the animal health product market that provide, among other things, access to additional product lines, sales representatives, customer opportunities, manufacturer relationships, sales territories and value-added services both in the United States and internationally. We believe that our experienced and disciplined management team, together with our organizational platform built on scaleable information management systems and processes, make us well positioned to participate in the consolidation of the industry. In October 2006 we acquired Hawaii Mega-Cor. and Farm City Animal Supply. In November 2006 we acquired Paul E. Blackmer, D.V.M., Inc. The acquired companies had annual revenues last year of approximately $30.0 million.

Products

We offer a broad selection of over 35,000 animal health products, including a number of a proprietary branded products, which we source from over 1,500 manufacturers. We also offer our customers additional products through special order. Our products are comprised of four major categories: pharmaceuticals, biologicals, medicated additives and other products.

Pharmaceuticals.    Pharmaceuticals include dosage form medicines employed in disease prevention and treatment programs. Pharmaceuticals such as antibiotics, anthelmintics, insecticides and implants include both over-the-counter products, which can be sold directly to end-users, and ethical products, which are sold to, or through, veterinarians.

 

  Antibiotics are administered for the treatment and prevention of diseases such as chronic respiratory disease and for growth promotion. Antibiotics include products such as tetracyclines, penicillins, erythromycins, cephalosporins and fluroquinolones. Antibiotics are available in injectable, bolus (i.e. pill), additive and drench (i.e. liquid) forms.

 

 

Anthelmintics are deworming agents administered on a routine basis to animals for the prevention and treatment of internal parasites and worms in production animals. Worms

 

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include gastrointestinal roundworms, stomach worms, intestinal worms and lungworms. Anthelmintics are available in injectable, bolus, drench, additive, pour-on and paste forms.

 

  Insecticides are used to control insect populations on animals and their premises, and are administered on a routine, preventative basis. Insecticides can be used to control flies, lice, ticks, mites and fleas, and are available in dust, liquid, spray and ear tag forms. Endectocides are active against both internal and external parasites and hence are both an anthelmintic and an insecticide.

 

  Implants are used for the promotion of growth in animals, to increase weight gain and improve efficiency in cattle.

Biologicals.    Biologicals, including bacterial and viral vaccines and antitoxins, stimulate immunity to disease in both production and companion animals. Bacterial vaccines are bacterial products that are used on a routine basis to prevent diseases such as black leg, leptospirosis, red water and shipping fever. Viral vaccines are used for the control of respiratory and gastrointestinal diseases. Antitoxins provide short-term protection for certain soil borne and certain other infections such as tetanus.

Medicated additives.    Medicated additives include highly regulated products such as antibiotics and anti-bacterials, and are used at low levels to promote growth and improve efficiency in production animals and, at high levels, for therapeutic treatment.

Other products, including probiotics (i.e. beneficial bacteria-based treatments), nutritionals, fluids, diagnostics, capital equipment, medical devices and supplies, cleansers and sanitizers.    Other products include disposable kits, replacement strips and reagents (excluding equipment and devices) used in testing all animal species’ body fluids and tissue for disease and/or conditions or in residue testing of animal products. While heartworm diagnostics are at the core of this market, other products also include a full range of blood tests for disorders such as ehrlichia, feline leukemia, parvovirus, feline infectious peritonitis and feline immunodeficiency virus. Chemicals include sanitizers, cleaning agents, disinfectants, insecticides and rodenticides. Medical supplies are used in cleaning and sanitizing equipment and facilities, as well as diagnostic and suture components and include grooming products such as brushes and shampoos.

Proprietary branded products.    In addition to the four major categories of products discussed above, we selectively target new product areas to expand our proprietary branded products portfolio, while maintaining our strategic manufacturer relationships. We market these products, such as vaccines, antibiotics, nutritionals and general pharmaceuticals, under the RXV Products, AGRIpharm, First Companion, Mineral Max and Ivermax brands. 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 confident in our brands. We believe we can partner with domestic and international manufacturers to continue to grow our proprietary branded products business by (1) marketing new specialty niche products and (2) developing proprietary branded products for products coming off patent. Proprietary branded product manufacturing is done both by third-party contract manufacturers as well as branded product companies that have excess capacity. We believe that we are well-positioned to capitalize on the trend towards increased private brands given our strong relationships with manufacturers and strong market position in the distribution of animal health products.

 

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Consultative services

In addition to providing a broad selection of animal health products, we offer a comprehensive set of consultative services, software and equipment that differentiates us from our competition and further solidifies what we believe is our leading market position. We do not generate any revenue from our consultative services, software or equipment. These services include:

Health and operations management software.    We offer user-friendly beef cattle computer management systems. Our proprietary health management software allows producers to accurately document the health history and treatment costs for each animal. Our accounting software package enables producers to organize financial data for their operations including information on employees, taxes, commodity costs and transaction records.

Microingredient machines.    We install microingredient machines that (1) precisely measure expensive feed additive ingredients used to complete balanced feeding rations for cattle and (2) store and administer pharmaceuticals. This service is sold with discounts to customers purchasing large orders of feed additives.

Herd health management.    We work with production animal veterinarians to design specific animal health packages with vaccination and treatment protocols. We assist customers in the implementation and administration of these packages and help veterinarians in disease identification and vaccine management.

Dairy technicians.    Our dedicated technicians assist customers with the cleaning, maintenance and replacement of dairy equipment and also provide various disinfectant supplies used by customers to maintain sanitary facilities. Additionally, our technicians interface with dairy cooperatives and help manage accounting and payment processes.

Logistics services.    We provide contract logistics, warehousing and delivery services to both manufacturers and customers. We also provide customers with microbacterial monitoring, cleaning and disinfecting and litter management services.

Merchandising services.    Our field sales representatives visit large dealers and provide shelf management and organization, product information and monitoring services on a monthly basis.

Electronic commerce platform.    Our user-friendly e-commerce application allows customers to review product descriptions, access customer-specific product pricing, view current vendor promotions, download detailed product usage history and place orders.

Newsletters and publications.    We publish weekly newsletters customized by market. Our publications include: Heads Up (targeted to the beef market), Dairy Health Update (targeted to the dairy market) and DVM Resources Industry Update (targeted towards veterinarians). These newsletters include information regarding recent product introductions, health articles, advice columns and conferences and seminars.

Value in purchasing.    Our Value In Purchasing (“VIP”) program is designed to reward our customers for repeat business. For every purchase made from our VIP Premier Product Line, customers earn points redeemable through our program catalog.

Promotional material development and disbursement.    Our marketing and graphic design professionals assist small manufacturers in developing and producing promotional materials for their animal health products.

 

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Customers

We have a diverse customer base with over 62,000 accounts consisting of veterinarians, production animal operators and animal health product retailers. We believe our good reputation for customer service, product selection and high quality products has enabled us to establish and maintain this customer base. In fiscal 2006, no customer represented more than 1.0% of net sales and our 10 largest accounts only comprised approximately 6.1% of net sales. 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. Our customers range in size from single-practitioner veterinarians to large, corporate cattle feeding operations. Due to longstanding relationships between our sales force and our customers, 90% of our top 500 customers that placed orders with us in 2002 still order from us today.

Beef customers.    Our beef customers are divided into three primary sub-groups: cow/calf, stocker and feedlots. Cattle require animal health products during each stage to optimize weight gain, shorten production cycles, prevent disease and maintain overall health. Additionally, as transportation is physically taxing on cattle, animal health products are administered each time cattle are transported between stages. We have historically targeted stocker and feedlot customers, most of whom have over 500 and 2,000 cattle, respectively. Our acquisition of the Hi-Pro division of Friona Industries, Inc. in 2002 expanded our presence in the cow/calf and stocker sub-markets. We sell directly to cow/calf customers with over 200 cattle. We also employ a direct marketing strategy to address smaller cow/calf customers, who are highly fragmented and purchase in smaller volumes. These customers are also serviced via our sales to production animal veterinarians, dealers and retail stores. Our e-commerce initiative reaches small cow-calf producers which have herd sizes of 50-200 cattle. The key products sold to these customers include endectocides, antibiotics, growth promoting implants, vaccines, identification tags and nutritionals.

 

  Cow/Calf.    According to the USDA, this sub-group is extremely fragmented with over 982,000 cattle operations. However, approximately 612,000 operations have 49 or fewer cattle. Calves remain in the cow/calf stage from birth until reaching approximately 400 lbs (roughly seven months) at which point they are sold to buying agents and delivered to stocker locations. Per-cattle animal health product spending is approximately $17 during the cow/calf stage.

 

  Stocker.    This market consists of operations holding large tracts of land predominantly in the central and western states where cattle are moved to graze for four months prior to being sold to feedlots. During their stay, cattle increase in weight from 400 lbs to 600 lbs. Per-cattle spending is approximately $12 during the stocker stage.

 

  Feedlots.    Feedlots are typically located in the central and western U.S. regions and hold several thousand to 100,000 cattle in open pens. There are approximately 2,100 feedlots in the United States with capacity greater than 1,000 cattle. Cattle undergo their final growth stage prior to processing and increase in weight from 600 lbs to 1,200 lbs. Length of stay approximates 90 to 120 days and per-cattle spending during this stage is approximately $20. Feedlot animal health product requirements mainly consist of de-wormers, growth implants, preventive animal health products (substantially the same products required by cow/calf and stocker customers), acute/chronic disease treatments and medicated additives for growth promotion.

Dairy customers.    We believe we are a leader in the dairy market. We target dairy farms with a minimum size of 500 cattle, with our average dairy customer having 1,500 cattle. The dairy

 

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market is undergoing significant consolidation resulting in a shift towards larger operations. According to USDA estimates, dairies with 500 or more cattle currently account for 45% of the U.S. milk producing cow population, an increase from 24% in 1997. Given our strong relationships with larger dairies and our national footprint, we are seeking to continue to gain share as dairy consolidation continues. The key products sold to these customers include endectocides, antibiotics, reproductive products, vaccines, identification tags, nutritionals and sanitation products.

Poultry and swine customers.    We sell animal health products to major poultry and swine integrators. Our field sales representatives typically visit customer locations at least once every four weeks and facilitate product delivery on a weekly basis. We sell to local production supervisors, centralized purchasing managers and production animal veterinarians who provide herd management consulting services to the major integrators. We believe we will increase our market share with major integrators as we further develop customized national account management programs. The key products sold to these customers include antibiotics, vaccines, nutritionals, sanitation products and bio-security products.

Companion animal customers.    Our companion animal health products sales are made through the veterinarian and over-the-counter channels, with the majority of sales made to rural, mixed-practice veterinarians. Over the past three years, we have begun to penetrate the urban and suburban veterinarian markets, visiting veterinarians in these areas on a bi-weekly basis. We intend to leverage our centralized procurement and inventory management model to develop a leading cost-to-serve position in the companion animal health products market. By providing competitive pricing and superior service, we seek to build on our strong position in the companion animal health products distribution market. The key products sold to these customers include flea and tick controls and preventative products, antibiotics, vaccines, arthritis treatments and pharmaceuticals. By leveraging our service platform, we intend to capture market share rapidly within the fragmented veterinarian customer base of approximately 27,123 veterinary practices as of December 31, 2005, according to the American Veterinary Medical Association.

Corporate accounts.    We have recently hired two corporate account sales representatives to solicit large, corporate customers for the production animal health products and companion animal health products that we distribute. We believe corporate account customers represent an attractive growth opportunity.

Dealer retail.    The dealer retail division distributes animal health products to tack, feed and animal health retailers that generally exist in rural areas with high animal populations. These retailers then resell these animal health products to individual animal owners and sub-scale production animal operators.

Manufacturers

We distribute more than 35,000 products sourced from over 1,500 manufacturers. We currently do not manufacture any of our products and are dependent on manufacturers for our supply of products. We believe we have access to leading brand name products in the product categories we serve. The manufacturers we purchase from include many large multi-national and domestic manufacturers of animal health products. While our manufacturers often have relationships with multiple distributors, our 10 largest manufacturers have been working with us for over 20 years.

 

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We believe that effective purchasing is a key to maintaining our position as a leading provider of animal health care products. We regularly assess our purchasing needs and our manufacturers’ product offerings to obtain products at favorable prices. In addition, our ability to source products globally provides us with a greater selection of products that can be purchased at favorable prices. Smaller distributors often do not have the ability to access these overseas manufacturers. While we purchase products from many manufacturers and there are generally multiple manufacturers for most animal health product categories, we do have concentration of aggregate purchases with certain manufacturers. For our fiscal year ended June 30, 2006, our top manufacturer, Pfizer, supplied products that accounted for approximately 26.0% of our net sales and represents the only manufacturer that accounted for more than 10.0% of our net sales during this period. Our 10 largest manufacturers accounted for approximately 60.0% of our net sales for our fiscal year ended June 30, 2006.

There are two major types of transactions associated with the flow of products from our manufacturers, through us, to our customers. Traditional “buy/sell” transactions, which account for more than 99.0% of our business in fiscal 2006, involve the direct purchase of products by us from manufacturers, which we manage and store in our warehouses. A customer then places an order with us, and the order is then picked, packed, shipped and invoiced by us to our customer, followed by payment from our customer to us. On a limited basis, we also sell products to our customers under agency agreements with some of our manufacturers. Under this model, when we receive orders for products from the customer, we transmit the order to the manufacturer who then picks, packs and ships the products. In some cases our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer. We receive a commission payment for soliciting the order and for providing additional services.

Our livestock products agreement with Pfizer provides that we shall supply selected customers in the cattle and swine fields with Pfizer products. In return we are entitled to certain service fees and rebates. Pfizer is required to indemnify us against any third party claims for personal injury or property damage arising out of the distribution or sale of Pfizer products, except in certain circumstances, and any claims alleging that the Pfizer products are defective, except in certain limited situations. Pfizer also reserves the right to sell directly to our customers or any other party. The livestock products agreement has a one year term that expires on December 31, 2006 and may be terminated by either party with or without cause upon 30 days prior written notice. In addition, Pfizer may terminate the agreement upon 15 days prior written notice if we take any action that harms the goodwill of Pfizer.

We typically do not have long-term written agreements with our manufacturers. The written agreements that we have with our manufacturers generally provide for annual renewals, 30 to 90 day termination provisions and free on board destination shipping.

We collaboratively establish annual sales growth goals with a number of our manufacturers. Attainment of these goals may affect annual rebates with several of these manufacturers. Since many of our manufacturer rebates are based on a calendar year, historically the quarter ended December 31 has been our most significant quarter for recognition of rebates. Manufacturer rebates are collaboratively established with many manufacturers and include inventory purchase rebates and sales-related rebates. Rebates range from one-time purchase opportunities to sales-related programs that last a month, a quarter or the entire calendar year. The programs can be related to a specific product or product line, or related to the type of customer or specific species of animal.

 

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Product returns from our customers and to our manufacturers occur in the ordinary course of business. We extend our customers the same return of goods policies as are extended to us by our manufacturers. We do not believe that our operations will be adversely impacted due to the return of products.

Sales and marketing

Sales.    Our sales organization consists of presidents for each of our five primary customer groups (i.e. beef, dairy, poultry and swine, veterinarian and dealer), divisional/locational managers and sales force employees.

Our 69 distribution locations are organized along customer channels, each under the direction of a customer group president. We have an experienced and loyal sales force comprised of 323 employees (45 managers, 223 field sales representatives and 55 inside sales representatives). Each of our distribution locations employs one to 10 field sales representatives who service customers in their surrounding geographical areas on a weekly basis. Many members of our sales force have spent their entire careers in the animal health industry, providing an extensive knowledge base that distinguishes us from our competitors. Our sales force is specialized by customer market, and members of our sales force have been with us for an average of nine years. Our annual field sales representative turnover has historically been approximately 13%.

We are focused on providing high-quality training for our sales force. Training entails program selling, territory management, pricing management and sales technique workshops. Additionally, our field sales representatives meet annually as a group at our national sales meeting where fiscal year results are reviewed, outlooks for the various markets and product categories are presented and best practices shared. Bi-annual and quarterly sales meetings are also held for markets (i.e. beef, dairy, poultry and swine) and individual locations, respectively.

We use various tools to evaluate and improve our performance. For example, our field sales representatives receive customized monthly Territory Performance Reports, which track detailed product sales, gross margins, budget variances and other marketing statistics. We also provide software applications and performance tracking tools to our sales force, such as Sales Pro, which is a proprietary, automated software package that allows our sales force to analyze product and pricing trends. We share sales information throughout the organization in the form of a scoreboard, which breaks down sales and gross profit by market, region and location. In addition, we publish monthly reports ranking various metrics and compiling best practices. Several “clubs” such as the Presidents Club are used to distinguish field sales representatives that achieve specific sales targets and maintain high organizational standards.

Marketing.    We have an extensive marketing organization. We maintain a dedicated marketing department consisting of 15 employees. Our five marketing managers each cover a specific customer group (beef, dairy, poultry/swine, veterinarian and dealer). These managers, together with the business group presidents, develop customized marketing programs to increase product sales and usage, manage loyalty programs, monitor supplier management programs and support manufacturers’ new product launches. Three graphic artists produce detailed product technical sheets, catalogs and promotional literature. Our dedicated proprietary brand manager devises marketing plans for our proprietary branded product lines. Finally, an e-commerce manager oversees the development of Internet product ordering platforms and tracking features.

 

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Distribution model

We use a centralized procurement and distribution model whereby approximately 56% of the dollar volume of our customer purchases flow through our central replenishment and distribution facility in Memphis, Tennessee. The majority of the orders are delivered within one business day. From the Memphis facility, we then deliver products on a weekly basis to our 68 distribution locations.

Our centralized procurement and inventory management model provides us with several competitive advantages. We are able to effectively purchase large quantities of products, allowing all divisions, independent of size, to receive the lowest possible price. Furthermore, by having an organized purchasing strategy, versus the non-coordinated regional strategy employed by many competitors, we manage inventory more effectively and reduce working capital investment. We

believe our procurement disciplines provide us with a gross margin advantage relative to our competitors. Our centralized model is highly scalable and allows us to increase order flow through the Memphis facility without costly buildouts of additional distribution facilities.

We expect our model to become an area of differentiation and believe it provides a competitive advantage in our companion animal operations. Our model enables overnight product delivery from our Memphis inventory center using third-party common-carrier delivery services, thereby satisfying veterinarians’ demands for rapid product delivery. As we expand our companion animal operations, we expect to achieve significant purchasing economies and working capital efficiencies relative to competitors given:

 

  our strong relationships with leading manufacturers of animal health products;

 

  our centralized procurement and distribution system that minimizes redundant purchases and inventories;

 

  our ability to leverage our fixed cost base; and

 

  our scalable infrastructure.

Information technology

We use a J.D. Edwards ERP information technology system. We have invested significant management resources in customizing the system for use across all of our divisions and have trained employees to utilize its functionality. Internally, we use the system for inventory management and product tracking. Purchasing managers can query the database to develop detailed product ordering and shipping histories, track ordering status and monitor product requests from field sales representatives. Managers and field sales representatives have access to real-time product data such as inventory quantities (both at our central replenishment and distribution facility and at individual distribution locations), upcoming shipments and timing of deliveries. The system tracks inventory turns at specific distribution locations allowing us to better manage the appropriate inventory level for each product at every distribution location. This enables us to move inventory from one distribution center to another as needed.

We also provide manufacturers with critical data. Traditionally, manufacturers tended to have difficulty tracking products after they had been shipped to distributors. Therefore, it was cumbersome for manufacturers to accurately assess customer demand and pricing thresholds. Using our information technology systems, we send daily updates to key manufacturers

 

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regarding product shipments, extensively detailing both end locations as well as product pricing.

Understanding this information allows us to partner with manufacturers to develop customized supplier management programs that aid our manufacturers in effectively placing various products.

We believe our Internet platform is well-positioned to benefit from increased electronic ordering by our customer base. Our Internet ordering system is a user-friendly application that enables customers to review product descriptions, access customer-specific product pricing, view current vendor promotions, download detailed product usage history and place orders. While most customers choose to receive products on a weekly basis, we offer customized inventory programs that allow customers to easily maintain inventories for certain products. We ensure availability and immediate delivery of these products. Because of its accessibility and ease of use, we anticipate that veterinarians will increasingly use this electronic platform for direct product ordering, which we believe would increase the productivity of our sales force.

Competition

The distribution and manufacture of animal health products is highly competitive. 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. Additionally, certain manufacturers compete through the direct marketing of products. We compete based on customer relationships, service and delivery, product selection, price and e-commerce capabilities. Some of our competitors, particularly those in the companion animal products market with bigger market share, have greater financial and other resources than we do. Most of our products are available from several sources, including other distributors and manufacturers, and our customers tend to have relationships with several distributors. In addition, our competitors could obtain exclusive rights to distribute certain products, eliminating our ability to distribute those products. Consolidation in the animal health products industry could result in existing competitors increasing their market share, which could give them greater pricing power, decrease our revenues and profitability, and increase the competition for customers. See “Risk factors—Risks related to our business—Consolidation in the animal health products industry may decrease our net sales and profitability.”

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.

The role of the animal health product distributor has changed dramatically during the last decade. Successful distributors are increasingly providing value-added services in addition to the products they traditionally provided. We believe that to remain competitive we must continue to add value to the distribution channel, while removing unnecessary costs associated with product movement.

Distribution of animal health products is often characterized as “ethical” and “over-the-counter,” commonly referred to as OTC, channels of product movement. Ethical distribution is defined as those sales of goods to licensed veterinarians for use in their professional practice. Many of these products are prescription and must be sold or prescribed by a licensed professional. OTC distribution is the movement of non-prescription goods to the animal owner and the end user. Many of these products are also purchased by the licensed veterinarian for professional use or for

 

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resale to their client. There are numerous ethical and OTC distribution companies operating throughout the United States and competition in the animal health products industry is intense. See “Risk factors—Risks related to our business—Our market is highly competitive. Failure to compete successfully could have a material adverse effect on our business, financial condition and results of operations.”

Trademarks and other intellectual property

Our success depends in part on our proprietary technology. We rely on our trademarks, trade names and brand names to distinguish our proprietary branded products and services from the products and services of our competitors. As of September 30, 2006, we have registered 48 and applied to register 43 additional trademarks. We also rely on unpatented proprietary technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. As of September 30, 2006, we owned one U.S. patent. This patent will expire in approximately nine years.

There are always risks that third parties may claim that we are infringing upon their intellectual property rights and we could be prevented from selling our products, or suffer significant

litigation or licensing expenses as a result of these claims. See “Risk factors—Risks related to our business—If third parties claim that we infringe upon their intellectual property rights, our operating profits could be adversely affected.” In addition, third parties may infringe upon or design around our intellectual property rights, and we may expend significant resources enforcing our rights or suffer competitive injury with adverse effects on our business and results of operations. See “Risk factors—Risks related to our business—Our intellectual property rights may be inadequate to protect our business.”

Insurance and risk management

We purchase insurance to cover standard risks in our industry, including policies to cover general products liability, workers compensation, auto liability and other casualty and property risks. We do not, however, carry business interruption insurance. Therefore, we will not be compensated for certain losses that may occur as a result of a major disruption to our facilities. Our insurance rates are dependent upon our safety record as well as trends in the insurance industry. We utilize a paid loss self-insurance plan for health, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence and annual aggregate cash outlay. Accrued expenses and other liabilities include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims.

We face an inherent risk of exposure to product liability claims in the event that, among other things, the use of products sold by us result in injury, such as the death of animals treated with our products. With respect to product liability coverage, we carry insurance coverage typical of our industry and product lines. Our coverage involves self-insured retentions with primary and excess liability coverage above the retention amount. For our non-proprietary products, we have the ability to refer claims to most of our manufacturers and their insurers to pay the costs associated with any claims arising from such manufacturer’s products. In most cases, our insurance covers such claims that are not adequately covered by a manufacturer’s insurance and provides for excess secondary coverage above the limits provided by our manufacturers.

We self-insure auto physical damage exposure risk and certain property and casualty risks due to our analysis of the risks, the frequency and severity of a loss and the cost of insurance for the

 

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risks. We believe that the amount of self-insurance is not significant and will not have an adverse impact on our performance. In addition, we may from time to time self-insure liability with respect to specific ingredients in products that we may sell.

Government regulation

Our manufacturers of pharmaceuticals, vaccines, parasiticides, insecticides and pesticides and certain controlled substances are typically regulated by federal agencies, such as FDA, USDA, EPA and DEA, as well as most similar state agencies. Therefore, we are subject, either directly or indirectly, to regulation by the same agencies. Most states and the DEA require us to be registered or otherwise keep a current permit or license to handle controlled substances. Manufacturers of vaccines are required by the FDA to comply with various storage and shipping criteria and requirements for vaccines. To the extent we distribute such products, we must comply with the same requirements, including, without limitation, the storage and shipping requirements for vaccines. In addition, we are subject to regulations by the Department of Transportation relating to the transportation of our products.

State boards of pharmacy require us to be licensed in their respective states for the sale and distribution of pharmaceutical products and medical devices within their jurisdictions. As a

distributor of prescription pharmaceutical products, we are subject to the regulatory requirements of the FDA and regulatory requirements promulgated under the Prescription Drug Marketing Act (PDMA). The PDMA and FDA provide governance and authority to the states to provide minimum standards, terms and conditions for the licensing by state licensing authorities of persons who “engage” in wholesale distribution (as defined by each state regulatory agency) in interstate commerce of prescription drugs. With this authority, states require site-specific registrations for the parties that engage in the selling and/or physical distribution of pharmaceutical products within and into their state in the form of out-of-state registrations. Selling and/or distribution without the appropriate registrations may be subject to fines, penalties, misdemeanor or felony convictions, and/or seizure of the products involved.

Some states (as well as certain cities and counties) require us to collect sales taxes/use taxes on certain types of animal health products. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. In addition, we are subject to additional regulations regarding our hiring practices because several federal, state and local governmental agencies are our customers.

We have implemented internal procedures to help ensure that we are in compliance with all statutes and regulations applicable to animal healthcare distribution, as well as other general health and safety laws and regulations, and that we possess all necessary permits and licenses required for the conduct of our business. See “Risk factors—Risks related to our business—If we fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.”

Environmental

We are subject to environmental, health and safety laws and regulations concerning, among other things, air and wastewater discharges, the generation, handling, storage, transportation and disposal of pesticides, hazardous waste and toxic substances. Pursuant to some of these laws and regulations, we are required to obtain permits from governmental authorities for certain operations. We cannot assure you that we have been or will be at all times in complete

 

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compliance with such laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators.

We could also be responsible for costs incurred relating to contamination at our third party waste disposal sites or relating to damages incurred as a result of human exposure to such substances or other environmental damage caused by our operations or our disposal of waste. In addition, our past and present ownership or operation of real property that is contaminated with hazardous or toxic substances could also result in an obligation to perform or pay for a clean-up or other damages, regardless of whether we knew of or were responsible for such contamination. While we have incurred in the past, and expect to incur in the future, capital and other expenditures related to environmental compliance and remediation matters, we do not anticipate that such expenditures will have a material adverse effect on our capital expenditures, earnings or competitive position in the future. See “Risk factors—Risks related to our business—We are subject to significant environmental regulation and environmental compliance expenditures and liabilities.”

Employees

As of September 30, 2006, we had 815 employees across the United States. We have not experienced a shortage of qualified personnel in the past, and believe that we will be able to attract such employees in the future. None of our employees is a party to a collective bargaining agreement, and we consider our relations with our employees to be good.

Legal proceedings

We are involved in litigation from time to time in the ordinary course of our business. We are not currently involved in any outstanding litigation that we believe, individually or in the aggregate, will have a material adverse effect on our business, results of operations or financial condition.

The company is subject to a cease and desist order issued by the SEC. See “Management—Executive officers and directors—Supplemental disclosure.”

Properties

We conduct our operations out of 66 locations throughout the United States and two affiliated locations in Canada. Properties include distribution locations, retail locations, a central replenishment and distribution center and corporate headquarters. Distribution locations range in size from 4,000 to 65,000 square feet. Our central replenishment and distribution facility in Memphis, Tennessee, is comprised of two buildings totaling 89,000 square feet. We own 35 locations, with the remainder leased under varying lease terms, ranging in maturities from three to five years.

 

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Management

Executive officers and directors

The following table sets forth information regarding our directors, executive officers and key employees, including their ages as of September 30, 2006.

 

Name    Age    Position
 

Executive Officers and Directors

     

James C. Robison

   51    Chairman of the Board of Directors, President and Chief Executive Officer

Greg Eveland

   48    Senior Vice President and Chief Operating Officer

Kathy C. Hassenpflug

   54    Director of Human Resources

William F. Lacey

   49    Senior Vice President and Chief Financial Officer

Damian Olthoff

   31    General Counsel and Secretary

David W. Biegler(1)(2)

   56    Director

Michael Eisenson(2)(3)

   51    Director

Mark Rosen(1)(3)

   56    Director

Ronald G. Steinhart(1)(3)

   65    Director

Brandon White(1)(2)

   33    Director

Other Key Employees

     

Brian N. Bagnall

   60    Vice President—Information Systems

Allen R. Carmichael

   48    Division President, Beef

Larry Delozier

   46    Division President, Swine/Poultry

Mark Alan Gray

   42    Vice President—Operations

Doug Harris

   48    Division President, Dairy

Jon A. Kuehl

   53    Division President, Dealer

Mark Middleton

   46    Division President, Veterinary

Henry H. Moomaw, III

   43    Vice President—Controller

Jeff Williams

   43    Vice President—Marketing
 

 

(1)   Member of the audit committee.

 

(2)   Member of the compensation committee.

 

(3)   Member of the nominating and corporate governance committee.

James C. Robison Mr. Robison has served as our Chairman, President and Chief Executive Officer since 1997. Prior to joining us, Mr. Robison was an Executive Vice President, Chief Operating Officer and a director of General Medical Corporation. Mr. Robison holds a B.B.A. from the University of Texas and an M.A. from the University of Texas-Dallas.

Greg Eveland Mr. Eveland has been employed by us since 1991 and has served as our Chief Operating Officer since 2000. Mr. Eveland holds a B.A. from Vanderbilt University.

 

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Kathy C. Hassenpflug Ms. Hassenpflug has served as our Director of Human Resources since November 1998. Ms. Hassenpflug holds a B.S. from the Virginia Polytechnic Institute and State University.

William F. Lacey Mr. Lacey has served as our Chief Financial Officer since 2003. Prior to joining us, Mr. Lacey was Vice President and Chief Financial Officer of Rawlings Sporting Goods Co., Inc., a manufacturer and retailer of sports equipment and apparel, from 2000 to 2003. Mr. Lacey holds a B.S. from the University of Alabama.

Damian Olthoff Mr. Olthoff has served as our General Counsel and Secretary since 2005. Prior to joining us, Mr. Olthoff was Staff Counsel of TrinTel Communications, Inc. an owner, operator and developer of infrastructure for the wireless communications industry, from 2001 to 2005. Mr. Olthoff holds a B.B.A. from the University of Missouri at Kansas City and a J.D. from the University of Missouri at Kansas City.

David W. Biegler Mr. Biegler has agreed to serve as director upon the effectiveness of our initial public offering. Mr. Biegler has been Chairman of Estrella Energy L.P., a company engaged in natural gas transportation and processing, since September 2003. Mr. Biegler retired as Vice Chairman of TXU Corporation at the end of 2001, having served TXU Corporation as President and Chief Operating Officer from 1997 until 2001. Mr. Biegler previously served as Chairman, President and CEO of ENSERCH Corporation from 1993 to 1997. Mr. Biegler is also a director of Dynegy Inc., Trinity Industries, Inc., Southwest Airlines Co. and Austin Industries. Mr. Biegler holds a B.S. from St. Mary’s University and completed the Harvard University Advanced Management Program.

Michael Eisenson Mr. Eisenson has served as a director since June 2005. He co-founded Charlesbank Capital Partners LLC, a private equity firm, in 1998, and currently serves as Managing Director and Chief Executive Officer. Prior to joining Charlesbank Capital Partners LLC, Mr. Eisenson was the President of Harvard Private Capital Group. Mr. Eisenson is a member of the board of directors of Caliper Life Sciences, Inc., Playtex Products, Inc. and United Auto Group, Inc., the Executive Committee of the Dana-Farber Cancer Institute and the Berklee College of Music Board of Trustees. Mr. Eisenson holds a B.A. from Williams College and a J.D. and M.B.A. from Yale University.

Mark Rosen Mr. Rosen has served as a director since June 2005. He co-founded Charlesbank Capital Partners LLC, a private equity firm, in 1998, and currently serves as a Managing Director. Prior to joining Charlesbank Capital Partners LLC, Mr. Rosen was a Managing Director of Harvard Private Capital Group. Mr. Rosen holds a B.A. from Amherst College and a J.D. from Yale University.

Ronald G. Steinhart Mr. Steinhart has agreed to serve as a director upon the effectiveness our initial public offering. Mr. Steinhart served as Chairman and Chief Executive Officer of the Commercial Banking Group of Bank One Corporation from December 1996 until Mr. Steinhart’s retirement in January 2000. From January 1995 to December 1996, Mr. Steinhart was Chairman and Chief Executive Officer of Bank One, Texas, N.A. Mr. Steinhart joined Bank One in connection with its merger with Team Bank, which he founded in 1988. Mr. Steinhart is a member of the board of directors of Penson Worldwide, Inc. and United Auto Group, Inc. and serves as a trustee of the MFS/Compass Group of mutual funds. Mr. Steinhart also serves on the advisory boards of JP Morgan Chase Dallas and SunTx Capital Partners. Mr. Steinhart holds a B.B.A. and an M.B.A. from the University of Texas at Austin and is a Certified Public Accountant.

Brandon White Mr. White has served as a director since June 2005. He has been employed by Charlesbank Capital Partners LLC, a private equity firm, since 1998, and currently serves as a

 

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Managing Director. Prior to joining Charlesbank Capital Partners, Mr. White was employed by Harvard Private Capital Group. Mr. White holds a B.A. from Brigham Young University.

Brian Bagnall Mr. Bagnall has served as our Vice President—Information Systems since 1999. Mr. Bagnall holds a B.B.A. and M.B.A. from the University of Texas at Arlington.

Allen R. Carmichael Mr. Carmichael has served as our Division President, Beef since 2000 and has been employed by us since 1976. Mr. Carmichael holds an associates degree from Garber City Community College.

Larry Delozier Mr. Delozier has been employed by us since 2002 and has served as our Division President, Swine/Poultry since July 2005. Prior to joining us, Mr. Delozier was the territory sales representative and operations manager of Wade Jones Company, a division of Alpharma, Inc. (NYSE: ALO) a multinational human and animal pharmaceutical company.

Mark Gray Mr. Gray has served as our Vice President—Operations since 1998. Mr. Gray holds a B.B.A. from Stephen Austin University.

Doug Harris Mr. Harris has served as our Division President, Dairy since 2000 and has been employed by us since 1981.

Jon Kuehl Mr. Kuehl has been employed by us since 1997 and has served as our Division President, Dealer since 2000. Mr. Kuehl holds a B.S. from the University of Wisconsin.

Mark Middleton Mr. Middleton has been employed by us since 1985 and has served as our Division President, Veterinary since 2000. Mr. Middleton holds a B.S. from Texas Tech University.

Henry H. Moomaw, III Mr. Moomaw has served as our Vice President—Controller since 1999. Mr. Moomaw holds a B.B.A. from Southern Methodist University.

Jeff Williams Mr. Williams has been employed by us since 1999 and has served as our Vice President—Marketing since 2002. Mr. Williams holds a degree in Animal Science from the University of Arkansas.

Supplemental disclosure

On June 28, 2006, the SEC announced the filing and simultaneous settlement of cease-and-desist proceedings against us and our Chief Executive Officer, James Robison, relating to our purchase of products from Virbac and the filing and simultaneous settlement of a civil action against Virbac Corporation and certain of its officers. The SEC found that from late 1999 through the first half of 2003, Virbac improperly reported inflated revenue relating to sales to certain of its distributors, including us. The SEC made the following additional findings: that we caused Virbac to violate Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, or the Securities Act, and Section 13(a) and 13(b) of the Exchange Act, and that we caused similar violations by Virbac employees, by participating in transactions intended to help Virbac inflate its revenues and thereby achieve its sales and income targets. In the settled cease-and-desist proceedings (in which we and Mr. Robison neither admitted nor denied the SEC’s findings), we and Mr. Robison consented to an SEC order to cease and desist from committing or causing any violation and any future violation of certain antifraud provisions set forth in Section 17(a) of the Securities Act, violation of the Exchange Act’s reporting, recordkeeping and internal accounting controls provisions, and violation of the Exchange Act’s financial record falsification and internal accounting controls circumvention prohibitions, set forth in Sections 13(a) and 13(b) of the Exchange Act and the rules and regulations thereunder. In connection with the settlement, Mr. Robison paid a $50,000 fine to the SEC.

 

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Board of directors

We currently have four directors, each of whom was elected as a director under board composition provisions of a stockholders agreement or our certificate of incorporation. Charlesbank has the right to elect a total of five directors pursuant to the board composition provisions of the stockholders agreement and our certificate of incorporation. The board composition provisions of the stockholders agreement and our certificate of incorporation will be terminated upon the closing of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Following the offering, the board of directors will have six directors and will be divided into three classes with members of each class of directors serving for staggered three-year terms. The board of directors will consist of two Class I directors (James C. Robison and Michael Eisenson), two Class II directors (Mark Rosen and Ronald G. Steinhart) and two Class III directors (Brandon White and David W. Biegler), whose initial terms will expire at the annual meetings of stockholders held in 2007, 2008 and 2009, respectively. Our classified board could have the effect of making it more difficult for a third party to acquire control of us. See “Risk factors—Risks related to the common stock, the offering and our capital structure—Provisions in our certificate of incorporation and by-laws may deter third parties from acquiring us.” Within twelve months of the effective date of the registration statement of which this prospectus is a part, we intend to expand the board of directors and elect one additional director, who will not be an officer or employee of the Company, and who will be independent as defined under the rules of the Nasdaq Global Market.

James C. Robison, our President and Chief Executive Officer, serves as the Chairman of our board of directors.

Board committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and functioning of all of our committees complies with the rules of the SEC and the Nasdaq Global Market that are currently applicable to us and we intend to comply with additional requirements to the extent that they become applicable to us.

Audit committee.    Brandon White and Mark Rosen currently serve on the audit committee. Following the offering, Mark Rosen, Ronald G. Steinhart and David W. Biegler will serve on the audit committee. Mr. Rosen serves and will serve as the Chairman of the audit committee. The audit committee’s responsibilities include, but are not limited to:

 

  appointing, approving the compensation of, and assessing the independence of our independent auditor, KPMG LLP;

 

  overseeing the work of our independent auditor, including through the receipt and consideration of certain reports from the independent auditor;

 

  resolving disagreements between management and our independent auditor;

 

  pre-approving all auditing and permissible non-audit services (except de minimis non-audit services), and the terms of such services, to be provided by our independent auditor;

 

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  reviewing and discussing with management and the independent auditors our annual and quarterly financial statements and related disclosures;

 

  coordinating the oversight of our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;

 

  discussing our risk management policies;

 

  establishing policies regarding hiring employees from the independent auditor and procedures for the receipt and retention of accounting related complaints and concerns;

 

  meeting independently with our independent auditors and management; and

 

  preparing the audit committee report required by SEC rules to be included in our proxy statements.

Our board of directors has determined that each of our contemplated audit committee members qualifies as an “audit committee financial expert” as defined under the Exchange Act and the applicable rules of the Nasdaq Global Market. In making its determination, our board considered the nature and scope of the experiences and responsibilities Messrs. Rosen, Steinhart and Biegler have previously had with reporting companies. Neither of the current members are “independent” for audit committee purposes under the applicable rules of the Nasdaq Global Market and the SEC. Two new “independent” directors, Messrs. Steinhart and Biegler, shall join the audit committee upon the effective date and a third “independent” director shall join within twelve months of the effective date and Mr. Rosen will resign from the audit committee.

Compensation committee. Michael Eisenson and Brandon White currently serve on the compensation committee. Following the offering, Mr. Biegler will also serve on the compensation committee. Mr. Eisenson serves as the Chairman of the compensation committee. The compensation committee’s responsibilities include, but are not limited to:

 

  annually reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer;

 

  evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and determining the compensation of our Chief Executive Officer;

 

  determining the compensation of our other executive officers;

 

  overseeing an evaluation of our senior executives;

 

  overseeing and administering our incentive-based compensation plans and equity-based compensation plans; and

 

  reviewing and making recommendations to the board with respect to director compensation.

Nominating and corporate governance committee. Michael Eisenson and Mark Rosen currently serve on the nominating and corporate governance committee. Following the offering, Mr. Steinhart will also serve on the nominating and corporate governance committee. Mr. Eisenson serves as the Chairman of the nominating and corporate governance committee. The nominating and corporate governance committee’s responsibilities include, but are not limited to:

 

  developing and recommending to the board criteria for board and committee membership;

 

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  establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;

 

  identifying individuals qualified to become board members;

 

  establishing procedures for stockholders to submit recommendations for director candidates;

 

  recommending to the board the persons to be nominated for election as directors and to each of the board’s committees;

 

  developing and recommending to the board a set of corporate governance guidelines; and

 

  overseeing the evaluation of the board and management.

Director compensation

Directors who are also our employees receive no additional compensation for their services as directors. Upon completion of this offering, each non-employee director will be entitled to receive an annual fee from us of $30,000. In addition, we will pay our non-employee directors a fee of $2,500 for each in-person board of directors meeting they attend and $500 for each telephonic board of directors meeting they attend. The chairperson of our audit committee will be entitled to receive an additional annual fee of $10,000, and the chairpersons of our compensation committee and nominating and corporate governance committee will be entitled to receive an additional annual fee of $5,000. We will also reimburse non-employee directors for reasonable expenses incurred in connection with attending board of directors and committee meetings. Our directors who are affiliated with Charlesbank Capital Partners LLC will assign the compensation they receive from us to Charlesbank Capital Partners LLC or an affiliated investment fund.

Pursuant to the terms of the 2007 Option Plan, as described below, directors will be permitted to defer all, or a portion, of their director compensation fees, other than meeting fees. All deferred fees will be converted to stock units based on the fair market value of shares of our common stock on the date the fees would otherwise be paid. The units are typically settled in shares in a lump sum when the director resigns from the board of directors.

Upon election to the board of directors, non-employee directors are granted such number of restricted stock units that are equal in value to $40,000, pursuant to the terms of the 2007 Option Plan. All such units shall be granted at the fair market value on the grant date. These units vest on the one year anniversary of the grant date. Additional grants of restricted stock units to our non-employee directors will be made annually. The vesting of these units accelerates upon a change of control of the Company. These units are typically settled in shares in a lump sum when the director resigns from the board of directors.

Compensation committee interlocks and insider participation

None of our executive officers serves as a member of the compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our compensation committee. During fiscal 2006 and part of fiscal 2007, James Robison, our President and Chief Executive Officer, was a member of our compensation committee.

Executive officers

Each of our executive officers has been elected by our board of directors and serves until his or her successor is duly elected and qualified.

 

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Executive compensation

The following summarizes the compensation earned during fiscal 2006 by our Chief Executive Officer and our four other most highly compensated executive officers who were serving as executive officers as of June 30, 2006 and whose total compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”

Summary compensation table

 

            Annual compensation    All other
compensation(1)
Name and principal position    Year    Salary    Bonus   
                           

James C. Robison

   2006    $ 350,000    $ 545,000    $ 10,428

Chairman and Chief Executive Officer

           

Greg Eveland

   2006      225,000      272,500      9,229

Sr. Vice President and Chief Operating Officer

           

William F. Lacey

   2006      225,540      267,500      130,281

Sr. Vice President and Chief Financial Officer

           

Kathy Hassenpflug

   2006      85,000      35,800      1,500

Director of Human Resources

           

Damian Olthoff(2)

   2006      83,282      36,440      1,200

General Counsel

           
                           

 

(1)   “Other” compensation consists of matching contributions to our 401(k) plan, insurance premiums paid by us and relocation costs paid on behalf of or reimbursed to Mr. Lacey. The following table shows the amount of each category of “other” compensation received by each named executive officer in the fiscal year ended June 30, 2006:

 

Name   

Car

allowance

   401(k)
contribution
   Insurance
premiums
  
Relocation
        

James C. Robison

   $ 4,800    $ 1,500    $ 4,128    $

Greg Eveland

     4,800      1,500      2,929     

William F. Lacey

     4,800      1,500      5,988      117,993

Kathy Hassenpflug

          1,500          

Damian Olthoff

     1,200               
        

 

(2)   Mr. Olthoff was hired in August 2005.

Option grants in last fiscal year

There were no individual grants of stock options to any of the named executive officers during fiscal 2006.

Option exercises in last fiscal year and fiscal year-end option values

None of our named executive officers or directors exercised or held any options during fiscal 2006 or exercised options to date in fiscal 2007.

Employee benefit plans

Amended and Restated 2005 Stock Option and Grant Plan

Our Amended and Restated 2005 Stock Option and Grant Plan, or 2005 Option Plan, was adopted by our board of directors and approved by our stockholders in September 2005. We reserved 90,000 shares of our series A preferred stock and 2,873,282 shares of our common stock for the issuance of awards under the 2005 Option Plan. As of September 30, 2006, 13,900 of the shares of our series A preferred stock and 743,770 shares of our common stock were available for issuance. All shares issued under the 2005 Option Plan were purchased by participants under the 2005 Option Plan at a price equal to the fair market value of such shares as of the date of each respective purchase.

 

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The 2005 Option Plan is administered by our compensation committee or by our board of directors. The administrator of the 2005 Option Plan has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2005 Option Plan.

The 2005 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, restricted stock awards and unrestricted stock awards to officers, employees, directors, consultants and other key persons. Stock options granted under the 2005 Option Plan have a maximum term of 10 years from the date of grant and incentive stock options have an exercise price of no less than the fair market value of the common stock on the date of grant. Restricted stock awards vest either in equal annual installments over a period of five years or upon the achievement of certain investor return milestones.

All shares of vested restricted stock issued under the 2005 Option Plan and subject to time-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering. If a “sale event” is deemed to have occurred in connection with the consummation of our initial public offering or at any time thereafter, all shares of unvested restricted stock issued under the 2005 Stock Plan and subject to time-based vesting will no longer be subject to a repurchase right. We anticipate that all shares of restricted stock issued under the 2005 Option Plan and subject to performance-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering.

In the event of a merger, sale or dissolution of the Company, any transaction resulting in the holder of the Company’s outstanding stock holding less than a majority of the Company’s outstanding stock following such transaction, or a similar “sale event,” all awards will terminate upon the consummation of the “sale event,” unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. The 2005 Option Plan shall also automatically terminate upon the consummation of the “sale event,” unless the parties, in their sole discretion, provide otherwise.

In connection with the adoption of our 2007 Option Plan, which is discussed in detail below, our board of directors determined not to grant any further awards under the 2005 Option Plan.

2005 Stock Option and Grant Plan—California

Our 2005 Stock Option and Grant Plan—California, or 2005 Option Plan—California, was adopted by our board of directors and approved by our stockholders in September 2005. We reserved 10,000 shares of our series A preferred stock and 183,401 shares of our common stock for the issuance of awards to our California employees under the 2005 Option Plan—California. As of September 30, 2006, 5,342 of the shares of our series A preferred stock and 61,134 shares of our common stock were available for issuance. All shares issued under the 2005 Option Plan—California were purchased by participants under the 2005 Option Plan—California at a price equal to the fair market value of such shares as of the date of each respective purchase.

The 2005 Option Plan—California is administered by our compensation committee or by our board of directors. The administrator of the 2005 Option Plan—California has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2005 Option Plan—California.

 

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The 2005 Option Plan—California permits us to make grants of incentive stock options, non-qualified stock options, restricted stock awards and unrestricted stock awards to officers, employees, directors, consultants and other key persons. Stock options granted under the 2005 Option Plan—California have a maximum term of 10 years from the date of grant and incentive stock options have an exercise price of no less than the fair market value of the common stock on the date of grant. Restricted stock awards vest either in equal annual installments over a period of five years or upon the achievement of certain investor return milestones.

All shares of vested restricted stock issued under the 2005 Option Plan—California and subject to time-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering. If a “sale event” is deemed to have occurred in connection with the consummation of our initial public offering or at any time thereafter, all shares of unvested restricted stock issued under the 2005 Option Plan—California and subject to time-based vesting will no longer be subject to a repurchase right. We anticipate that all shares of restricted stock issued under the 2005 Option Plan—California and subject to performance-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all awards will terminate upon the consummation of the “sale event,” unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards. The 2005 Option Plan—California shall also automatically terminate upon the consummation of the “sale event,” unless the parties, in their sole discretion, provide otherwise.

In connection with the adoption of our 2007 Option Plan, which is discussed in detail below, our board of directors determined not to grant any further awards under the 2005 Option Plan—California.

2007 Stock Option and Incentive Plan

Our 2007 Stock Option and Incentive Plan, or 2007 Option Plan, was adopted by our board of directors and approved by our stockholders in January, 2007. The 2007 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards, cash-based awards, performance share awards and dividend equivalent rights. We reserved 2,500,000 shares of our common stock for the issuance of awards under the 2007 Option Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited, canceled from awards, held back upon exercise of an award, reacquired by us or satisfied without the issuance of shares of our common stock under the 2007 Option Plan also will be available for future awards. We currently anticipate that we will issue options to purchase an aggregate of approximately 750,000 shares under the 2007 Option Plan, effective upon the effective date of this offering.

The 2007 Option Plan is administered by either a committee of at least two non-employee directors, or by our full board of directors. The administrator of the 2007 Option Plan has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 Option Plan.

All full-time and part-time officers, employees, non-employee directors and other key persons (including consultants and prospective employees) are eligible to participate in the 2007 Option Plan, subject to the discretion of the administrator. There are certain limits on the number of

 

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awards that may be granted under the 2007 Option Plan. For example, no more than 1,000,000 shares of stock may be granted in the form of stock options or stock appreciation rights to any one individual during any one-calendar-year period.

The exercise price of stock options awarded under the 2007 Option Plan may not be less than the fair market value of our common stock on the date of the option grant and the term of each option may not exceed 10 years from the date of grant. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the 2007 Option Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.

To qualify as incentive options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options which first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders. No incentive stock option awards may be granted under the 2007 Option Plan after January 8, 2017.

Stock appreciation rights may also be granted under our 2007 Option Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The administrator determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the increased appreciation in cash or with shares of our common stock, or a combination thereof. The exercise price of stock appreciation rights granted under our 2007 Option Plan may not be less than the fair market value of our common stock on the date of grant.

Restricted stock may also be granted under our 2007 Option Plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any recipient. The administrator may impose whatever vesting conditions it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Deferred stock awards may also be granted under our 2007 Option Plan. Deferred stock awards are stock units entitling the recipient to receive shares of stock paid out on a deferred basis, and subject to such restrictions and conditions, as the administrator shall determine. Certain grantees, including directors, will be permitted to defer their compensation and receive deferred stock awards in lieu of current cash compensation. All deferred compensation will be structured to meet the requirements of Section 409A of the Internal Revenue Code.

Automatic grants of deferred stock units are made to our non-employee directors under the 2007 Option Plan. Each non-employee director will automatically be granted, upon his or her election to the board, such number of shares of deferred stock units that are equal in value to $40,000 (pro-rated for partial years except for the initial grants made in connection with this initial public offering. ). These grants will vest on the one year anniversary of the grant date. Annual grants of deferred stock units of the same value will also be made to our non-employee directors around the time of our annual meeting. These directors’ grants will vest on the one-year anniversary of the grant date or the date our next annual meeting, if earlier.

Unrestricted stock, cash-based awards, dividend equivalent rights and performance share awards may also be granted under our 2007 Option Plan. Unrestricted stock awards are awards of shares of stock that are free of any restrictions. The administrator may grant unrestricted stock awards

 

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in respect of past services or in lieu of other compensation. Cash-based awards are awards that entitle the recipient to receive a cash-denominated payment. The administrator shall establish the terms and conditions of cash-based awards, including the conditions upon which any such award will become vested or payable. Cash-based awards may be made in cash or shares of stock in the administrator’s discretion. Dividend equivalent rights are the right to receive credits based on cash dividends that would have been paid on the shares of stock underlying the award and are subject to the terms and conditions specified by the administrator at the time of grant. The 2007 Option Plan also permits the administrator to grant performance share awards that are intended to qualify as “performance-based compensation” under Section 162(m) of the Internal Revenue Code. These awards are only payable upon the attainment of specified performance goals, as described in the 2007 Option Plan. The maximum performance-based award payable in any performance cycle to any one individual is 500,000 shares or $6,000,000 in the event of a performance-based award that is a cash-based award.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all stock options and stock appreciation rights granted under the 2007 Option Plan will automatically become fully exercisable and all other awards granted under the 2007 Option Plan will become fully vested and non-forfeitable unless these awards are assumed by an entity whose shares are publicly traded.

Our board of directors may amend or discontinue the 2007 Option Plan at any time and the administrator may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in our stock or a merger or similar transaction, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options. Further, amendments to the 2007 Option Plan will be subject to approval by our stockholders if the amendment (1) increases the number of shares available for issuance under the 2007 Option Plan, (2) expands the types of awards available under, the eligibility to participate in, or the duration of, the plan, (3) materially changes the method of determining fair market value for purposes of the 2007 Option Plan, (4) is required by the Nasdaq Global Market rules or (5) is required by the Internal Revenue Code to ensure that incentive options are tax-qualified.

Agreements with executive officers

On June 30, 2005, we entered into an amended employment agreement with our Chief Executive Officer, James C. Robison. The term of his employment is indefinite unless either party terminates pursuant to the terms and conditions of the agreement. Mr. Robison’s agreement calls for the payment of $350,000 in annual base salary, subject to increases approved by our board of directors. Mr. Robison was awarded a performance bonus of $545,000 as a result of our performance in fiscal year 2006. Mr. Robison’s bonuses in subsequent years of employment will be determined by our board of directors based upon our performance and other individual performance milestones to be determined by the board.

Mr. Robison’s agreement provides standard insurance and retirement benefits and an automobile allowance of $500 per month. The agreement also provides for severance payments in the event his employment with us is terminated as a result of his death or disability. In addition, in the case of termination by Mr. Robison for good reason, or by us without cause, he will receive his full

 

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base salary for the following 12 months. Additionally, we will continue to pay the premium cost of the life and long term disability insurance, group medical and dental plans for 12 months, provided that Mr. Robison is entitled to continue such participation under applicable law and plan terms.

Additionally, under the terms of Mr. Robison’s agreement, he agreed not to compete with us for a period ending one year following the termination of his employment with us for any reason. Finally, Mr. Robison agreed to refrain from hiring, attempting to hire or soliciting any of our employees and soliciting or encouraging our clients to terminate or diminish their relationship with us for a period of two years following the termination of his employment with us for any reason.

In connection with his employment, Mr. Robison was entitled to purchase 801,786 restricted shares of our common stock. Approximately half of these restricted shares vest in equal annual installments over a five year period and the other half vest upon the achievement of certain investor return milestones. Upon the consummation of this offering our repurchase right with respect to all of Mr. Robison’s vested shares subject to time-based vesting will terminate and we anticipate that our repurchase right with respect to all of Mr. Robison’s shares subject to performance-based vesting will terminate. If a “sale event” is deemed to have occurred upon the consummation of this offering, all of Mr. Robison’s shares subject to time-based vesting will immediately vest. If Mr. Robison is terminated without cause, he terminates his employment for good reason or his employment is terminated due to death or disability, any unvested shares are subject to our option to repurchase such shares at the original per share purchase price. If Mr. Robison is terminated with cause or he terminates his employment without good reason, any unvested shares are subject to our option to repurchase such shares at the lower of the original per share purchase price or the fair market value of such shares. The restricted shares purchased by Mr. Robison are subject to certain transfer restrictions. These transfer restrictions terminate upon the closing of this offering to the extent such restricted shares vest.

On June 30, 2005, we entered into an amended employment agreement with our Chief Operating Officer, Greg Eveland. The term of his employment is indefinite unless either party terminates pursuant to the terms and conditions of the agreement. Mr. Eveland’s agreement calls for the payment of $225,000 in annual base salary, subject to increases approved by our board of directors. Mr. Eveland was awarded a performance bonus of $272,500 as a result of our performance in fiscal year 2006. Mr. Eveland’s bonuses in subsequent years of employment will be determined by our board of directors based upon our performance and other individual performance milestones to be determined by the board.

Mr. Eveland’s agreement provides standard insurance and retirement benefits and an automobile allowance of $500 per month. The agreement also provides for severance payments in the event his employment with us is terminated as a result of his death or disability. In addition, in the case of termination by Mr. Eveland for good reason, or by us without cause, he will receive his full base salary for the following 12 months. Additionally, we will continue to pay the premium cost of group medical and dental plans for 12 months, provided that Mr. Eveland is entitled to continue such participation under applicable law and plan terms. Additionally, under the terms of Mr. Eveland’s agreement, he agreed not to compete with us for a period ending one year following the termination of his employment with us for any reason. Finally, Mr. Eveland agreed to refrain from hiring, attempting to hire or soliciting any of our employees and soliciting or encouraging our clients to terminate or diminish their relationship with us for a period of two years following the termination of his employment with us for any reason.

 

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In connection with his employment, Mr. Eveland was entitled to purchase 389,439 restricted shares of our common stock. Approximately half of these restricted shares vest in equal annual installments over a five year period and the other half vest upon the achievement of certain investor return milestones. Upon the consummation of this offering our repurchase right with respect to all of Mr. Eveland’s vested shares subject to time-based vesting will terminate and we anticipate that our repurchase right with respect to all of Mr. Eveland’s shares subject to performance-based vesting will terminate. If a “sale event” is deemed to have occurred upon the consummation of this offering, all of Mr. Eveland’s shares subject to time-based vesting will immediately vest. If Mr. Eveland is terminated without cause, he terminates his employment for good reason or his employment is terminated due to death or disability, any unvested shares are

subject to our option to repurchase such shares at the original per share purchase price. If Mr. Eveland is terminated with cause or he terminates his employment without good reason, any unvested shares are subject to our option to repurchase such shares at the lower of the original per share purchase price or the fair market value of such shares. The restricted shares purchased by Mr. Eveland are subject to certain transfer restrictions. These transfer restrictions terminate upon the closing of this offering to the extent such restricted shares vest.

On June 30, 2005, we entered into an amended employment agreement with our Chief Financial Officer, William F. Lacey. The term of his employment is indefinite unless either party terminates pursuant to the terms and conditions of the agreement. Mr. Lacey’s agreement calls for the payment of $225,000 in annual base salary, subject to increases approved by our board of directors. Mr. Lacey was awarded a performance bonus of $267,500 as a result of our performance in fiscal year 2006. Mr. Lacey’s bonuses in subsequent years of employment will be determined by our board of directors based upon our performance and other individual performance milestones to be determined by the board.

Mr. Lacey’s agreement provides standard insurance and retirement benefits and an automobile allowance of $500 per month. The agreement also provides for severance payments in the event his employment with us is terminated as a result of his death or disability. In addition, in the case of termination by Mr. Lacey for good reason, or by us without cause, he will receive his full base salary for the following 12 months. Additionally, we will continue to pay the premium cost of group medical and dental plans for 12 months, provided that Mr. Lacey is entitled to continue such participation under applicable law and plan terms. Additionally, under the terms of Mr. Lacey’s agreement, he agreed not to compete with us for a period ending one year following the termination of his employment with us for any reason. Finally, Mr. Lacey agreed to refrain from hiring, attempting to hire or soliciting any of our employees and soliciting or encouraging our clients to terminate or diminish their relationship with us for a period of two years following the termination of his employment with us for any reason.

In connection with his employment, Mr. Lacey was entitled to purchase 366,532 restricted shares of our common stock. Approximately half of these restricted shares vest in equal annual installments over a five year period and the other half vest upon the achievement of certain investor return milestones. Upon the consummation of this offering our repurchase right with respect to all of Mr. Lacey’s vested shares subject to time-based vesting will terminate and we anticipate that our repurchase right with respect to the vested portion of Mr. Lacey’s shares subject to performance-based vesting will terminate. If a “sale event” is deemed to have occurred upon the consummation of this offering, all of Mr. Lacey’s shares subject to time-based vesting will immediately vest. If Mr. Lacey is terminated without cause or if he terminates his employment for good reason, any unvested shares are subject to our option to repurchase such

 

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shares at the original per share purchase price. If Mr. Lacey is terminated without cause, he terminates his employment for good reason or his employment is terminated due to death or disability, any unvested shares are subject to our option to repurchase such shares at the lower of the original per share purchase price or the fair market value of such shares. The restricted shares purchased by Mr. Lacey are subject to certain transfer restrictions. These transfer restrictions terminate upon the closing of this offering to the extent such restricted shares vest.

On April 1, 2006, we entered into an employment agreement with our General Counsel, Damian Olthoff. The term of his employment is indefinite unless either party terminates pursuant to the terms and conditions of the agreement. Mr. Olthoff’s agreement calls for the payment of $110,000 in annual base salary, subject to increases approved by our board of directors. Mr. Olthoff was awarded a performance bonus of $16,440 as a result of our performance in fiscal year 2006. Mr. Olthoff’s bonuses in subsequent years of employment will be determined by our board of directors based upon our performance and other individual performance milestones to be determined by the board.

Mr. Olthoff’s agreement provides standard insurance and retirement benefits and an automobile allowance of up to $500 per month. The agreement also provides for severance payments in the event his employment with us is terminated as a result of his disability. In addition, in the case of termination by Mr. Olthoff for good reason, or by us without cause, he will receive his full base salary and automobile allowance for the following 6 months. Additionally, we will continue to pay the premium cost of group medical and dental plans for 6 months, provided that Mr. Olthoff is entitled to continue such participation under applicable law and plan terms. Additionally, Mr. Olthoff is eligible to receive total severance compensation of at least $100,000, less any pre-tax income realized by Mr. Olthoff as a result of the sale or transfer of any shares of our capital stock held by Mr. Olthoff, in connection with termination by us without cause or by Mr. Olthoff with good reason if such termination occurs within 12 months of a change in control. Additionally, under the terms of Mr. Olthoff’s agreement, he agreed not to compete with us for a period ending one year following the termination of his employment with us for any reason. Finally, Mr. Olthoff agreed to refrain from hiring, attempting to hire or soliciting any of our employees and soliciting or encouraging our clients to terminate or diminish their relationship with us for a period of two years following the termination of his employment with us for any reason.

Limitation of liability and indemnification

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and by-laws to be in effect at the closing of this offering that limit or eliminate the personal liability of our directors. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability for:

 

  any breach of the director’s duty of loyalty to us or our stockholders;

 

  any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

 

  any transaction from which the director derived an improper personal benefit.

 

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These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

In addition, our by-laws provide that:

 

  we will indemnify our directors, executive officers and, in the discretion of our board of directors, employees to the fullest extent permitted by the Delaware General Corporation Law; and

 

  we will advance expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to executive officers and employees, in connection with legal proceedings, subject to limited exceptions.

We have entered into indemnification agreements with each of our directors and executive officers. These agreements provide that we will indemnify these directors and executive officers to the fullest extent permitted by law and our certificate of incorporation and by-laws, and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available.

We also maintain general liability insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors or officers of the Company, or persons controlling the Company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

 

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Certain transactions

General

Michael Eisenson, one of our directors, is a Managing Director and Chief Executive Officer of Charlesbank Capital Partners LLC, and Mark Rosen and Brandon White, each of whom serves on our board of directors, are Managing Directors of Charlesbank Capital Partners LLC. James Robison and Greg Eveland have commitments to invest $1,000,000 and $500,000, respectively, pursuant to their limited partnership interests in Charlesbank Equity Fund VI, Limited Partnership, a fund affiliated with Charlesbank Capital Partners LLC.

The Charlesbank transaction

On June 30, 2005, Charlesbank, in conjunction with the existing management team, acquired all of the outstanding stock of Animal Health International, Inc. In connection with the acquisition, we entered into a management and advisory services agreement with Charlesbank Capital Partners LLC. See “Certain transactions—Management and advisory services agreement.”

Cash dividend

In January 2006, we paid an aggregate cash dividend of approximately $0.9 million to the holders of shares of our preferred stock, including $0.8 million to Charlesbank. In September 2006, we paid an aggregate cash dividend of $53.3 million to the holders of shares of our preferred stock, including $47.8 million to Charlesbank and the following amounts to the following executive officers: $2.7 million to James Robison, $1.3 million to Greg Eveland and $0.7 million to William Lacey. In September 2006, we also paid an aggregate cash dividend of approximately $1.2 million to the holders of shares of our common stock, including the following amounts to the following executive officers: $0.4 million to James Robison, $0.2 million to Greg Eveland and $0.2 million to William Lacey.

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 each share of our preferred stock will immediately convert into 6.11337 shares of our common stock.

Stockholders agreement

In connection with the investment in us by Charlesbank, we entered into a stockholders agreement, dated as of June 29, 2005, with Charlesbank and others, including Messrs. Robison, Eveland and Lacey, each of whom is an executive officer. The stockholders agreement contains rights of first refusal and co-sale, drag-along rights, preemptive rights, voting obligations relating to board obligations and piggyback registration rights. The stockholders agreement also enables Charlesbank to require all of the other current stockholders to participate in a sale event in which it elects to participate. The parties to the stockholders agreement intend to terminate the agreement effective upon the closing of this offering.

Registration rights agreement

Charlesbank and others, including Messrs. Robison, Eveland and Lacey, each of whom is an executive officer of the Company, are parties to a registration rights agreement that becomes

 

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effective upon the termination of the stockholders agreement described above. The registration rights agreement contains demand and piggyback registration rights. Pursuant to the registration rights agreement, under certain circumstances these stockholders are entitled to require us to register their shares of common stock under the Securities Act for resale. See “Description of capital stock—Registration rights.”

Indemnification and employment agreements

We have agreed to indemnify our directors and officers in certain circumstances. See “Management—Limitation of liability and indemnification.” We have also entered into employment agreements and non-competition agreements with our executive officers. See “Management—Agreements with executive officers.”

Management and advisory services agreement

Effective June 30, 2005, we entered into an agreement with Charlesbank Capital Partners LLC for the provision of management and advisory services. The agreement continues until terminated by mutual consent of both parties. We paid Charlesbank Capital Partners LLC approximately $664,000 and $575,000, for the years ended June 30, 2006 and 2005, respectively. The payments included management and advisory service fees as well as reimbursement for out-of-pocket expenses. We have agreed with Charlesbank Capital Partners LLC to terminate this agreement effective upon the closing of this offering. In connection with this termination, we have agreed to pay Charlesbank Capital Partners LLC the prorated portion of the fees due under the agreement for management and advisory services provided in fiscal 2007 and reimbursement for out-of-pocket expenses.

Debt

In connection with our sale of treasury stock during the year ended June 30, 1999, to members of our senior management, we received a note from Mr. Eveland in the amount of $123,029. The note was paid in full concurrent with Charlesbank’s acquisition of the Company on June 30, 2005.

 

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Principal and selling stockholders

The following table sets forth information with respect to the beneficial ownership of our common stock, as of September 30, 2006, and as adjusted to reflect the sale of common stock offered by us in this offering, for:

 

  each beneficial owner of more than 5% of our outstanding common stock;
  each of our named executive officers;
  each of our directors;
  all of our executive officers and directors as a group; and
  the selling stockholders.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 30, 2006 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Ownership calculations below are based on 15,233,033 shares outstanding as of September 30, 2006 (which assumes the conversion of all outstanding shares of our series A preferred stock, into an aggregate of 12,975,182 shares of common stock that will occur immediately prior to the completion of this offering).

Charlesbank has granted to the underwriters the option to purchase up to an additional 1,770,000 shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus if the underwriters sell more than 11,800,000 shares of common stock in this offering. Information in the following table assumes that the underwriters do not exercise their option to purchase additional shares.

 

      Beneficial Ownership
Prior to Offering
   Shares
Sold
Pursuant
to Offering
   Beneficial Ownership
After Offering
Name and Address of Beneficial Owner(1)    Shares
Beneficially
Owned
   Percentage       Shares
Beneficially
Owned
   Percentage

Charlesbank Funds(2)

   11,635,341    76.4%    2,700,000    8,935,341    36.7%

James C. Robison

   1,457,383    9.6       1,457,383    6.0

W. Greg Eveland

   694,019    4.6       694,019    2.9

Kathy Hassenpflug

   21,072    *       21,072    *

William F. Lacey

   530,431    3.5       530,431    2.2

Damian Olthoff

   6,113    *       6,113    *

Michael Eisenson(3)

   11,635,341    76.4    2,700,000    8,935,341    36.7

Mark Rosen(4)

   11,635,341    76.4    2,700,000    8,935,341    36.7

Brandon White(5)

   11,635,341    76.4    2,700,000    8,935,341    36.7

All executive officers and directors as a group (8 persons)(6)

   14,344,359    94.2%    2,700,000    11,644,359    47.9%
      

 

*   Represents less than 1% of the outstanding shares of common stock.

 

(1)   Except as otherwise indicated, addresses are c/o Animal Health International, Inc., 7 Village Circle, Suite 200, Westlake, TX 76262. The address of Charlesbank Capital Partners LLC, Mr. Eisenson, Mr. Rosen and Mr. White is c/o Charlesbank Capital Partners LLC, 200 Clarendon Street, 54th Floor, Boston, MA 02116.

 

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(2)   Amounts shown reflect the aggregate number shares of common stock held by Charlesbank Equity Fund VI, Limited Partnership, CB Offshore Equity Fund VI, L.P., Charlesbank Equity Coinvestment Fund VI, Limited Partnership, and Charlesbank Coinvestment Partners, Limited Partnership (collectively, the “Charlesbank Funds”). Investment and voting control of the Charlesbank Funds is held by Charlesbank Capital Partners LLC.

 

(3)   Mr. Eisenson is a Managing Director and Chief Executive Officer of Charlesbank Capital Partners LLC and may be considered to have beneficial ownership of Charlesbank’s interest in us. Mr. Eisenson disclaims beneficial ownership of all such shares, except to the extent of his pecuniary interest therein. Mr. Eisenson has been a member of our board of directors since June 2005. See note 2 above.

 

(4)   Mr. Rosen is a Managing Director of Charlesbank Capital Partners LLC and may be considered to have beneficial ownership of Charlesbank’s interest in us. Mr. Rosen disclaims beneficial ownership of all such shares, except to the extent of his pecuniary interest therein. Mr. Rosen has been a member of our board of directors since June 2005. See note 2 above.

 

(5)   Mr. White is a Managing Director of Charlesbank Capital Partners LLC and may be considered to have beneficial ownership of Charlesbank’s interest in us. Mr. White disclaims beneficial ownership of all such shares, except to the extent of his pecuniary interest therein. Mr. White has been a member of our board of directors since June 2005. See note 2 above.

 

(6)   The Charlesbank Funds are the sole selling stockholders.

The Charlesbank Funds, our majority stockholders and the sole selling stockholders in this offering, are an “underwriter” as this term is understood under the Securities Act of 1933.

 

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Description of capital stock

General

Upon completion of this offering, our authorized capital stock will consist of 90,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.01 per share. The following description of our capital stock is intended as a summary only and is qualified in its entirety by reference to our amended and restated certificate of incorporation and amended and restated by-laws to be in effect at the closing of this offering, which are filed as exhibits to the registration statement, of which this prospectus forms a part, and to the applicable provisions of the Delaware General Corporation Law. We refer in this section to our amended and restated certificate of incorporation as our certificate of incorporation, and we refer to our amended and restated by-laws as our by-laws.

As of September 30, 2006, there were 2,257,851 shares of our common stock outstanding held by 133 stockholders of record and 2,122,431 shares of our series A preferred stock outstanding held by 43 stockholders of record, and no outstanding options to purchase shares of our common stock under our stock option plans. Upon the completion of this offering, each share of our currently outstanding series A preferred stock will be converted into an aggregate of 6.11337 shares of common stock.

Common stock

The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are entitled to receive proportionally any dividends declared by our board of directors, subject to any preferential dividend rights of any outstanding preferred stock.

In the event of our liquidation or dissolution, holders of our common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable.

Preferred stock

Upon completion of this offering, our board of directors will be authorized, without action by the stockholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more series. The board of directors can fix the rights, preferences and privileges of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible future financings and acquisitions and other corporate purposes could, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of us and might harm the market price of our common stock.

Our board of directors will make any determination to issue such shares based on its judgment as to our best interests and the best interests of our stockholders. We have no current plans to issue any shares of preferred stock.

 

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Registration rights

We entered into a registration rights agreement in September 2006 with Charlesbank, members of our board of directors, and certain of our executive officers, including Messrs. Robison, Eveland and Lacey, and other stockholders. Subject to the terms of this agreement, holders of shares having registration rights, or registrable securities, can demand that we file a registration statement or request that their shares be covered by a registration statement that we are otherwise filing.

Demand registration rights.    At any time after the effective date of this offering, subject to certain exceptions, the holders of a majority of the then outstanding registrable securities, which is currently Charlesbank, have the right to demand that we file a registration statement on Form S-1 covering the offering and sale of their shares of our common stock that are subject to the registration rights agreement, provided, however, that we are not obligated to cause the registration statement to become effective prior to the date which is six months following the effective date of this offering. We are not obligated to file a registration statement on Form S-1 on more than two occasions upon the request of the holders of a majority of registrable securities; however, this offering will not count toward that limitation.

If we are eligible to file a registration statement on Form S-3, the holders of a majority of the then outstanding registerable securities, which is currently Charlesbank, will have the right to demand, on one or more occasions, that we file registration statements on Form S-3 to cover the offer and sale of their shares of our common stock subject to the registration rights agreement, provided that the aggregate amount of securities to be sold pursuant to such request exceeds $500,000.

We have the ability to delay the filing of a registration statement under specified conditions, such as for a period of time following the effective date of a prior registration statement, if our board of directors deems it advisable to delay such filing or if we are in possession of material nonpublic information that would be in our best interests not to disclose. Such postponements cannot exceed 90 days during any twelve month period.

Piggyback registration rights.    All parties to the registration rights agreement have piggyback registration rights. Under these provisions, if we register any securities for public sale, including pursuant to any stockholder initiated demand registration, these stockholders will have the right to include their shares in the registration statement, subject to customary exceptions. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, and piggyback registration rights are also subject to the priority rights of stockholders having demand registration rights in any demand registration.

Expenses of registration.    We will pay all registration expenses, other than underwriting discounts and commissions, related to any demand or piggyback registration.

Indemnification.    The registration rights agreement contains customary cross-indemnification provisions, pursuant to which we are obligated to indemnify the selling stockholders in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

 

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Certain anti-takeover provisions of our certificate of incorporation and by-laws

Our certificate of incorporation and by-laws will, upon completion of this offering, include a number of provisions that may have the effect of delaying, deferring or discouraging another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board composition and filling vacancies.    In accordance with our certificate of incorporation, our board is divided into three classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum.

No written consent of stockholders.    Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our by-laws or removal of directors by our stockholder without holding a meeting of stockholders.

Meetings of stockholders.    Our by-laws provide that only a majority of the members of our board of directors then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our by-laws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Advance notice requirements.    Our by-laws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in the by-laws.

Amendment to certificate of incorporation and by-laws.    As required by the Delaware General Corporation Law, any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action, directors, limitation of liability and the amendment of our certificate of incorporation must be approved by not less than 75% of the outstanding shares entitled to vote on the amendment, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class. Our by-laws may be amended by the affirmative vote of a majority vote of the directors then in office, subject to any limitations set forth in the by-laws; and may also be amended by the affirmative vote of at

 

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least 75% of the outstanding shares entitled to vote on the amendment, or, if the board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated preferred stock.    Our certificate of incorporation provides for authorized              shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of us or our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Section 203 of the Delaware General Corporate Law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s outstanding voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

 

  before the stockholder became interested, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

  upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or

 

  at or after the time the stockholder became interested, the business combination was approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

 

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Nasdaq global market listing

We have applied for quotation of our common stock on the Nasdaq Global Market under the symbol “AHII.”

Transfer agent and registrar

The transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company.

 

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Shares eligible for future sale

Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Although we have applied to have our common stock approved for quotation on the Nasdaq Global Market, we cannot assure you that there will be an active public market for our common stock.

Upon completion of this offering, we will have outstanding an aggregate of 24,333,033 shares of common stock, assuming the issuance of 9,100,000 shares of common stock offered hereby. Of these shares, the 11,800,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to certain limitations and restrictions described below.

The remaining 12,533,033 shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. Approximately 12,121,962 of these shares will be subject to “lock-up” agreements described below on the effective date of this offering. On the effective date of this offering, there will be no shares eligible for sale pursuant to Rule 144(k), Rule 144 or Rule 701. Upon expiration of the lock-up agreements 180 days after the effective date of this offering (unless extended in certain specified circumstances described below), all remaining shares will become eligible for sale, subject in most cases to the limitations of Rule 144. In addition, holders of stock options could exercise such options and sell certain of the shares issued upon exercise as described below.

 

Days After Date of this
Prospectus
  

Shares Eligible

for Sale

   Comment

Upon Effectiveness

   11,800,000   

Shares sold in the offering.

Upon Effectiveness

   0    Freely tradable shares saleable under Rule 144(k) that are not subject to the lock-up.

90 Days

   411,071    Shares saleable under Rules 144 and 701 that are not subject to a lock-up.

180 Days

   12,121,962   

Lock-up released; shares saleable under Rules 144 and 701.

Thereafter

   0   

Restricted securities held for one year or less.

Employee benefit plans

As of September 30, 2006, we have issued a total of 2,251,779 shares of common stock pursuant to restricted stock agreements under our 2005 Option Plan and 2005 Option Plan—California. Restricted stock awards vest either in equal annual installments over a period of five years or upon the achievement of certain investor return milestones. All shares of vested restricted stock issued under our 2005 Option Plan and 2005 Option Plan—California and subject to time-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering. If a “sale event” is deemed to have occurred in connection with the consummation of our initial public offering, all shares of unvested restricted stock issued under our 2005 Option Plan and 2005 Option Plan—California and subject to time-based vesting will no

 

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longer be subject to a repurchase right. We anticipate that all shares of restricted stock issued under our 2005 Option Plan and 2005 Option Plan—California and subject to performance-based vesting will no longer be subject to a repurchase right upon the consummation of our initial public offering. However, 1,988,747 of these shares are subject to lock-up agreements. Immediately after the completion of this offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under the 2005 Option Plan, the 2005 Option Plan—California and the 2007 Option Plan. Assuming we complete our initial public offering on or prior to March 31, 2007, on the date which is 180 days, subject to extension under certain circumstances as described in “Underwriting,” after the effective date of this offering, a total of approximately 2,251,779 shares of common stock subject to restricted stock agreements will be vested. After the effective dates of the registration statements on Form S-8, and subject to the vesting schedule set forth in the restricted stock agreements, shares issued pursuant to the 2005 Option Plan, the 2005 Option Plan—California and the 2007 Option Plan generally would be available for resale in the public market.

Lock-up agreements

All directors and officers, and certain other stockholders, have entered into lock-up agreements under which they have agreed not to directly or indirectly transfer, dispose of or hedge any shares of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock for a period of 180 days from the date of this prospectus. In addition, during the 180 day lock-up period, a 10b5-1 trading plan that complies with Rule 10b5-1 under the Exchange Act may be established or amended, so long as there are no sales of our common stock under such plans during the lock-up period.

In addition, we have agreed that, without the prior written consent of J.P. Morgan Securities Inc., we will not offer, transfer or dispose of, directly or indirectly, any shares of common stock, any security convertible into or exchangeable or exercisable for shares of common stock or any securities substantially similar to our common stock until a date that is 180 days after the date of this prospectus.

The 180-day lock-up periods described above will be extended if (1) we release earnings results or material news or a material event relating to our company occurs during the last 17 days of the lock-up period, or (2) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period. In either case, the lock-up period will be extended for 18 days after the date of the release of the earnings results or the occurrence of the material news or material event. To the extent shares of our common stock are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our common stock could decline. In considering a request to release shares from a lock-up agreement, J.P. Morgan Securities Inc. would consider the particular circumstances surrounding the request, including, but not limited to, the length of time before the lock-up expires, the number of shares requested to be released, the reasons for the requested release, the possible impact on the market for our common stock and whether the person seeking the release is an officer, director or affiliate of ours.

Rule 144

In general, subject to the lock-up agreements discussed above, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned

 

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shares of our common stock for at least one year, including an affiliate of ours, would be entitled to sell in “broker’s transactions” or to market makers, within any three-month period, a number of shares that does not exceed the greater of:

 

  1% of the number of shares of our common stock then outstanding, which will equal approximately 243,330 shares immediately after this offering; or

 

  the average weekly trading volume in our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are generally subject to the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice filing provisions of Rule 144. Therefore, unless otherwise restricted, “144(k) shares” may be sold immediately upon the completion of this offering.

Rule 701

In general, subject to the lock-up agreements discussed above, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to sell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements of Rule 144 and, in the case of non-affiliates, without having to comply with the public information, volume limitation or notice filing provisions of Rule 144.

The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and subject to the contractual restrictions described above. Beginning 90 days after the date of this prospectus, such securities may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates without compliance with the one year minimum holding period requirements under Rule 144.

Registration rights

Upon completion of this offering, the holders of at least 11,617,174 shares of our common stock will be eligible for certain rights with respect to the registration of such shares under the Securities Act. See “Description of capital stock—Registration rights.” Upon the effectiveness of a registration statement covering these shares, the shares would become freely tradable.

 

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

The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of the Company’s common stock by a beneficial owner that is a “non-U.S. holder.” For purposes of this discussion, a “non-U.S. holder” is a person or entity that does not own or has not owned, actually or constructively, more than 5% of the Company’s common stock, and is for U.S. federal income tax purposes:

 

  a non-resident alien individual, other than certain former citizens and residents of the United States;

 

  a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of a jurisdiction other than the United States or any state or political subdivision thereof;

 

  an estate, other than an estate the income of which is subject to United States federal income taxation regardless of its source; or

 

  a trust, other than if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.

A “non-U.S. holder” does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition of the Company’s stock and is not otherwise a resident of the United States for U.S. federal income tax purposes. Such an individual is urged to consult his or her own tax adviser regarding the U.S. federal income tax consequences of the sale, exchange or other disposition of common stock.

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein, possibly with a retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to non-U.S. holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction.

The discussion below is limited to non-U.S. holders that hold the Company’s shares of common stock as capital assets within the meaning of the Code and that are not subject to special rules under the Code (e.g., financial institutions, governments or agencies or instrumentalities thereof, certain former citizens or residents of the United States, controlled foreign corporations, or passive foreign investment companies).

If a partnership, or any entity treated as a partnership for U.S. federal income tax purposes, is a holder of the Company’s common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A holder that is a partnership, and the partners in such partnership, should consult their own tax advisers regarding the tax consequences of the acquisition, holding and disposition of the Company’s common stock.

Prospective holders are urged to consult their tax advisers with respect to the particular tax consequences to them of acquiring, holding and disposing of the Company’s common stock, including the consequences under the laws of any state, local or foreign jurisdiction.

 

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Any dividends paid to a non-U.S. holder of common stock generally will be subject to withholding tax at a 30% rate, or a reduced rate specified by an applicable income tax treaty. In order to obtain a reduced rate of withholding under an applicable income tax treaty, a non-U.S. holder must provide an Internal Revenue Service Form W-8BEN certifying its entitlement to benefits under the treaty.

The withholding tax does not apply to dividends paid to a non-U.S. holder that provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (“effectively connected dividends”). Instead, effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. holder were a U.S. resident, subject to any applicable income tax treaty providing otherwise. A non-U.S. corporation receiving effectively connected dividends may also be subject to an additional “branch profits tax,” currently at the rate of 30% (or a lower rate prescribed under an applicable income tax treaty).

Gain on disposition of common stock

A non-U.S. holder generally will not be subject to U.S. federal income tax on gain realized on a sale or other disposition of common stock unless:

the gain is effectively connected with a trade or business of the non-U.S. holder in the United States, subject to an applicable income tax treaty providing otherwise; or

the Company is or has been a “U.S. real property holding corporation,” as defined below, at any time within the five-year period preceding the disposition or during the non-U.S. holder’s holding period, whichever period is shorter.

The Company is not, and does not anticipate becoming, a U.S. real property holding corporation. Generally, a corporation is a “U.S. real property holding corporation” if the fair market value of its U.S. real property interests (as defined in the Code and the applicable Treasury regulations) equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. Even if the Company were to become a U.S. real property holding corporation, gain on the sale or other disposition of common stock by a non-U.S. holder generally would not be subject to U.S. federal income tax, provided that the common stock is regularly traded on an established securities market and the non-U.S. holder does not actually or constructively own more than 5% of the common stock during the shorter of (i) the five-year period ending on the date of the disposition or (ii) the period of time during which the holder held such shares.

Information reporting requirements and backup withholding

Information returns will be filed with the Internal Revenue Service in connection with payments of dividends to a non-U.S. holder. Unless a non-U.S. holder complies with certification procedures to establish that it is not a U.S. person, information returns may be filed with the Internal Revenue Service in respect of the proceeds from a sale or other disposition of common stock and the non-U.S. holder may be subject to U.S. backup withholding on payments of dividends or on the proceeds from a sale or other disposition of common stock. The certification procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements necessary to avoid the backup withholding tax as well. The amount of any backup withholding from a payment to a non-U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the Internal Revenue Service.

 

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Federal estate tax

Individual Non-U.S. holders and entities the property of which is potentially includible in such individuals’ gross estate for U.S. federal estate tax purposes (for example, a trust funded by a non-U.S. holder individual and with respect to which the individual has retained certain interests or powers), should note that, absent an applicable treaty benefit, the common stock will be treated as U.S. situs property subject to U.S. federal estate tax.

 

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Underwriting

We and the selling stockholders are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities Inc. is acting as book-running manager of the offering and as representative of the underwriters. We and the selling stockholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name    Number of shares
 

J.P. Morgan Securities Inc.

  

William Blair & Company, L.L.C.

  

Piper Jaffray & Co.

  

Robert W. Baird & Co. Incorporated

  
    

Total

   11,800,000
 

The underwriters are committed to purchase all the shares offered by us and the selling stockholders if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.

The underwriters propose to offer the common stock directly to the pubic at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $             per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $             per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters. The representative has advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the common stock offered in this offering.

The underwriters have an option to buy up to 1,770,000 additional shares of common stock from the selling stockholders to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option. If any shares are purchased with this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

 

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The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us and the selling stockholders per share of common stock. The underwriting fee is $             per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

      Paid by Us   

Paid by

the Selling Stockholders

     No Exercise    Full Exercise    No Exercise    Full Exercise
 

Per Share

   $                 $                 $                 $             
      

Total

   $      $      $      $  
 

We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $2.2 million.

A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of J.P. Morgan Securities Inc. for a period of 180 days after the date of this prospectus. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

Our directors and executive officers, and certain of our stockholders have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities Inc., (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock which may be deemed to be beneficially owned by such directors, executive officers and stockholders in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such transaction described in clause (1) or (2)

 

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above is to be settled by delivery of common stock or such other securities, in cash or otherwise. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

We have applied to have our common stock approved for quotation on the Nasdaq Global Market under the symbol “AHII.”

In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ option to purchase additional shares referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representative of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representative can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the Nasdaq Global Market, in the over-the-counter market or otherwise.

 

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Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representative of the underwriters. In determining the initial public offering price, we and the representative of the underwriters expect to consider a number of factors including:

 

  the information set forth in this prospectus and otherwise available to the representative;

 

  our prospects and the history and prospects for the industry in which we compete;

 

  an assessment of our management;

 

  our prospects for future earnings;

 

  the general condition of the securities markets at the time of this offering;

 

  the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

  other factors deemed relevant by the underwriters and us.

Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market at or above the initial public offering price.

Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

The Charlesbank Funds, our majority stockholders and the sole selling stockholders in this offering, are an “underwriter” as this term is understood under the Securities Act of 1933.

 

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Legal matters

Goodwin Procter LLP, Boston, Massachusetts, has passed upon the validity of the shares of common stock offered hereby. Legal matters relating to this offering will be passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.

Experts

The consolidated balance sheets of Animal Health International, Inc. (formerly Walco International Holdings, Inc.) and subsidiaries (Successor) as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended June 30, 2006, and cash flows on June 30, 2005 (Successor periods) and the consolidated statements of operations, stockholders’ equity, and cash flows of Walco Holdings, Inc. (Predecessor) for the two-year period ended June 30, 2005, have been included herein in reliance upon the report of KPMG LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

Where you can find more information

We have filed with the SEC a registration statement on Form S-1 (File Number 333-137656) under the Securities Act with respect to the shares of common stock we are offering by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

Upon the closing of the offering, we will be subject to the informational requirements of the Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C., 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C., 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.

 

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Animal Health International, Inc.

Index to consolidated financial statements

 

Report of independent registered public accounting firm

  F-2

Consolidated balance sheets as of June 30, 2005 and 2006

  F-3

Consolidated statements of operations for the years ended June 30, 2004, 2005 and 2006

  F-4

Consolidated statements of stockholders’ equity for the years ended June 30, 2004, 2005 and 2006

  F-6

Consolidated statements of cash flows for the years ended June 30, 2004, 2005 and 2006

  F-7

Notes to consolidated financial statements

  F-8

Condensed consolidated balance sheets as of June 30, 2006 and September 30, 2006 (unaudited)

  F-30

Condensed consolidated statements of operations (unaudited) for the three months ended September 30, 2005 and 2006

  F-31

Condensed consolidated statements of cash flows (unaudited) for the three months ended September 30, 2005 and 2006

  F-32

Notes to condensed consolidated financial statements

  F-33

 

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Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors

Animal Health International, Inc.:

We have audited the accompanying consolidated balance sheets of Animal Health International, Inc. and subsidiaries (Successor) as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended June 30, 2006 and cash flows on June 30, 2005 (Successor periods) and the consolidated statements of operations, stockholders’ equity, and cash flows of Walco Holdings, Inc. (Predecessor) for the two-year period ended June 30, 2005 (Predecessor periods). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of Animal Health International, Inc. and subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for the Successor periods in conformity with U.S. generally accepted accounting principles. Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Walco Holdings, Inc. for the Predecessor periods, in conformity with U.S. generally accepted accounting principles.

As discussed in note 4 to the consolidated financial statements, effective June 30, 2005, Animal Health International, Inc. acquired all of the outstanding stock of Walco Holdings, Inc. in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

As discussed in note 3 to the consolidated financial statements, the Company has restated its consolidated financial statements.

KPMG LLP

Dallas, Texas

September 26, 2006, except for note 3, as to which the date is January 3, 2007,

and except for the second paragraph of note 16, as to which the date is

January 12, 2007

 

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ANIMAL HEALTH INTERNATIONAL, INC.

Consolidated balance sheets

June 30, 2005 and 2006

(In thousands, excluding share information)

 

      2005     2006       
 
Assets      (as restated)       (as restated)    

Current assets:

    

Cash and cash equivalents

   $ 7,583     $ 3,036    

Accounts receivable, net

     72,085       70,178    

Current portion of notes receivable

     73       54    

Income tax receivable

     1,488       232    

Merchandise inventories, net

     70,883       71,679    

Deferred income taxes

     1,007       3,063    

Prepaid expenses

     1,402       1,520    
                    

Total current assets

     154,521       149,762    

Noncurrent assets:

      

Notes receivable, net of current portion

     917       684    

Property, plant, and equipment, net

     15,632       16,045    

Goodwill

     60,475       59,939    

Customer relationships

     35,685       32,711    

Noncompete agreements

     3,192       2,791    

Trademarks and trade names

     26,260       26,260    

Debt issue costs and other assets, net of accumulated amortization of $807 and $0, respectively

     5,588       6,145    
                    

Total assets

   $ 302,270     $ 294,337    
                    
Liabilities and stockholders’ equity       

Current liabilities:

      

Accounts payable

   $ 77,057     $ 65,077    

Accrued liabilities

     10,765       18,100    

Current portion of long-term debt

     82,756       81,759    
                    

Total current liabilities

     170,578       164,936    

Noncurrent liabilities:

      

Long-term debt, net of current portion

     64,766       55,875    

Deferred lease incentives

           1,964    

Deferred income taxes

     28,834       27,241    
                    

Total liabilities

     264,178       250,016    
                    

Commitments and contingencies (note 15)

      

Redeemable preferred stock, par value $0.01 per share. Authorized 3,500,000 shares, issued and outstanding 2,122,431 shares

     47,500       47,500    

Stockholders’ equity:

      

Common stock, par value $0.01 per share. Authorized 15,000,000 shares, issued 1,563,825 and 2,259,991 shares, respectively, and outstanding 1,563,825 and 2,259,991 shares, respectively

     16       23    

Additional paid-in capital

     (9,424 )     (9,405 )  

Accumulated earnings

           6,446    

Accumulated other comprehensive income (loss)

           (243 )  
                    

Total stockholders’ equity

     (9,408 )     (3,179 )  
                    

Total liabilities and stockholders’ equity

   $ 302,270     $ 294,337    
 

See accompanying notes to consolidated financial statements.

 

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ANIMAL HEALTH INTERNATIONAL, INC.

Consolidated statements of operations

Years ended June 30, 2004, 2005, and 2006

(In thousands)

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

 

     

2004

    2005          2006  
    

(Predecessor)

          (Successor)  
                               
              (as restated )

Net sales

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

Costs and expenses:

           

Direct cost of products sold (excludes depreciation and amortization)

     408,105       436,955            459,173  

Salaries, wages, commissions, and related benefits

     38,464       39,022            43,958  

Selling, general, and administrative

     31,774       33,932            37,470  

Acquisition costs

     496       7,759            —    

Depreciation and amortization

     3,156       3,149            6,414  
                             

Operating income

     20,691       14,876            24,177  
 

Other income (expense):

           

Other income

     982       672            478  

Interest expense

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

Income before income taxes

     16,689       10,477            10,929  

Income tax expense

     (6,507 )     (3,203 )          (3,542 )
                             

Net income

   $ 10,182     $ 7,274          $ 7,387  

Dividend on preferred stock

     —         —              (941 )

Preferred stock participation in undistributed earnings

     —         —              (5,554 )
                             

Net income available to common stockholders

   $ 10,182     $ 7,274          $ 892  
                               
 

Earnings (loss) per common share (as restated)

           

Basic

           

Common

            $ 0.43  

Class A

   $ 4.80     $ 3.38         

Class L

   $ 4.80     $ 3.38         

Class W

   $ 4.80     $ 3.38         

Dilutive

           

Common

            $ 0.43  

Class A

   $ 4.09     $ 2.82         

Class L

   $ 4.09     $ 2.82         

Class W

   $ 4.09     $ 2.82         

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Consolidated statements of operations — (continued)

Years ended June 30, 2004, 2005, and 2006

(In thousands)

 

 

     

2004

   2005         2006
    

(Predecessor)

         (Successor)

Shares used in computing earnings per share (as restated):

             

Basic

             

Common

              2,084

Class A

   1,869    1,900        

Class L

   182    182        

Class W

   72    72        

Dilutive

             

Common

              2,084

Class A

   2,221    2,307        

Class L

   197    197        

Class W

   72    72        
                     

See accompanying notes to consolidated financial statements.

 

F-5


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Consolidated statements of stockholders’ equity

Years ended June 30, 2004, 2005, and 2006

(In thousands, excluding share information)

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

 

     Common stock                       

Accumulated

other
comprehensive
income

   

Distribution

in excess of
predecessor
basis

        
            Class A     Class L   Class W  

Additional

paid-in
capital

          Accumulated
earnings/
(deficit)
           
   

Number

of

shares

  Amount  

Number

of

shares

    Amount    

Number
of

shares

    Amount   Number
of
shares
    Amount     Treasury
stock
          Total  
   

Predecessor

                           

Balance, June 30, 2003

    $   1,870,188     $ 2     184,375     $   72,000     $   29,085     (130 )   (5,037 )   51     (3,308 )   $ 20,663  

Exercise of stock options

        7,037                           17                       17  

Purchase of treasury stock

                                      (251 )                 (251 )

Comprehensive income:

                           

Net income

                                          10,182               10,182  

Foreign currency translation adjustment

                                              1           1  
                                 

Total comprehensive income

                              10,183  
     

Balance, June 30, 2004

        1,877,225       2     184,375         72,000         29,102     (381 )   5,145     52     (3,308 )     30,612  

Exercise of stock options

        28,770                           67                       67  

Comprehensive income:

                           

Net income

                                          7,274               7,274  

Foreign currency translation adjustment

                                              134           134  
                                 

Total comprehensive income

                              7,408  
     

Balance, June 30, 2005 prior to acquisition

    $   1,905,995     $ 2     184,375         72,000         29,169     (381 )   12,419     186     (3,308 )     38,087  
     

Successor

                           

Redemptions pursuant to acquisition

    $   (1,905,995 )   $ (2 )   (184,375 )       (72,000 )       (29,169 )   381     (12,419 )   (186 )   3,308       (38,087 )

Issuances pursuant to acquisition

  1,563,825     16                             41                       57  

Deemed dividend for management’s continued ownership interest
(as restated)

                                  (9,465 )                     (9,465 )
     

Balance, June 30, 2005

  1,563,825     16                             (9,424 )                     (9,408 )

Purchase of treasury stock

                                                         

Issuance of common stock

  696,166     7                             19                       26  

Dividend on preferred stock

                                          (941 )             (941 )

Comprehensive income:

                           

Net income
(as restated)

                                          7,387               7,387  

Foreign currency translation adjustment

                                              (243 )         (243 )
                                 

Total comprehensive income

                              7,144  
     

Balance, June 30, 2006

  2,259,991   $ 23       $         $       $   (9,405 )       6,446     (243 )       $ (3,179 )
   

See accompanying notes to consolidated financial statements.

 

F-6


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Consolidated statements of cash flows

Years ended June 30, 2004, 2005, and 2006 and on

June 30, 2005

(In thousands)

All references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc., which operated under a different ownership and capital structure.

 

 

     

Year ended

         On June 30     Year ended  
     2004    

2005

        

2005

    2006  
     (Predecessor)               

(Successor)

(as restated)

 
                                      
 

Cash flows from operating activities:

            

Net income

   $ 10,182     $ 7,274         $     $ 7,387  

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation and amortization

     3,156       3,149                 6,414  

Amortization of debt issue costs

     1,137       640                 807  

(Gain) loss on sale of equipment

     (313 )     (292 )               36  

Deferred income taxes

     1,738       693                 (3,649 )

Deferred lease incentives

                           2,020  

Changes in assets and liabilities:

            

Accounts receivable

     (7,880 )     (13,491 )               1,907  

Merchandise inventories

     (4,547 )     (7,785 )               (796 )

Income taxes receivable/payable

     (2,230 )     (1,240 )               1,256  

Prepaid expenses

     72       182                 (118 )

Accounts payable

     8,736       9,813                 (9,733 )

Accrued liabilities and other

     1,942       9,662                 7,335  
                                    

Net cash provided by operating activities

     11,993       8,605                 12,866  
                                    
 

Cash flows from investing activities:

            

Purchase of property, plant, and equipment

     (2,369 )     (2,139 )               (3,300 )

Purchase of other assets

     (384 )     (330 )               (1,526 )

Acquisition of Predecessor, net of cash acquired

                     (122,036 )      

Purchase price adjustments

                           536  

Proceeds from sale of equipment

     877       499                 92  

Net changes in notes receivable

     (833 )     39                 252  
                                    

Net cash used for investing activities

     (2,709 )     (1,931 )         (122,036 )     (3,946 )
                                    
 

Cash flows from financing activities:

            

Repayment of long-term debt

     (564 )     (563 )         (12,055 )     (3,794 )

Borrowings of long-term debt

                     70,000        

Net repayments under revolving credit facilities

     (7,000 )     (11,698 )         (49,284 )     (6,093 )

Borrowings under new revolving credit facility

                     77,228        

Debt issue costs

     (490 )     (107 )         (3,827 )     (175 )

Change in overdraft balances

     (634 )     6,024                 (2,589 )

Proceeds from the issuance of preferred stock

                     47,500        

Dividend on preferred stock

                           (941 )

Proceeds from the issuance of common stock

                     57       26  

Purchase of treasury stock

     (251 )                      

Proceeds from the exercise of stock options

     17       67                  
                                    

Net cash provided by (used for) financing activities

     (8,922 )     (6,277 )         129,619       (13,566 )

Effect of exchange rate changes in cash and cash equivalents

     1       104                 99  
                                    

Net increase (decrease) in cash and cash equivalents

     363       501           7,583       (4,547 )

Cash and cash equivalents, beginning of year

     4,267       4,630                 7,583  
                                    

Cash and cash equivalents, end of year

   $ 4,630     $ 5,131         $ 7,583     $ 3,036  
                                      

See accompanying notes to consolidated financial statements.

 

F-7


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Notes to consolidated financial statements

June 30, 2005 and 2006

(Dollars in thousands)

(1) Organization

Animal Health International, Inc. (the Company or Successor), formerly known as Walco International Holdings, Inc., was incorporated in June 2005 in Delaware. Through its wholly owned subsidiary, Walco International, Inc., the Company’s primary business activity is the sale and distribution of animal health products, supplies, services and technology through operating divisions located throughout the United States and Canada. On June 30, 2005, the Company acquired Walco Holdings, Inc. (Predecessor) (note 4).

(2) Summary of significant accounting policies

(a) Basis of consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and Predecessor. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

(b) Revenue recognition

Revenues are recognized when the title passes according to shipping terms. Sales returns and allowances are immaterial in all periods presented as most product returns from customers are returned to product manufacturers for full credit. Any losses incurred on sales returns are recognized in the period the products are returned. Provision for sales discounts is recorded at the time of sale.

For multiple arrangements in which a customer signs up for a multi-year exclusive supply agreement and receives certain equipment and software products at no charge, revenue is recognized using the relative fair value method under Financial Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-21 (EITF 00-21), whereby each separate unit of accounting is recognized as revenue at its relative fair value, in which the delivered item (certain equipment and software products) is limited to the non-contingent amount. Since all consideration paid by the customer is contingent upon delivery of the product, no amount is recorded as equipment and software revenue under these multiple element arrangements.

(c) Direct cost of products sold

Direct cost of products sold includes the cost of inventories, net of purchase rebates, and inbound and outbound freight costs.

(d) Rebates

Inventory rebates are recognized when estimable and probable and include inventory purchase rebates and sales-related rebates. Inventory purchase rebates received are capitalized into inventory while sales-related rebates are recorded as a reduction of cost of sales.

 

F-8


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Notes to consolidated financial statements — (continued)

June 30, 2005 and 2006

(Dollars in thousands)

 

(e) Shipping and handling

The Company and Predecessor invoice certain customers for shipping and handling. This revenue is included in net sales and was approximately $926, $814, and $905 for the years ended June 30, 2004, 2005, and 2006, respectively. The costs associated with shipping and handling are reflected in direct cost of products sold in the consolidated statements of operations and were approximately $7,491, $8,481, and $9,302 for the years ended June 30, 2004, 2005, and 2006, respectively.

(f) Rent expense

Minimum rental expenses are recognized on a straight-line basis over the term of the lease. The Company recognizes minimum rent starting when possession of the property is taken from the landlord. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred lease incentives. Tenant allowances received are reflected in deferred lease incentives and amortized on a straight-line basis as a reduction to rent expense over the term of the lease.

(g) Cash and cash equivalents

All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. These amounts are stated at cost, which approximates fair value. Book overdrafts totaling $14,317 and $11,728 at June 30, 2005 and 2006, respectively, are classified as accounts payable in the consolidated balance sheets. Included in cash and cash equivalents is $100 and $0 of restricted cash at June 30, 2005 and 2006, respectively.

(h) Accounts receivable

Accounts receivable consist primarily of receivables from trade customers. The Company records a provision for doubtful accounts to allow for any amounts which may be unrecoverable. This allowance is based upon an analysis of historical write-offs and is adjusted as necessary to reserve for specific accounts that are judged to be potentially uncollectible. Specific accounts determined to be uncollectible are written-off against the allowance.

(i) Merchandise inventories

Merchandise inventories are stated at the lower of average cost or market. Inventories include the cost of product, net of purchase rebates, and inbound freight, and primarily consist of finished goods stored in warehouses.

 

F-9


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Notes to consolidated financial statements — (continued)

June 30, 2005 and 2006

(Dollars in thousands)

 

(j) Property, plant, and equipment

Property, plant, and equipment are recorded at cost. Depreciation is determined for financial reporting purposes primarily using the straight-line method over the estimated useful lives of the assets, which are as follows (in years):

 

 

Buildings and improvements

   10-40

Leasehold improvements

   5-30

Equipment:

  

Warehouse

   3-8

Automotive

   3-8

Computer hardware and software

   3-5

Office

   3-8
 

Expenditures for renewals and betterments are capitalized, and maintenance and repairs are expensed as incurred to operations. Depreciation expense was $2,823, $2,797, and $2,446 for the years ended June 30, 2004, 2005, and 2006, respectively. The Company periodically reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed by Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that if the sum of the undiscounted expected future cash flows from an asset is less than the carrying value of the asset, impairment must be recognized in the financial statements by writing down the asset to its fair value.

(k) Goodwill and other intangible assets

At June 30, 2006, the Company performed its annual impairment test, and no impairment was noted. At June 30, 2005, the Predecessor was acquired (note 3), and correspondingly, no impairment test was necessary at that date. The impairment test is performed by comparing the Company’s estimated fair value to the carrying amount of its goodwill and other nonamortizing intangible assets. If the carrying amount exceeds the fair value, an impairment loss would be recognized in an amount equal to the excess. The Company will continue to evaluate goodwill and other nonamortizing intangible assets consisting of trademarks and trade names for potential impairment based upon any changes to the Company’s operations or its operating business environment. Amortizing intangible assets including customer relationships and noncompete agreements are being amortized over their estimated useful lives of twelve and eight years, respectively.

(l) Debt issue costs and other assets

Debt issue costs are capitalized and amortized to interest expense over the term of the underlying debt utilizing the effective interest method. Other assets include equipment held for lease, which are amortized over their useful lives, and investments, which are recorded at cost.

 

F-10


Table of Contents
Index to Financial Statements

ANIMAL HEALTH INTERNATIONAL, INC.

Notes to consolidated financial statements — (continued)

June 30, 2005 and 2006

(Dollars in thousands)

 

(m) Stock options

In December 2002, the FASB issued SFAS 148. SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation.

SFAS 123 encourages but does not require a fair value based method of accounting for employee stock options or similar equity instruments. SFAS 123 allows an entity to elect to continue to measure compensation costs under Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, but requires pro forma disclosure of net earnings as if the fair value based method of accounting had been applied.

The Company and Predecessor elected to follow APB 25, and related interpretations in accounting for its employee stock option plan. Accordingly, no compensation expense has been recognized related to its stock option plan as the exercise price equaled or exceeded the stock price on the date of grant. The following table summarizes the effect on net income if the Company and Predecessor had adopted the provisions of SFAS 123:

 

      Year ended June 30,
      2004     2005      2006
      (Predecessor)      (Successor)
                         

Net income

   $ 10,182     $ 7,274      $ 7,387