UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
June 16, 2015
Date
of earliest event reported
PATTERSON COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| Minnesota |
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0-20572 |
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41-0886515 |
| (State or Other Jurisdiction
of Incorporation) |
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(Commission
File Number) |
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(IRS Employer
Identification No.) |
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of Principal Executive Offices, including Zip Code)
(651) 686-1600
(Registrant’s Telephone Number, including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
| ¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
On June 16, 2015, Patterson Companies, Inc. (“Patterson”) filed a Current Report on Form 8-K (the
“Original Form 8-K”) reporting that on June 16, 2015, Patterson closed its acquisition of Animal Health International, Inc., a Colorado corporation (“Animal Health”). This Form 8-K/A amends the Original Form 8-K to include
the historical audited and unaudited financial statements of Animal Health and the unaudited pro forma condensed combined financial information required by Items 9.01(a) and 9.01(b) of Form 8-K that were excluded from the Original Form 8-K
in reliance on the instructions to such items.
Item 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired. The audited financial statements of Animal Health for the year ended June 30, 2014, are filed
herewith as Exhibit 99.1. The unaudited financial statements of Animal Health as of March 31, 2015 and for the nine month periods ended March 31, 2015 and March 31, 2014, are filed herewith as Exhibit 99.2. The consent of McGladrey
LLP, Animal Health’s independent auditors, is attached as Exhibit 23.
(b) Pro forma financial information. The unaudited pro forma condensed
combined financial information of Patterson and Animal Health for the year ended April 25, 2015 is filed herewith as Exhibit 99.3.
(d) Exhibits
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| 23 |
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Consent of McGladrey LLP, Independent Auditors of Animal Health. |
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| 99.1 |
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Audited financial statements of Animal Health for the year ended June 30, 2014. |
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| 99.2 |
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Unaudited financial statements of Animal Health as of March 31, 2015 and for the nine month periods ended March 31, 2015 and March 31, 2014. |
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| 99.3 |
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Unaudited pro forma condensed combined financial information of Patterson and Animal Health for the year ended April 25, 2015. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
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PATTERSON COMPANIES, INC. |
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| Date: September 1, 2015 |
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By: |
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/s/ Ann B. Gugino |
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Ann B. Gugino |
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Executive Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT INDEX
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| Exhibit
Number |
|
Description |
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| 23 |
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Consent of McGladrey LLP, Independent Auditors of Animal Health. |
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| 99.1 |
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Audited financial statements of Animal Health for the year ended June 30, 2014. |
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| 99.2 |
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Unaudited financial statements of Animal Health as of March 31, 2015 and for the nine month periods ended March 31, 2015 and March 31, 2014. |
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| 99.3 |
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Unaudited pro forma condensed combined financial information of Patterson and Animal Health for the year ended April 25, 2015. |
Exhibit 23
CONSENT OF INDEPENDENT AUDITOR
We consent to
the incorporation by reference in the Registration Statements (Nos. 333-19951, 333-41199, 333-61489, 333-79147, and 333-116226) on Forms S-3 and in the Registration Statements (Nos. 333-03583, 333-45742, 333-87488, 333-101691, 333-114643,
333-137497, 333-183979, and 333-198694) on Forms S-8 of Patterson Companies, Inc. of our report dated September 30, 2014, relating to our audit of the consolidated financial statements of Animal Health International, Inc. and Subsidiaries as of
and for the years ended June 30, 2014 and 2013, included in this Current Report on Form 8-K/A.
/s/ McGladrey LLP
Denver, Colorado
September 1, 2015
Exhibit 99.1
Table of Contents
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| Independent Auditor’s Report |
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1 |
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| Consolidated Financial Statements |
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| Consolidated Balance Sheets |
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2-3 |
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| Consolidated Statements of Income |
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4 |
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| Consolidated Statements of Comprehensive Income |
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5 |
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| Consolidated Statements of Shareholders’ Equity |
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6 |
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| Consolidated Statements of Cash Flows |
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7-8 |
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| Notes to Consolidated Financial Statements |
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9-27 |
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McGladrey LLP
Independent Auditor’s Report
To the Board of Directors
Animal Health International, Inc.
Greeley, Colorado
Report on the Consolidated Financial
Statements
We have audited the accompanying consolidated financial statements of Animal Health International, Inc. and its subsidiaries which comprise
the consolidated balance sheets as of June 30, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended and the related notes to the consolidated
financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Animal Health
International, Inc. and its subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of
America.
Denver, Colorado
September 30, 2014
Member of the RSM International
network of Independent accounting, tax and consulting firms.
1
Animal Health International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2014 and
2013
(dollars in thousands, except share amounts)
|
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| Assets |
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2014 |
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2013 |
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| Current Assets |
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| Cash and cash equivalents |
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$ |
17,639 |
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$ |
10,969 |
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| Trade receivables, net |
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132,662 |
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|
114,959 |
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| Other receivables |
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13,556 |
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|
9,809 |
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| Related party notes receivable |
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— |
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31 |
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| Inventories, net |
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189,786 |
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|
198,466 |
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| Income taxes receivable |
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|
1,350 |
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|
1,617 |
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| Deferred tax assets |
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1,715 |
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|
1,600 |
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| Equity method investment, held for sale |
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4,169 |
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— |
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| Other current assets |
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6,257 |
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6,778 |
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| Total current assets |
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367,134 |
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344,229 |
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| Property and Equipment, net |
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31,532 |
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28,202 |
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| Intangible Assets, net |
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109,564 |
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114,864 |
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| Goodwill |
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91,285 |
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91,378 |
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| Equity Method Investments |
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13,562 |
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16,253 |
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| Debt Issuance Costs, net, and Other Long-Term Assets |
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3,399 |
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3,796 |
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$ |
616,476 |
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$ |
598,722 |
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See Notes to Consolidated Financial Statements.
2
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| Liabilities and Shareholders’ Equity |
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2014 |
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2013 |
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| Current Liabilities |
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| Line of credit |
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$ |
165,000 |
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$ |
161,426 |
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| Trade accounts payable |
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118,318 |
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120,701 |
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| Excess of outstanding checks over bank balances |
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15,329 |
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18,048 |
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| Accrued expenses and other liabilities |
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14,213 |
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11,601 |
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| Total current liabilities |
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312,860 |
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311,776 |
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| Deferred Tax Liabilities |
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48,324 |
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47,824 |
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| Commitments and Contingencies (Note 6) |
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| Shareholders’ Equity |
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| Convertible preferred stock, no par value; 50,000,000 shares authorized; 22,575,754 Series A shares issued and outstanding; total
liquidation preference of outstanding stock 2014: $146,439; 2013: $136,622 |
|
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— |
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— |
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| Common stock, voting, no par value; 88,000,000 shares authorized; 32,344,498 shares issued and outstanding |
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— |
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— |
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| Common stock, non-voting, no par value; 12,000,000 shares authorized; 2014: 3,689,030; 2013: 3,703,795 shares issued and
outstanding |
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— |
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— |
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| Additional paid-in capital |
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128,532 |
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|
126,933 |
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| Retained earnings |
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|
128,283 |
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|
113,306 |
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| Accumulated other comprehensive loss |
|
|
(1,523 |
) |
|
|
(1,117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
255,292 |
|
|
|
239,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
616,476 |
|
|
$ |
598,722 |
|
|
|
|
|
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|
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|
3
Animal Health International, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended
June 30, 2014 and 2013
(dollars in thousands)
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| |
|
2014 |
|
|
2013 |
|
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|
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| Net sales |
|
$ |
1,389,535 |
|
|
$ |
1,308,879 |
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|
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| Cost of sales |
|
|
1,167,749 |
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|
1,095,197 |
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|
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| Gross profit |
|
|
221,786 |
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|
|
213,682 |
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|
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|
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| Operating expenses: |
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| Wages, compensation and benefits |
|
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100,888 |
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|
97,927 |
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| General and administrative |
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27,705 |
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|
27,407 |
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| Occupancy, equipment and communications |
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|
16,655 |
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|
16,648 |
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| Marketing and advertising |
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|
3,033 |
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|
1,971 |
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| Freight and shipping |
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|
20,539 |
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|
19,055 |
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| Supplies |
|
|
5,371 |
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|
|
4,840 |
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| Bad debt expense |
|
|
320 |
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|
|
264 |
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| Restructuring expenses |
|
|
1,600 |
|
|
|
3,052 |
|
| Depreciation and amortization |
|
|
17,050 |
|
|
|
16,529 |
|
| Impairment of goodwill |
|
|
— |
|
|
|
11,546 |
|
|
|
|
|
|
|
|
|
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| Total operating expenses |
|
|
193,161 |
|
|
|
199,239 |
|
|
|
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|
|
|
|
|
|
|
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| Operating income |
|
|
28,625 |
|
|
|
14,443 |
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|
|
|
|
|
|
|
|
|
|
|
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| Other income (expense): |
|
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|
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|
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| Interest expense, net |
|
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(5,228 |
) |
|
|
(5,731 |
) |
| Income from equity method investments |
|
|
1,343 |
|
|
|
413 |
|
| Miscellaneous expense |
|
|
(392 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
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|
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| Total other expense |
|
|
(4,277 |
) |
|
|
(5,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
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| Income before taxes |
|
|
24,348 |
|
|
|
8,726 |
|
|
|
|
| Provision for income taxes |
|
|
9,366 |
|
|
|
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
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| Net income |
|
$ |
14,982 |
|
|
$ |
4,388 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
Animal Health International, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years
Ended June 30, 2014 and 2013
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
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|
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| Net income |
|
$ |
14,982 |
|
|
$ |
4,388 |
|
|
|
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| Other comprehensive loss, foreign currency translation adjustment |
|
|
(406 |
) |
|
|
(853 |
) |
|
|
|
|
|
|
|
|
|
|
|
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| Total comprehensive income |
|
$ |
14,576 |
|
|
$ |
3,535 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
Animal Health International, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended June 30, 2014 and 2013
(dollars in
thousands, except share amounts)
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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| |
|
Series A
Preferred Stock |
|
|
Voting
Common Stock |
|
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Non-Voting
Common Stock |
|
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Additional
Paid-In
Capital |
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Retained
Earnings |
|
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Accumulated
Other
Comprehensive
Loss |
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Total
Shareholders’
Equity |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2012 |
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|
22,575,754 |
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|
$ |
— |
|
|
|
32,344,498 |
|
|
$ |
— |
|
|
|
4,018,995 |
|
|
$ |
— |
|
|
$ |
125,583 |
|
|
$ |
110,366 |
|
|
$ |
(264 |
) |
|
$ |
235,685 |
|
| Repurchase of stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(315,200 |
) |
|
|
— |
|
|
|
(187 |
) |
|
|
(1,448 |
) |
|
|
— |
|
|
|
(1,635 |
) |
| Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,537 |
|
|
|
— |
|
|
|
— |
|
|
|
1,537 |
|
| Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(853 |
) |
|
|
(853 |
) |
| Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,388 |
|
|
|
— |
|
|
|
4,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2013 |
|
|
22,575,754 |
|
|
|
— |
|
|
|
32,344,498 |
|
|
|
— |
|
|
|
3,703,795 |
|
|
|
— |
|
|
|
126,933 |
|
|
|
113,306 |
|
|
|
(1,117 |
) |
|
|
239,122 |
|
| Repurchase of stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,765 |
) |
|
|
— |
|
|
|
(56 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
(61 |
) |
| Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,655 |
|
|
|
— |
|
|
|
— |
|
|
|
1,655 |
|
| Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(406 |
) |
|
|
(406 |
) |
| Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,982 |
|
|
|
— |
|
|
|
14,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2014 |
|
|
22,575,754 |
|
|
$ |
— |
|
|
|
32,344,498 |
|
|
$ |
— |
|
|
|
3,689,030 |
|
|
$ |
— |
|
|
$ |
128,532 |
|
|
$ |
128,283 |
|
|
$ |
(1,523 |
) |
|
$ |
255,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
6
Animal Health International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended
June 30, 2014 and 2013
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
14,982 |
|
|
$ |
4,388 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation of property and equipment |
|
|
10,891 |
|
|
|
10,452 |
|
| Amortization of intangible assets |
|
|
5,131 |
|
|
|
5,082 |
|
| Amortization of debt issuance costs |
|
|
1,028 |
|
|
|
995 |
|
| Bad debt expense |
|
|
320 |
|
|
|
264 |
|
| Stock-based compensation |
|
|
1,655 |
|
|
|
1,537 |
|
| Deferred taxes |
|
|
396 |
|
|
|
(1,039 |
) |
| Gain on disposition of property and equipment |
|
|
(235 |
) |
|
|
(472 |
) |
| Income from equity method investments |
|
|
(1,343 |
) |
|
|
(413 |
) |
| Impairment of goodwill |
|
|
— |
|
|
|
11,546 |
|
| Net changes in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
| Trade and other receivables, net |
|
|
(21,889 |
) |
|
|
14,601 |
|
| Inventories, net |
|
|
8,519 |
|
|
|
2,112 |
|
| Income taxes receivable |
|
|
267 |
|
|
|
3,549 |
|
| Other current assets |
|
|
(33 |
) |
|
|
(107 |
) |
| Other long-term assets |
|
|
21 |
|
|
|
10 |
|
| Trade accounts payable |
|
|
(2,321 |
) |
|
|
(6,790 |
) |
| Accrued expenses and other liabilities |
|
|
2,656 |
|
|
|
(4,995 |
) |
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
20,045 |
|
|
|
40,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| Proceeds from sale of property and equipment |
|
|
1,416 |
|
|
|
1,048 |
|
| Purchase of property and equipment |
|
|
(14,860 |
) |
|
|
(15,599 |
) |
| Repayment of related party notes receivable |
|
|
31 |
|
|
|
373 |
|
| Proceeds from sale of equity method investments |
|
|
— |
|
|
|
263 |
|
| Acquisition of consolidated entity (net of cash acquired) |
|
|
— |
|
|
|
(2,361 |
) |
| Purchase of equity method investments |
|
|
(613 |
) |
|
|
(4,386 |
) |
| Distributions from equity method investments |
|
|
478 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(13,548 |
) |
|
|
(20,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| Net borrowings (payments), line of credit |
|
|
3,602 |
|
|
|
(13,038 |
) |
| Excess of outstanding checks over bank balances |
|
|
(2,719 |
) |
|
|
(9,212 |
) |
| Repurchase of common stock |
|
|
(61 |
) |
|
|
(1,635 |
) |
| Payments of debt issuance costs |
|
|
(653 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
169 |
|
|
|
(23,885 |
) |
|
|
|
|
|
|
|
|
|
(Continued)
7
Animal Health International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended June 30, 2014 and 2013
(dollars in
thousands)
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Effect of exchange rate changes in cash and cash equivalents |
|
$ |
4 |
|
|
$ |
(446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Increase (decrease) in cash and cash equivalents |
|
|
6,670 |
|
|
|
(3,941 |
) |
|
|
|
| Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
| Beginning of year |
|
|
10,969 |
|
|
|
14,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| End of year |
|
$ |
17,639 |
|
|
$ |
10,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Information |
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
5,243 |
|
|
$ |
5,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes |
|
$ |
8,856 |
|
|
$ |
1,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Disclosure of Investing Activity |
|
|
|
|
|
|
|
|
| Net assets acquired |
|
|
|
|
|
|
|
|
| Working capital |
|
$ |
— |
|
|
$ |
196 |
|
| Property and equipment |
|
|
— |
|
|
|
123 |
|
| Intangible assets |
|
|
— |
|
|
|
1,852 |
|
| Goodwill |
|
|
— |
|
|
|
1,279 |
|
| Long-term debt |
|
|
— |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
3,417 |
|
| Less equity method investment previously held |
|
|
— |
|
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
| Total net assets acquired for cash |
|
$ |
— |
|
|
$ |
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Assets held for sale reclassed from: |
|
|
|
|
|
|
|
|
| Property and equipment |
|
$ |
— |
|
|
$ |
3,370 |
|
| Other long-term assets |
|
|
— |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
2,870 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
8
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies |
Nature of business: Animal Health
International, Inc. (AHI) and its wholly-owned subsidiaries (collectively, the Company) is involved in the distribution and sale of animal health products to the agricultural and veterinary industries throughout the United States and Canada. The
Company’s corporate offices are located in Greeley, Colorado.
Animal Health International, Inc.’s wholly-owned subsidiaries consist of the
following companies:
Kane Veterinary Supplies, Ltd. (Kane), which distributes animal health products throughout Canada.
Hawaii Mega-Cor, Inc., which distributes animal health products in Hawaii and in certain Pacific Rim markets.
Aspen Veterinary Resources, Ltd. (Aspen) distributes animal health products under the Aspen private label name and other trademarks throughout
the United States.
Advanced Veterinary Services, LLC and Indiana Animal Health, LLC provide veterinary services and sell related animal
health products, primarily to swine producers in Indiana.
AVS West, Inc. provides veterinary services and sells related animal health
products, primarily in the Western United States.
IAH Properties, LLC owns real estate in Wolcott, Indiana on which the operations of
Advanced Veterinary Services, LLC and Indiana Animal Health, LLC are located.
Turnkey Computer Systems, LLC, which provides information
technology, feedyard technology systems and accounting software for livestock producers.
A summary of significant accounting policies follows:
Basis of presentation: The Company follows accounting standards established by the Financial Accounting Standards Board (FASB)
to ensure consistent reporting of financial condition, results of operation, and cash flows. References to Generally Accepted Accounting Principles (GAAP) in these footnotes are to the FASB Accounting Standards Codification (ASC or the
Codification).
Principles of consolidation: The consolidated financial statements include the accounts of Animal Health
International, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant judgments and estimates include allowance for doubtful accounts, inventory reserve, useful lives of property and equipment and intangible assets, valuation of deferred tax assets, accrual for incurred
but not reported claims, and carrying value of intangible assets and goodwill.
9
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies (Continued) |
Concentrations of risk: Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company typically has cash accounts in excess of Federal Deposit Insurance Corporation insurance coverage. The Company has not experienced any
losses on such accounts, and management believes that the Company’s risk of loss is remote. Trade receivables credit risk is limited due to the large number of customers comprising the Company’s customer base and their dispersion across
geographic areas. The Company routinely assesses the collectability of its customer receivables. The Company grants credit to its customers who are located throughout the United States and Canada.
As of June 30, 2014 and 2013, there were two vendors each that the Company purchased more than 10% of total purchases. While the Company
purchases products from many vendors and there is generally more than one vendor for most animal health product categories, the Company’s concentration of aggregate purchases with key vendors is significant.
Cash and cash equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At certain times the Company might have outstanding checks in excess of the bank balance. The Company reclassifies any individual bank balance that is negative to excess of outstanding checks over bank balances on the
accompanying consolidated balance sheets.
Trade receivables: Trade receivables are carried at original invoice amount less an
estimate made for doubtful accounts. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of
those specific customers. The Company establishes an allowance to reduce the specific receivables to the amount that is reasonably believed to be collectible. The Company also establishes an allowance for all other trade receivables based on
multiple factors including historical experience with bad debts, the general economic environment, the financial condition of the Company’s distribution channels, and the aging of such receivables. Amounts are considered past due based upon
contractual terms. Accounts are written off when they are deemed uncollectible based upon management’s judgment. As of June 30, 2014 and 2013, the Company estimated the allowance for doubtful accounts to be $1,078 and $975, respectively.
The Company charges interest on past due receivables.
Inventories: Inventories consist of purchased merchandise and are valued at
the lower of aggregate cost (average cost method) or market. Inventories consist entirely of finished goods merchandise for resale. The Company records all purchases of inventory on FOB destination terms, which based on the Company’s purchase
agreements represents when the risk of ownership passes to the Company. The Company evaluates inventory for obsolete or slow-moving items and estimates an allowance to account for cost adjustments to market. Based on management’s analysis, the
allowance for obsolete and slow-moving inventory was $917 and $1,469 as of June 30, 2014 and 2013, respectively.
Property and
equipment: Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lesser of the term
of the lease or the estimated useful lives of the assets, as follows:
|
|
|
| Buildings and leasehold improvements |
|
5 - 30 years |
| Furniture and equipment |
|
3 - 7 years |
| Computer hardware and software |
|
2 - 5 years |
| Vehicles |
|
2 - 5 years |
10
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies (Continued) |
Goodwill and other long-lived assets: The Company, in accordance with ASC 350,
Goodwill and Other Intangible Assets (ASC 350), evaluates goodwill and other intangible assets on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible
assets may exceed its fair value. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others; a significant decline in the Company’s expected future cash
flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of the Company’s
goodwill and other intangible assets and could have a material impact on the Company’s consolidated financial statements.
The Company
evaluates long-lived assets for impairment loss whenever events or changes in circumstances have indicated that an asset may be impaired. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows
from such asset is less than its carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. No impairment of long-lived assets was identified as of
June 30, 2014 or 2013. The Company will continue to evaluate long-lived assets and other intangible assets for potential impairment based upon any changes to the Company’s operations or its operating business environment.
Goodwill represents the difference between the purchase price paid and the estimated fair values of the net assets acquired. Goodwill is not
amortized, but is subject to an annual impairment test. The Company has elected to conduct its annual goodwill and indefinite-lived intangible asset impairment test as of June 30 of each fiscal year. Goodwill impairment testing is performed at
the reporting unit level, equivalent to a business unit or one level below. Management has determined that there are nine reporting units.
Pursuant to the guidance in ASC 350, recoverability of goodwill is measured at the reporting unit level and consists of two steps. In the first
step, the reporting unit’s carrying amount, including goodwill, is compared to its fair value, which is measured based upon, among other factors, a discounted cash flow analysis as well as market multiples for comparable companies. If the
carrying amount of the reporting unit is greater than its fair value, goodwill is considered impaired and step two must be performed. Step two measures the impairment loss by comparing the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit (including unrecognized intangibles) as if the reporting unit had
been acquired in a business combination. The excess of fair value over the amounts allocated to the assets and liabilities of the reporting unit is the implied fair value of goodwill. The excess of the carrying amount over the implied fair value of
goodwill is the impairment loss. There were no impairments noted as a result of the Company’s impairment tests performed as of June 30, 2014. During the year ended June 30, 2013, the Company recognized an impairment loss on goodwill
of $11,546 (see Note 3).
Intangible assets: Intangible assets include product distribution rights, trademarks and trade names,
customer lists, developed technology and private brands, as described in Note 3. Intangible assets with finite lives are amortized over their estimated useful lives between ten to fifteen years. Indefinite-lived intangible assets are not amortized
but are reviewed for impairment annually on June 30, with any impairment identified charged to expense at that time. There were no impairments noted as a result of the Company’s impairment tests performed as of June 30, 2014 and 2013.
11
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies (Continued) |
Equity method investments: The Company’s investment in its affiliates is
accounted for using the equity method of accounting as the Company has a 50% or less interest in each of its affiliates and the Company has the ability to exercise significant influence over operating and financial policies of the affiliates. Under
this method, the Company records its share of the income (loss) attributable to its share of the affiliate as an increase (decrease) to the investment, and reduces the investment for any actual distributions received.
The fiscal year of the affiliates end on various dates; however, the Company’s policy is to recognize the previous twelve months of net
income of the affiliates as of June 30 when the Company is able to obtain affiliates’ financial information as of that date; otherwise, the Company recognizes the net income of the affiliates as of the fiscal year end dates for each
affiliate.
Debt issuance costs: Debt issuance costs are capitalized and amortized using the effective interest method over the term
of the related debt. Costs of $653 and $0 during the years ended June 30, 2014 and 2013, respectively, were incurred in connection with the issuance of debt and were capitalized. Debt issuance costs, net of accumulated amortization of $3,018
and $1,990, amounted to $2,610 and $2,985 as of June 30, 2014 and 2013, respectively, and are included on the accompanying consolidated balance sheets within debt issuance costs and other long-term assets. Amortization of debt issuance costs
amounted to $1,028 and $995 for the years ended June 30, 2014 and 2013, respectively, and is included within depreciation and amortization on the consolidated statements of income.
Assets held for sale: The Company has various land and buildings that are being marketed for sale. Assets held for sale are recorded at
the lower of their carrying amount or fair value less costs to sell. As of June 30, 2014 and 2013, the Company has recorded $2,373 and $2,870, respectively, of assets held for sale within other current assets on the accompanying consolidated
balance sheets. Carrying value was determined to approximate fair value less cost to sell. Depreciation on these assets ceased at the time the decision to sell was made.
Revenue recognition: Revenues are recognized when all of the following criteria are met (a) persuasive evidence of an
arrangement exists, (b) delivery has occurred and the title passes according to shipping terms, (c) the seller’s price to the buyer is fixed or determinable, and (d) collectability is reasonably assured. 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.
Revenues are presented net of sales taxes collected from retail customers and remitted to government taxing authorities.
The Company
evaluates its arrangements to sell consigned inventory to determine whether revenue should be reported based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services, or
(b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee. Based on the terms of each consigned inventory sales arrangement, $3,306 and $2,856 of
the Company’s net sales for the years ended June 30, 2014 and 2013, respectively, was recognized on a net basis, while the remainder of consigned inventory revenue was recorded on a gross basis.
Cost of sales: Cost of sales includes the cost of inventories, net of purchase rebates, and inbound freight costs.
Rebates: Inventory rebates from vendors are recognized when estimable and probable and include inventory purchase rebates and
sales-related rebates. Inventory purchase rebates received are netted into inventory while sales-related rebates are recorded as a reduction of cost of sales.
12
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies (Continued) |
Marketing and advertising costs: Advertising costs, net of reimbursements and
cooperative advertising income, are expensed as incurred and amounted to $3,033 and $1,971 for the years ended June 30, 2014 and 2013, respectively.
Freight and shipping: Shipping and handling costs incurred by the Company, including outbound freight costs, are classified on the
consolidated statements of income as freight and shipping within operating expenses. The Company also bills customers for the cost of shipping products and records this within net sales on the consolidated statement of income, which amounted to
$1,635 and $1,959 for the years ended June 30, 2014 and 2013, respectively.
Foreign currency: The functional currency for the
Company’s Canadian operations, Kane, is the Canadian dollar. The assets and liabilities for these operations are translated into U.S. dollars at the exchange rate in effect as of the balance sheet date. Statements of income and cash flow
amounts are translated at average exchange rates prevailing during the year. The cumulative effects of translating the balance sheet accounts from the functional currencies into the U.S. dollar at the applicable exchange rates are included in
accumulated other comprehensive loss. Foreign currency gains and losses are recorded in miscellaneous expense in the consolidated statements of income and historically have not been material.
Restructuring expenses: The Company incurred exit and disposal costs, consisting primarily of one-time termination benefits to employees
and costs to consolidate warehouses, during the years ended June 30, 2014 and 2013 related to the acquisition of Animal Health Holdings, Inc. (Holdings) and its wholly-owned subsidiaries on June 10, 2011. The Company incurred approximately
$325 and $1,300 related to one-time termination benefits during the years ended June 30, 2014 and 2013, respectively. In addition, approximately $1,275 and $1,700 was expensed to consolidate warehouses during the years ended June 30, 2014
and 2013, respectively. Cumulative restructuring costs incurred to date as of June 30, 2014 was approximately $19,628. The Company expects to incur approximately $600 in additional restructuring expenses during the year ended June 30, 2015
as the Company continues the consolidation of warehouses. The actual amount incurred could differ from this estimate. Restructuring expenses are included as a component of operating income in the accompanying consolidated statements of income.
Stock-based compensation: The Company accounts for stock-based compensation under ASC 718, Stock Compensation (ASC 718), which
addresses the accounting for stock-based payment transactions in which an enterprise receives director and employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of
the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The topic requires that stock-based compensation transactions be accounted for using a fair value based model. The Company uses the
Black-Scholes option pricing model to determine the fair value of stock-based awards. The Company has elected to recognize graded vesting compensation expense on a straight-line basis over the vesting term of the option.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
13
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 1. |
Nature of Business and Significant Accounting Policies (Continued) |
The Company applies the accounting standard on accounting for uncertainty in income taxes,
which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position
only if it is more-likely-than-not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties
on income taxes, and accounting in interim periods. See Note 8 for further discussion.
Recent accounting pronouncements: In January
2014, the FASB issued Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02), allowing private companies an accounting alternative for the subsequent accounting for
goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy
election to test goodwill for impairment at either the entity level or the reporting unit level. While the ASU is effective prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual
periods beginning after December 15, 2014, early adoption is permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
In March 2014, the FASB issued ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (ASU
2014-07), allowing private companies an accounting alternative for the application of variable interest entities (VIEs) to a lessor entity if (a) the private company lessee and the lessor entity are under common control, (b) the private
company lessee has a lease arrangement with the lessor entity, (c) substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities, and (d) if the private company lessee
explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company. The accounting alternative is an accounting policy election, that when elected the VIE guidance for a lessor
entity under common control would not be applicable. ASU 2014-07 is effective retrospectively to all periods presented and will be effective for annual periods beginning after December 15, 2014, with early adoption permitted. The Company is
currently evaluating the impact of this guidance on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. The updated standard will be
effective for annual reporting periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
Subsequent events: The Company has evaluated subsequent events through September 30, 2014, the date on which the consolidated
financial statements were available to be issued, and management has determined that there are no such events requiring disclosure, other than those disclosed in Note 12.
14
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 2. |
Property and Equipment |
Property and equipment consist of the following as of June 30, 2014 and
2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Land, buildings and leasehold improvements |
|
$ |
12,800 |
|
|
$ |
12,811 |
|
| Furniture and equipment |
|
|
40,380 |
|
|
|
31,575 |
|
| Computer hardware and software |
|
|
35,235 |
|
|
|
32,490 |
|
| Vehicles |
|
|
4,555 |
|
|
|
5,389 |
|
|
|
|
|
|
|
|
|
|
| Total property and equipment |
|
|
92,970 |
|
|
|
82,265 |
|
| Less accumulated depreciation |
|
|
(61,438 |
) |
|
|
(54,063 |
) |
|
|
|
|
|
|
|
|
|
| Net property and equipment |
|
$ |
31,532 |
|
|
$ |
28,202 |
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment amounted to $10,891 and $10,452 for the years ended June 30, 2014 and 2013,
respectively.
| Note 3. |
Goodwill and Intangible Assets |
In connection with the acquisition of Turnkey Computer Systems, LLC
(Turnkey) on January 1, 2013, the Company allocated $1,279 to goodwill, $1,239 to customer lists, $311 to trademarks and $302 to developed technology. The Company is amortizing the customer lists on a straight-line basis over the benefit period
of 15 years ending June 2028 and the developed technology on a straight-line basis over the benefit period of 12 years ending June 2025. Goodwill is not deductible for tax purposes.
The Company’s goodwill includes $27,658 that is deductible for tax purposes. A rollforward of goodwill as of June 30, 2014 and 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross |
|
|
Accumulated
Impairment Loss |
|
|
Net |
|
|
|
|
|
| Balance, June 30, 2012 |
|
$ |
101,787 |
|
|
$ |
— |
|
|
$ |
101,787 |
|
| Acquisition of Turnkey |
|
|
1,279 |
|
|
|
— |
|
|
|
1,279 |
|
| Foreign currency translation adjustment |
|
|
(142 |
) |
|
|
— |
|
|
|
(142 |
) |
| Impairment loss |
|
|
— |
|
|
|
(11,546 |
) |
|
|
(11,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2013 |
|
|
102,924 |
|
|
|
(11,546 |
) |
|
|
91,378 |
|
| Foreign currency translation adjustment |
|
|
(93 |
) |
|
|
— |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2014 |
|
$ |
102,831 |
|
|
$ |
(11,546 |
) |
|
$ |
91,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2013, the Company recognized an impairment loss on goodwill of $11,546. The impairment
loss relates to two reporting units and was caused by a decrease in expected cash flows. The fair values of the reporting units were determined using the income and market approaches. Fair values under the income approach were derived through the
use of a discounted cash flow method while fair values under the market approach were derived through the use of the mergers and acquisitions method.
15
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 3. |
Goodwill and Intangible Assets (Continued) |
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.
Intangible assets consisted of the following as of June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2014 |
|
|
2013 |
|
| |
|
Estimated
Useful Lives |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
| Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product distribution rights |
|
10 years |
|
$ |
1,182 |
|
|
$ |
(1,182 |
) |
|
$ |
— |
|
|
$ |
1,182 |
|
|
$ |
(1,132 |
) |
|
$ |
50 |
|
| Developed technology |
|
12 years |
|
|
383 |
|
|
|
(41 |
) |
|
|
342 |
|
|
|
383 |
|
|
|
(5 |
) |
|
|
378 |
|
| Trademarks and tradenames |
|
15 years |
|
|
1,500 |
|
|
|
(600 |
) |
|
|
900 |
|
|
|
1,500 |
|
|
|
(500 |
) |
|
|
1,000 |
|
| Customer lists |
|
11-15 years |
|
|
62,470 |
|
|
|
(14,772 |
) |
|
|
47,698 |
|
|
|
62,470 |
|
|
|
(9,658 |
) |
|
|
52,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,535 |
|
|
|
(16,595 |
) |
|
|
48,940 |
|
|
|
65,535 |
|
|
|
(11,295 |
) |
|
|
54,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Trademarks and tradenames |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
56,464 |
|
|
|
|
|
|
|
|
|
|
|
56,464 |
|
| Private brands |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
4,160 |
|
|
|
|
|
|
|
|
|
|
|
4,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,624 |
|
|
|
|
|
|
|
|
|
|
|
60,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total intangible assets |
|
|
|
|
|
|
|
|
|
|
|
$ |
109,564 |
|
|
|
|
|
|
|
|
|
|
$ |
114,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization of the finite-lived intangible assets is as follows for the years ending June 30:
|
|
|
|
|
| 2015 |
|
$ |
5,083 |
|
| 2016 |
|
|
5,083 |
|
| 2017 |
|
|
5,083 |
|
| 2018 |
|
|
5,083 |
|
| 2019 |
|
|
5,083 |
|
| Thereafter |
|
|
23,525 |
|
|
|
|
|
|
|
|
$ |
48,940 |
|
|
|
|
|
|
Amortization expense for the years ended June 30, 2014 and 2013 was $5,131 and $5,082, respectively.
The Company has a revolving credit agreement with a financial institution with an
aggregate principal amount at any time outstanding not to exceed $265 million. On March 28, 2014, the revolving credit agreement was amended to extend the maturity date to March 28, 2019. Under the terms of the revolving credit agreement,
the aggregate principal amount outstanding shall not exceed $250 million for the U.S. revolving loan and $15 million for the Canadian revolving loan. The revolving credit agreement also allows for an additional $21.5 million in swingline loans.
Swingline loans allow the lender to extend credit at any time during the credit term and the aggregate principal amount outstanding at any time under the swingline loans shall not exceed $20 million for U.S. swingline loans and $1.5 million for
Canadian swingline loans. The agreement bears variable interest at 1.50% - 2.00% over the 30-day LIBOR (0.15% and 0.22% as of June 30, 2014 and 2013, respectively) or 0.50% over the US Alternate Borrowing Rate and 1.00% over the CDOR rate, and
is payable on the first day of each January, April, July, and October and at maturity.
16
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 4. |
Line of Credit (Continued) |
Amounts available under the revolving credit agreement are subject to borrowing base calculations for U.S.
and Canadian operations, respectively. The borrowing base is calculated at (a) eighty-five percent (85%) of the book value of Eligible Accounts, as defined in the agreement; plus, to the extent applicable; (b) during each period of
April 1 through and including September 30, the lesser of (i) seventy-five percent (75%) of the value of Eligible Inventory, as defined in the agreement, valued at the lower of cost or market on a first-in, first-out basis, or
(ii) ninety percent (90%) of the value of Eligible Inventory multiplied by the then current Net Orderly Liquidation Value (NOLV) Factor, as defined in the agreement; or (c) during each period of October 1 through and including
the following March 31, the lesser of (i) sixty-five percent (65%) of the value of Eligible Inventory valued at the lower of cost or market on a first-in, first-out basis or (ii) eighty-five percent (85%) of the value of
Eligible Inventory multiplied by the then current NOLV Factor.
The line of credit is collateralized by the Company’s trade receivables. The
outstanding balance under the line of credit amounted to $165,000 and $161,426 as of June 30, 2014 and 2013, respectively, and subject to the borrowing base, the additional maximum borrowing available under the line of credit at June 30,
2014 is $59,564. The agreement provides for certain affirmative and negative covenants relating to the Company’s fixed charge coverage ratio, limitations on additional indebtedness, investments, sales and leasebacks, swap agreements, restricted
payments and transactions with affiliates. The line of credit can be repaid in whole or in part without premium or penalty.
In the event of a Cash
Dominion Liquidity Event, as defined in the revolving credit agreement, all funds deposited into any lockbox or collateral deposit account during the continuance of a Cash Dominion Liquidity Event shall be swept on a daily basis and applied to the
outstanding obligations. Once the Cash Dominion Liquidity Event has been cured or when all the secured obligations have been satisfied, any amounts remaining in the lockbox or collateral deposit account shall be remitted back to the Company.
| Note 5. |
Shareholders’ Equity |
Series A Preferred Stock: In connection with its acquisition of
Holdings, the Company authorized 50,000,000 preferred shares, with no par value, of which the Company designated 30,000,000 shares of 7.00% Series A Redeemable Conditional Convertible Participating Preferred Stock, no par value.
Voting rights: At any time after receipt of Regulatory Approval (as defined in the agreement), or if such Regulatory Approval is not required, the
holders of shares of Series A Preferred Stock shall be entitled to vote with the holders of shares of Common Stock on all matters submitted to a vote of shareholders of the Company. Each holder of shares of Series A Preferred Stock shall be entitled
to the number of votes equal to the largest number of whole shares of Common Stock into which all shares of Series A Preferred Stock held as of record by such holder could then be converted at the record date.
Dividends: No cash dividend may be declared or paid on the Common Stock during a Dividend Period unless a cash dividend is also declared and paid on
the Series A Preferred Stock for such Dividend Period in an amount (the “Common Participation Amount”) equal to (a) the Per Share Amount as of the Record Date for such dividend (the “Dividend Record Date”) multiplied by
(b) the amount per share distributed or to be distributed in respect of the Common Stock in connection with such cash dividend.
17
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 5. |
Shareholders’ Equity (Continued) |
In addition to participation in cash dividends on Common Stock, holders of the Series A Preferred Stock shall
be entitled to receive, on each share of Series A Preferred Stock and with respect to each Dividend Period, an amount (such amount, the “Net Preferred Dividend”) equal to the Dividend Rate (7% per annum) multiplied by the Liquidation
Preference (initially $5.2471) per share of Series A Preferred Stock (the “Preferred Dividend”). If and to the extent that the Company does not pay the entire Net Preferred Dividend for a particular Dividend Period in cash on the
applicable Dividend Payment Date for such period, the amount of such Net Preferred Dividend not paid in cash shall be added to the Liquidation Preference in accordance with the definition thereof. Amounts payable at the Dividend Rate shall begin to
accrue and be cumulative from the Original Issue Date, whether or not the Company has funds legally available for such dividends or such dividends are declared, shall compound on each Dividend Payment Date (i.e., no dividends shall accrue on other
dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable in arrears on the first Dividend Payment Date after such Dividend Period.
Dividends that are payable on the Series A Preferred Stock on any Dividend Payment Date shall be payable to holders of record of the Series A Preferred Stock as they appear on the stock register of the Company on the Record Date for such dividend,
which shall be the date 15 days prior to the applicable Dividend Payment Date.
Liquidation rights: In the event of any liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or involuntary, holders of the Series A Preferred Stock shall be entitled to receive for each share of Series A Preferred Stock, out of the assets of the Company or proceeds thereof
(whether capital or surplus) available for distribution to shareholders of the Company, and after satisfaction of all liabilities and obligations to creditors of the Company, on par with each share of Parity Stock but before any distribution of such
assets or proceeds is made to or set aside for the holders of Junior Stock, an amount equal to the greater of (1) the sum of (a) the Liquidation Preference per share of the Series A Preferred Stock plus (b) an amount per share equal
to accrued but unpaid dividends not previously added to the Liquidation Preference from and including the immediately preceding Dividend Payment Date to but excluding the date fixed for such liquidation, dissolution or winding up of the Company and
(2) the per share amount of all cash securities and other property (such securities or other property having a value equal to its fair market value as reasonably determined by the Board of Directors) to be distributed in respect of the Common
Stock (assuming full exercise and conversion of all the outstanding shares of Series A Preferred Stock into Common Stock) such holder would have been entitled to receive had it converted such Series A Preferred Stock immediately prior to the date
fixed for such liquidation, dissolution or winding up of the Company. To the extent such amount is paid in full to all holders of Series A Preferred Stock and all the holders of Parity Stock, the holders of Junior Stock of the Company shall be
entitled to receive all remaining assets of the Company (or proceeds thereof) according to their respective rights and preferences.
The liquidation
preference for Series A Preferred Stock is $146,439 and $136,622 as of June 30, 2014 and 2013, respectively, which includes cumulative preferred dividends of approximately $27,983 and $18,165, respectively, that have not been declared or
accrued.
Redemption: Upon the occurrence of a “Fundamental Change” (as defined in the agreement) or the seventh anniversary of the
Original Issue Date, each holder of the Series A Preferred Stock shall have the right to require the Company, in each such case, to repurchase all or any part of such holder’s Series A Preferred Stock for cash at a purchase price per share
equal to 100% of the sum of (a) the Liquidation Preference per share of the Series A Preferred Stock plus (b) an amount equal to accrued but unpaid dividends not previously added to the Liquidation Preference per share on such share of
Series A Preferred Stock from and including the immediately preceding Dividend Payment Date to but excluding the date of redemption.
18
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 5. |
Shareholders’ Equity (Continued) |
Conversion: At any time after receipt of Regulatory Approval, to the extent required, each outstanding
share of Series A Preferred Stock may be converted on any date, from time to time, at the option of the holder thereof, into the number of shares of Common Stock (the “Per Share Amount”) equal to the Initial Liquidation Preference divided
by the Conversion Price (initially $5.2471, with subsequent dilution adjustments). Following the seventh anniversary of the Original Issue Date, all outstanding shares of Series A Preferred Stock that were not validly tendered to the Company for
repurchase shall be automatically converted into shares of Common Stock on the redemption date specified in the redemption notice given by the Company.
Stock repurchases: The Company repurchased Series A preferred stock and voting common shares from certain shareholders at various prices ranging from
$3.98 to $5.25 per share during the years ended June 30, 2014 and 2013, respectively. The repurchases are reflected in the accompanying consolidated statement of shareholders’ equity as reductions in additional paid-in capital for the
amount of the original purchase price, with any excess cost over the original purchase price reducing retained earnings.
| Note 6. |
Commitments and Contingencies |
Leases: The Company leases office and warehouse facilities on a
monthly basis from partnerships that are owned by a shareholder of the Company. There are two types of leases – Type A (two leases in total) and Type B (12 leases in total). The Type A and Type B leases contain a Real Property Purchase Option
Agreement between the Company and the partnerships. The Type A leases require the Company to purchase the Type A facilities upon (a) an IPO event or (b) upon the exercise of a put right by the partnership that is exercisable (i) upon
the death of the shareholder, (ii) upon termination of a Type A lease, or (iii) the refusal of the Company to continue the lease of a Type A facility. The Type B leases require the Company to purchase all or any of the Type B facilities
upon the exercise of a put right by the partnership that is exercisable upon the death of the shareholder. As of June 30, 2014, the Company has not terminated or refused to continue any of the Type A leases. Additionally, the partnership has
not exercised the put right related to either Type A or Type B leases.
The total estimated purchase prices of the Type A facilities as of June 30,
2014 is approximately $5,000. Type B facilities would be purchased at fair value on the date of purchase. The leases have a term of 3 years, except for one Type B lease which has a 10 year term, and the leases do not contain an automatic renewal
feature. The put rights held by the partnerships create a variable interest in the partnerships above. The partnerships are VIEs; however, the Company is not the primary beneficiary of the partnerships and therefore the partnerships are not
consolidated in the accompanying consolidated financial statements. In December 2013, the Company entered into a lease for a warehouse facility from the partnerships. The lease has a 10 year term and is not covered by the Real Property Option
Agreement. The Company has determined that it is not the primary beneficiary because the Company does not have the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. The partnerships are financed
solely by the shareholder through equity contributions and mortgage loans.
Rent expense to these entities amounted to $2,215 and $2,241 during the years
ended June 30, 2014 and 2013, respectively. The Company also leases facilities, equipment, and vehicles from non-related entities. Total rent expense to all entities amounted to $11,688 and $11,848 during the years ended June 30, 2014 and
2013, respectively.
19
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 6. |
Commitments and Contingencies (Continued) |
Following is the future minimum rental payments under non-cancelable operating leases:
|
|
|
|
|
| Years Ending June 30, |
|
|
|
|
|
| 2015 |
|
$ |
9,571 |
|
| 2016 |
|
|
5,956 |
|
| 2017 |
|
|
4,484 |
|
| 2018 |
|
|
3,150 |
|
| 2019 |
|
|
2,417 |
|
| Thereater |
|
|
4,357 |
|
|
|
|
|
|
|
|
$ |
29,935 |
|
|
|
|
|
|
Additionally, the Company has accrued $277 and $879 related to abandoned leases as of June 30, 2014 and 2013,
respectively, which is included in accrued expenses and other liabilities on the accompanying consolidated balance sheets.
Letter of credit: The
Company has four unused, irrevocable letters of credit with a financial institution totaling $2,591, in favor of insurance companies in connection with the Company’s insurance coverage and a guarantee of a loan from a bank to an affiliate. The
guarantee period for the loan of an affiliate expires on October 15, 2014, with the maximum liability under the irrevocable letter of credit of $1,250.
The letters of credit expire at various dates through June 30, 2015, and three of the four are automatically extendable for one year from each respective
future expiration date. The financial institution may cancel the letters of credit upon thirty days written notice prior to any expiration date.
Litigation: The Company is party to various claims and legal actions arising in the normal course of business. Although the ultimate outcome of these
matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse affect on the Company’s business, results of operations, financial condition or
cash flows; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company’s results of operations in any period.
| Note 7. |
Stock-Based Compensation |
During the year ended June 30, 2012, the Company adopted the 2011 Stock
Option Plan (the Plan). The Plan provides for the granting of stock options to employees, consultants, and independent directors of the Company and its subsidiaries who perform services for the Company and its subsidiaries. A maximum of 6,000,000
shares of common stock may be awarded under the Plan. Options granted under the Plan may be either incentive or nonqualified stock options. Incentive stock options may only be granted to Company employees; nonqualified stock options may be granted
to Company employees, consultants, and independent directors of the Company.
20
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 7. |
Stock-Based Compensation (Continued) |
The vested portion of the stock options can be exercised during the earliest of the following: (a) with
respect to a non-qualified stock option, the expiration of ten years from the grant date; (b) with respect to an incentive stock option in the case of an optionee owning, at the time the option was granted, 10% or less of the total combined
voting power of all classes of stock of the Company or any Subsidiary, the expiration of ten years from the grant date, or (c) with respect to an incentive stock option in the case of an optionee owning, at the time the option was granted, more
than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary, the expiration of five years from the grant date. Options granted under the Plan are issued with exercise prices determined by the Board of
Directors and vest over a 5-year period beginning on the date of the grant.
Options granted under the Plan contain both time-vesting and
performance-vesting components. Time-vesting criteria states that 20% of shares vest after 2 years, 10% after 3 years, 10% after 4 years and 10% after 5 years. The performance-vesting is based on achievement of annual or cumulative EBITDA targets
over 5 years. Compensation expense related to time-vesting shares is recognized on a straight-line basis over the requisite service period. Compensation expense related to performance-vesting shares is recognized over the requisite service period
only if the performance condition is probable of being met. On April 1, 2014, the Company modified the performance conditions, which resulted in no incremental compensation cost during the year ended June 30, 2014 in accordance with ASC
718. The Company performed this analysis as of June 30, 2014 and determined that all performance conditions are probable of being met. This assessment will be updated at the end of each reporting period and the cumulative effect of any change
in the probability estimate is to be recognized in the period of the change. If the performance conditions are not met and the probability of the cumulative performance conditions is not likely, any previously recognized compensation expense will be
reversed.
As of June 30, 2014, 5,175,000 options were outstanding under the Plan with a weighted average exercise price of $5.37 per share. The
Company has 825,000 options remaining available for grant under the Plan.
The following is a summary of stock option activity under the Plan for the year
ended June 30, 2014:
|
|
|
|
|
|
|
|
|
| |
|
Number of
Options |
|
|
Weighted
Average
Exercise Price |
|
|
|
|
| Options outstanding, June 30, 2013 |
|
|
4,675,000 |
|
|
$ |
5.30 |
|
| Options granted |
|
|
540,000 |
|
|
|
5.94 |
|
| Options exercised |
|
|
— |
|
|
|
|
|
| Options forfeited |
|
|
(40,000 |
) |
|
|
5.25 |
|
|
|
|
|
|
|
|
|
|
| Options outstanding, June 30, 2014 |
|
|
5,175,000 |
|
|
$ |
5.37 |
|
|
|
|
|
|
|
|
|
|
21
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 7. |
Stock-Based Compensation (Continued) |
The fair value of each option grant during the years ended June 30, 2014 and 2013 is estimated on the
date of grant using the Black-Scholes option pricing model (BSOPM) with the following average assumptions:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Fair value of stock option grants |
|
$ |
1.90 |
|
|
$ |
1.99 |
|
| Risk-free interest rate |
|
|
2.04 |
% |
|
|
1.03 |
% |
| Expected term in years |
|
|
6.4 |
|
|
|
6.4 |
|
| Average expected volatility |
|
|
27 |
% |
|
|
29 |
% |
| Expected forfeitures |
|
|
10 |
% |
|
|
10 |
% |
| Expected dividends |
|
|
None |
|
|
|
None |
|
The expected term represents the estimated average period of time that the options will remain outstanding. Since the Company
does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual term. Expected
volatility is based on the average historical volatility of the publicly traded stock of a peer group of companies. The risk-free interest rate is determined by reference to U.S. Treasury yields at or near the time of grant for time periods similar
to the expected term of the award. The Company historically has not paid cash dividends.
Stock-based compensation expense for the years ended
June 30, 2014 and 2013, based on the fair values of the stock option grants, was $1,655 and $1,537, respectively, and has been included within wages, compensation and benefits in the accompanying consolidated statements of income. The total
income tax benefit recognized in the statement of income for stock-based compensation arrangements was $702 and $588 for the years ended June 30, 2014 and 2013, respectively. As of June 30, 2014, stock-based compensation not yet recognized
in income totaled $4,273, which is expected to be recognized over a weighted-average period of 1.84 years.
The following table summarizes information
about stock options outstanding and exercisable at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted-Average |
|
|
|
|
|
|
|
Range of
Exercise Prices |
|
|
Number
Outstanding |
|
|
Remaining
Contractual
Life (Years) |
|
Weighted-
Average
Exercise Price |
|
|
Number
Outstanding |
|
|
Weighted-
Average
Exercise Price |
|
|
|
|
|
|
|
| $ |
5.25 |
|
|
|
4,445,000 |
|
|
7.3 |
|
$ |
5.25 |
|
|
|
1,419,400 |
|
|
$ |
5.25 |
|
| $ |
6.37 |
|
|
|
190,000 |
|
|
8.5 |
|
$ |
6.37 |
|
|
|
22,800 |
|
|
$ |
6.37 |
|
| $ |
5.94 |
|
|
|
540,000 |
|
|
9.5 |
|
$ |
5.94 |
|
|
|
— |
|
|
$ |
— |
|
22
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
The sources of income before income taxes are as follows for the years ended June 30,
2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Current |
|
$ |
8,981 |
|
|
$ |
5,377 |
|
| Deferred |
|
|
385 |
|
|
|
(1,039 |
) |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
$ |
6,337 |
|
|
$ |
2,366 |
|
| State |
|
|
1,528 |
|
|
|
469 |
|
| Foreign |
|
|
1,501 |
|
|
|
1,503 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the years ended June 30, 2014 and 2013 consists of the following:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| United States |
|
$ |
18,590 |
|
|
$ |
2,696 |
|
| International |
|
|
5,758 |
|
|
|
6,030 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
24,348 |
|
|
$ |
8,726 |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount computed by applying the applicable statutory rates primarily due to
the following:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Expected tax expense at statutory rates |
|
$ |
8,522 |
|
|
$ |
2,967 |
|
| State taxes, net of federal benefit |
|
|
993 |
|
|
|
310 |
|
| Permanent differences |
|
|
228 |
|
|
|
226 |
|
| Foreign rate differential |
|
|
(547 |
) |
|
|
(502 |
) |
| Change in deferred tax rate |
|
|
1,710 |
|
|
|
— |
|
| Impairment of goodwill |
|
|
— |
|
|
|
1,311 |
|
| Transaction costs |
|
|
(1,603 |
) |
|
|
— |
|
| Other |
|
|
63 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
23
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 8. |
Income Taxes (Continued) |
The tax effects of significant temporary differences which give rise to the Company’s deferred tax
assets and liabilities are as follows as of June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Deferred tax assets: |
|
|
|
|
|
|
|
|
| Trade receivables |
|
$ |
355 |
|
|
$ |
345 |
|
| Accrued expenses |
|
|
1,132 |
|
|
|
700 |
|
| Inventories |
|
|
1,254 |
|
|
|
1,293 |
|
| Stock-based compensation |
|
|
1,680 |
|
|
|
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,421 |
|
|
|
3,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Prepaid expenses |
|
|
(1,027 |
) |
|
|
(731 |
) |
| Property and equipment |
|
|
(3,208 |
) |
|
|
(3,270 |
) |
| Intangible assets |
|
|
(45,884 |
) |
|
|
(44,753 |
) |
| Equity method investments |
|
|
(911 |
) |
|
|
(786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(51,030 |
) |
|
|
(49,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total net deferred tax liabilities |
|
$ |
(46,609 |
) |
|
$ |
(46,224 |
) |
|
|
|
|
|
|
|
|
|
The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets as of
June 30, 2014 and 2013, as follows:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Current assets |
|
$ |
1,715 |
|
|
$ |
1,600 |
|
| Long-term liabilities |
|
|
(48,324 |
) |
|
|
(47,824 |
) |
|
|
|
|
|
|
|
|
|
| Total net deferred tax liabilities |
|
$ |
(46,609 |
) |
|
$ |
(46,224 |
) |
|
|
|
|
|
|
|
|
|
The liability for gross unrecognized tax benefits at June 30, 2014 was zero. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in interest expense in the consolidated statements of income. As of June 30, 2014 and 2013, no interest or penalties have been accrued. Based on information currently available, the Company
does not anticipate any material change in the uncertain tax liability within the next twelve months.
Tax returns filed in previous years are subject to
audit by various federal, state and international taxing authorities, and as a result of such audits, additional tax assessments may be proposed. As of June 30, 2014, in general, tax years after June 30, 2010 remain subject to audit.
The Company has not provided U.S. deferred taxes on cumulative earnings on non-U.S. affiliates that the Company considers to be reinvested indefinitely. It is
not practicable to estimate the amount of U.S. income taxes that would be incurred in the event that the Company were to repatriate the cumulative earnings of non-U.S. affiliates. Deferred taxes will be provided for non-U.S. affiliates when the
Company determines that such earnings are no longer indefinitely reinvested.
24
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 9. |
Related Party Transactions |
The Company leases office and warehouse facilities from a shareholder, see
“Leases” in Note 6.
During the years ended June 30, 2014 and 2013, in the normal course of business, the Company purchased $27,994 and
$21,114, respectively, of inventories from affiliates included in cost of sales in the accompanying statements of income, and incurred other expenses of $292 and $410, respectively, from affiliates. As of June 30, 2014 and 2013, the Company has
$22 and $61, respectively, in amounts due from affiliates included in other receivables on the accompanying consolidated balance sheets and $734 and $905, respectively, in amounts due to affiliates included in trade accounts payable on the
accompanying consolidated balance sheets.
| Note 10. |
Financial Instruments |
As of June 30, 2014 and 2013, financial instruments include cash and cash
equivalents, receivables, accounts payable and the line of credit, and the carrying amounts approximate fair value due to the short maturities of these instruments and the variable interest rate on the line of credit.
| Note 11. |
Employee Benefit Plans |
Retirement plans: The Company and its subsidiaries have a defined
contribution 401(k) plan (the 401(k) Plan) that covers all employees with one year of service who elect to enter the 401(k) Plan. Employees may elect to contribute no less than 1% and up to a maximum of fifteen percent of their compensation. The
Company contributes an amount equal to fifty percent of each employee’s contribution up to a maximum of two percent of the employee’s compensation. The Company’s contributions amounted to $1,010 and $998 for the years ended
June 30, 2014 and 2013, respectively.
Captive insurance plan. The Company participates in the Affinity Insurance Ltd. (Affinity) captive to
provide insurance coverage on workers’ compensation, automobile, and general liability claims. Premiums paid to Affinity for the years ended June 30, 2014 and 2013 were $1,353 and $1,213, respectively. As of June 30, 2014 and 2013,
the Company has $1,694 and $1,046, respectively, included as prepaid insurance claims within other current assets in the accompanying consolidated balance sheets and $1,126 and $318, respectively, included as claims incurred but not reported within
accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Health & welfare plan. The Company had created a
health & welfare (H&W) plan for employees whereby the Company and employees contribute funds to a Trust and any H&W claims (medical, dental, vision) by the employees, and their eligible dependents are paid out from that Trust. As of
June 30, 2013, the Company had $1,635, of net assets in the Trust which is not consolidated in the accompanying consolidated financial statements. The Trust was terminated effective December 31, 2013.
Beginning January 2014, the Company provides a self-insured medical plan to all employees, with a stop loss per individual of $150,000. The Company estimates
an accrual for incurred but not reported claims based on historical claims amounts and average lag time. As of June 30, 2014, the Company recorded $1,000 for incurred but not reported claims, which is included in accrued expenses and other
liabilities on the accompanying consolidated balance sheets.
Short-term disability plan. The Company had created a short-term disability plan for
non-exempt employees whereby the Company and employees contribute funds to a Trust and any short-term disability claims by the non-exempt employees, their eligible dependents and beneficiaries are paid out from that Trust. As of June 30, 2013,
the Company had $36, of net assets in the Trust which is not consolidated in the accompanying consolidated financial statements. The Trust was terminated effective December 31, 2013, at which time the Company obtained a full coverage short-term
disability plan.
25
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 12. |
Equity Method Investments |
As of June 30, 2014 and 2013, the Company included $17,731 and $16,253,
respectively, in equity method investments in the accompanying consolidated balance sheets related to the following investments the Company holds with various entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
2013 |
| Investee |
|
Percentage
of
Ownership |
|
|
Financial
Information
As of |
|
Percentage
of
Ownership |
|
|
Financial
Information
As of |
|
|
|
|
|
| Company A |
|
|
40 |
% |
|
June 30 |
|
|
40 |
% |
|
June 30 |
| Company B |
|
|
45 |
% |
|
June 30 |
|
|
45 |
% |
|
June 30 |
| Company C |
|
|
50 |
% |
|
June 30 |
|
|
50 |
% |
|
June 30 |
| Company D |
|
|
50 |
% |
|
June 30 |
|
|
50 |
% |
|
June 30 |
| Company E |
|
|
5 |
% |
|
December 31 |
|
|
5 |
% |
|
December 31 |
| Company F |
|
|
25 |
% |
|
April 30 |
|
|
|
* |
|
* |
| Company G |
|
|
33 |
% |
|
June 30 |
|
|
33 |
% |
|
June 30 |
| Company H |
|
|
25 |
% |
|
May 31 |
|
|
25 |
% |
|
May 31 |
| Company I |
|
|
18 |
% |
|
June 30 |
|
|
|
** |
|
** |
| * |
Investment purchased on April 14, 2014. |
| ** |
Investment purchased on June 5, 2014. |
On March 14, 2014, the Company made the decision to sell the
investment in Company D. At June 30, 2014, the investment in Company D was being marketed for sale and is being classified as a current asset held for sale on the accompanying consolidated balance sheet. As of June 30, 2014, the Company
has recorded $3,000 as an impairment to the carrying value of the equity method investment included in income from equity method investments on the accompanying consolidated statements of income. The impairment to the carrying value in the
investment in Company D was recorded based on the Company’s estimated selling price of the investment less the estimated costs to sell the investment. The Company expects to complete a sale of the investment during the year ended June 30,
2015.
Subsequent to June 30, 2014, the Company entered into an agreement to purchase an additional 24% ownership interest in Company H for $4,128.
The carrying value of the Company’s investments exceeded its share of the underlying equity in the net assets of the investees by $5,029 as of
June 30, 2014. The excess has been deemed related to goodwill of the investees and is not being amortized nor has the excess been impaired as of June 30, 2014.
26
Animal Health International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in
thousands, except for share amounts)
| Note 12. |
Equity Method Investments (Continued) |
The combined financial results of the Company’s equity method investments as of and for the twelve
months ended as noted above are summarized as follows:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Assets |
|
$ |
83,534 |
|
|
$ |
64,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
37,830 |
|
|
|
34,706 |
|
| Equity |
|
|
45,704 |
|
|
|
30,110 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and equity |
|
$ |
83,534 |
|
|
$ |
64,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
186,024 |
|
|
$ |
169,544 |
|
| Cost of sales |
|
|
150,351 |
|
|
|
135,830 |
|
| Operating expenses |
|
|
31,035 |
|
|
|
31,078 |
|
| Other income (expense) |
|
|
4,470 |
|
|
|
(965 |
) |
| Provision (benefit) for income taxes |
|
|
1,154 |
|
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
7,954 |
|
|
$ |
1,777 |
|
|
|
|
|
|
|
|
|
|
27
Exhibit 99.2
Animal Health International,
Inc. and Subsidiaries
Unaudited Consolidated Financial Report
March 31,
2015
Animal Health International, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(dollars in
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
June 30, |
|
| |
|
2015 |
|
|
2014 |
|
| Assets |
|
(Unaudited) |
|
|
(Audited) |
|
| Current Assets |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
10,088 |
|
|
$ |
17,639 |
|
| Trade receivables, net |
|
|
161,376 |
|
|
|
132,662 |
|
| Other receivables |
|
|
18,650 |
|
|
|
13,556 |
|
| Inventories, net |
|
|
247,180 |
|
|
|
189,786 |
|
| Income taxes receivable |
|
|
196 |
|
|
|
1,350 |
|
| Deferred tax assets |
|
|
2,516 |
|
|
|
1,715 |
|
| Equity method investment, held for sale |
|
|
3,919 |
|
|
|
4,169 |
|
| Other current assets |
|
|
5,733 |
|
|
|
6,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
449,658 |
|
|
|
367,134 |
|
|
|
|
| Property and Equipment, net |
|
|
32,367 |
|
|
|
31,532 |
|
|
|
|
| Intangible Assets, net |
|
|
104,113 |
|
|
|
109,564 |
|
|
|
|
| Goodwill |
|
|
90,286 |
|
|
|
91,285 |
|
|
|
|
| Equity Method Investments |
|
|
15,202 |
|
|
|
13,562 |
|
|
|
|
| Debt Issuance Costs, net, and Other Long-Term Assets |
|
|
2,246 |
|
|
|
3,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
693,872 |
|
|
$ |
616,476 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
2
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
June 30, |
|
| |
|
2015 |
|
|
2014 |
|
| Liabilities and Shareholders’ Equity |
|
(Unaudited) |
|
|
(Audited) |
|
| Current Liabilities |
|
|
|
|
|
|
|
|
| Line of credit |
|
$ |
178,500 |
|
|
$ |
165,000 |
|
| Trade accounts payable |
|
|
160,352 |
|
|
|
118,318 |
|
| Excess of outstanding checks over bank balances |
|
|
16,574 |
|
|
|
15,329 |
|
| Accrued expenses and other liabilities |
|
|
16,443 |
|
|
|
14,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
371,869 |
|
|
|
312,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred Tax Liabilities |
|
|
47,152 |
|
|
|
48,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commitments and Contingencies (Note 6) |
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ Equity |
|
|
|
|
|
|
|
|
| Convertible preferred stock, no par value; 50,000,000 shares authorized; 22,575,754 Series A shares issued and outstanding; total
liquidation preference of outstanding stock 2015: $154,263; 2014: $146,439 |
|
|
— |
|
|
|
— |
|
| Common stock, voting, no par value; 88,000,000 shares authorized; 32,344,498 shares issued and outstanding |
|
|
— |
|
|
|
— |
|
| Common stock, non-voting, no par value; 12,000,000 shares authorized; 2015: 3,585,814 shares; 2014: 3,689,030 issued and
outstanding |
|
|
— |
|
|
|
— |
|
| Additional paid-in capital |
|
|
129,417 |
|
|
|
128,532 |
|
| Retained earnings |
|
|
152,540 |
|
|
|
128,283 |
|
| Accumulated other comprehensive loss |
|
|
(7,106 |
) |
|
|
(1,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
274,851 |
|
|
|
255,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
693,872 |
|
|
$ |
616,476 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
3
Animal Health International, Inc. and Subsidiaries
Unaudited Consolidated Statements of Income
Nine
Months Ended March 31, 2015 and 2014
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended March 31, |
|
| |
|
2015 |
|
|
2014 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| Net sales |
|
$ |
1,169,283 |
|
|
$ |
1,032,923 |
|
|
|
|
| Cost of sales |
|
|
980,180 |
|
|
|
870,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
189,103 |
|
|
|
162,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
| Wages, compensation and benefits |
|
|
80,753 |
|
|
|
74,602 |
|
| General and administrative |
|
|
18,152 |
|
|
|
20,722 |
|
| Occupancy, equipment and communications |
|
|
12,081 |
|
|
|
12,332 |
|
| Marketing and advertising |
|
|
1,781 |
|
|
|
1,755 |
|
| Freight and shipping |
|
|
17,043 |
|
|
|
14,493 |
|
| Supplies |
|
|
4,144 |
|
|
|
3,880 |
|
| Bad debt expense |
|
|
813 |
|
|
|
773 |
|
| Restructuring expenses |
|
|
480 |
|
|
|
491 |
|
| Depreciation and amortization |
|
|
12,984 |
|
|
|
12,603 |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
148,231 |
|
|
|
141,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
40,872 |
|
|
|
20,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income (expense): |
|
|
|
|
|
|
|
|
| Interest expense, net |
|
|
(3,028 |
) |
|
|
(4,111 |
) |
| Income from equity method investments |
|
|
1,363 |
|
|
|
861 |
|
| Miscellaneous expense |
|
|
(1,604 |
) |
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
| Total other expense |
|
|
(3,269 |
) |
|
|
(3,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Income before taxes |
|
|
37,603 |
|
|
|
17,082 |
|
|
|
|
| Provision for income taxes |
|
|
13,284 |
|
|
|
6,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
24,319 |
|
|
$ |
10,612 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
4
Animal Health International, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended March 31, |
|
| |
|
2015 |
|
|
2014 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| Net income |
|
$ |
24,319 |
|
|
$ |
10,612 |
|
|
|
|
| Other comprehensive loss, foreign currency translation adjustment |
|
|
(5,583 |
) |
|
|
(1,566 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total comprehensive income |
|
$ |
18,736 |
|
|
$ |
9,046 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
5
Animal Health International, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
Nine
Months Ended March 31, 2015 and 2014
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended March 31, |
|
| |
|
2015 |
|
|
2014 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
| Net income |
|
$ |
24,319 |
|
|
$ |
10,612 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| Depreciation of property and equipment |
|
|
8,339 |
|
|
|
8,043 |
|
| Amortization of intangible assets |
|
|
3,812 |
|
|
|
3,816 |
|
| Amortization of debt issuance costs |
|
|
844 |
|
|
|
746 |
|
| Bad debt expense |
|
|
813 |
|
|
|
773 |
|
| Stock-based compensation |
|
|
1,290 |
|
|
|
1,249 |
|
| Deferred taxes |
|
|
(1,538 |
) |
|
|
56 |
|
| Gain on disposition of property and equipment |
|
|
(146 |
) |
|
|
(182 |
) |
| Income from equity method investments |
|
|
(1,363 |
) |
|
|
(861 |
) |
| Net changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
| Trade and other receivables, net |
|
|
(36,130 |
) |
|
|
(33,501 |
) |
| Inventories, net |
|
|
(59,908 |
) |
|
|
(27,944 |
) |
| Income taxes receivable |
|
|
1,154 |
|
|
|
(307 |
) |
| Other current assets |
|
|
475 |
|
|
|
(391 |
) |
| Other long-term assets |
|
|
309 |
|
|
|
113 |
|
| Trade accounts payable |
|
|
42,924 |
|
|
|
11,454 |
|
| Accrued expenses and other liabilities |
|
|
2,328 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
|
(12,478 |
) |
|
|
(26,181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
| Proceeds from sale of property and equipment |
|
|
732 |
|
|
|
749 |
|
| Purchase of property and equipment |
|
|
(9,870 |
) |
|
|
(11,225 |
) |
| Repayment of related party notes receivable |
|
|
— |
|
|
|
31 |
|
| Purchase of equity method investments |
|
|
(794 |
) |
|
|
(448 |
) |
| Distributions from equity method investments |
|
|
767 |
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(9,165 |
) |
|
|
(10,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
| Net borrowings, line of credit |
|
|
13,500 |
|
|
|
36,292 |
|
| Excess of outstanding checks over bank balances |
|
|
1,245 |
|
|
|
992 |
|
| Repurchase of common stock |
|
|
(466 |
) |
|
|
(19 |
) |
| Payments of debt issuance costs |
|
|
— |
|
|
|
(653 |
) |
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
|
14,279 |
|
|
|
36,612 |
|
|
|
|
|
|
|
|
|
|
(Continued)
6
Animal Health International, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows (Continued)
Nine Months Ended March 31, 2015 and 2014
(dollars in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended March 31, |
|
| |
|
2015 |
|
|
2014 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
| Effect of exchange rate changes in cash and cash equivalents |
|
$ |
(187 |
) |
|
$ |
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Decrease in cash and cash equivalents |
|
|
(7,551 |
) |
|
|
(178 |
) |
|
|
|
| Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
| Beginning of period |
|
|
17,639 |
|
|
|
10,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| End of period |
|
$ |
10,088 |
|
|
$ |
10,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Supplemental Information |
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
2,857 |
|
|
$ |
4,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes |
|
$ |
12,897 |
|
|
$ |
6,142 |
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements.
7
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The notes to the financial statements included
here are extracted from the audited financial statements of Animal Health International, Inc. for the fiscal year ended June 30, 2014. These notes have been updated for the unaudited consolidated statements of income for the nine month periods
ended March 31, 2015 and 2014 and unaudited consolidated balance sheet as of March 31, 2015.
| Note 1. |
Nature of Business and Significant Accounting Policies |
Nature of business: Animal Health
International, Inc. and its wholly-owned subsidiaries (collectively, the Company) is involved in the distribution and sale of animal health products to the agricultural and veterinary industries throughout the United States and Canada. The
Company’s corporate offices are located in Greeley, Colorado.
Animal Health International, Inc.’s wholly-owned subsidiaries consist of the
following companies:
Kane Veterinary Supplies, Ltd. (Kane), which distributes animal health products throughout Canada.
Hawaii Mega-Cor, Inc., which distributes animal health products in Hawaii and in certain Pacific Rim markets.
Aspen Veterinary Resources, Ltd. (Aspen) distributes animal health products under the Aspen private label name and other trademarks throughout
the United States.
Advanced Veterinary Services, LLC and Indiana Animal Health, LLC provide veterinary services and sell related animal
health products, primarily to swine producers in Indiana.
AVS West, Inc. provides veterinary services and sells related animal health
products, primarily in the Western United States.
IAH Properties, LLC owns real estate in Wolcott, Indiana on which the operations of
Advanced Veterinary Services, LLC and Indiana Animal Health, LLC are located.
Turnkey Computer Systems, LLC, which provides information
technology, feedyard technology systems and accounting software for livestock producers.
Acquisition by Patterson Companies, Inc.: On
June 16, 2015, Patterson Companies, Inc. (“Patterson”) completed its previously announced acquisition of the Company, pursuant to the terms of an Agreement and Plan of Merger dated as of May 2, 2015 (the “Merger
Agreement”) by and among Patterson, Rams Merger Sub, Inc., a Colorado corporation and a wholly-owned subsidiary of Patterson (“Merger Sub”), Animal Health International, Inc. and Leonard Green & Partners, L.P., a Delaware
limited partnership (solely in its capacity as representative of Animal Health equity holders).
The acquisition was accomplished by the merger of Merger
Sub with and into the Company, and upon consummation of the merger, Merger Sub ceased to exist and the Company became a wholly-owned subsidiary of Patterson. Under the Merger Agreement, each share of the Company’s no par value Series A
Preferred Stock issued and outstanding was canceled and converted automatically into one share of the Company’s no par value common stock; each share of the Company’s no par value common stock was canceled and converted automatically into
the right to receive the common pro rata percentage of the aggregate merger consideration, which was approximately $1.1 billion in cash (the “Merger Consideration”). A portion of the Merger Consideration is being held in escrow to secure
the indemnification obligations of the Company’s equity holders.
8
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
A summary of significant accounting policies follows:
Basis of presentation: The Company follows accounting standards established by the Financial Accounting Standards Board (FASB) to ensure
consistent reporting of financial condition, results of operation, and cash flows. References to Generally Accepted Accounting Principles (GAAP) in these footnotes are to the FASB Accounting Standards Codification (ASC or the Codification). In the
opinion of management, all adjustments which are necessary for a fair presentation of the results for interim periods have been included.
Principles of consolidation: The consolidated financial statements include the accounts of Animal Health International, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of
estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant judgments and estimates include allowance for doubtful accounts,
Inventory reserve, useful lives of property and equipment and intangible assets, valuation of deferred tax assets, accrual for incurred but not reported claims, and carrying value of intangible assets and goodwill.
Concentrations of risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and
cash equivalents and trade accounts receivable. The Company typically has cash accounts in excess of Federal Deposit Insurance Corporation insurance coverage. The Company has not experienced any losses on such accounts, and management believes that
the Company’s risk of loss is remote. Trade receivables credit risk is limited due to the large number of customers comprising the Company’s customer base and their dispersion across geographic areas. The Company routinely assesses the
collectability of its customer receivables. The Company grants credit to its customers who are located throughout the United States and Canada.
As of June 30, 2014 and 2013, there were two vendors each that the Company purchased more than 10% of total purchases. While the Company
purchases products from many vendors and there is generally more than one vendor for most animal health product categories, the Company’s concentration of aggregate purchases with key vendors is significant.
Updated for March 31, 2015 (unaudited):
As of March 31, 2015, there were two vendors each that the Company purchased more than 10% of total purchases. While the Company purchases
products from many vendors and there is generally more than one vendor for most animal health product categories, the Company’s concentration of aggregate purchases with key vendors is significant.
Cash and cash equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. At certain times the Company might have outstanding checks in excess of the bank balance. The Company reclassifies any individual bank balance that is negative to excess of outstanding checks over bank balances on the
accompanying consolidated balance sheets.
Trade receivables: Trade receivables are carried at original invoice amount less an
estimate made for doubtful accounts. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of
those specific customers. The Company establishes an allowance to reduce the
9
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
specific receivables to the amount that is reasonably believed to be collectible. The Company also establishes an allowance for all other trade receivables based on multiple factors including
historical experience with bad debts, the general economic environment, the financial condition of the Company’s distribution channels, and the aging of such receivables. Amounts are considered past due based upon contractual terms. Accounts
are written off when they are deemed uncollectible based upon management’s judgment. As of June 30, 2014 and 2013, the Company estimated the allowance for doubtful accounts to be $1,078 and $975, respectively. The Company charges interest
on past due receivables.
Updated for March 31, 2015 (unaudited):
As of March 31, 2015, the Company estimated the allowance for doubtful accounts to be $1,741.
Inventories: Inventories consist of purchased merchandise and are valued at the lower of aggregate cost (average cost method) or market.
Inventories consist entirely of finished goods merchandise for resale. The Company records all purchases of inventory on FOB destination terms, which based on the Company’s purchase agreements represents when the risk of ownership passes to the
Company. The Company evaluates inventory for obsolete or slow-moving items and estimates an allowance to account for cost adjustments to market. Based on management’s analysis, the allowance for obsolete and slow-moving inventory was $917 and
$1,469 as of June 30, 2014 and 2013, respectively.
Updated for March 31, 2015 (unaudited):
Based on management’s analysis, the allowance for obsolete and slow moving inventory was $1,421 as of March 31, 2015.
Property and equipment: Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lesser of the term of the lease or the estimated useful lives of the assets, as follows:
|
|
|
| Buildings and leasehold improvements |
|
5 - 30 years |
| Furniture and equipment |
|
3 - 7 years |
| Computer hardware and software |
|
2 - 5 years |
| Vehicles |
|
2 - 5 years |
Goodwill and other long-lived assets: The Company, in accordance with ASC 350, Goodwill and Other
Intangible Assets (ASC 350), evaluates goodwill and other intangible assets on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible assets may exceed its
fair value. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others; a significant decline in the Company’s expected future cash flows; a significant
adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of the Company’s goodwill and other
intangible assets and could have a material impact on the Company’s consolidated financial statements.
The Company evaluates
long-lived assets for impairment loss whenever events or changes in circumstances have indicated that an asset may be impaired. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flows from such
asset is less than its carrying value. In that event, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. No impairment of long-lived assets was identified as of June 30,
2014 or 2013. The Company will continue to evaluate long-lived assets and other intangible assets for potential impairment based upon any changes to the Company’s operations or its operating business environment.
10
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Goodwill represents the difference between the purchase price paid and the estimated fair
values of the net assets acquired. Goodwill is not amortized, but is subject to an annual impairment test. The Company has elected to conduct its annual goodwill and indefinite-lived intangible asset impairment test as of June 30 of each fiscal
year. Goodwill impairment testing is performed at the reporting unit level, equivalent to a business unit or one level below. Management has determined that there are nine reporting units.
Pursuant to the guidance in ASC 350, recoverability of goodwill is measured at the reporting unit level and consists of two steps. In the first
step, the reporting unit’s carrying amount, including goodwill, is compared to its fair value, which is measured based upon, among other factors, a discounted cash flow analysis as well as market multiples for comparable companies. If the
carrying amount of the reporting unit is greater than its fair value, goodwill is considered impaired and step two must be performed. Step two measures the impairment loss by comparing the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit (including unrecognized intangibles) as if the reporting unit had
been acquired in a business combination. The excess of fair value over the amounts allocated to the assets and liabilities of the reporting unit is the implied fair value of goodwill. The excess of the carrying amount over the implied fair value of
goodwill is the impairment loss. There were no impairments noted as a result of the Company’s impairment tests performed as of June 30, 2014. During the year ended June 30, 2013, the Company recognized an impairment loss on goodwill
of $11,546 (see Note 3).
Updated for March 31, 2015 and 2014 (unaudited):
During the nine month periods ended March 31, 2015 and 2014 the Company had no impairment loss.
Intangible assets: Intangible assets include product distribution rights, trademarks and trade names, customer lists, developed
technology and private brands, as described in Note 3. Intangible assets with finite lives are amortized over their estimated useful lives between ten to fifteen years. Indefinite-lived intangible assets are not amortized but are reviewed for
impairment annually on June 30, with any impairment identified charged to expense at that time. There were no impairments noted as a result of the Company’s impairment tests performed as of June 30, 2014 and 2013.
Updated for March 31, 2015 and 2014 (unaudited):
There were no impairments noted as of March 31, 2015 or 2014.
Equity method investments: The Company’s investment in its affiliates is accounted for using the equity method of accounting as the
Company has a 50% or less interest in each of its affiliates and the Company has the ability to exercise significant influence over operating and financial policies of the affiliates. Under this method, the Company records its share of the income
(loss) attributable to its share of the affiliate as an increase (decrease) to the investment, and reduces the investment for any actual distributions received.
The fiscal year of the affiliates end on various dates; however, the Company’s policy is to recognize the previous twelve months of net
income of the affiliates as of June 30 when the Company is able to obtain affiliates’ financial information as of that date; otherwise, the Company recognizes the net income of the affiliates as of the fiscal year end dates for each
affiliate.
Debt issuance costs: Debt issuance costs are capitalized and amortized using the effective interest method over the term
of the related debt. Costs of $653 and $0 during the years ended June 30, 2014 and 2013, respectively, were incurred in connection with the issuance of debt and were capitalized.
11
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Debt issuance costs, net of accumulated amortization of $3,018 and $1,990, amounted to $2,610 and $2,985 as of June 30, 2014 and 2013, respectively, and are included on the accompanying
consolidated balance sheets within debt issuance costs and other long-term assets. Amortization of debt issuance costs amounted to $1,028 and $995 for the years ended June 30, 2014 and 2013, respectively, and is included within depreciation and
amortization on the consolidated statements of income.
Updated for March 31, 2015 and 2014 (unaudited):
Costs of $0 and $653 during the nine month periods ended March 31, 2015 and 2014, respectively, were incurred in connection with the
issuance of debt and were capitalized.
Debt issuance costs, net of accumulated amortization, amounted to $1,766 as of March 31, 2015
and are included on the accompanying unaudited consolidated balance sheets within debt issuance costs and other long-term assets.
Amortization of debt issuance costs amounted to $844 and $746 for the nine month periods ended March 31, 2015 and 2014, respectively, and
is included within depreciation and amortization on the unaudited consolidated statements of income.
Assets held for sale: The
Company has various land and buildings that are being marketed for sale. Assets held for sale are recorded at the lower of their carrying amount or fair value less costs to sell. As of June 30, 2014 and 2013, the Company has recorded $2,373 and
$2,870, respectively, of assets held for sale within other current assets on the accompanying consolidated balance sheets. Carrying value was determined to approximate fair value less cost to sell. Depreciation on these assets ceased at the time the
decision to sell was made.
Updated for March 31, 2015 (unaudited):
As of March 31, 2015, the Company has recorded $76 of assets held for sale within other current assets on the accompanying unaudited
consolidated balance sheets. Carrying value was determined to approximate fair value less cost to sell. Depreciation on these assets ceased at the time the decision to sell was made.
Revenue recognition: Revenues are recognized when all of the following criteria are met (a) persuasive evidence of an
arrangement exists, (b) delivery has occurred and the title passes according to shipping terms, (c) the seller’s price to the buyer is fixed or determinable, and (d) collectability is reasonably assured. 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.
Revenues are presented net of sales taxes collected from retail customers and remitted to government taxing authorities.
The Company
evaluates its arrangements to sell consigned inventory to determine whether revenue should be reported based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services, or
(b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee. Based on the terms of each consigned inventory sales arrangement, $3,306 and $2,856 of
the Company’s net sales for the years ended June 30, 2014 and 2013, respectively, was recognized on a net basis, while the remainder of consigned inventory revenue was recorded on a gross basis.
Updated for March 31, 2015 and 2014 (unaudited):
Based on the terms of each consigned inventory sales arrangement, $2,909 and $2,987 of the Company’s net sales for the nine month periods
ended March 31, 2015 and 2014, respectively, was recognized on a net basis, while the remainder of consigned inventory revenue was recorded on a gross basis.
12
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Cost of sales: Cost of sales includes the cost of inventories, net of purchase
rebates, and inbound freight costs.
Rebates: Inventory rebates from vendors are recognized when estimable and probable and include
inventory purchase rebates and sales-related rebates. Inventory purchase rebates received are netted into inventory while sales-related rebates are recorded as a reduction of cost of sales.
Marketing and advertising costs: Advertising costs, net of reimbursements and cooperative advertising income, are expensed as incurred
and amounted to $3,033 and $1,971 for the years ended June 30, 2014 and 2013, respectively.
Updated for March 31, 2015
and 2014 (unaudited):
Advertising costs, net of reimbursements and cooperative advertising income, are expensed as incurred and
amounted to $1,781 and $1,755 for the nine month periods ended March 31, 2015 and 2014, respectively.
Freight and shipping:
Shipping and handling costs incurred by the Company, including outbound freight costs, are classified on the consolidated statements of income as freight and shipping within operating expenses. The Company also bills customers for the cost of
shipping products and records this within net sales on the consolidated statement of income, which amounted to $1,635 and $1,959 for the years ended June 30, 2014 and 2013, respectively.
Updated for March 31, 2015 and 2014 (unaudited):
The Company also bills customers for the cost of shipping products and records this within net sales on the unaudited consolidated statements
of income, which amounted to $1,187 and $1,214 for the nine month periods ended March 31, 2015 and 2014, respectively.
Foreign
currency: The functional currency for the Company’s Canadian operations, Kane, is the Canadian dollar. The assets and liabilities for these operations are translated into U.S. dollars at the exchange rate in effect as of the balance sheet
date. Statements of income and cash flow amounts are translated at average exchange rates prevailing during the year. The cumulative effects of translating the balance sheet accounts from the functional currencies into the U.S. dollar at the
applicable exchange rates are included in accumulated other comprehensive loss. Foreign currency gains and losses are recorded in miscellaneous expense in the consolidated statements of income and historically have not been material.
Restructuring expenses: The Company incurred exit and disposal costs, consisting primarily of one-time termination benefits to employees
and costs to consolidate warehouses, during the years ended June 30, 2014 and 2013 related to the acquisition of Animal Health Holdings, Inc. (Holdings) and its wholly-owned subsidiaries on June 10, 2011. The Company incurred approximately
$325 and $1,300 related to one-time termination benefits during the years ended June 30, 2014 and 2013, respectively. In addition, approximately $1,275 and $1,700 was expensed to consolidate warehouses during the years ended June 30, 2014
and 2013, respectively. Cumulative restructuring costs incurred to date as of June 30, 2014 was approximately $19,628. The Company expects to incur approximately $600 in additional restructuring expenses during the year ended June 30, 2015
as the Company continues the consolidation of warehouses. The actual amount incurred could differ from this estimate. Restructuring expenses are included as a component of operating income in the accompanying consolidated statements of income.
Updated for March 31, 2015 and 2014 (unaudited):
The Company incurred approximately $120 and $296 related to one-time termination benefits during the nine month periods ended March 31,
2015 and 2014, respectively.
13
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
In addition, approximately $360 and $195 was expensed to consolidate warehouses during the
nine month periods ended March 31, 2015 and 2014, respectively. Cumulative restructuring costs incurred to date as of March 31, 2015 and 2014 was approximately $480 and $491, respectively.
Stock-based compensation: The Company accounts for stock-based compensation under ASC 718, Stock Compensation (ASC 718), which
addresses the accounting for stock-based payment transactions in which an enterprise receives director and employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of
the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The topic requires that stock-based compensation transactions be accounted for using a fair value based model. The Company uses the
Black-Scholes option pricing model to determine the fair value of stock-based awards. The Company has elected to recognize graded vesting compensation expense on a straight-line basis over the vesting term of the option.
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
The Company applies the accounting standard on accounting for
uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, the Company may recognize the tax benefit
from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition,
classification, interest and penalties on income taxes, and accounting in interim periods. See Note 8 for further discussion.
Recent
accounting pronouncements: In January 2014, the FASB issued Accounting Standards Update (ASU) 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02), allowing private companies an accounting
alternative for the subsequent accounting for goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further
required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. While the ASU is effective prospectively to goodwill existing as of the beginning of the period of adoption and
new goodwill recognized in annual periods beginning after December 15, 2014, early adoption is permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
In March 2014, the FASB issued ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (ASU
2014-07), allowing private companies an accounting alternative for the application of variable interest entities (VIEs) to a lessor entity if (a) the private company lessee and the lessor entity are under common control, (b) the private
company lessee has a lease arrangement with the lessor entity, (c) substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities, and (d) if the private company lessee
explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company. The accounting alternative is an accounting policy election, that when elected the VIE guidance for a lessor
entity under common control would not be applicable.
14
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
ASU 2014-07 is effective retrospectively to all periods presented and will be effective for annual periods beginning after December 15, 2014, with early adoption permitted. The Company is
currently evaluating the impact of this guidance on the consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. The updated standard will be
effective for annual reporting periods beginning after December 15, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
Updated for March 31, 2015 (unaudited):
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new guidance changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a
direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The updated guidance will be effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for all entities for financial statements that have not been previously issued.
In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU
2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are variable
interest entities or voting interest entities. ASU 2015-02 is effective for annual periods and for interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect the provisions of ASU 2015-02 to have
any effect on its consolidated financial position, results of operations or cash flows.
Subsequent events: The Company has
evaluated subsequent events through September 30, 2014, the date on which the consolidated financial statements were available to be issued, and management has determined that there are no such events requiring disclosure, other than those
disclosed in Note 12.
Updated for March 31, 2015 (unaudited):
The Company has evaluated subsequent events for potential recognition or disclosure through September 1, 2015, the date which the
unaudited consolidated financial statements were available to be issued. Except as disclosed within Note 1 above, there have not been any events that have occurred that would require adjustments or disclosure in our unaudited consolidated financial
statements.
15
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
| Note 2. |
Property and Equipment |
Property and equipment consist of the following as of
June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Land, buildings and leasehold improvements |
|
$ |
12,800 |
|
|
$ |
12,811 |
|
| Furniture and equipment |
|
|
40,380 |
|
|
|
31,575 |
|
| Computer hardware and software |
|
|
35,235 |
|
|
|
32,490 |
|
| Vehicles |
|
|
4,555 |
|
|
|
5,389 |
|
|
|
|
|
|
|
|
|
|
| Total property and equipment |
|
|
92,970 |
|
|
|
82,265 |
|
| Less accumulated depreciation |
|
|
(61,438 |
) |
|
|
(54,063 |
) |
|
|
|
|
|
|
|
|
|
| Net property and equipment |
|
$ |
31,532 |
|
|
$ |
28,202 |
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment amounted to $10,891 and $10,452 for the years ended June 30, 2014
and 2013, respectively.
Updated for March 31, 2015 and 2014 (unaudited):
Depreciation of property and equipment amounted to $8,339 and $8,043 for the nine month periods ended March 31, 2015 and 2014,
respectively.
| Note 3. |
Goodwill and Intangible Assets |
In connection with the acquisition of Turnkey Computer Systems, LLC
(Turnkey) on January 1, 2013, the Company allocated $1,279 to goodwill, $1,239 to customer lists, $311 to trademarks and $302 to developed technology. The Company is amortizing the customer lists on a straight-line basis over the benefit period
of 15 years ending June 2028 and the developed technology on a straight-line basis over the benefit period of 12 years ending June 2025. Goodwill is not deductible for tax purposes.
The Company’s goodwill includes $27,658 that is deductible for tax purposes. A rollforward of goodwill as of June 30, 2014 and 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross |
|
|
Accumulated
Impairment Loss |
|
|
Net |
|
|
|
|
|
| Balance, June 30, 2012 |
|
$ |
101,787 |
|
|
$ |
— |
|
|
$ |
101,787 |
|
| Acquisition of Turnkey |
|
|
1,279 |
|
|
|
— |
|
|
|
1,279 |
|
| Foreign currency translation adjustment |
|
|
(142 |
) |
|
|
— |
|
|
|
(142 |
) |
| Impairment loss |
|
|
— |
|
|
|
(11,546 |
) |
|
|
(11,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2013 |
|
|
102,924 |
|
|
|
(11,546 |
) |
|
|
91,378 |
|
| Foreign currency translation adjustment |
|
|
(93 |
) |
|
|
— |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, June 30, 2014 |
|
$ |
102,831 |
|
|
$ |
(11,546 |
) |
|
$ |
91,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2013, the Company recognized an impairment loss on goodwill of $11,546. The impairment
loss relates to two reporting units and was caused by a decrease in expected cash flows. The fair values of the reporting units were determined using the income and market approaches. Fair values under the income approach were derived through the
use of a discounted cash flow method while fair values under the market approach were derived through the use of the mergers and acquisitions method.
16
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.
Intangible assets consisted of the following as of June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2014 |
|
|
2013 |
|
| |
|
Estimated
Useful
Lives |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
| Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product distribution rights |
|
10 years |
|
$ |
1,182 |
|
|
$ |
(1,182 |
) |
|
$ |
— |
|
|
$ |
1,182 |
|
|
$ |
(1,132 |
) |
|
$ |
50 |
|
| Developed technology |
|
12 years |
|
|
383 |
|
|
|
(41 |
) |
|
|
342 |
|
|
|
383 |
|
|
|
(5 |
) |
|
|
378 |
|
| Trademarks and tradenames |
|
15 years |
|
|
1,500 |
|
|
|
(600 |
) |
|
|
900 |
|
|
|
1,500 |
|
|
|
(500 |
) |
|
|
1,000 |
|
| Customer lists |
|
11-15 years |
|
|
62,470 |
|
|
|
(14,772 |
) |
|
|
47,698 |
|
|
|
62,470 |
|
|
|
(9,658 |
) |
|
|
52,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,535 |
|
|
|
(16,595 |
) |
|
|
48,940 |
|
|
|
65,535 |
|
|
|
(11,295 |
) |
|
|
54,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Trademarks and tradenames |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
56,464 |
|
|
|
|
|
|
|
|
|
|
|
56,464 |
|
| Private brands |
|
Indefinite |
|
|
|
|
|
|
|
|
|
|
4,160 |
|
|
|
|
|
|
|
|
|
|
|
4,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,624 |
|
|
|
|
|
|
|
|
|
|
|
60,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total intangible assets |
|
|
|
|
|
|
|
|
|
|
|
$ |
109,564 |
|
|
|
|
|
|
|
|
|
|
$ |
114,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization of the finite-lived intangible assets is as follows for the years ending June 30:
|
|
|
|
|
| 2015 |
|
$ |
5,083 |
|
| 2016 |
|
|
5,083 |
|
| 2017 |
|
|
5,083 |
|
| 2018 |
|
|
5,083 |
|
| 2019 |
|
|
5,083 |
|
| Thereafter |
|
|
23,525 |
|
|
|
|
|
|
|
|
$ |
48,940 |
|
|
|
|
|
|
Amortization expense for the years ended June 30, 2014 and 2013 was $5,131 and $5,082, respectively.
Updated for March 31, 2015 and 2014 (unaudited):
Amortization expense for the nine month periods ended March 31, 2015 and 2014 was $3,812 and $3,816, respectively.
The Company has a revolving credit agreement with a financial institution with an
aggregate principal amount at any time outstanding not to exceed $265 million. On March 28, 2014, the revolving credit agreement was amended to extend the maturity date to March 28, 2019. Under the terms of the revolving credit agreement,
the aggregate principal amount outstanding shall not exceed $250 million for the U.S. revolving loan and $15 million for the Canadian revolving loan. The revolving credit agreement also allows for an additional $21.5 million in swingline loans.
Swingline loans allow the lender to extend credit at any time during the credit term and the aggregate principal amount outstanding at any time under the swingline loans shall not exceed $20 million for U.S. swingline loans and $1.5 million for
Canadian swingline loans. The agreement bears variable interest at 1.50% - 2.00% over the 30-day LIBOR (0.15% and 0.22% as of June 30, 2014 and 2013, respectively) or 0.50% over the US Alternate Borrowing Rate and 1.00% over the CDOR rate, and
is payable on the first day of each January, April, July, and October and at maturity.
17
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Amounts available under the revolving credit agreement are subject to borrowing base calculations for U.S.
and Canadian operations, respectively. The borrowing base is calculated at (a) eighty-five percent (85%) of the book value of Eligible Accounts, as defined in the agreement; plus, to the extent applicable; (b) during each period of
April 1 through and including September 30, the lesser of (i) seventy-five percent (75%) of the value of Eligible Inventory, as defined in the agreement, valued at the lower of cost or market on a first-in, first-out basis, or
(ii) ninety percent (90%) of the value of Eligible Inventory multiplied by the then current Net Orderly Liquidation Value (NOLV) Factor, as defined in the agreement; or (c) during each period of October 1 through and including
the following March 31, the lesser of (i) sixty-five percent (65%) of the value of Eligible Inventory valued at the lower of cost or market on a first-in, first-out basis or (ii) eighty-five percent (85%) of the value of
Eligible Inventory multiplied by the then current NOLV Factor.
The line of credit is collateralized by the Company’s trade receivables. The
outstanding balance under the line of credit amounted to $165,000 and $161,426 as of June 30, 2014 and 2013, respectively, and subject to the borrowing base, the additional maximum borrowing available under the line of credit at June 30,
2014 is $59,564. The agreement provides for certain affirmative and negative covenants relating to the Company’s fixed charge coverage ratio, limitations on additional indebtedness, investments, sales and leasebacks, swap agreements, restricted
payments and transactions with affiliates. The line of credit can be repaid in whole or in part without premium or penalty.
In the event of a Cash
Dominion Liquidity Event, as defined in the revolving credit agreement, all funds deposited into any lockbox or collateral deposit account during the continuance of a Cash Dominion Liquidity Event shall be swept on a daily basis and applied to the
outstanding obligations. Once the Cash Dominion Liquidity Event has been cured or when all the secured obligations have been satisfied, any amounts remaining in the lockbox or collateral deposit account shall be remitted back to the Company.
Updated for March 31, 2015 (unaudited):
Swingline loans allow the lender to extend credit at any time during the credit term and the aggregate principal amount outstanding at any time under the
swingline loans shall not exceed $20 million for U.S. swingline loans and $1.5 million for Canadian swingline loans. The agreement bears variable interest at 1.50%—2.00% over the 30-day LIBOR (0.18% as of March 31, 2015) or 0.50% over the
US Alternate Borrowing Rate and 1.00% over the CDOR rate, and is payable on the first day of each January, April, July, and October and at maturity.
The
outstanding balance under the line of credit amounted to $178,500 as of March 31, 2015, and subject to the borrowing base, the additional maximum borrowing available under the line of credit at March 31, 2015 is $83,871.
| Note 5. |
Shareholders’ Equity |
Series A Preferred Stock: In connection with its acquisition of
Holdings, the Company authorized 50,000,000 preferred shares, with no par value, of which the Company designated 30,000,000 shares of 7.00% Series A Redeemable Conditional Convertible Participating Preferred Stock, no par value.
Voting rights: At any time after receipt of Regulatory Approval (as defined in the agreement), or if such Regulatory Approval is not required, the
holders of shares of Series A Preferred Stock shall be entitled to vote with the holders of shares of Common Stock on all matters submitted to a vote of shareholders of the Company. Each holder of shares of Series A Preferred Stock shall be entitled
to the number of votes equal to the largest number of whole shares of Common Stock into which all shares of Series A Preferred Stock held as of record by such holder could then be converted at the record date.
18
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Dividends: No cash dividend may be declared or paid on the Common Stock during a Dividend Period
unless a cash dividend is also declared and paid on the Series A Preferred Stock for such Dividend Period in an amount (the “Common Participation Amount”) equal to (a) the Per Share Amount as of the Record Date for such dividend (the
“Dividend Record Date”) multiplied by (b) the amount per share distributed or to be distributed in respect of the Common Stock in connection with such cash dividend.
In addition to participation in cash dividends on Common Stock, holders of the Series A Preferred Stock shall be entitled to receive, on each share of Series
A Preferred Stock and with respect to each Dividend Period, an amount (such amount, the “Net Preferred Dividend”) equal to the Dividend Rate (7% per annum) multiplied by the Liquidation Preference (initially $5.2471) per share of Series A
Preferred Stock (the “Preferred Dividend”). If and to the extent that the Company does not pay the entire Net Preferred Dividend for a particular Dividend Period in cash on the applicable Dividend Payment Date for such period, the amount
of such Net Preferred Dividend not paid in cash shall be added to the Liquidation Preference in accordance with the definition thereof. Amounts payable at the Dividend Rate shall begin to accrue and be cumulative from the Original Issue Date,
whether or not the Company has funds legally available for such dividends or such dividends are declared, shall compound on each Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment
Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable in arrears on the first Dividend Payment Date after such Dividend Period. Dividends that are payable on the Series A Preferred
Stock on any Dividend Payment Date shall be payable to holders of record of the Series A Preferred Stock as they appear on the stock register of the Company on the Record Date for such dividend, which shall be the date 15 days prior to the
applicable Dividend Payment Date.
Liquidation rights: In the event of any liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, holders of the Series A Preferred Stock shall be entitled to receive for each share of Series A Preferred Stock, out of the assets of the Company or proceeds thereof (whether capital or surplus) available for
distribution to shareholders of the Company, and after satisfaction of all liabilities and obligations to creditors of the Company, on par with each share of Parity Stock but before any distribution of such assets or proceeds is made to or set aside
for the holders of Junior Stock, an amount equal to the greater of (1) the sum of (a) the Liquidation Preference per share of the Series A Preferred Stock plus (b) an amount per share equal to accrued but unpaid dividends not
previously added to the Liquidation Preference from and including the immediately preceding Dividend Payment Date to but excluding the date fixed for such liquidation, dissolution or winding up of the Company and (2) the per share amount of all
cash securities and other property (such securities or other property having a value equal to its fair market value as reasonably determined by the Board of Directors) to be distributed in respect of the Common Stock (assuming full exercise and
conversion of all the outstanding shares of Series A Preferred Stock into Common Stock) such holder would have been entitled to receive had it converted such Series A Preferred Stock immediately prior to the date fixed for such liquidation,
dissolution or winding up of the Company. To the extent such amount is paid in full to all holders of Series A Preferred Stock and all the holders of Parity Stock, the holders of Junior Stock of the Company shall be entitled to receive all remaining
assets of the Company (or proceeds thereof) according to their respective rights and preferences.
The liquidation preference for Series A Preferred Stock
is $146,439 and $136,622 as of June 30, 2014 and 2013, respectively, which includes cumulative preferred dividends of approximately $27,983 and $18,165, respectively that have not been declared or accrued.
Redemption: Upon the occurrence of a “Fundamental Change” (as defined in the agreement) or the seventh anniversary of the Original Issue
Date, each holder of the Series A Preferred Stock shall have the right to require the Company, in each such case, to repurchase all or any part of such holder’s Series A Preferred Stock for cash at a purchase price per share equal to 100% of
the sum of (a) the Liquidation Preference per share of the Series A Preferred Stock plus (b) an amount equal to accrued but unpaid
19
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
dividends not previously added to the Liquidation Preference per share on such share of Series A Preferred Stock from and including the immediately preceding Dividend Payment Date to but
excluding the date of redemption.
Conversion: At any time after receipt of Regulatory Approval, to the extent required, each outstanding share of
Series A Preferred Stock may be converted on any date, from time to time, at the option of the holder thereof, into the number of shares of Common Stock (the “Per Share Amount”) equal to the Initial Liquidation Preference divided by the
Conversion Price (initially $5.2471, with subsequent dilution adjustments). Following the seventh anniversary of the Original Issue Date, all outstanding shares of Series A Preferred Stock that were not validly tendered to the Company for repurchase
shall be automatically converted into shares of Common Stock on the redemption date specified in the redemption notice given by the Company.
Stock
repurchases: The Company repurchased Series A preferred stock and voting common shares from certain shareholders at various prices ranging from $3.98 to $5.25 per share during the years ended June 30, 2014 and 2013, respectively. The
repurchases are reflected in the accompanying consolidated statement of shareholders’ equity as reductions in additional paid-in capital for the amount of the original purchase price, with any excess cost over the original purchase price
reducing retained earnings.
Updated for March 31, 2015 (unaudited):
The liquidation preference for Series A Preferred Stock is $154,263 as of March 31, 2015, which includes cumulative preferred dividends of approximately
$35,806 that have not been declared or accrued.
The Company repurchased non-voting common shares from certain shareholders at various prices ranging from
$4.18 to $4.62 per share during the nine month period ended March 31, 2015.
| Note 6. |
Commitments and Contingencies |
Leases: The Company leases office and warehouse facilities on a
monthly basis from partnerships that are owned by a shareholder of the Company. There are two types of leases – Type A (two leases in total) and Type B (12 leases in total). The Type A and Type B leases contain a Real Property Purchase Option
Agreement between the Company and the partnerships. The Type A leases require the Company to purchase the Type A facilities upon (a) an IPO event or (b) upon the exercise of a put right by the partnership that is exercisable (i) upon
the death of the shareholder, (ii) upon termination of a Type A lease, or (iii) the refusal of the Company to continue the lease of a Type A facility. The Type B leases require the Company to purchase all or any of the Type B facilities
upon the exercise of a put right by the partnership that is exercisable upon the death of the shareholder. As of June 30, 2014, the Company has not terminated or refused to continue any of the Type A leases. Additionally, the partnership has
not exercised the put right related to either Type A or Type B leases.
The total estimated purchase prices of the Type A facilities as of June 30,
2014 is approximately $5,000. Type B facilities would be purchased at fair value on the date of purchase. The leases have a term of 3 years, except for one Type B lease which has a 10 year term, and the leases do not contain an automatic renewal
feature. The put rights held by the partnerships create a variable interest in the partnerships above. The partnerships are VIEs; however, the Company is not the primary beneficiary of the partnerships and therefore the partnerships are not
consolidated in the accompanying consolidated financial statements. In December 2013, the Company entered into a lease for a warehouse facility from the partnerships. The lease has a 10 year term and is not covered by the Real Property Option
Agreement. The Company has determined that it is not the primary beneficiary because the Company does not have the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. The partnerships are financed
solely by the shareholder through equity contributions and mortgage loans.
20
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Rent expense to these entities amounted to $2,215 and $2,241 during the years ended June 30, 2014 and
2013, respectively. The Company also leases facilities, equipment, and vehicles from non-related entities. Total rent expense to all entities amounted to $11,688 and $11,848 during the years ended June 30, 2014 and 2013, respectively.
Following is the future minimum rental payments under non-cancelable operating leases:
|
|
|
|
|
| Years Ending June 30, |
|
|
|
|
|
| 2015 |
|
$ |
9,571 |
|
| 2016 |
|
|
5,956 |
|
| 2017 |
|
|
4,484 |
|
| 2018 |
|
|
3,150 |
|
| 2019 |
|
|
2,417 |
|
| Thereater |
|
|
4,357 |
|
|
|
|
|
|
|
|
$ |
29,935 |
|
|
|
|
|
|
Additionally, the Company has accrued $277 and $879 related to abandoned leases as of June 30, 2014 and 2013,
respectively, which is included in accrued expenses and other liabilities on the accompanying consolidated balance sheets.
Letter of credit: The
Company has four unused, irrevocable letters of credit with a financial institution totaling $2,591, in favor of insurance companies in connection with the Company’s insurance coverage and a guarantee of a loan from a bank to an affiliate. The
guarantee period for the loan of an affiliate expires on October 15, 2014, with the maximum liability under the irrevocable letter of credit of $1,250.
The letters of credit expire at various dates through June 30, 2015, and three of the four are automatically extendable for one year from each respective
future expiration date. The financial institution may cancel the letters of credit upon thirty days written notice prior to any expiration date.
Litigation: The Company is party to various claims and legal actions arising in the normal course of business. Although the ultimate outcome of these
matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse effect on the Company’s business, results of operations, financial condition or
cash flows; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company’s results of operations in any period.
Updated for March 31, 2015 and 2014 (unaudited):
Rent expense to these entities amounted to $1,818 and $1,668 for the nine month periods ended March 31, 2015 and 2014, respectively. The Company also
leases facilities, equipment, and vehicles from non-related entities. Total rent expense to all entities amounted to $9,483 and $9,495 during the nine month periods ended March 31, 2015 and 2014, respectively.
Additionally, the Company has accrued $0 related to abandoned leases as of March 31, 2015, which is included in accrued expenses and other liabilities on
the accompanying unaudited consolidated balance sheets.
As of March 31, 2015, the total estimated purchase price of the Type A facilities is
approximately $5,000.
21
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The Company has four unused, irrevocable letters of credit with a financial institution totaling $2,629, in
favor of insurance companies in connection with the Company’s insurance coverage and a guarantee of a loan from a bank to an affiliate, which was extended to March 31, 2015.
| Note 7. |
Stock-Based Compensation |
During the year ended June 30, 2012, the Company adopted the 2011 Stock
Option Plan (the Plan). The Plan provides for the granting of stock options to employees, consultants, and independent directors of the Company and its subsidiaries who perform services for the Company and its subsidiaries. A maximum of 6,000,000
shares of common stock may be awarded under the Plan. Options granted under the Plan may be either incentive or nonqualified stock options. Incentive stock options may only be granted to Company employees; nonqualified stock options may be granted
to Company employees, consultants, and independent directors of the Company.
The vested portion of the stock options can be exercised during the earliest
of the following: (a) with respect to a non-qualified stock option, the expiration of ten years from the grant date; (b) with respect to an incentive stock option in the case of an optionee owning, at the time the option was granted, 10%
or less of the total combined voting power of all classes of stock of the Company or any Subsidiary, the expiration of ten years from the grant date, or (c) with respect to an incentive stock option in the case of an optionee owning, at the
time the option was granted, more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary, the expiration of five years from the grant date. Options granted under the Plan are issued with exercise prices
determined by the Board of Directors and vest over a 5-year period beginning on the date of the grant.
Options granted under the Plan contain both
time-vesting and performance-vesting components. Time-vesting criteria states that 20% of shares vest after 2 years, 10% after 3 years, 10% after 4 years and 10% after 5 years. The performance-vesting is based on achievement of annual or cumulative
EBITDA targets over 5 years. Compensation expense related to time-vesting shares is recognized on a straight-line basis over the requisite service period. Compensation expense related to performance-vesting shares is recognized over the requisite
service period only if the performance condition is probable of being met. On April 1, 2014, the Company modified the performance conditions, which resulted in no incremental compensation cost during the year ended June 30, 2014 in
accordance with ASC 718. The Company performed this analysis as of June 30, 2014 and determined that all performance conditions are probable of being met. This assessment will be updated at the end of each reporting period and the cumulative
effect of any change in the probability estimate is to be recognized in the period of the change. If the performance conditions are not met and the probability of the cumulative performance conditions is not likely, any previously recognized
compensation expense will be reversed.
As of June 30, 2014, 5,175,000 options were outstanding under the Plan with a weighted average exercise price
of $5.37 per share. The Company has 825,000 options remaining available for grant under the Plan.
22
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The following is a summary of stock option activity under the Plan for the year ended
June 30, 2014:
|
|
|
|
|
|
|
|
|
| |
|
Number of
Options |
|
|
Weighted
Average
Exercise Price |
|
|
|
|
| Options outstanding, June 30, 2013 |
|
|
4,675,000 |
|
|
$ |
5.30 |
|
| Options granted |
|
|
540,000 |
|
|
|
5.94 |
|
| Options exercised |
|
|
— |
|
|
|
|
|
| Options forfeited |
|
|
(40,000 |
) |
|
|
5.25 |
|
|
|
|
|
|
|
|
|
|
| Options outstanding, June 30, 2014 |
|
|
5,175,000 |
|
|
$ |
5.37 |
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant during the years ended June 30, 2014 and 2013 is estimated on the date of grant using
the Black-Scholes option pricing model (BSOPM) with the following average assumptions:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Fair value of stock option grants |
|
$ |
1.90 |
|
|
$ |
1.99 |
|
| Risk-free interest rate |
|
|
2.04 |
% |
|
|
1.03 |
% |
| Expected term in years |
|
|
6.4 |
|
|
|
6.4 |
|
| Average expected volatility |
|
|
27 |
% |
|
|
29 |
% |
| Expected forfeitures |
|
|
10 |
% |
|
|
10 |
% |
| Expected dividends |
|
|
None |
|
|
|
None |
|
The expected term represents the estimated average period of time that the options will remain outstanding.
Since the Company does not have sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as the average of the vesting period and the contractual
term. Expected volatility is based on the average historical volatility of the publicly traded stock of a peer group of companies. The risk-free interest rate is determined by reference to U.S. Treasury yields at or near the time of grant for time
periods similar to the expected term of the award. The Company historically has not paid cash dividends.
Stock-based compensation expense
for the years ended June 30, 2014 and 2013, based on the fair values of the stock option grants, was $1,655 and $1,537, respectively, and has been included within wages, compensation and benefits in the accompanying consolidated statements of
income. The total income tax benefit recognized in the statement of income for stock-based compensation arrangements was $702 and $588 for the years ended June 30, 2014 and 2013, respectively. As of June 30, 2014, stock-based compensation
not yet recognized in income totaled $4,273, which is expected to be recognized over a weighted-average period of 1.84 years.
23
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The following table summarizes information about stock options outstanding and exercisable at
June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Weighted-Average |
|
|
|
|
|
|
|
Range of
Exercise Prices |
|
|
Number
Outstanding |
|
|
Remaining
Contractual
Life (Years) |
|
|
Weighted-
Average
Exercise Price |
|
|
Number
Outstanding |
|
|
Weighted-
Average
Exercise Price |
|
|
|
|
|
|
|
| $ |
5.25 |
|
|
|
4,445,000 |
|
|
|
7.3 |
|
|
$ |
5.25 |
|
|
|
1,419,400 |
|
|
$ |
5.25 |
|
| $ |
6.37 |
|
|
|
190,000 |
|
|
|
8.5 |
|
|
$ |
6.37 |
|
|
|
22,800 |
|
|
$ |
6.37 |
|
| $ |
5.94 |
|
|
|
540,000 |
|
|
|
9.5 |
|
|
$ |
5.94 |
|
|
|
— |
|
|
$ |
— |
|
Updated for March 31, 2015 and 2014 (unaudited):
As of March 31, 2015, 5,230,000 options were outstanding under the Plan with a weighted average exercise price of $5.54 per share. The
Company has 770,000 options remaining available for grant under the Plan.
Stock-based compensation expense for the nine month periods
ended March 31, 2015 and 2014, based on the fair values of the stock option grants, was $1,290 and $1,249, respectively, and has been included within wages, compensation and benefits in the accompanying unaudited consolidated statements of
income. The total income tax benefit recognized in the unaudited consolidated statement of income for stock-based compensation arrangements was $516 and $500 for the nine month periods ended March 31, 2015 and 2014, respectively. As of
March 31, 2015, stock-based compensation not yet recognized in income totaled $3,557, which is expected to be recognized over a weighted-average period of 3 months.
The sources of income before income taxes are as follows for the years ended June 30,
2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Current |
|
$ |
8,981 |
|
|
$ |
5,377 |
|
| Deferred |
|
|
385 |
|
|
|
(1,039 |
) |
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Federal |
|
$ |
6,337 |
|
|
$ |
2,366 |
|
| State |
|
|
1,528 |
|
|
|
469 |
|
| Foreign |
|
|
1,501 |
|
|
|
1,503 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
24
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The provision for income taxes for the years ended June 30, 2014 and 2013 consists of the following:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| United States |
|
$ |
18,590 |
|
|
$ |
2,696 |
|
| International |
|
|
5,758 |
|
|
|
6,030 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
24,348 |
|
|
$ |
8,726 |
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount computed by applying the applicable statutory rates primarily due to
the following:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Expected tax expense at statutory rates |
|
$ |
8,522 |
|
|
$ |
2,967 |
|
| State taxes, net of federal benefit |
|
|
993 |
|
|
|
310 |
|
| Permanent differences |
|
|
228 |
|
|
|
226 |
|
| Foreign rate differential |
|
|
(547 |
) |
|
|
(502 |
) |
| Change in deferred tax rate |
|
|
1,710 |
|
|
|
— |
|
| Impairment of goodwill |
|
|
— |
|
|
|
1,311 |
|
| Transaction costs |
|
|
(1,603 |
) |
|
|
— |
|
| Other |
|
|
63 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
| Provision for income taxes |
|
$ |
9,366 |
|
|
$ |
4,338 |
|
|
|
|
|
|
|
|
|
|
The tax effects of significant temporary differences which give rise to the Company’s deferred tax assets and liabilities
are as follows as of June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
| Deferred tax assets: |
|
|
|
|
|
|
|
|
| Trade receivables |
|
$ |
355 |
|
|
$ |
345 |
|
| Accrued expenses |
|
|
1,132 |
|
|
|
700 |
|
| Inventories |
|
|
1,254 |
|
|
|
1,293 |
|
| Stock-based compensation |
|
|
1,680 |
|
|
|
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,421 |
|
|
|
3,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Prepaid expenses |
|
|
(1,027 |
) |
|
|
(731 |
) |
| Property and equipment |
|
|
(3,208 |
) |
|
|
(3,270 |
) |
| Intangible assets |
|
|
(45,884 |
) |
|
|
(44,753 |
) |
| Equity method investments |
|
|
(911 |
) |
|
|
(786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(51,030 |
) |
|
|
(49,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| Total net deferred tax liabilities |
|
$ |
(46,609 |
) |
|
$ |
(46,224 |
) |
|
|
|
|
|
|
|
|
|
25
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The deferred tax amounts mentioned above have been classified on the accompanying consolidated balance sheets
as of June 30, 2014 and 2013, as follows:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Current assets |
|
$ |
1,715 |
|
|
$ |
1,600 |
|
| Long-term liabilities |
|
|
(48,324 |
) |
|
|
(47,824 |
) |
|
|
|
|
|
|
|
|
|
| Total net deferred tax liabilities |
|
$ |
(46,609 |
) |
|
$ |
(46,224 |
) |
|
|
|
|
|
|
|
|
|
The liability for gross unrecognized tax benefits at June 30, 2014 was zero. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in interest expense in the consolidated statements of income. As of June 30, 2014 and 2013, no interest or penalties have been accrued. Based on information currently available, the Company
does not anticipate any material change in the uncertain tax liability within the next twelve months.
Tax returns filed in previous years are subject to
audit by various federal, state and international taxing authorities, and as a result of such audits, additional tax assessments may be proposed. As of June 30, 2014, in general, tax years after June 30, 2010 remain subject to audit.
The Company has not provided U.S. deferred taxes on cumulative earnings on non-U.S. affiliates that the Company considers to be reinvested indefinitely. It is
not practicable to estimate the amount of U.S. income taxes that would be incurred in the event that the Company were to repatriate the cumulative earnings of non-U.S. affiliates. Deferred taxes will be provided for non-U.S. affiliates when the
Company determines that such earnings are no longer indefinitely reinvested.
Updated for March 31, 2015 and 2014 (unaudited):
The income tax expense was $13,284 and $6,470 (see Unaudited Consolidated Statements of Income, page 4) for the nine month periods ended March 31, 2015
and 2014, respectively. The effective income tax rate for the nine months ended March 31, 2015 and 2014 was 36.5% and 42% for the United States and 25.6% and 25.5% for Canada, respectively.
| Note 9. |
Related Party Transactions |
The Company leases office and warehouse facilities from a shareholder, see
“Leases” in Note 6.
During the years ended June 30, 2014 and 2013, in the normal course of business, the Company purchased $27,994 and
$21,114, respectively, of inventories from affiliates included in cost of sales in the accompanying statements of income, and incurred other expenses of $292 and $410, respectively, from affiliates. As of June 30, 2014 and 2013, the Company has
$22 and $61, respectively, in amounts due from affiliates included in other receivables on the accompanying consolidated balance sheets and $734 and $905, respectively, in amounts due to affiliates included in trade accounts payable on the
accompanying consolidated balance sheets.
Updated for March 31, 2015 and 2014 (unaudited):
During the nine month periods ended March 31, 2015 and 2014, in the normal course of business, the Company purchased $22,276 and $27,250, respectively, of
inventories from affiliates included in cost of sales in the accompanying unaudited consolidated statements of income, and incurred other expenses of $1,819 and $1,668, respectively, from affiliates. As of March 31, 2015, the Company has $29 in
amounts due from affiliates included in other receivables on the accompanying unaudited consolidated balance sheets and $2,196 in amounts due to affiliates included in trade accounts payable on the accompanying unaudited consolidated balance sheets.
26
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
| Note 10. |
Financial Instruments |
As of June 30, 2014 and 2013, financial instruments include cash and cash
equivalents, receivables, accounts payable and the line of credit, and the carrying amounts approximate fair value due to the short maturities of these instruments and the variable interest rate on the line of credit.
Updated for March 31, 2015 (unaudited):
No
changes as of March 31, 2015.
| Note 11. |
Employee Benefit Plans |
Retirement plans: The Company and its subsidiaries have a defined
contribution 401(k) plan (the 401(k) Plan) that covers all employees with one year of service who elect to enter the 401(k) Plan. Employees may elect to contribute no less than 1% and up to a maximum of fifteen percent of their compensation. The
Company contributes an amount equal to fifty percent of each employee’s contribution up to a maximum of two percent of the employee’s compensation. The Company’s contributions amounted to $1,010 and $998 for the years ended
June 30, 2014 and 2013, respectively.
Captive insurance plan. The Company participates in the Affinity Insurance Ltd. (Affinity) captive to
provide insurance coverage on workers’ compensation, automobile, and general liability claims. Premiums paid to Affinity for the years ended June 30, 2014 and 2013 were $1,353 and $1,213, respectively. As of June 30, 2014 and 2013,
the Company has $1,694 and $1,046, respectively, included as prepaid insurance claims within other current assets in the accompanying consolidated balance sheets and $1,126 and $318, respectively, included as claims incurred but not reported within
accrued expenses and other liabilities in the accompanying consolidated balance sheets.
Health & welfare plan. The Company had created a
health & welfare (H&W) plan for employees whereby the Company and employees contribute funds to a Trust and any H&W claims (medical, dental, vision) by the employees, and their eligible dependents are paid out from that Trust. As of
June 30, 2013, the Company had $1,635, of net assets in the Trust which is not consolidated in the accompanying consolidated financial statements. The Trust was terminated effective December 31, 2013.
Beginning January 2014, the Company provides a self-insured medical plan to all employees, with a stop loss per individual of $150,000. The Company estimates
an accrual for incurred but not reported claims based on historical claims amounts and average lag time. As of June 30, 2014, the Company recorded $1,000 for incurred but not reported claims, which is included in accrued expenses and other
liabilities on the accompanying consolidated balance sheets.
Short-term disability plan. The Company had created a short-term disability plan for
non-exempt employees whereby the Company and employees contribute funds to a Trust and any short-term disability claims by the non-exempt employees, their eligible dependents and beneficiaries are paid out from that Trust. As of June 30, 2013,
the Company had $36, of net assets in the Trust which is not consolidated in the accompanying consolidated financial statements. The Trust was terminated effective December 31, 2013, at which time the Company obtained a full coverage short-term
disability plan.
Updated for March 31, 2015 and 2014 (unaudited):
The Company’s contributions to its retirement plan amounted to $848 and $780 for the nine month periods ended March 31, 2015 and 2014, respectively.
27
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
Premiums paid to Affinity, the Company’s captive insurance plan, for the nine month periods ended
March 31, 2015 and 2014 were $986 and $998, respectively. As of March 31, 2015, the Company has $2,283 included as prepaid insurance claims within other current assets in the accompanying unaudited consolidated balance sheets and $1,126
included as claims incurred but not reported within accrued expenses and other liabilities in the accompanying unaudited consolidated balance sheets.
As
of March 31, 2015, the Company recorded $1,102 for incurred but not reported claims, which is included in accrued expenses and other liabilities on the accompanying unaudited consolidated balance sheets.
Recorded claims for the nine month periods ended March 31, 2015 and 2014 were $6,382 and $7,144, respectively.
| Note 12. |
Equity Method Investments |
As of June 30, 2014 and 2013, the Company included $17,731 and $16,253,
respectively, in equity method investments in the accompanying consolidated balance sheets related to the following investments the Company holds with various entities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
2013 |
| Investee |
|
Percentage
of
Ownership |
|
|
Financial
Information
As of |
|
Percentage
of
Ownership |
|
|
Financial
Information
As of |
|
|
|
|
|
| Company A |
|
|
40 |
% |
|
June 30 |
|
|
40 |
% |
|
June 30 |
| Company B |
|
|
45 |
% |
|
June 30 |
|
|
45 |
% |
|
June 30 |
| Company C |
|
|
50 |
% |
|
June 30 |
|
|
50 |
% |
|
June 30 |
| Company D |
|
|
50 |
% |
|
June 30 |
|
|
50 |
% |
|
June 30 |
| Company E |
|
|
5 |
% |
|
December 31 |
|
|
5 |
% |
|
December 31 |
| Company F |
|
|
25 |
% |
|
April 30 |
|
|
|
* |
|
* |
| Company G |
|
|
33 |
% |
|
June 30 |
|
|
33 |
% |
|
June 30 |
| Company H |
|
|
25 |
% |
|
May 31 |
|
|
25 |
% |
|
May 31 |
| Company I |
|
|
18 |
% |
|
June 30 |
|
|
|
** |
|
** |
| * |
Investment purchased on April 14, 2014. |
| ** |
Investment purchased on June 5, 2014. |
On March 14, 2014, the Company made the decision to sell the
investment in Company D. At June 30, 2014, the investment in Company D was being marketed for sale and is being classified as a current asset held for sale on the accompanying consolidated balance sheet. As of June 30, 2014, the Company
has recorded $3,000 as an impairment to the carrying value of the equity method investment included in income from equity method investments on the accompanying consolidated statements of income. The impairment to the carrying value in the
investment in Company D was recorded based on the Company’s estimated selling price of the investment less the estimated costs to sell the investment. The Company expects to complete a sale of the investment during the year ended June 30,
2015.
Subsequent to June 30, 2014, the Company entered into an agreement to purchase an additional 24% ownership interest in Company H for $4,128.
The carrying value of the Company’s investments exceeded its share of the underlying equity in the net assets of the investees by $5,029 as of
June 30, 2014. The excess has been deemed related to goodwill of the investees and is not being amortized nor has the excess been impaired as of June 30, 2014.
28
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The combined financial results of the Company’s equity method investments as of and for
the twelve months ended as noted above are summarized as follows:
|
|
|
|
|
|
|
|
|
| |
|
2014 |
|
|
2013 |
|
|
|
|
| Assets |
|
$ |
83,534 |
|
|
$ |
64,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
37,830 |
|
|
|
34,706 |
|
| Equity |
|
|
45,704 |
|
|
|
30,110 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and equity |
|
$ |
83,534 |
|
|
$ |
64,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
186,024 |
|
|
$ |
169,544 |
|
| Cost of sales |
|
|
150,351 |
|
|
|
135,830 |
|
| Operating expenses |
|
|
31,035 |
|
|
|
31,078 |
|
| Other income (expense) |
|
|
4,470 |
|
|
|
(965 |
) |
| Provision (benefit) for income taxes |
|
|
1,154 |
|
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
7,954 |
|
|
$ |
1,777 |
|
|
|
|
|
|
|
|
|
|
Updated for March 31, 2015 (unaudited):
As of March 31, 2015, the Company included $19,121 in equity method investments in the accompanying unaudited consolidated balance sheets
related to the above investments the Company held in various entities.
As of March 31, 2015, the Company has not recorded an
impairment to the carrying value of the equity method investment included in income from equity method investments on the accompanying unaudited consolidated statements of income.
|
|
|
|
|
|
|
| |
|
March 31, 2015 (Unaudited) |
| Investee |
|
Percentage of
Ownership |
|
|
Financial
Information As of |
|
|
|
| Company A |
|
|
40 |
% |
|
March 31 |
| Company B |
|
|
45 |
% |
|
February 28 |
| Company C |
|
|
50 |
% |
|
March 31 |
| Company D |
|
|
50 |
% |
|
See Note Below |
| Company E |
|
|
5 |
% |
|
December 31 |
| Company F |
|
|
25 |
% |
|
February 28 |
| Company G |
|
|
33 |
% |
|
December 31 |
| Company H |
|
|
25 |
% |
|
December 31 |
| Company I |
|
|
18 |
% |
|
February 28 |
| Company J |
|
|
12 |
% |
|
February 28 |
29
Animal Health International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except for share amounts)
The combined financial results of the Company’s equity method investments as of March 31, 2015 are
summarized as follows:
|
|
|
|
|
| |
|
March 31,
2015
Unaudited |
|
|
|
| Assets |
|
$ |
67,091 |
|
|
|
|
|
|
|
|
| Liabilities |
|
|
21,488 |
|
| Equity |
|
|
45,603 |
|
|
|
|
|
|
| Total liabilities and equity |
|
$ |
67,091 |
|
|
|
|
|
|
|
|
| Net sales |
|
$ |
149,774 |
|
| Cost of sales |
|
|
116,769 |
|
| Operating expenses |
|
|
29,455 |
|
| Other income (expense) |
|
|
4,232 |
|
|
|
| Provision (benefit) for income taxes |
|
|
2,123 |
|
|
|
|
|
|
| Net income |
|
$ |
5,659 |
|
|
|
|
|
|
Subsequent to March 31, 2014, the Company entered into an agreement to sell the assets and liquidate its investment in
Company D. The carrying value of estimated liquidation proceeds of $3,919 has been classified as a current asset held for sale on the accompanying unaudited consolidated balance sheets.
Subsequent to March 31, 2014, the Company invested in Company J.
30
Exhibit 99.3
The following unaudited pro forma consolidated financial statements are based on the consolidated financial statements of Patterson Companies, and are
adjusted to give effect to the events described in the Form 8-K to which this exhibit is attached as if those events occurred at an earlier date. The unaudited pro forma consolidated statement of income for the fiscal year ended April 25, 2015
is adjusted to reflect the events described herein as if they occurred on April 25, 2015, the last day of the most recently filed period. The unaudited pro forma consolidated balance sheet is adjusted to reflect the events described herein as
if they occurred on April 25, 2015, the last day of the most recently filed period.
Patterson and Animal Health have different fiscal year ends.
Accordingly, the unaudited pro forma consolidated balance sheet as of April 25, 2015 combines Patterson’s historical audited consolidated balance sheet as of April 25, 2015 and Animal Health’s unaudited consolidated balance sheet
as of March 31, 2015 and is presented as if the acquisition of Animal Health had occurred on April 25, 2015. In order to present results for comparable periods the unaudited pro forma consolidated statement of income for the fiscal year
ended April 25, 2015 combines the historical results of Patterson for the fiscal year ended April 25, 2015 and the historical results of Animal Health for the twelve-month period ended March 31, 2015. The twelve-month period ended
March 31, 2015 for Animal Health is April 1, 2014 through March 31, 2015 which includes the fourth quarter of fiscal year 2014 and the first three quarters of fiscal year 2015 to complete the twelve-month period. The unaudited pro
forma consolidated statement of income is presented as if the acquisition had occurred on April 27, 2014.
The unaudited pro forma consolidated
financial statements are provided for illustrative purposes only and, therefore, are not necessarily indicative of the operating results or financial position that might have been achieved had the event described in the Form 8-K to which this
exhibit is attached occurred as of an earlier date, nor are they necessarily indicative of future operating results or financial position. The unaudited pro forma consolidated financial statements should be read in conjunction with the historical
consolidated financial statements and notes thereto in Patterson’s Annual Report on Form 10-K for the fiscal year ended April 25, 2015.
PATTERSON COMPANIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
April 25, 2015 |
|
| |
|
Historical
Financial
Statement |
|
|
Pro Forma
Adjustment -
Animal Health
International |
|
|
Pro Forma
Adjustment -
Medical (n) |
|
|
Pro Forma
Adjustment - Debt
Reduction (q) |
|
|
Pro Forma
Financial
Statement |
|
| ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
347,260 |
|
|
$ |
(19,330 |
) (a) |
|
$ |
715,000 |
|
|
$ |
(670,000 |
) |
|
$ |
372,930 |
|
| Short-term investments |
|
|
53,372 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
53,372 |
|
| Receivables, net of allowance for doubtful accounts |
|
|
644,139 |
|
|
|
157,272 |
(b) |
|
|
(57,876 |
) |
|
|
— |
|
|
|
743,535 |
|
| Inventory |
|
|
456,687 |
|
|
|
250,709 |
(c) |
|
|
(48,265 |
) |
|
|
— |
|
|
|
659,131 |
|
| Prepaid expenses and other current assets |
|
|
71,767 |
|
|
|
41,737 |
(d) |
|
|
(12,206 |
) |
|
|
— |
|
|
|
101,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
1,573,225 |
|
|
|
430,388 |
|
|
|
596,653 |
|
|
|
(670,000 |
) |
|
|
1,930,266 |
|
| Property and equipment, net |
|
|
226,805 |
|
|
|
43,797 |
(e) |
|
|
(22,672 |
) |
|
|
— |
|
|
|
247,930 |
|
| Long-term receivables, net |
|
|
71,686 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
71,686 |
|
| Goodwill |
|
|
837,099 |
|
|
|
495,948 |
(f) |
|
|
(537,175 |
) |
|
|
— |
|
|
|
795,872 |
|
| Identifiable intangibles, net |
|
|
199,829 |
|
|
|
434,300 |
(g) |
|
|
(74,804 |
) |
|
|
— |
|
|
|
559,325 |
|
| Other |
|
|
39,062 |
|
|
|
50,541 |
(h) |
|
|
(1,143 |
) |
|
|
— |
|
|
|
88,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
2,947,706 |
|
|
$ |
1,454,974 |
|
|
$ |
(39,141 |
) |
|
$ |
(670,000 |
) |
|
$ |
3,693,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
349,635 |
|
|
$ |
160,352 |
(i) |
|
$ |
(26,341 |
) |
|
$ |
— |
|
|
$ |
483,646 |
|
| Accrued payroll expense |
|
|
79,964 |
|
|
|
12,317 |
(j) |
|
|
(7,500 |
) |
|
|
— |
|
|
|
84,781 |
|
| Other accrued liabilities |
|
|
148,086 |
|
|
|
4,516 |
(k) |
|
|
8,127 |
(o) |
|
|
— |
|
|
|
160,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
577,685 |
|
|
|
177,185 |
|
|
|
(25,714 |
) |
|
|
— |
|
|
|
729,156 |
|
| Long-term debt |
|
|
725,000 |
|
|
|
1,100,000 |
(l) |
|
|
— |
|
|
|
(670,000 |
) |
|
|
1,155,000 |
|
| Deferred income taxes |
|
|
88,264 |
|
|
|
177,789 |
(m) |
|
|
(46,851 |
) |
|
|
— |
|
|
|
219,202 |
|
| Other |
|
|
42,634 |
|
|
|
— |
|
|
|
(2,563 |
) |
|
|
— |
|
|
|
40,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
1,433,583 |
|
|
|
1,454,974 |
|
|
|
(75,128 |
) |
|
|
(670,000 |
) |
|
|
2,143,429 |
|
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock |
|
|
1,033 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,033 |
|
| Additional paid-in capital |
|
|
21,026 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21,026 |
|
| Accumulated other comprehensive income (loss) |
|
|
(60,346 |
) |
|
|
— |
|
|
|
13,795 |
|
|
|
— |
|
|
|
(46,551 |
) |
| Retained earnings |
|
|
1,630,148 |
|
|
|
— |
|
|
|
22,192 |
(p) |
|
|
— |
|
|
|
1,652,340 |
|
| Unearned ESOP shares |
|
|
(77,738 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(77,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
1,514,123 |
|
|
|
— |
|
|
|
35,987 |
|
|
|
— |
|
|
|
1,550,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
|
$ |
2,947,706 |
|
|
$ |
1,454,974 |
|
|
$ |
(39,141 |
) |
|
$ |
(670,000 |
) |
|
$ |
3,693,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PATTERSON COMPANIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended April 25, 2015 |
|
| |
|
Historical
Financial
Statement |
|
|
Pro Forma
Adjustment -
Animal Health
International |
|
|
Pro Forma
Adjustment -
Medical (n) |
|
|
Pro Forma
Adjustment - Debt
Reduction |
|
|
Pro Forma
Financial
Statement |
|
| Net sales |
|
$ |
4,375,020 |
|
|
$ |
1,541,191 |
|
|
$ |
(464,155 |
) |
|
$ |
— |
|
|
$ |
5,452,056 |
|
| Cost of sales |
|
|
3,136,814 |
|
|
|
1,292,946 |
|
|
|
(286,498 |
) |
|
|
— |
|
|
|
4,143,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
1,238,206 |
|
|
|
248,245 |
|
|
|
(177,657 |
) |
|
|
— |
|
|
|
1,308,794 |
|
| Operating expenses |
|
|
864,779 |
|
|
|
221,428 |
(r) |
|
|
(108,816 |
) |
|
|
— |
|
|
|
977,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating income |
|
|
373,427 |
|
|
|
26,817 |
|
|
|
(68,841 |
) (u) |
|
|
— |
|
|
|
331,403 |
|
| Other income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other income, net |
|
|
2,937 |
|
|
|
632 |
|
|
|
488 |
|
|
|
— |
|
|
|
4,057 |
|
| Interest expense |
|
|
(33,693 |
) |
|
|
(32,981 |
) (s) |
|
|
— |
|
|
|
15,678 |
(v) |
|
|
(50,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income before taxes |
|
|
342,671 |
|
|
|
(5,532 |
) |
|
|
(68,353 |
) |
|
|
15,678 |
|
|
|
284,464 |
|
| Income taxes |
|
|
119,410 |
|
|
|
(2,193 |
) (t) |
|
|
(25,175 |
) (t) |
|
|
5,926 |
(t) |
|
|
97,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
$ |
223,261 |
|
|
$ |
(3,339 |
) |
|
$ |
(43,178 |
) |
|
$ |
9,752 |
|
|
$ |
186,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
2.26 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.44 |
) |
|
$ |
0.10 |
|
|
$ |
1.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
$ |
2.24 |
|
|
$ |
(0.03 |
) |
|
$ |
(0.43 |
) |
|
$ |
0.10 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
98,989 |
|
|
|
98,989 |
|
|
|
98,989 |
|
|
|
98,989 |
|
|
|
98,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
|
99,694 |
|
|
|
99,694 |
|
|
|
99,694 |
|
|
|
99,694 |
|
|
|
99,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Represents the net amount relating to an increase of cash resulting from a $1.0 billion unsecured term loan and a $100 million draw on a revolving line of credit, a decrease of cash resulting from the $1.1 billion
Animal Health purchase consideration and a decrease of cash related to debt issuance costs. |
| (b) |
Represents the following: |
| |
• |
|
Historical Animal Health receivables, net balance of $161.4 million |
| |
• |
|
Less $4.1 million adjustment to receivables to conform the sales return policy to Patterson’s policy |
| (c) |
Reflects the historical inventory balance of $247.2 million plus $3.5 million adjustment to inventory to conform the sales return policy to Patterson’s policy. |
| (d) |
Represents the following: |
| |
• |
|
Historical Animal Health prepaid expenses and other current assets balance of $25.6 million |
| |
• |
|
Plus $3.5 million to receivable balance for estimated sale proceeds of an investment in which Animal Health has entered into a sale agreement with a purchaser |
| |
• |
|
Plus $12.6 million to income taxes receivable to reflect the recalculated balance of $13.9 million |
| (e) |
Reflects historical property, plant, and equipment, net of $32.4 million increased by $11.4 million to reflect the adjustment for estimated fair value. |
| (f) |
Reflects historical goodwill adjusted to zero, plus the recognition of $495.9 million to reflect the impact of the purchase price allocation. |
| (g) |
Reflects historical intangible asset, net of $196.2 million increased by $238.1 million to reflect the adjustment for estimated fair value. These intangible assets include trade names, developed technologies, customer
relationships, and non-competition agreements. |
| (h) |
Represents the following: |
| |
• |
|
Historical Animal Health other assets balance of $21.4 million |
| |
• |
|
Plus debt issuance cost of $11.6 million |
| |
• |
|
Plus $18.4 million in investments to reflect the adjustment for estimated fair value of $37.6 million |
| |
• |
|
Plus $0.9 million in deferred tax asset to reflect the recalculated balance of $2.6 million |
| |
• |
|
Less $1.8 million for historical unamortized deferred financing costs related to debt not assumed by Patterson |
| (i) |
Reflects certain historical balances of Animal Health, which approximate fair value as of April 25, 2015. |
| (j) |
Represents the following: |
| |
• |
|
Historical Animal Health accrued payroll expenses balance of $10.6 million |
| |
• |
|
Plus $1.7 million for a liability accrual to conform vacation accrual policies to Patterson |
| (k) |
Represents the following: |
| |
• |
|
Historical Animal Health other accrued liabilities balance of $71.8 million |
| |
• |
|
Plus $0.6 million to recognize unfavorable leasehold interests at estimated fair value |
| |
• |
|
Less $16.6 million related to excess outstanding checks |
| |
• |
|
Less $0.4 million related for historical interest payable related to debt not assumed by Patterson |
| |
• |
|
Less $50.9 million for historical deferred tax liability; the recalculated balance is recognized in deferred income taxes |
| (l) |
Reflects historical long-term debt adjusted to zero and an increase in long-term debt of $1.1 billion resulting from acquiring Animal Health. |
| (m) |
Represents the recalculated deferred tax liability. |
| (n) |
Reflects the elimination of Patterson Medical’s historical assets, liabilities and accumulated comprehensive income amounts, and the receipt of $715 million of cash proceeds upon sale of Patterson Medical on
August 28, 2015. Refer to the Current Report on Form 8-K filed August 31, 2015 for additional information regarding the sale of Patterson Medical. |
| (o) |
Reflects historical other accrued liabilities less estimated income taxes payable resulting from the gain on sale of Patterson Medical. |
| (p) |
Reflects the estimated gain on sale of Patterson Medical, less estimated income taxes payable. The actual gain to be recognized will be adjusted by the actual closing adjustments and actual transaction fees incurred.
|
| (q) |
Reflects the use of $670 million of net proceeds from the sale of Patterson Medical for long-term debt reduction. |
| (r) |
Represents the following: |
| |
• |
|
Historical Animal Health operating expenses balance of $199.8 million |
| |
• |
|
Plus $23.5 million related to incremental property, plant, and equipment depreciation and intangible assets and liabilities amortization at estimated fair value |
| |
• |
|
Less $0.4 million for fees incurred under historical ownership structure and are non-recurring |
| |
• |
|
Less $1.5 million for transaction costs related to the Animal Health acquisition |
| (s) |
Reflects historical interest expense adjusted to zero and addition of interest expense related to the $1.1 billion debt financing used for acquisition. |
| (t) |
Reflects the tax effect of pro forma adjustments made to income and expense items. |
| (u) |
Reflects the elimination of Patterson Medical’s historical segment operating results, adjusted to exclude $2.7 million of distribution costs, $1.3 million of shared branch expenses, and $0.8 million of compensation
expenses consistent with the accounting requirements of presenting discontinued operations. Also, consistent with discontinued operations accounting requirements, $3.2 million of divestiture-related transaction costs incurred by Patterson Medical
during the period that were not included in Patterson Medical’s historical segment results have been included in the Pro Forma Adjustment-Medical results. |
| (v) |
Reflects reduced interest expense related to the $670 million debt reduction per note (q). |
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