UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

 

For the quarterly period ended December 31, 2014

OR

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☒  No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

 

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 30, 2015 was 12,913,187.

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MWI VETERINARY SUPPLY, INC.

 

 

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MWI VETERINARY SUPPLY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars and sterling pounds in thousands, except share and per share data
(unaudited)

NOTE 1 — GENERAL

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the results of operations, financial position and cash flows of MWI Veterinary Supply, Inc. and its wholly-owned subsidiaries (collectively referred to as “we,” “us,” and “our” throughout this Form 10-Q).  All intercompany balances have been eliminated. 

 

In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly, in all material respects, our results for the periods presented. These condensed consolidated financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our 2014 Annual Report on Form 10-K filed with the SEC on November 26, 2014.  The results of operations for the three months ended December 31, 2014 are not necessarily indicative of results to be expected for the entire fiscal year.

 

Our unaudited condensed consolidated balance sheet as of September 30, 2014 has been derived from the audited consolidated balance sheet as of that date. 

 

Use of Estimates

 

The accompanying unaudited condensed consolidated financial statements have been prepared on the accrual basis of accounting using accounting principles generally accepted in the United States. In preparing financial information, we use certain estimates and assumptions that may affect the reported amounts and disclosures. Some of these estimates require difficult, subjective and complex judgments about matters that are inherently uncertain. As a result, actual results could differ materially from these estimates. Estimates are used when accounting for, among other items, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, and contingencies. The estimates of fair value of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses for the periods are based on assumptions that we believe to be reasonable.

 

Revenue Recognition

 

We sell products we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have historically not been significant to our financial statements. We record revenues net of sales tax.  In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $73,050 and $67,514 for the three months ended December 31, 2014 and 2013, respectively, and generated commission revenue of $4,353 and $3,818, respectively.

 

Customer incentives are accrued based on the terms of the contracts with each customer. These incentive programs provide that the customer receive an incentive based on their product purchases or attainment of performance goals. Incentives are estimated based on the specific terms in each agreement, historical experience and product growth rates.  Incentives are recognized as a reduction to product sales.

 

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Cost of Product Sales and Vendor Rebates

 

Cost of product sales consist of our inventory product cost, including shipping and delivery costs to and from our distribution centers.  Vendor rebates are recorded based on the terms of the contracts or programs with each vendor.  Many of our vendors’ rebate programs are based on a calendar year.  We may receive quarterly, semi-annual or annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in the accompanying condensed consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are classified as a reduction of inventory until the product is sold. When the inventory is sold and purchase measures are achieved, purchase rebates are recognized as a reduction to cost of product sales. 

 

Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.

 

Concentrations of Risk

 

Our financial instruments that are exposed to concentrations of credit risk consist primarily of our receivables. Our customers are geographically dispersed throughout the United States and United Kingdom. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States.  Our customers in the United Kingdom accounted for an aggregate of 11.7% and 12.3% of our consolidated accounts receivable balance as of December 31, 2014 and September 30, 2014, respectively. We routinely assess the financial strength of our customers and review their credit history before extending credit. In addition, we establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

NOTE 2 — EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. This guidance is effective for our fiscal year and interim periods beginning October 1, 2017. We are currently evaluating the effect that adopting this new accounting guidance will have on our consolidated financial statements.

 

NOTE 3 — BUSINESS ACQUISITIONS

 

On November 1, 2013, MWI Co. purchased substantially all of the assets of IVESCO Holdings, LLC (“IVESCO”) for a net purchase price of $79,633, after giving effect to post-closing adjustments. The cash purchase price was funded with borrowings by the Company under its existing Credit Agreement (as defined herein). IVESCO engaged in the distribution and sale of animal health and related products and service, logistics and technical support relating to such distribution and sale of animal health and related products.  The intangible assets acquired in the acquisition include trade name and customer relationships.  The intangible asset representing customer relationships acquired in the acquisition has an estimated useful life of 9 years.  The amount recorded in goodwill is expected to be deductible for tax purposes over 15 years. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques

 

On September 2, 2014, MWI Co. purchased all of the outstanding share capital of VetSpace Limited and certain of its affiliates (collectively, VetSpace) for a net purchase price of $25,013.  This transaction is subject to a final post-closing working capital adjustment.  The cash purchase price was funded with borrowings by the Company under its Credit Agreement.  VetSpace is a provider of practice management software to veterinary practices, principally in the United Kingdom.  The intangible assets acquired in the acquisition include trade name and customer relationships, which have useful lives ranging from 10 to 20 years.  The amount recorded in goodwill will not be deductible for tax purposes.  The fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.

 

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of each acquisition. The fair values for VetSpace may be adjusted during the measurement period as defined in Accounting Standards Codification (“ASC”) 805. These purchase price allocations are based on a combination of valuations and analyses.

 

 

Revenues and earnings of VetSpace that are included in our condensed consolidated statements of income during the quarter ended December 31, 2014 are not presented separately as they are not material.

 

The following table presents information for IVESCO that is included in our condensed consolidated statements of income from the acquisition date of November 1, 2013 through the end of the quarter ended December 31, 2013. Due to the commencement of the integration of IVESCO, it is impracticable to separately present the revenues and earnings of IVESCO that are included in our consolidated statements of income for the quarter ended December 31, 2014.

 

 

The following table presents supplemental pro forma information as if the acquisition of substantially all of the assets of IVESCO had occurred on October 1, 2013 for the three months ended December 31, 2013 (pro forma information is not presented for VetSpace as it is not material):

 

 

The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2013.  Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.

 

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NOTE 4 — RECEIVABLES

 

 

 

 

 

 

 

 

NOTE 5 — PROPERTY AND EQUIPMENT

 

 

Depreciation expense was $2,206 and $1,974 for the three months ended December 31, 2014 and 2013, respectively.

 

NOTE 6 — GOODWILL AND INTANGIBLES

 

The changes in the carrying value of goodwill are as follows:

 

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Balances of intangibles are as follows:

 

 

 

 

Amortization expense was $906 and $840 for the three months ended December 31, 2014 and 2013, respectively.    

 

Estimated future annual amortization expense related to intangible assets as of December 31, 2014 is as follows:

 

 

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NOTE 7 — DEBT

 

The following table presents the outstanding debt and capital lease obligations as of December 31, 2014 and September 30, 2014:

 

 

Revolving Credit Facility — MWI Co. as borrower, is party to an Amended and Restated Credit Agreement dated October 2, 2014 (the “Credit Agreement”), by and among MWI Co., MWI, and Memorial Pet Care, Inc. (“Memorial”) and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”).  The Credit Agreement allows for an aggregate revolving commitment of the Lenders of $230,000 and includes a $45,000 sublimit for borrowings in alternative currencies.  The Credit Agreement has a maturity date of October 2, 2019.  Under the Credit Agreement, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Credit Agreement ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate on borrowings in dollars, euros or British pounds is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.  The Credit Agreement contains financial covenants, including an interest charge coverage ratio and a funded debt to EBITDA ratio.  We were in compliance with all of the financial covenants as of December 31, 2014 and September 30, 2014. 

 

Sterling Revolving Credit Facility— On March 15, 2013, Centaur Services Limited (“Centaur”) entered into a First Amendment (the “Amendment”) to the unsecured revolving line of credit facility (the “Sterling Revolving Credit Facility”) dated November 5, 2010 with Wells Fargo Bank, N.A. London Branch.  The Amendment increases the maximum loan amount of the Sterling Revolving Credit Facility to £20,000, an increase of £7,500, and extends the term of the facility to November 1, 2016. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 0.95% to 1.50%, and the commitment fee ranges from 0.15% to 0.25%, depending on our funded debt to EBITDA ratio.  The facility contains a financial covenant requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of December 31, 2014 and September 30, 2014, Centaur was in compliance with the covenant.

 

Also on March 15, 2013, Centaur entered into an uncommitted overdraft facility (the “Overdraft Facility”) with Wells Fargo. The Overdraft Facility allows Centaur to borrow an additional £10,000 to fund short term normal trading cycle fluctuations. The Overdraft Facility will expire on November 1, 2016.  Interest on the borrowing under the Overdraft Facility is the same as the terms under the Amendment.

 

MWI Co. guarantees the obligations of Centaur under the Sterling Revolving Credit Facility and the Overdraft Facility.

 

 

NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures.  This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data.  The guidance categorizes these inputs used in measuring fair value into three levels which include the following:

 

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As of December 31, 2014 and September 30, 2014, financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.

 

Our revolving credit facilities in the United States and in the United Kingdom were amended in the recent past and are based on market conditions such as LIBOR.  Because these credit facilities include interest rates based on current market conditions (Level 1 inputs), we believe that the estimated fair value of our debt approximated carrying value.

 

NOTE 9 — COMMON STOCK AND STOCK-BASED AWARDS

 

We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. As of December 31, 2014 and September 30, 2014, we had 758,104 and 757,588 shares, respectively, of our common stock available for issuance under the 2005 Plan. As of December 31, 2014, 11,727 options to purchase common stock were outstanding with a weighted average exercise price of $17.50 per share and expiring through September 2015.

 

The 2005 Plan permits us to grant stock options (both incentive stock options and non‑qualified stock options), restricted and unrestricted stock and deferred stock. The compensation committee will determine the number and type of stock-based awards to each participant, the exercise price of each award, the duration of the award (not to exceed ten years), vesting provisions and all other terms and conditions of such award in individual award agreements. The 2005 Plan provides for the cancellation of all unvested awards upon termination of employment with us, unless determined otherwise by the compensation committee at the time awards are granted.

 

We did not grant common stock options during each of the three months ended December 31, 2014 and 2013.  During the three months ended December 31, 2014 and 2013, we issued 450 and 3,750 shares, respectively, of restricted stock under the 2005 Plan.  During the three months ended December 31, 2014 and 2013, we recognized $1,442 and $1,105 of compensation expense related to stock grants, respectively.    

 

We also have an employee stock purchase plan (“ESPP”) that allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase.  The purchase date is the last trading date of the purchase periods, which begin in March, June, September and December.  Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually.  An employee is allowed to purchase a maximum of 200 shares per purchase period.  During the three months ended December 31, 2014 and 2013, we issued 1,511  and 1,097 shares, respectively, of our common stock under the ESPP. 

 

NOTE 10 — INCOME TAXES

Our effective tax rate for the three months ended December 31, 2014 and 2013 was 38.5% and 39.1%, respectively.  The decrease was primarily attributable to a reduction in nondeductible expenses as well as an increase in pre-tax income both in the US and internationally.

With few exceptions, we are no longer subject to income tax examination for years before 2010 in the U.S. and significant state and local jurisdictions.  We are no longer subject to income tax examination for years before 2012 in significant foreign jurisdictions.

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NOTE 11 — COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share data)

 

 

 

 

 

 

 

 

NOTE 12 — ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Changes in accumulated other comprehensive income, comprised entirely of foreign currency translation adjustments, consisted of the following:

 

 

 

 

 

 

 

 

 

 

NOTE 13 — RELATED PARTIES

 

MWI Co. holds a 50.0% membership interest in Feeders’ Advantage LLC (“Feeders’ Advantage”).  MWI Co. charged Feeders’ Advantage for certain operating and administrative services in the amounts of $342 and $326 for the three months ended December 31, 2014 and 2013, respectively. Sales of products to Feeders’ Advantage were $21,256 and $20,700 for the three months ended December 31, 2014 and 2013, respectively, which represented 3% of total product sales for each of the three-month periods.

 

MWI Co. allows Feeders’ Advantage to use its cash management system to finance its day-to-day operations. At any given time, the outstanding position used in the cash management system may be a receivable or payable depending on the cash activity.  A receivable balance bears interest at the prime rate. The interest due on the outstanding receivable is calculated and charged to Feeders’ Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders’ Advantage, the payable balance accrues interest in favor of Feeders’ Advantage at the average federal funds rates in effect for that month.  MWI Co. had a payable balance to Feeders’ Advantage of $2,368 and $1,495 as of December 31, 2014 and September 30, 2014, respectively.

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NOTE 14 — STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NON-CASH DISCLOSURES

 

 

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES

 

From time to time, in the normal course of business, we may become a party to legal proceedings that may have an adverse effect on our financial position, results of operations and cash flow.  Except as set forth below, at December 31, 2014, we were not a party to any material pending legal proceedings and were not aware of any claims that individually or in the aggregate could have a material adverse effect on our financial position, results of operations or cash flows.

On July 30, 2014, Ealena Callender, a purported stockholder of the Company, brought a derivative lawsuit in the Court of Chancery of the State of Delaware against the Company as nominal defendant and against each of the Company’s directors, as well as a former director, as defendants, alleging breach of fiduciary duty and unjust enrichment relating to the Company’s non-employee director stock grants made between 2012 and 2014.  The complaint alleges that the directors breached their fiduciary duties by issuing stock grants that were inconsistent with the terms of the Company’s Amended and Restated 2005 Stock-Based Incentive Compensation Plan.  The complaint seeks rescission of a total of 16,505 shares of common stock issued to the directors as well as damages plus pre-judgment and post-judgment interest.  The Company believes that the allegations in the complaint are without merit.

 

 

NOTE 16 — SUBSEQUENT EVENT

 

On January 11, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AmerisourceBergen Corporation, a Delaware corporation (“AmerisourceBergen”), and Roscoe Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of AmerisourceBergen (“Merger Sub” or “Purchaser”).

 

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Merger Sub commenced a cash tender offer (the “Offer”), on January 26, 2015, for all of the Company’s outstanding shares of common stock, par value $0.01 per share (the “Shares”), at a purchase price of $190.00 per Share, net to the seller in cash, without interest, less any applicable withholding taxes. The Offer is initially scheduled to expire at 11:59 p.m., New York City time, on February 23, 2015, subject to extension in certain circumstances as required or permitted by the Merger Agreement, the SEC or applicable law.

 

The obligation of Merger Sub to consummate the Offer is subject to the condition that there be validly tendered into the Offer, and not validly withdrawn prior to the expiration of the Offer, a number of Shares (excluding Shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) that, together with the Shares owned by AmerisourceBergen and Purchaser (if any), represents at least a majority of the total number of then outstanding Shares determined on a fully-diluted basis as of the expiration of the Offer. The consummation of the Offer is also subject to the satisfaction of other customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The consummation of the Offer is not subject to any financing condition.

 

As soon as practicable following the completion of the Offer and subject to the satisfaction or waiver of the remaining conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of AmerisourceBergen, pursuant to Section 251(h) of the Delaware General Corporation Law (the “DGCL”), with no stockholder vote required to consummate the Merger.

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On February 3, 2015, Winners Circle Investment Club filed a purported stockholder class action against the Company, AmerisourceBergen, Purchaser and the Company’s Board in the Court of Chancery of the State of Delaware.  The case is captioned Winners Circle Investment Club v. MWI Veterinary Supply, Inc. et al., No. 10608.  Winners Circle Investment Club’s lawsuit alleges that the Company’s Board breached its fiduciary duties in evaluating, negotiating, and approving the transactions contemplated by the Merger Agreement and by causing the dissemination of purportedly materially misleading information about such transactions.  Winners Circle Investment Club also alleges that the Company, AmerisourceBergen and Purchaser aided and abetted those breaches of fiduciary duties.  Winners Circle Investment Club seeks to enjoin or rescind such transactions and requests attorneys’ fees and damages in an unspecified amount.  The defendants believe these claims are without merit.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

MWI Veterinary Supply, Inc.

Boise, Idaho

 

We have reviewed the accompanying condensed consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries (the "Company") as of December 31, 2014, and the related condensed consolidated statements of income, comprehensive income, and cash flows for the three-month periods ended December 31, 2014 and 2013. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of MWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated November 26, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2014 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP

Boise, Idaho

February 5, 2015

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

All dollar and sterling pound amounts are presented in thousands, except for per share amounts.

Overview

 

We are a leading distributor of animal health products in the United States and the United Kingdom. We sell our products primarily to veterinarians in both the companion and production animal markets. Our growth has been from internal growth initiatives as well as selective acquisitions.

 

We estimate that in the United States approximately 52% of our total revenues have been generated from sales to the companion animal market and 48% from sales to the production animal market.  Including the gross billings from agency commissions which are excluded from our total revenues in order to comply with generally accepted accounting principles, we estimate that in the United States approximately 57% of our total revenues have been generated from sales to the companion animal market and 43% from sales to the production animal market.  We estimate that approximately 75% of our total revenues have been generated from sales to the companion animal market and 25% from sales to the production animal market in the United Kingdom. The state of the overall economy in both the United States and United Kingdom and consumer spending have impacted both the companion animal and production animal markets, with volatile commodity prices in milk, grains, livestock and poultry, and changes in weather patterns (e.g. droughts or seasons of higher precipitation) also affecting demand in the production animal market. 

 

Industry

 

We believe that the companion animal market in both the United States and United Kingdom has improved in 2014, and we believe that it will continue to grow in 2015. The state of the overall economy, and recent product innovations in the market are positive trends that we believe will continue.  Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increasing expenditures on animal health and preventative care, an aging pet population, advancements in animal health products and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions. 

 

Product sales in the production animal market in both the United States and United Kingdom are impacted by volatility in commodity prices such as milk, grains, livestock and poultry, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and which products they are treated with.  Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.

 

We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk.  If our customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States.  These customers in the aggregate accounted for 11.7% and 12.3% of our consolidated accounts receivable balance as of December 31, 2014 and September 30, 2014, respectively.  We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary. 

 

Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by the marketing programs or price increase announcements of vendors and distributors, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made.

 

 

 

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Sales

 

We sell products that we source from our vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from our vendors. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We record sales from “buy/sell” transactions, which account for the vast majority of our business, as revenues in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor, who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the “commissions” line item on our condensed consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the “buy/sell” and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the “buy/sell” and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements, because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a “buy/sell” to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.

 

We typically renegotiate vendor contracts annually.  These vendor contracts may include terms defining margins, rebates, commissions, exclusivity requirements and the manner in which we go to market.  For example, vendors could require us to distribute their products on an exclusive basis, which could cause us to forego distributing competing products which may also be profitable.  Conversely, competitors could obtain exclusive rights to market particular products, which we would be unable to market.  If we lose the right to distribute products under such exclusive agreements, we may lose access to certain products and lose a competitive advantage.  Exclusivity agreements could allow potential competitors to sell products that we cannot offer and erode our market share.  In addition, vendors have the ability to expand the distributors that they use which could have a material adverse effect on our business. 

 

Some of our current and future vendors may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These vendors could sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these vendors.  Vendors may also elect to discontinue sales through distributors, including us, for some or all of their products.  For example, in July 2014, we received notice that IDEXX Laboratories is moving to a fully direct sales and distribution model, and as a result, ended its companion animal diagnostic products distribution agreement with us, effective December 31, 2014.  Other vendors may move between direct marketing and distribution in the future.

 

Many of our vendors’ rebate programs are based on a calendar year.  Historically, the three months ended December 31 has been our most significant quarter for recognition of rebates.  Sales growth goals are typically negotiated annually, and the amount of rebates available varies in any given year. Increasing growth goals, less lucrative rebate programs, and generic competition make it more challenging to achieve rebate goals each year. Vendor rebates based on sales are classified in our accompanying condensed consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.

 

Vendor Consolidation

 

Our ten largest vendors supplied products that accounted for approximately 70% and 69% of our revenues during the three months ended December 31, 2014 and 2013, respectively, and 67% of our revenues for the fiscal year ended September 30, 2014.  Zoetis supplied products that accounted for approximately 24% and 22% of our revenues during the three months ended December 31, 2014 and 2013, respectively, and 20% of our revenues for our fiscal year ended September 30, 2014.  Of the Zoetis supplied products, production animal products under a livestock agreement accounted for approximately 13% and 11% of our revenues for the three months ended December 31, 2014 and 2013, respectively, and approximately 10% of our revenues for our fiscal year ended September 30, 2014.  Merck (formerly known as Intervet/Schering-Plough), supplied products that accounted for approximately 13% and 10% of our revenues during the three months ended December 31, 2014

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and 2013, respectively, and 11% of our revenues for our fiscal year ended September 30, 2014.  Elanco, the animal health division of Eli Lilly and Company, supplied products that accounted for approximately 8% and 11% of our revenues during the three months ended December 31, 2014 and 2013, respectively and 10% of our revenues for our fiscal year ended September 30, 2014. Merial, the animal health division of Sanofi, supplies the majority of their products to us under an agency relationship.  Commission revenue generated from Merial products accounted for approximately 35% and 26% of total commission revenues during the three months ended December 31, 2014 and 2013, respectively, and 47% of total commission revenues for our fiscal year ended September 30, 2014.

 

For more information on our business, see our Annual Report on Form 10-K filed with the SEC on November 26, 2014.

 

Recent Developments

 

On January 11, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AmerisourceBergen Corporation, a Delaware corporation (“AmerisourceBergen”), and Roscoe Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of AmerisourceBergen (“Merger Sub” or “Purchaser”).

 

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Merger Sub commenced a cash tender offer (the “Offer”), on January 26, 2015, for all of the Company’s outstanding shares of common stock, par value $0.01 per share (the “Shares”), at a purchase price of $190.00 per Share, net to the seller in cash, without interest, less any applicable withholding taxes. The Offer is initially scheduled to expire at 11:59 p.m., New York City time, on February 23, 2015, subject to extension in certain circumstances as required or permitted by the Merger Agreement, the SEC or applicable law.

 

The obligation of Merger Sub to consummate the Offer is subject to the condition that there be validly tendered into the Offer, and not validly withdrawn prior to the expiration of the Offer, a number of Shares (excluding Shares tendered pursuant to guaranteed delivery procedures that have not yet been delivered in settlement or satisfaction of such guarantee) that, together with the Shares owned by AmerisourceBergen and Purchaser (if any), represents at least a majority of the total number of then outstanding Shares determined on a fully-diluted basis as of the expiration of the Offer. The consummation of the Offer is also subject to the satisfaction of other customary closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The consummation of the Offer is not subject to any financing condition.

 

As soon as practicable following the completion of the Offer and subject to the satisfaction or waiver of the remaining conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of AmerisourceBergen, pursuant to Section 251(h) of the Delaware General Corporation Law (the “DGCL”), with no stockholder vote required to consummate the Merger.

 

On February 3, 2015, Winners Circle Investment Club filed a purported stockholder class action against the Company, AmerisourceBergen, Purchaser and the Company’s Board in the Court of Chancery of the State of Delaware.  The case is captioned Winners Circle Investment Club v. MWI Veterinary Supply, Inc. et al., No. 10608.  Winners Circle Investment Club’s lawsuit alleges that the Company’s Board breached its fiduciary duties in evaluating, negotiating, and approving the transactions contemplated by the Merger Agreement and by causing the dissemination of purportedly materially misleading information about such transactions.  Winners Circle Investment Club also alleges that the Company, AmerisourceBergen and Purchaser aided and abetted those breaches of fiduciary duties.  Winners Circle Investment Club seeks to enjoin or rescind such transactions and requests attorneys’ fees and damages in an unspecified amount.  The defendants believe these claims are without merit.

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Results of Operations

 

The following table summarizes our results of operations for the three months ended December 31, 2014 and 2013, in dollars and as a percentage of total revenues.

 

 

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Three Months Ended December 31, 2014 Compared to Three Months Ended December 31, 2013

Total Revenues.  Total revenues increased 16.2% to $798,540 for the three months ended December 31, 2014, from $687,259 for the three months ended December 31, 2013. Revenue growth in the United States was 17.7% for the three months ended December 31, 2014, compared to the same period in the prior fiscal year, due to organic revenue growth and an additional month of ownership of IVESCO.  Revenues in the United Kingdom increased 4.3% from the same period in the prior fiscal year, as a result of a 4.4% organic increase, and a 2.1% increase related to the acquisition of VetSpace.  These increases were offset, in part, by a 2.2% decrease related to foreign currency translation.

Product sales to related party increased by 2.7% to $21,256 for the three months ended December 31, 2014, from $20,700 for the three months ended December 31, 2013.  Commissions increased 14.0% to $4,353 for the three months ended December 31, 2014, from $3,818 for the three months ended December 31, 2013.  Gross agency billings increased to $73,050 from $67,514 for the three months ended December 31, 2014 and 2013, respectively.  

Gross Profit.  Gross profit increased by 11.9% to $99,708 for the three months ended December 31, 2014, from $89,088 for the three months ended December 31, 2013.  Gross profit as a percentage of total revenues decreased to 12.5% for the three months ended December 31, 2014 from 13.0% for the three months ended December 31, 2013.  Product margin as a percentage of total revenues decreased primarily due to an expected reduction in a large manufacturer’s rebate.  We achieved very strong rebate goals with this manufacturer during the quarter ended December 31, 2013, and those goals were more difficult to achieve during the quarter ended December 31, 2014 as a result of the entry of competitive products into the marketplace.  Vendor rebates for the three months ended December 31, 2014 decreased by approximately $2,471 compared to the three months ended December 31, 2013.

Selling, General and Administrative (“SG&A”).  SG&A expenses increased 13.9% to $63,888 for the three months ended December 31, 2014, from $56,073 for the three months ended December 31, 2013.  The increase in SG&A expenses was partially due to an additional month of ownership of IVESCO compared to the prior year. SG&A expenses as a percentage of total revenues were 8.0% for the three months ended December 31, 2014 compared to 8.2% for the three months ended December 31, 2013.          

Depreciation and Amortization.  Depreciation and amortization increased 10.6% to $3,108 for the three months ended December 31, 2014, from $2,809 for the three months ended December 31, 2013.  The increase was primarily due to the assets acquired from VetSpace. 

Income Tax Expense.  Our effective tax rate for the three months ended December 31, 2014 and 2013 was 38.5% and 39.1%, respectively.  The decrease was primarily attributable to a reduction in nondeductible expenses as well as an increase in pre-tax income both in the US and internationally

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K filed with the SEC on November 26, 2014.

Liquidity and Capital Resources

Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months. 

We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us.  Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition. Volatility in commodity prices, such as milk, grains, livestock and poultry, and deteriorating economic conditions can have a significant impact on the financial results of our customers. In the United Kingdom, we rely on a smaller number of relatively larger customers than does our business in the United States.  Our customers in the United Kingdom accounted for an aggregate of 11.7% and 12.3% of our consolidated accounts receivable balance as of December 31, 2014 and September 30, 2014, respectively. We routinely assess the financial strength of our customers and review their credit history before extending credit.

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Capital Resources.  MWI Co. as borrower, is party to the Credit Agreement, by and among MWI Co., MWI, and Memorial and the Lenders.  The Credit Agreement allows for an aggregate revolving commitment of the Lenders of $230,000 and includes a $45,000 sublimit for borrowings in alternative currencies.  The Credit Agreement has a maturity date of October 2, 2019.  Under the Credit Agreement, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Credit Agreement ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate on borrowings in dollars, euros or British pounds is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.  The Credit Agreement contains financial covenants, including an interest charge coverage ratio and a funded debt to EBITDA ratio.  We were in compliance with all of the financial covenants as of December 31, 2014 and September 30, 2014. 

 

On March 15, 2013, Centaur entered into the Amendment to the Sterling Revolving Credit Facility dated November 5, 2010 with Wells Fargo Bank, N.A. London Branch.  The Amendment increases the maximum loan amount of the Sterling Revolving Credit Facility to £20,000, an increase of £7,500, and extends the term of the facility to November 1, 2016. Interest is based on LIBOR for the applicable interest period plus an applicable margin of 0.95% to 1.50%, and the commitment fee ranges from 0.15% to 0.25%, depending on our funded debt to EBITDA ratio.  The facility contains a financial covenant requiring Centaur to maintain a minimum tangible net worth of £5,000.  As of December 31, 2014 and September 30, 2014, Centaur was in compliance with the covenant.

Also on March 15, 2013, Centaur entered into the Overdraft Facility with Wells Fargo. The Overdraft Facility allows Centaur to borrow an additional £10,000 to fund short term normal trading cycle fluctuations. The Overdraft Facility will expire on November 1, 2016.  Interest on the borrowing under the Overdraft Facility is the same as the terms under the Amendment.

MWI Co. guarantees the obligations of Centaur under the Sterling Revolving Credit Facility and the Overdraft Facility.

 

Operating Activities.  For the three months ended December 31, 2014, cash provided by operations was $14,645 and was primarily attributable to net income of $20,055.  The increase in net income is a result of the factors discussed above in “Results of Operations”.  Changes in working capital used cash of $8,585.  The decrease in receivables was primarily due to the collection of receivables with extended payment terms, which came due during the quarter. The decrease in inventories and accounts payable was primarily due to the timing of purchases and payments for strategic inventory purchases.

 

Investing Activities.  For the three months ended December 31, 2014, net cash used in investing activities was $5,581, primarily related to capital expenditures for our new Greensboro, North Carolina and Amarillo, Texas distribution centers, as well as equipment and technology purchases.    

 

Financing Activities.  For the three months ended December 31, 2014, net cash used in financing activities was $8,665, which was primarily due to net payments of $8,869 on our revolving credit facilities.  Our revolving credit facilities are used to fund strategic acquisitions, capital expenditures and meet our working capital requirements.   

 

Contractual Obligations and Guarantees

      For information on our contractual obligations and guarantees, see our Annual Report on Form 10-K filed on November 26, 2014 with the SEC.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks primarily from changes in interest rates, in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. We do not engage in financial transactions for trading or speculative purposes.  We do not hedge the translation of foreign currency profits into U.S. dollars.  We continually evaluate our foreign currency exchange rate risk and the different options available for managing such risk.

 

We are exposed to foreign currency risk due to our U.K. subsidiaries.  A hypothetical 10% change in the value of the U.S. dollar in relation to the British Pound, which is the Company’s most significant foreign currency exposure, would have changed net sales for the three months ended December 31, 2014 by approximately $8,000. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses.

 

The interest payable on our revolving credit facilities is based on variable interest rates and is affected by changes in market interest rates. The outstanding balance on the revolving credit facility in the United States as of December 31, 2014 was $68,500.  The outstanding balance on the revolving credit facilities in the United Kingdom as of December 31, 2014 was $778.  If there had been a combined balance on the revolving credit facilities  of $277,000, which is the approximate maximum available amount on the facilities based on the foreign currency rates as of December 31, 2014, a change of 10% from the interest rates as of December 31, 2014 would have changed interest by $409 for the three months ended December 31, 2014.

 

 

Item 4.  Controls and Procedures

 

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer of the Company, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of December 31, 2014.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

 

 

 

PART II.  OTHER INFORMATION

 

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the amount and timing of interest expense, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of our performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:

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Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc.

 

Item 1.  Legal Proceedings

 

On July 30, 2014, Ealena Callender, a purported stockholder of the Company, brought a derivative lawsuit in the Court of Chancery of the State of Delaware against the Company as nominal defendant and against each of the Company’s directors, as well as a former director, as defendants, alleging breach of fiduciary duty and unjust enrichment relating to the Company’s non-employee director stock grants made between 2012 and 2014.  The complaint alleges that the directors breached their fiduciary duties by issuing stock grants that were inconsistent with the terms of the Company’s Amended and Restated 2005 Stock-Based Incentive Compensation Plan.  The complaint seeks rescission of a total of 16,505 shares of

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common stock issued to the directors as well as damages plus pre-judgment and post-judgment interest.  The Company believes that the allegations in the complaint are without merit.

 

On February  3, 2015, Winners Circle Investment Club filed a purported stockholder class action against the Company, AmerisourceBergen, Purchaser and the Company’s Board in the Court of Chancery of the State of Delaware.  The case is captioned Winners Circle Investment Club v. MWI Veterinary Supply, Inc. et al., No 10608.  Winners Circle Investment Club’s lawsuit alleges that the Company’s Board breached its fiduciary duties in evaluating, negotiating, and approving the transactions contemplated by the Merger Agreement and by causing the dissemination of purportedly materially misleading information about such transactions.  Winners Circle Investment Club also alleges that the Company, AmerisourceBergen and Purchaser aided and abetted those breaches of fiduciary duties.  Winners Circle Investment Club seeks to enjoin or rescind such transactions and requests attorneys’ fees and damages in an unspecified amount.  The defendants believe these claims are without merit.

 

Except as set forth above, we are not currently a party to any material pending legal proceedings and are not aware of any claims that individually or in the aggregate could have a material adverse effect on our financial position, results of operations or cash flows.

 

Item 1A.  Risk Factors

 

Other than with respect to the risk factors set forth below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

 

The announcement and pendency of our acquisition by AmerisourceBergen pursuant to the Offer and the Merger could have an adverse effect on our business, financial conditions and operations.

 

The announcement and pendency of the proposed acquisition could cause disruption in our business in the following ways: third parties may choose to delay or defer decisions to do business with us or terminate or renegotiate their contracts with us as a result of entering into the Merger Agreement; current and prospective employees may regard their future roles with us with uncertainty, which might affect our ability to retain and recruit key personnel; and we have diverted and will continue to divert significant management resources from the day-to-day business operations of the Company toward the Offer and the Merger, which could affect our business and results of operations.

 

The proposed acquisition by AmerisourceBergen is subject to obtaining required approvals and satisfying other conditions that may delay or prevent the completion of the acquisition.

 

The completion of the Offer and the Merger are subject to a number of conditions, including (i) that there shall have been validly tendered and not validly withdrawn enough Shares to constitute a majority of the Shares outstanding on a fully diluted basis, (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of any government litigation or orders, (iv) there not having occurred any change, circumstance, event or occurrence that has had or would reasonably be expected to have a Company Material Adverse Effect (as defined in the Merger Agreement) and (v) other customary conditions. Even though we and AmerisourceBergen are required to use reasonable best efforts to obtain all approvals and satisfy all conditions within our control in accordance with the Merger Agreement, we can give no assurance that such approvals will be obtained or that conditions will be satisfied.

 

Litigation has been filed against us and the members of our Board of Directors challenging the Offer and the Merger and any adverse outcome in any such litigation may prevent the Offer and the Merger from becoming effective or from becoming effective within the expected timeframe.

 

The Company, AmerisourceBergen, Purchaser and the Company’s Board of Directors have been named as defendants in a lawsuit brought by purported holders of our common stock challenging the Board’s actions in connection the transactions contemplated by the Merger Agreement and seeking, among other things, injunctive relief to enjoin the defendants from completing the Offer and the Merger on the agreed-upon terms. See Part II, Item 1. “Legal Proceedings” for more information about the lawsuit that has been filed related to the transactions contemplated by the Merger Agreement. If dismissals are not obtained or a settlement is not reached, this lawsuit could prevent or delay completion of the Offer and the Merger and/or result in substantial costs to us, including any costs associated with the indemnification of our directors.

 

 

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Failure to complete the Offer and the Merger could negatively affect our stock price, operating results, prospects or financial condition.

 

We cannot assure you that the Offer and the Merger will be completed. If the Offer and the Merger are not completed, we will be subject to several risks. Because the current trading price of our common stock may reflect a market assumption that the Offer and the Merger will occur, failure to complete the Offer and the Merger could adversely affect the share price of our common stock. We have incurred and will incur significant costs in connection with the Offer and the Merger, including the diversion of management resources, for which we will have received little or no benefit if the Offer and the Merger are not consummated. A failed transaction may result in a negative impression of us in the investment community. In addition, the Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances, we may be obligated to pay AmerisourceBergen a termination fee of $76.0 million. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and the price of our common stock.

 

The Merger Agreement contains provisions that could discourage a third party from acquiring us prior to the completion of the Offer and the Merger.

 

The Merger Agreement contains provisions that restrict our ability to entertain a third-party proposal for an acquisition of the Company. These provisions include the general prohibition on our soliciting, initiating or participating in discussions with third parties regarding any alternative acquisition proposal, and the requirement that we pay a termination fee of $76.0 million to AmerisourceBergen if the Merger Agreement is terminated under specified circumstances.

 

These provisions might discourage an otherwise-interested third party from proposing an acquisition of the Company. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

 

If the Offer and the Merger are completed, our current stockholders will not participate in any future increase in our value.

 

Our stockholders will be prevented from participating in our potential future earnings and growth or benefit from any potential future increase in our value following the Offer and the Merger.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Recent Sales of Unregistered Securities

None. 

Issuer Purchases of Equity Securities

The table below provides information concerning our repurchase of shares of our common stock during the three months ended December 31, 2014.

 

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Item 3.  Defaults upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

 

Item 6.  Exhibits

 

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SIGNATURE

 

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 thereunto duly authorized.

 

 

 

 

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