**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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| **x**      |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** |   | ** **                                                                                                              | ** ** |

 

**Forthe fiscal year ended September 30, 2005**

**Commissionfile number 000-51468**

**MWI VETERINARY SUPPLY, INC.**

(Exact name of Registrantas specified in its Charter)

| **Delaware**                               |   | **02-0620757**                           |
|--------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction)             |   | (I.R.S. Employer  Identification Number) |
| **651 S. Stratford Drive, Suite 100** |   | ** **                               |
| **Meridian,  ID**                          |   | **83642**                                |
| (Address of  principal executive offices)  |   | (Zip Code)                               |

 

|                                                            | **                                 (800)  824-3703                                ** | ** ** |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| (Registrant’s  telephone number, including area code) |

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OFTHE ACT:** NONE

**SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OFTHE ACT:**

|                                | **Title of  each class** |   |
|--------------------------------|--------------------------|--------|
| Common Stock,  $0.01 par value |

 

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934, as amended (the “Act”) during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (17 CFR section 405) is notcontained herein and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting stock held bynon-affiliates of the Registrant as of November 22, 2005 was approximately$109,783,096. Shares of common stock held by each executive officer anddirector and by each person who owns 10% or more of our outstanding commonstock have been excluded since such persons may be deemed affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

The number of shares of the Registrant’s common stock,$0.01 par value, outstanding as of November 22, 2005 was 10,579,423.

**Documents Incorporated byReference**

Listed hereunder are the documents, any portions ofwhich are incorporated by reference and the Parts of this Form 10-Kinto which such portions are incorporated:

1.      TheRegistrant’s definitive proxy statement for use in connection with the AnnualMeeting of Stockholders to be held on or about February 9, 2006 to befiled within 120 days after the Registrant’s fiscal year ended September 30,2005, portions of which are incorporated by reference into Part III ofthis Form 10-K.

 

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**MWI VETERINARY SUPPLY, INC.FORM 10-KTABLE OF CONTENTS**
| Item              | ** ** | ** **                                                                                                               | ** ** | **Page** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
|              |       | Cautionary Statement                                                                                                     |       | 3        |   |
| 1.                |       | Business                                                                                                                 |       | 3        |   |
| 1A.               |       | Risk Factors                                                                                                             |       | 15       |   |
| 1B.               |       | Unresolved Staff Comments                                                                                                |       | 23       |   |
| 2.                |       | Properties                                                                                                               |       | 23       |   |
| 3.                |       | Legal  Proceedings                                                                                                       |       | 24       |   |
| 4.                |       | Submission of Matters to a Vote of Security Holders                                                                      |       | 24       |   |
| **PART II**  |
| 5.                |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities |       | 24       |   |
| 6.                |       | Selected Financial Data                                                                                                  |       | 25       |   |
| 7.                |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                              |       | 27       |   |
| 7A.               |       | Quantitative and Qualitative  Disclosures About Market Risk                                                              |       | 40       |   |
| 8.                |       | Financial Statements and  Supplementary Data                                                                             |       | 41       |   |
| 9.                |       | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure                                    |       | 64       |   |
| 9A.               |       | Controls and Procedures                                                                                                  |       | 64       |   |
| 9B.               |       | Other  Information                                                                                                       |       | 64       |   |
| **PART III** |
| 10.               |       | Directors and Executive  Officers of the Registrant                                                                      |       | 64       |   |
| 11.               |       | Executive Compensation                                                                                                   |       | 64       |   |
| 12.               |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                     |       | 65       |   |
| 13.               |       | Certain Relationships and  Related Transactions                                                                          |       | 65       |   |
| 14.               |       | Principal Accountant Fees  and Services                                                                                  |       | 65       |   |
| **PART IV**  |
| 15.               |       | Exhibits and Financial  Statement Schedules                                                                              |       | 65       |   |
| SIGNATURES        |       | 67                                                                                                                       |       |

 

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**PART I**

***Cautionary Statement for Purposes of “Safe HarborProvisions” of the Private Securities Litigation Reform Act of 1995***

*This annual reporton Form 10K contains forward-looking statements within the meaning of thefederal securities laws. Statements that are not historical facts, includingstatements about the Company’s beliefs and expectations, are forward-lookingstatements. Forward-looking statements include statements preceded by, followedby or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,”“anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similarexpressions. These statements include, among others, statements regarding theCompany’s expected business outlook, anticipated financial and operating results,the Company’s business strategy and means to implement its strategy, theCompany’s objectives, the amount and timing of capital expenditures, the amountand timing of interest expense, the likelihood of the Company’s success inexpanding the Company’s business, financing plans, budgets, working capitalneeds and sources of liquidity.*

*Forward-lookingstatements are only predictions and are not guarantees of performance. Thesestatements are based on management’s beliefs and assumptions, which in turn arebased on currently available information. Important assumptions relating to theforward-looking statements include, among others assumptions regarding demandfor the Company’s products, the expansion of product offerings geographicallyor through new applications, the timing and cost of planned capitalexpenditures, competitive conditions and general economic conditions. Theseassumptions could prove inaccurate. Forward-looking statements also involveknown and unknown risks and uncertainties, which could cause actual resultsthat differ materially from those contained in any forward-looking statement.Many of these factors are beyond the Company’s ability to control or predict.Such factors include, but are not limited to, the following: vendor rebates basedupon attaining certain growth goals; changes in the way vendors introduceproducts to market; the recall of a significant product by one of the Company’svendors; seasonality; the impact of general economic trends on the Company’sbusiness; the timing and effectiveness of marketing programs offered by theCompany’s vendors; the timing of the introduction of new products and servicesby the Company’s vendors; and competition.*

*Except as required by applicable law, including thesecurities laws of the United States and the rules and regulations of theSecurities and Exchange Commission, or the SEC, the Company is under noobligation to publicly update or revise any forward-looking statements, whetheras a result of any new information, future events or otherwise. You should notplace undue reliance on the Company’s forward-looking statements. Although theCompany believes that the expectations reflected in the forward-lookingstatements are reasonable, the Company cannot guarantee future results orperformance.*

***Item 1.****                          Business.*

**General**

MWI’s business commenced operations as part of aveterinary practice in 1976 and was incorporated as MWI Drug Supply, Inc.,an Idaho corporation, in 1980. MWI Drug Supply, Inc. was acquired by AgriBeef Co. in 1981. MWI Veterinary Supply Co. was incorporated as an independentsubsidiary of Agri Beef Co. in September 1994. Effective June 18,2002, MWI Holdings, Inc. was formed by Bruckmann, Rosser, Sherrill &Co. II, L.P. (“BRS”) for the sole purpose of acquiring all of the outstandingstock of MWI Veterinary Supply Co. from Agri Beef Co. BRS, Agri Beef Co. andmembers of MWI’s senior management team each participated in the acquisitiontransaction. As a result of this transaction, MWI Veterinary Supply Co. becamea wholly-owned subsidiary of MWI Holdings, Inc. On April 21, 2005 theCompany changed its name from MWI Holdings, Inc. to MWI Veterinary Supply, Inc.

MWI Veterinary Supply, Inc. and subsidiaries(together “MWI” or the “Company”) is a leading distributor of animal healthproducts to veterinarians across the United States. The Company distributesmore than 11,000 products sourced from over 400 vendors to more than 14,500veterinary practices 

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nationwide from tenstrategically located distribution centers. Products MWI sells includepharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment,supplies, veterinary pet food and nutritional products. The Company marketsthese products to veterinarians in both the companion animal and productionanimal markets. Companion animals include dogs, cats, other pets and horses,while production animals include cattle and other food-producing animals. As ofSeptember 30, 2005, MWI had a sales force of 227 people covering theUnited States. The Company also offers its customers a variety of value-addedservices, including on-line ordering, pharmacy fulfillment, inventorymanagement, equipment procurement consultation and special order fulfillment,which MWI believes closely integrates the Company with its customers’day-to-day operations and provides them with meaningful incentives to continueordering from MWI.

Approximately two-thirdsof MWI’s total revenues have been generated from sales of companion animalproducts and one-third from production animal products. For the fiscal yearsended September 30, 2005, 2004 and 2003, MWI’s total revenues were $496.7million, $394.3 million and $341.7 million, respectively. MWI’s operatingincome for the fiscal years ended September 30, 2005, 2004 and 2003, was$15.8 million, $12.6 million and $10.2 million, respectively.

**Industry Overview**

According to the Animal Health Institute (“AHI”),animal health product sales in the United States for 2004 totaled nearly$5 billion, an increase of 5% compared to 2003. AHI estimates that themarket for animal health products in the United States for 2004 wasapproximately 58% companion animal and 42% production animal.

MWI believes the companion animal health productsmarket is growing due to the increasing number of households with companionanimals, an aging pet population, increased expenditures on animal health andpreventative care, advancements in pharmaceuticals and diagnostic testing andextensive marketing programs sponsored by companion animal nutrition andpharmaceutical companies. MWI believes that product sales in the productionanimal health products market are largely driven by continued spending onanimal health products to improve productivity, weight gain and diseaseprevention, as well as a growing focus on food safety. MWI believes that thesegrowth factors are mitigated by the downward influence of generic drugs onpricing.

Veterinarians are one of the primary purchasers ofanimal health products, particularly in the companion animal market. Accordingto the American Veterinary Medical Association (“AVMA”), there areapproximately 47,000 veterinarians in private practice in 23,600 veterinarypractices nationwide. Based on data provided by AVMA, the Company estimatesthat these veterinary practices purchase an average of $140,000 of animalhealth products, including food, annually, the majority of which is orderedthrough distributors. The Company believes veterinary practices typically placeat least one order per week to avoid storing and managing large volumes ofsupplies.

MWI believes thatdistributors play a vital role for veterinary practices by providing access toa broad selection of products through a single channel and helping themefficiently manage their inventory levels. Distributors also offer productvendors substantial value by providing cost-effective access to a highlyfragmented and geographically diverse customer base.

**Competitive Strengths**

MWI believes that its strengths include:

*Leading Distributor toVeterinarians.**  *Basedupon the Company’s total revenues for its fiscal year ended September 30,2005, MWI is a leading animal health products distributor to veterinarians inthe United States. While most of the products the Company sells are availablefrom several sources and 

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MWI’s customerstypically have relationships with several distributors, MWI has achieved thisposition primarily through internal growth and currently serves more than14,500 of the approximately 23,600 veterinary practices nationwide. The Companybelieves that its broad product offering, competitive pricing, superiorcustomer service, rapid product fulfillment and value-added services providemeaningful incentives for its customers to continue ordering from the Company.

*Leading Sales andMarketing Franchise.**  *MWIsales representatives educate customers on new veterinary products, assist inproduct selection and purchasing, and offer inventory management solutions. Asof September 30, 2005, the Company had a sales force of 134 field salesrepresentatives and 93 telesales representatives covering the United States.The Company also publishes detailed product catalogs and monthly magazines,which are often utilized by its customers as reference tools. While salespeopleand printed materials are vital to the Company’s marketing strategy, MWI alsoprovides on-line ordering, valuable business information and value-addedservices through its Internet site, *www.mwivet.com*.For the Company’s fiscal year ended September 30, 2005, approximately 21%of MWI’s product sales were generated through orders placed over the Internet.

*Strong, EstablishedRelationships with Veterinarians and Vendors.**  *MWI’s ability to serve as a singlesource for most of its customers’ animal health product needs has enabled theCompany to develop strong and long-term customer relationships. Approximately79% of the Company’s product sales for fiscal year ended September 30,2005 were from customer accounts that were opened prior to fiscal 2002.Independent veterinary practices have historically accounted for more than 80%of the Company’s product sales. In addition, for more than five years theCompany has maintained distribution arrangements with Banfield—The Pet Hospital(“Banfield”), the nation’s largest private veterinary practice, and with anon-controlled affiliate, Feeders’ Advantage, L.L.C. (“Feeders’ Advantage”), arelated party and a buying group composed of several of the largest cattlefeeders in the United States. Since the Company does not manufacture any of itsproducts, MWI is dependent on its vendors for its supply of products. While theCompany’s vendors often have relationships with multiple distributors, many ofthe Company’s key vendors including Ft. Dodge, Schering-Plough and Vedco havebeen working with MWI for over ten years, while other key vendors includingIDEXX Laboratories, Merial and Pfizer have more recently expanded theirrelationships with the Company. MWI believes its market position makes theCompany an attractive partner for leading product vendors, since MWI providescost-effective access to a significant portion of the highly fragmented andgeographically diverse veterinary market.

*Recurring Revenue ProductBase.**  *Over95% of the Company’s product sales for its fiscal years ended September 30,2005, 2004 and 2003 were from consumable medicines and supplies commonlyrequired by veterinarians in their practice. Historically, this aspect of MWI’sbusiness has resulted in a recurring stream of revenues.

*Sophisticated Technologyand Information Systems.**  *In 2004, the Company successfully completed acomprehensive upgrade of its enterprise information system, the central hub forall of MWI’s business processes. This system supports order processing,inventory control, invoicing, shipping, sales analysis and reporting, supplychain management and financial accounting.

*ExperiencedManagement Team.**  *TheCompany has a strong and experienced senior management team with substantialanimal health industry expertise. The members of the Company’s seniormanagement team have been with MWI for an average of over ten years, and eachmember has demonstrated a commitment and capability to deliver growth inrevenues and profitability.

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**Business Strategy**

The Company’s mission is to strengthen its position asa leading national animal health products distributor while continuing toefficiently deliver substantial value and innovation to its customers, increaserevenues and improve profitability. MWI’s strategy to achieve its mission isoutlined below.

*Increase Sales to ExistingCustomers.**  *MWIbelieves that veterinary practices typically purchase animal health productsfrom multiple distributors. For the Company’s fiscal year ended September 30,2005, the average annual product sales per veterinary practice served wasapproximately $28,000. The Company intends to increase its share of thesepurchases by utilizing the Company’s proprietary customer database to focus itsmarketing efforts, expanding its sales force, selectively adding products tothe Company’s portfolio and increasing and expanding the value-added servicesthe Company provides to its customers. By increasing the dollar value ofpurchases made by each customer as well as their average order size, theCompany intends to increase its profitability. Competition for hiring salesrepresentatives who have existing customer relationships is intense and theCompany focuses on retaining its valued staff who have demonstrated the skillsneeded to successfully market the Company’s products and services. If theCompany fails to hire or retain a sufficient number of qualified professionals,it could adversely impact MWI’s business.

*Expand Business AssistanceServices for Veterinarians.**  *The Company intends to enhance its customerrelationships by expanding its business assistance services for veterinarians.These value-added services include the Company’s e-commerce and in-clinicinventory management systems, pharmacy fulfillment program, equipmentprocurement consultation and pet cremation service offerings.

*Increase the Total Numberof Customers.**  *TheCompany believes it provides some products and services to more than 50% of alldomestic veterinary practices. MWI intends to raise this percentage byincreasing the number and productivity of its sales representatives,selectively acquiring competitors and adding distribution centers. MWI believesthe greatest opportunities to add new customers are in the Northeastern,Midwestern and Southeastern regions of the United States, areas where MWI doesnot hold the leading market position. MWI believes it is important to increasethe total number of customers served in order to attain the growth goals thatare a feature of many of the Company’s vendors’ rebate programs. Changes to anyvendor rebate program or the Company’s failure to achieve these growth goalsmay have a material effect on the Company’s gross profit and operating resultsin any given quarter or year.

*Continuously Seek toImprove Operations.**  *MWIcontinuously evaluates opportunities to increase sales, lower costs and realizeoperating efficiencies. Current initiatives include investments in the Company’sdatabases and distribution center management systems. MWI also plans to pursuealternative product sourcing strategies and to implement a private labelprogram on selected products to reduce its procurement costs and increase itsprofitability, while maintaining strong relationships with key vendors.

*MakeSelective Acquisitions.**  *The U.S. market for animal health productsdistribution is highly fragmented, with numerous national, regional and localdistributors. Many of these companies are small, privately-held businesses,some of which may represent attractive acquisition candidates. Since November 2004,MWI has acquired and integrated Memorial Pet Care, Inc. and VetpoDistributors, Inc. into its operations. MWI intends to continue pursuingacquisitions that are consistent with MWI’s mission of enhancing value to itscustomers, increasing revenues and improving profitability, while strengtheningthe Company’s competitive position. Additionally, the Company may evaluateselective acquisitions of niche health care distribution and ancillarybusinesses that can benefit from MWI’s infrastructure, systems and expertise.However, difficulties with the integration of 

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any acquisition may impose substantial costs anddelays and cause other unanticipated problems for the Company.

**Products**

MWI distributes more than11,000 products, including pharmaceuticals, vaccines, parasiticides,diagnostics, capital equipment, supplies and nutritional products. In addition,MWI sells over 600 products under agency agreements with its vendors. Under anagency agreement, MWI typically solicits orders and provides customer servicefor a commission, while the vendor stocks and ships the products. The Companyalso has available on special order over 7,000 products that it does notnormally stock in its distribution centers. MWI continually seeks to update andimprove the range of products that it offers to address customer requirements.Over 95% of the Company’s product sales for fiscal years ended September 30,2005, 2004 and 2003 were from the sale of consumable medicines and suppliescommonly required by veterinarians in their practice. Historically, this aspectof MWI’s business has resulted in a recurring stream of revenues.

***Pharmaceuticals, Vaccines and Parasiticides***

The Company offers itscustomers a variety of pharmaceuticals, vaccines and parasiticides. The Company’spharmaceutical products typically include anesthetics, analgesics, antibiotics,ophthalmics and hormones. The Company’s vaccine products are primarilycomprised of small animal, equine and production animal biologicals. TheCompany’s parasiticides are used for control of fleas, ticks, flies, mosquitoesand internal parasites.

***Diagnostics, Capital Equipment and Supplies***

MWI offers a wide range ofdiagnostics, capital equipment and supplies to veterinarians. Diagnostic salestypically include consumable in-clinic tests for detecting heartworm, lyme,feline leukemia and parvovirus, as well as consumable products for measuringblood chemistry, electrolyte balance and cell counts. MWI’s capital equipmentsales include anesthesia machines, surgical monitors, diagnostic equipment,dental machines, cages, lights and x-ray machines. The Company employs a teamof capital equipment specialists to analyze the latest technologies andrecommend equipment to meet customers’ specific needs. Additionally, theCompany’s capital equipment specialists provide training on the Company’scapital equipment product lines to its customers and its sales force. MWI salesof supplies include syringes, instruments, bandages, IV products, surgicalconsumables, grooming materials and other small equipment items used byveterinary practices.

***Veterinary Pet Food and Nutritional Products***

MWI offers its customers abroad selection of veterinary pet foods and nutritional products. The Companyconsiders veterinary pet food to consist of two categories: foods for specialtydiets and premium pet foods. Specialty diets are recommended by veterinariansto address specific medical and nutritional needs. Premium pet foods arerecommended by veterinarians to promote optimal nutrition in healthy animals. Petfoods are typically sold under agency agreements. Nutritional products includedietary supplements, vitamins, dental chews and specialty treats which eitherhelp address specific medical conditions or are compatible with recommendednutritional guidelines.

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**Value-Added Services**

MWIoffers its customers a variety of value-added services, which it believesclosely integrates the Company with its customers’ day-to-day operations andprovides them with meaningful incentives to continue ordering from MWI. These servicesinclude the following:
| **Service**                         | ** ** | ** **                                                                                                                                                                                                              | ** ** | **Description** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| E-commerce platform                 |       | On-line ordering system  that provides information to veterinary practices on products, vendor  programs and purchasing history                                                                                         |
| Pharmacy fulfillment                |       | Shipment of  prescription animal health products to end-users on behalf of veterinarians  from the Company’s three licensed pharmacies located in Grand Prairie, Texas;  Harrisburg, Pennsylvania and Nampa, Idaho |
| Inventory management  system        |       | Flexible system that facilitates counting, maintaining and ordering inventory  used in veterinary practices                                                                                                             |
| Equipment procurement  consultation |       | Consultation, demonstrations and training provided by our dedicated capital  equipment specialists                                                                                                                      |
| Special order  fulfillment          |       | Procurement and  shipment of over 7,000 unique products that MWI does not normally stock in  its distribution centers                                                                                                   |
| Educational seminars                |       | Seminars for MWI  customers covering business and medical topics, frequently sponsored in  conjunction with its vendors                                                                                                 |
| Pet cremation                       |       | New business unit  presently operating in southwestern Idaho and eastern Oregon that serves  veterinary practices and their clients by providing cremation services                                                     |

 

**Customers**

MWI serves more than 14,500 of the approximately23,600 veterinary practices located throughout the United States. Theseveterinary practices are typically small, privately-held businesses that theCompany believes place at least one order per week to avoid storing andmanaging large volumes of supplies. MWI believes that these veterinary practicesusually purchase animal health products from multiple distributors. MWI seeksto be the principal provider of animal health products to its customer base.

MWI maintains a diverse and stable customer base.Independent veterinary practices have historically accounted for more than 80%of the Company’s product sales. Also, for more than five years, the Company hasmaintained distribution arrangements with Banfield, the nation’s largestprivate veterinary practice with over 450 veterinary hospitals, and the Company’snon-controlled affiliate, Feeders’ Advantage, a buying group composed ofseveral of the largest cattle feeders in the United States. Banfield accountedfor approximately 10% of the Company’s product sales for the fiscal years endedSeptember 30, 2005, 2004 and 2003, respectively. Feeders’ Advantageaccounted for approximately 6% of the Company’s product sales for the fiscalyears ended September 30, 2005 and 2004, respectively, and approximately7% of product sales for the fiscal year ended September 30, 2003. The lossof Banfield or Feeders’ Advantage or a deterioration in MWI’s relations witheither of them could significantly affect the Company’s financial condition andresults of operations. MWI’s ten largest customers, excluding Banfield andFeeders’ Advantage, accounted for approximately 5%, 7% and 6% of the Company’sproduct sales for fiscal years ended September 30, 2005, 2004 and 2003,respectively with no single customer representing more than 1% of the Company’sproduct sales for the years ended September 30, 2005 and 2004 and onecustomer 

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representing approximately1% of product sales for the year ended September 30, 2003. The Companytypically does not enter into long-term contracts with its independentveterinary customers.

MWI is a party to twowritten agreements with Banfield, an Agreement for Product Purchases and anAgreement for Logistics Services. These agreements govern the pricing, shippingand other terms and conditions upon which the Company sells products andprovides services to Banfield. The agreements are effective through June 30,2008, and thereafter may be renewed for additional twelve-month periods. Theagreements may be terminated by either party with or without cause upon 150days prior written notice. Under the Agreement for Product Purchases, theCompany provides a limited warranty with respect to all goods sold by theCompany and paid for by Banfield that good title to the products is conveyed,that the products are delivered free of any security interest, that theproducts will conform to the description, grade and condition of the productsinvoiced, that there will be an agreed upon time remaining before theexpiration or out-of-code date on any product and that all products will befree of any defects arising while the products are either in the Company’spossession or control or in the control of any carrier transporting the goodsfrom the Company to Banfield. The Company is also required to maintaininsurance in an amount equal to at least the replacement cost of all propertythat is purchased by Banfield from third parties and is held by the Company ontheir behalf.

**Sales and Marketing**

MWI’s sales and marketing strategies are designed toestablish and maintain strong customer relationships through personal visits byfield sales representatives, frequent telesales contact and direct marketing,emphasizing the Company’s broad product lines, competitive pricing, efficientordering capabilities, high levels of customer support and service and othervalue-added services. The key elements of the Company’s sales and marketingstrategy are:

*Field SalesRepresentatives:**  *MWI’ssales force is a key component of its value-added approach. Due to thefragmented nature of the animal health products market, the Company believesthat a large sales force is vital to effectively support existing customers andtarget potential customers. As of September 30, 2005, MWI had 134 fieldsales representatives covering most of the United States. The Company’s fieldsales representatives educate customers on new veterinary products, assist inproduct selection and purchasing and offer inventory management solutions. Oncea field sales representative has established a relationship with a customer,the field sales representative encourages the customer to use the Company’stelesales representatives and online ordering capabilities for day-to-daycustomer needs. Field sales representatives work under the supervision ofregional sales managers within an assigned sales territory to ensure effectivecommunication and timely sales calls with customers. MWI’s field salesrepresentatives complement its telesales and direct marketing efforts andenables the Company to better market, service and support the sale of itsproducts and services. MWI’s field sales representatives are employees of theCompany and are compensated with a combination of salaries and commissions.

*Telesales:**  *MWI supports its field salesrepresentatives and direct marketing efforts with telesales representatives infive call centers covering the United States. As of September 30, 2005,MWI had 93 telesales representatives. Telesales representatives work aspartners with the Company’s field sales representatives, providing a dualcoverage approach for individual customers. Telesales representatives processorders and generate new sales through frequent and direct contact withcustomers. Telesales representatives are responsible for assisting customerswith ordering, purchasing decisions and general questions. Telesalesrepresentatives utilize the Company’s customized order entry system to processcustomer orders, access pricing, availability and promotional information aboutproducts, and research customer preferences and order history. The Company’sfive call centers are connected by its telecommunications system which enablesthem to operate as one virtual call center.

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*Direct Marketing:**  *MWI markets to existing andpotential customers by distributing product catalogs and monthly magazines. MWIpublishes its comprehensive animal health products catalog every other year.This catalog contains over 8,000 SKUs, includes detailed descriptions andspecifications of MWI products and is often used as a reference tool by MWI’scustomers and sales force. The Company also promotes its products and servicesin its monthly magazine, the *Messenger*,which its field sales representatives use as a tool to educate customers onproduct and vendor programs. Additional marketing tools that the Companyutilizes include specialty catalogs, customer loyalty programs, specificproduct and vendor programs, flyers, faxes, order stuffers and otherpromotional materials. MWI also participates in national and regional tradeshows to extend its customer reach and enhance customer interaction.

*E-BusinessPlatform:**  *MWIprovides on-line ordering, valuable business information and value-addedservices to veterinarians via the Company’s primary Internet site, *www.mwivet.com*, and customized Internet sites that theCompany maintains for two of its largest customers. Customers can use MWIInternet sites to order products, learn more about products and vendor programs,print forms needed for their veterinary practice, review their historicalpurchases and manage their inventory. For the Company’s fiscal years ended September 30,2005, 2004 and 2003, approximately 21%, 18% and 18%, respectively, of theCompany’s product sales were generated through orders placed over the Internet.

**Product Sourcing**

MWI distributes more than 11,000 products sourced frommore than 400 vendors, including most major vendors of animal health productsthat sell through distributors. MWI believes that it is a leading distributorfor many of these vendors.

MWI does not manufacture any of its products and isdependent on vendors for its supply of products. MWI believes that effectivepurchasing is a key factor in maintaining the Company’s position as a leadingprovider of animal health care products. MWI regularly assesses its purchasingneeds and its vendors’ product offerings and prices to obtain products atfavorable prices. While MWI purchases products from many vendors and there isgenerally more than one vendor for most animal health product categories, theCompany’s concentration of aggregate purchases with key vendors is significant.MWI’s top three vendors, Fort Dodge, Pfizer and Vedco supplied products thataccounted for approximately 45% of the Company’s revenues for its fiscal yearsended September 30, 2005 and 2004, and approximately 43% for its fiscalyear ended September 30, 2003. MWI ten largest vendors accounted forapproximately 73%, 72% and 73% of the Company’s revenues for its fiscal yearsended September 30, 2005, 2004 and 2003, respectively.

There are two major types of transactions that canaffect the flow of MWI products from its vendors, through the Company, to MWI’scustomers. The method of selling products to veterinarians is dictated by theCompany’s vendors. Traditional “buy/sell” transactions, which account for thevast majority of MWI’s business, involve the direct purchase of product by theCompany from the vendor, which is managed and stored in MWI distributioncenters. A customer then places an order with MWI, and the order is picked,packed, shipped and invoiced by the Company to the customer, followed bypayment from the customer to the Company.

MWI also sells certain product lines to its customersunder agency agreements with some of its vendors. Under this model, when theCompany receives orders for products from the customer, the Company transmitsthe order to the vendor who then picks, packs and ships the products. In somecases the vendor invoices and collects payment from the customer, while inother cases MWI invoices and collects payment from the customer. MWI earns acommission for soliciting the order and for providing other customer serviceactivities. MWI operating expenses associated with agency sales transactionsare lower than in traditional “buy/sell” transactions.

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MWI has written agreements with approximately 30 ofits vendors, including Fort Dodge and Pfizer. The Company’s distributionagreement with Fort Dodge provides that the Company shall act as a distributorof Fort Dodge products in the United States on a non-exclusive basis. FortDodge may reduce the size of MWI’s territory upon 30 days written notice.MWI is required to actively promote and solicit sales of Fort Dodge productsand to include their products in its regular sales promotions. In return, MWIis entitled to participate in Fort Dodge’s distributor incentive program. FortDodge is required to indemnify MWI against any claims alleging that the FortDodge products are defective, except in certain limited situations. MWI isrequired to maintain sufficient inventory of each Fort Dodge product to meetanticipated customer demand and to store the products in accordance with theirrespective label instructions. The distribution agreement had an original termthat expired on December 31, 2004 but the agreement automatically renewsfor additional periods of one year. The agreement may be terminated by eitherparty with or without cause upon 90 days prior written notice.

MWI’s Livestock Products Agreement with Pfizerprovides that the Company shall supply selected customers in the cattle andswine fields with Pfizer products. In return, MWI is entitled to certainservice fees and rebates. MWI is required to maintain sufficient inventory tomeet anticipated customer demand on a monthly basis and to store the Pfizerproducts in accordance with their respective label instructions. Pfizer alsoreserves the right to sell directly to the Company’s customers or any otherparty. The livestock products agreement has a one-year term that expires onDecember 31, 2005 and may be terminated by either party with or withoutcause upon 30 days prior written notice.

Animal health product vendors typically implementsales promotions for products distributed to veterinarians that can affect thetiming in which MWI recognize revenues. In addition, at the time MWI negotiatesvendor agreements for the upcoming year, its vendors typically establish salesgrowth goals for the Company to meet in order to receive performance rebates.Since many of the Company’s vendor rebates are based on a calendar year,historically the quarter ended December 31 has been the Company’s mostsignificant quarter for recognition of rebates.

Product returns from theCompany’s customers and to the Company’s vendors occur in the ordinary courseof business. MWI extends its customers the same return of goods policies as areextended to MWI by its vendors. MWI does not believe that its operations willbe adversely impacted due to the return of products.

**Information Systems**

In 2004, MWI successfullycompleted a comprehensive upgrade of its enterprise information system, thecentral hub for all of the Company’s business processes. MWI’s informationsystems enable the centralized management of key functions, including accountsreceivable, inventory management, accounts payable, payroll, purchasing, salesand order fulfillment. These systems allow the Company to efficiently manageits growth, deliver superior customer service, effectively target customers,manage financial performance and monitor daily operational statistics.

**Distribution**

MWI distributes productsfrom ten strategically located distribution centers throughout the UnitedStates. Once a customer’s order is entered into the Company’s customized orderentry system, it is electronically transmitted to the distribution center thatcarries the product and is closest to the customer’s location. Followingreceipt of the order, a document is printed in the distribution center whichreflects the bin location of the product to facilitate product fulfillment. Theorder is then packaged and shipped along with an itemized invoice. MWImaintains inventory levels in its distribution centers appropriate to satisfycustomer demand for prompt delivery and fulfillment of their product orders.Inventory levels are managed on a daily basis through the Company’s informationsystems. In order to meet the rapid delivery 

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requirementsof MWI’s customers, the Company offers next-day delivery service on most of theproducts stocked in the Company’s distribution centers. MWI estimates that asof September 30, 2005, approximately 98% of the dollar value of ordersplaced by its customers was shipped the same day that the orders were placed.MWI currently ships the majority of its orders through United Parcel Service (“UPS”),with the balance of its orders being shipped by the Company’s own deliverytrucks, regional carriers and other national carriers.

**Acquisitions**

On November 1, 2004, MWI acquired certain assetsof Memorial Pet Care, Inc. (“MPC”), a pet crematorium located in Meridian,Idaho. MPC operates in southwestern Idaho and eastern Oregon and servesveterinary practices and their clients by providing cremation services.

On January 3, 2005,MWI acquired substantially all of the assets of Vetpo Distributors, Inc. (“Vetpo”),a regional animal health products distributor located in Holland, Michigan.This acquisition has enabled MWI to substantially expand its market presenceand improve its distribution capabilities in Michigan, Illinois, Indiana, Ohioand Wisconsin.

**Competition**

The distributionand manufacture of animal health products is highly competitive. MWI competeswith numerous vendors and distributors based on customer relationships, serviceand delivery, product selection, price and e-business capabilities. Most of theCompany’s products are available from several sources, including otherdistributors and vendors, and MWI customers tend to have relationships withseveral distributors. In addition, the Company’s competitors could obtainexclusive rights to distribute certain products, eliminating MWI’s ability todistribute those products. Consolidation in the veterinary distributionbusiness could result in existing competitors increasing their market share,which could give them greater pricing power, decrease our revenues and profitability,and increase the competition for customers. MWI’s primary competitors,excluding vendors, include:

·       ButlerAnimal Health Supply;

·       LextronAnimal Health, Inc.;

·       ProfessionalVeterinary Products, Ltd.;

·       VetPharm, Inc.;

·       WalcoInternational, Inc.;

·       WebsterVeterinary Supply, a division of Patterson Companies, Inc.; and

·       othernational, regional, local and specialty distributors.

The role of the animal health product distributor haschanged dramatically during the last decade. Successful distributors areincreasingly providing value-added services in addition to the products theytraditionally provided. MWI believes that to remain competitive it mustcontinue to add value to the distribution channel, while removing unnecessarycosts associated with product movement.

Distribution of animalhealth products is characterized by either “ethical” or “over-the counter,”commonly referred to as OTC, channels of product movement. Ethical distributionis defined as those sales of goods to licensed veterinarians for use in theirprofessional practice. Many of these products are prescription and must be soldor prescribed by a licensed professional. OTC distribution is the movement ofnon-prescription goods to the animal owner and the end-user. Many of these productsalso are purchased by the licensed veterinarian for professional use or forresale to their client. There are 

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numerousethical and OTC distribution companies operating throughout the United Statesand competition in the veterinary distribution industry is strong.

**Trademarks**

MWI has registered withthe United States Patent and Trademark Office the marks “MWI,” “MWI Design” and“MWIVET.com,” and has filed applications to register the marks “VETONE” and “VETRIMEC.”The Company believes that the MWI mark is well recognized in the animal healthproducts industry and by veterinarians and is therefore a valuable asset of theCompany.

**Employees**

As of September 30,2005, MWI had 596 employees across the United States. MWI has not experienced ashortage of qualified personnel in the past, and believes that the Company willbe able to attract such employees in the future. None of the Company’semployees are party to collective bargaining agreements, and MWI considers itsrelations with its employees to be good.

**Website**

MWI’s website address is *www.mwivet.com*. The information on the Company’s website isnot incorporated as a part of this filing.

**Governmental Regulation**

MWI’s vendors of pharmaceuticals, vaccines,parasiticides and certain controlled substances are typically regulated byfederal agencies, such as the Food and Drug Administration (“FDA”), the USDepartment of Agriculture (“USDA”), the Environmental Protection Agency (“EPA”)and the Drug Enforcement Administration (“DEA”), as well as most similar stateagencies. Therefore, MWI is subject, either directly or indirectly, toregulation by the same agencies. Most states and the DEA require the Company tobe registered or otherwise keep a current permit or license to handlecontrolled substances. Manufacturers of vaccines are required by the USDA tocomply with various storage and shipping criteria and requirements forvaccines. To the extent the Company distributes such products, it must complywith the same requirements, including, without limitation, the storage andshipping requirements for vaccines.

Most state boards of pharmacy require MWI to belicensed in their respective states for the sale of pharmaceutical products andmedical devices within their jurisdictions. As a distributor of prescription pharmaceuticalproducts, MWI is subject to the Prescription Drug Marketing Act (“PDMA”). ThePDMA provides governance and authority to the states to provide minimumstandards, terms and conditions for the licensing by state licensingauthorities of persons who “engage” in wholesale distribution (as defined byeach state regulatory agency) in interstate commerce of prescription drugs.With this authority, states require site-specific registrations for the partiesthat engage in the selling and/or physical distribution of pharmaceuticalproducts into their state in the form of out-of-state registrations. A companyselling and/or distributing these products without the appropriateregistrations may be subject to fines, penalties, misdemeanor or felonyconvictions, and/or seizure of the products involved. MWI has a Manager ofRegulatory Compliance and has engaged an outside consultant to assist theCompany in meeting and complying with the various state licensure requirementsto which the Company is subject.

MWI’s pet cremation business is subject to state andlocal zoning laws, and the Company is required to maintain permits for theconstruction and operation of an animal incineration device. MWI is alsorequired to have an air pollution permit in connection with the operation ofour pet cremation business.

Some states (as well ascertain cities and counties) require the Company to collect sales taxes/usetaxes on certain types of animal products. MWI is also subject to lawsgoverning its relationship with employees, 

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includingminimum wage requirements, overtime, working conditions and citizenshiprequirements. In addition, the Company is subject to additional regulationsregarding hiring practices because several federal, state and localgovernmental agencies are the Company’s customers. To date MWI has notexperienced increased costs related to its hiring practices as a result ofgovernment agencies being customers.

**Environmental Considerations**

MWI does not manufactureor alter in any way the composition of products that it distributes. Allproducts are distributed in compliance with the relevant rules andregulations as approved by various state and federal agencies. 

**Executive Officers**of Registrant

Thefollowing table sets forth the names, ages and titles, as well as a briefaccount of the business experience, of each person who is an executive officerof the Company:

| **Name**                   | ** ** | **Age** | ** ** | **Title**                                                           |
|----------------------------|------------|---------|------------|---------------------------------------------------------------------|
| James F.  Cleary, Jr. |       | 42      |       | Board Director,  President and Chief Executive Officer              |
| Mary Patricia B.  Thompson |       | 42      |       | Vice President,  Secretary and Chief Financial Officer              |
| James S. Hay               |       | 62      |       | Chief Information  Officer                                          |
| James W. Culpepper         |       | 51      |       | Director of Inventory  Management                                   |
| Jeffrey J. Danielson       |       | 45      |       | Director of Sales                                                   |
| Bryan P. Mooney            |       | 37      |       | Director of Operations                                              |
| James M. Ross              |       | 56      |       | Director of Banfield  Accounts and Director of Business Development |
| John R. Ryan               |       | 36      |       | Director of Marketing & Analysis                           |

 

***James F. Cleary, Jr.***has served as President since March 2000 andChief Executive Officer since June 2002. Mr. Cleary has also been amember of the board of directors since June 2002. He joined MWI in January 1998as Director of National Accounts and was promoted to Vice President of DemandGeneration in 1999. Mr. Cleary was Vice President of Agri Beef Co., MWI’sformer parent, from 1996 to 1998. From 1990 to 1996, Mr. Cleary wasemployed in management positions with Morrison Knudsen Corporation and itsaffiliate MK Rail Corporation. Mr. Cleary graduated from Dartmouth Collegein 1985 with a Bachelor of Arts in Economics and received his Masters ofBusiness Administration from Harvard Business School in 1990. Mr. Clearyis also a member of the board of directors of Agri Beef Co. and the AmericanVeterinary Distributors Association, where he has served as President andChairman of the Board of Directors, and a manager of Feeders’ Advantage, L.L.C.Mr. Cleary is the brother-in-law of Mr. Robert Rebholtz, one of theCompany’s board directors.

***Mary Patricia B.Thompson*********has served as Vice President, Secretary andChief Financial Officer since June 2002. Ms. Thompson joined AgriBeef Co. in 1989 as the Feedlot and Commodity Division Controller. In September 1991,Ms. Thompson was promoted to Controller of MWI Veterinary Supply Co., thena wholly owned subsidiary of Agri Beef Co. Prior to joining Agri Beef Co., Ms. Thompsonworked for Arthur Andersen LLP from 1985 to 1989, where she provided auditingand accounting services. Ms. Thompson graduated from the University ofIdaho in 1985, summa cum laude, with a Bachelor of Science in Accounting. Ms. Thompsonis a licensed Certified Public Accountant.

***James S. Hay*********has served as ChiefInformation Officer since September 2002. Mr. Hay joined Agri BeefCo. in 1996 as Vice President of Information Systems. Prior to joining AgriBeef Co., Mr. Hay served as Director of Management Information Systems atNatural Wonders Inc. from 1991 to 1995; Director of Management InformationSystems at the Oakland Tribune from 1989 to 1991; Vice President and Chief 

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Information Officer ofLiquor Barn, Inc. from 1987 to 1989; Director of Information Services atGenstar Corporation from 1974 to 1987; management consultant at PriceWaterhouse from 1968 to 1974; and as a systems engineer at IBM Corporation from1965 to 1968. Mr. Hay graduated from the University of Manitoba in 1965with a Bachelor of Science in Mathematics and Physics.

***James W. Culpepper*********has served asDirector of Inventory Management since 1998. Mr. Culpepper joined MWI in1997 as General Merchandise Manager. Prior to joining MWI, Mr. Culpepperworked for Payless Drug Stores for 20 years. During that period, Mr. Culpepperheld various positions, including pharmacist, merchandiser and buyer ofpharmaceutical supplies, and Inventory Control Manager. Mr. Culpeppergraduated from Oregon State University’s School of Pharmacy in 1977.

***Jeffrey J.Danielson*********has served as Director of Sales since 2001. Mr. Danielsonjoined MWI Veterinary Supply Co. in 1985 as an Outside Sales Representative,serving the state of Washington. From 1989 to 1991, Mr. Danielson servedas Assistant Sales Manager and from 1991 to 2001 served as National SalesManager. Mr. Danielson graduated from Colorado State University in 1983with a Bachelor of Science in Agricultural Business.

***Bryan P. Mooney*********has served asDirector of Operations since May 2005. Mr. Mooney joined MWI in January 1994as the Operations Manager of the Company’s Denver, Colorado distributionoperation and served in that capacity until May 1998. From May 1998until February 2005, Mr. Mooney served as Manager of Transportationand Logistics and from January 2005 until May 2005 as the WesternRegional Operations Manager. Mr. Mooney graduated from the University ofWyoming in 1991 with a Bachelor of Science in Agricultural Business.

***James M. Ross*********has served asDirector of Banfield Accounts since April 2001 and as Director of BusinessDevelopment since 2003. Prior to joining MWI, Mr. Ross worked for32 years in the human medical supply distribution industry, where Mr. Rossserved as an operations manager for Intermountain Surgical Supply of Boise,Idaho from 1970 to 1972 and as Account Manager from 1972 to 1976; as BranchManager and General Manager of Intermedco, Inc.’s Oklahoma operations from1976 to 1985; as Vice President, West Region Manager of Durr-FillauerMedical of Montgomery, Alabama from 1985 to 1996; and as Vice President ofOperations for Bergen Brunswig Medical Corporation, a Division of BergenBrunswig Corporation in Orange, California from 1996 to 1998. In 1999, Mr. Rossbecame Executive Vice President of Sales and Distribution and in December 1999assumed the additional position of Chief Operating Officer of Bergen BrunswigMedical Corporation and served in those positions until September 2000.From January 2001 until April 2001, Mr. Ross served as VicePresident, General Manager of Columbia Diagnostics, a division of FisherScientific. Mr. Ross graduated from Boise State University in 1972 with aBachelor of Science in Business Administration.

***John R. Ryan*********has served asDirector of Marketing & Analysis since 2000. Mr. Ryan joined MWIin June 1995 as an Outside Sales Representative and served in suchcapacity until June 2000. Prior to joining MWI, Mr. Ryan worked forthe Virbac Corporation (a companion animal pharmaceutical company) as aTerritory Manager from 1993 to 1995. Mr. Ryan graduated from theUniversity of California, Davis in 1993, with a Bachelor of Science in AnimalPhysiology.

***Item 1A.****                  RiskFactors.*

*In addition to the factors discussed elsewhere in thisForm 10-K, the following are important factors which could causeactual results or events to differ materially from those contained in anyforward-looking statements made by or on behalf of the Company.*

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***Our operating results may fluctuate due to factorsoutside of management’s control.***

Our future revenuesand results of operations may significantly fluctuate due to a combination offactors, many of which are outside of management’s control. The most notable ofthese factors include:

·       vendorrebates based upon attaining certain growth goals;

·       changesin the way vendors introduce products to market;

·       therecall of a significant product by one of our vendors;

·       extendedshortage or backorder of a significant product by one of our vendors;

·       seasonality;

·       theimpact of general economic trends on our business;

·       thetiming and effectiveness of marketing programs offered by our vendors;

·       thetiming of the introduction of new products and services by our vendors; and

·       competition.

These factors couldadversely impact our results of operations and financial condition. We may beunable to reduce operating expenses quickly enough to offset any unexpectedshortfall in revenues or gross profit. If we have a shortfall in revenues orgross profit without a corresponding reduction to expenses, operating resultsmay suffer. Our operating results for any particular fiscal year or quarter maynot be indicative of future operating results. You should not rely onyear-to-year or quarter-to-quarter comparisons of results of operations as anindication of our future performance.

***An adverse change in vendor rebates could negativelyaffect our business.***

The terms on which we purchase products from manyvendors of animal health products entitle us to receive a rebate based on theattainment of certain growth goals. If market conditions deteriorate, vendorsmay adversely change the terms of some or all of these rebate programs. Becausethe amount of rebates we earn is directly related to the attainment ofpre-determined sales growth goals, and because the nature of the rebateprograms and the amount of rebates available are determined by the vendors,there can be no assurance as to the amount of rebates that we will earn in anygiven year. Historically, we have been successful in achieving most rebategrowth goals and have not experienced any material adverse impact on ourresults of operations and financial condition due to a change in a rebateprogram. Changes to any rebate program initiated by our vendors may have amaterial effect on our gross profit and our operating results in any given quarteror year. Vendors may reduce the amount of rebates offered under their programs,or increase the growth goals or other conditions we must meet to earn rebatesto levels that we cannot achieve.

Additionally, factorsoutside of our control, such as customer preferences or vendor supply issues,can have a material impact on our ability to achieve the growth goalsestablished by our vendors, which may reduce the amount of rebates we receive.The occurrence of any of these events could have an adverse impact on ourresults of operations.

***Our quarterly operating results may fluctuatesignificantly.***

Our quarterly revenues andoperating results have varied significantly in the past, and may continue to doso in the future. While we accrue rebates from vendors as they are earned, ourrebates have historically been highest during the quarter ended December 31,since most of our vendors’ rebate programs are designed to include targets tobe achieved during the calendar year. Historically, our revenues have been seasonal,with peak sales in the spring and fall months. The seasonal nature of ourbusiness is directly tied 

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to thebuying patterns of veterinarians for production animal health products used forcertain medical procedures performed on production animals during the springand fall months. These buying patterns can also be affected by vendors’ anddistributors’ marketing programs launched during the summer months,particularly in June, which can cause veterinarians to purchase productionanimal health products earlier than those products are used. This kind of earlypurchasing may reduce our sales in the months these purchases would haveotherwise been made. While companion animal products tend to have a differentproduct use cycle than production animal health products, and approximatelytwo-thirds of our revenues have been generated from the sale of companionanimal products, we cannot assure you that our revenues and operating resultswill not continue to fluctuate on a quarter-to-quarter basis.

***Our market ishighly competitive. Failure to compete successfully could have a materialadverse effect on our business, financial condition and results of operations.***

The market for veterinary distribution services ishighly competitive, continually evolving and subject to technological change.We compete with numerous vendors and distributors based on customerrelationships, service and delivery, product selection, price and e-businesscapabilities. Some of our competitors may have more customers, stronger brand recognitionor greater financial and other resources than we do. Most of our products areavailable from several sources, including other distributors and vendors, andour customers typically have relationships with several distributors andvendors. Many of our competitors have comparable product lines, technicalexpertise or distribution strategies that directly compete with us. Ourcompetitors could obtain exclusive rights to distribute certain products,eliminating our ability to distribute those products. Additionally, some of ourvendors may decide to compete with us directly by selling their productsdirectly to our customers. If we do not compete successfully against theseorganizations, it could have a material and adverse effect on our business, financialcondition and results of operations.

We have manycompetitors including:

·       ButlerAnimal Health Supply;

·       LextronAnimal Health, Inc.;

·       ProfessionalVeterinary Products, Ltd.;

·       VetPharm, Inc.;

·       WalcoInternational, Inc.;

·       WebsterVeterinary Supply, a division of Patterson Companies, Inc.; and

·       othernational, regional, local and specialty distributors.

Consolidation in the veterinary distribution businesscould result in existing competitors increasing their market share, which couldgive them greater pricing power, decrease our revenues and profitability, andincrease the competition for customers. Any of these developments could resultin increased marketing expenses and have a material adverse effect on ourbusiness, financial condition and results of operations. The entry of newdistributors in the industry could also have a material adverse effect on ourability to compete. These and other competitive factors could materially andadversely affect our business, financial condition and results of operations.

Consolidation of the many small, privately-heldveterinary practices would result in an increasing number of larger veterinarypractices, which could have increased purchasing leverage and the ability tonegotiate lower product costs. This could reduce our operating margins andnegatively impact our revenues and profitability.

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***Our business,financial condition and results of operations depend upon maintaining ourrelationships with vendors.***

We currently distribute more than 11,000 productssourced from more than 400 vendors to over 14,500 veterinary practices. Wecurrently do not manufacture any of our products and are dependent on thesevendors for our supply of products. Our top three vendors, Fort Dodge, Pfizerand Vedco, supplied products that accounted for approximately 45% of ourrevenues for our fiscal year ended September 30, 2005. Our ten largestvendors supplied products that accounted for approximately 73% of our revenuesfor our fiscal year ended September 30, 2005. 

Our ability to sustain our gross profits has been, andwill continue to be, dependent in part upon our ability to obtain favorableterms and access to new and existing products from our vendors. These terms maybe subject to changes from time to time by vendors, such as changing from a “buy/sell”to an agency relationship, or from an agency to a “buy/sell” relationship. In a“buy/sell” transaction, we purchase or take inventory of products from ourvendors. Under an agency relationship, when we receive orders for products froma customer, we transmit the order to the vendor who then picks, packs and shipsthe products. Any changes from “buy/sell” to agency or from agency to “buy/sell”could adversely affect our revenues and operating income. The loss of one ormore of our large vendors, a material reduction in their supply of products tous or material changes in the terms we obtain from them could have a materialadverse effect on our business, financial condition and results of operations. 

Some of our current and future vendors may decide tocompete with us in the future by pursuing or increasing their efforts in directmarketing and sales of their products. These vendors could sell their productsat lower prices and maintain a higher gross margin on their product sales thanwe can. In this event, veterinarians or animal owners may elect to purchaseanimal health products directly from these vendors. Increased competition fromany vendor of animal health products could significantly reduce our marketshare and adversely impact our financial results. 

In addition, we may not beable to establish relationships with key vendors in the animal health industryif we have established relationships with competitors of these key vendors. Wehave written agreements with approximately 30 of our vendors, including FortDodge and Pfizer. Some of our agreements with vendors are for one-year periods.Upon expiration, we may not be able to renew our existing agreements onfavorable terms, or at all. If we lose the right to distribute products undersuch agreements, we may lose access to certain products and lose a competitiveadvantage. Potential competitors could sell products from vendors that we failto continue with and erode our market share. 

***We relysubstantially on third-party vendors, and the loss of products or delays inproduct availability from one or more third-party vendors could substantiallyharm our business.***

We must contract for the supply of current and futureproducts of appropriate quantity, quality and cost. These products must beavailable on a timely basis and be in compliance with any regulatoryrequirements. Failure to do so could substantially harm our business. 

We often purchaseproducts from our vendors under agreements that typically have a term of oneyear and can be terminated on a periodic basis. There can be no assurance,however, that our vendors will be able to meet their obligations under theseagreements or that we will be able to compel them to do so. Risks of relying onvendors include: 

·       Ifan existing agreement expires or a certain product line is discontinued orrecalled, then we would not be able to continue to offer our customers the samebreadth of products and our sales and operating results would likely sufferunless we are able to find an alternate supply of a similar product. 

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·       Agreementswe may negotiate in the future may commit us to certain minimum purchase levelsor other spending obligations. It is possible we will not be able to create themarket demand to meet such obligations, which would create an increased drainon our financial resources and liquidity. 

·       Ifmarket demand for our products increases suddenly, our current vendors mightnot be able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements or fund new sources of supply, and may result insubstantial delays in meeting market demand. If we consistently generate moredemand for a product than a given vendor is capable of handling, it could leadto large backorders and potentially lost sales to competitive products that aremore readily available. 

·       Wemay not be able to control or adequately monitor the quality of products wereceive from our vendors. Poor quality products could damage our reputationwith our customers. 

·       Someof our third party vendors are subject to ongoing periodic unannounced inspectionby regulatory authorities, including the FDA, the USDA, the EPA, the DEA andother federal and state agencies for compliance with strictly enforcedregulations. We do not have control over our vendors’ compliance with theseregulations and standards. Violations could potentially lead to interruptionsin supply that could lead to lost sales to competitive products that are morereadily available. 

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

***We rely upon thirdparties to ship products to our customers and interruptions in their operationscould harm our business, financial condition and results of operations.***

We use United ParcelService, Inc., or UPS, as our primary delivery service for our air andground shipments of products to our customers. If there were any significantservice interruptions, there can be no assurance that we could engagealternative service providers to deliver these products in either a timely orcost-efficient manner, particularly in rural areas where many of our customersare located. Any labor disputes, slowdowns, transportation disruptions or otheradverse conditions in the transportation industry experienced by UPS couldimpair or disrupt our ability to deliver our products to our customers on atimely basis, and could have a material adverse effect upon our customerrelationships, business, financial condition and results of operations. Forexample, during the strike by members of the International Brotherhood ofTeamsters against UPS in August 1997, many of our sales representatives,some traveling hundreds of miles, were required to make deliveries to customersfor which no alternative delivery service provider was available on a timelybasis. In addition, rising fuel costs may result in continued increases inshipping costs charged by UPS, or other delivery service providers, and couldhave an adverse effect on our financial condition and results of operations. 

***The loss of one ormore significant customers could adversely affect our profitability.***

Banfield and Feeders’Advantage, a related party, our two largest customers, accounted forapproximately 10% and 6% of our product sales for our fiscal year ended September 30,2005. Our ten largest customers, excluding Banfield and Feeders’ Advantage,accounted for approximately 6% of our product sales for our fiscal year ended September 30,2005. Our business and results of operations could be adversely affected if thebusiness of these customers was lost. We cannot guarantee that we will maintainor improve our relationships with these customers or that we will continue tosupply these customers at current levels. Banfield, Feeders’ Advantage andother customers may seek to purchase some of the products that we currentlysell directly from the vendors or from one or more of our competitors.Furthermore, our customers are not required to purchase any minimum amount ofproducts from us. The loss of Banfield or Feeders’ Advantage or a deteriorationin our relations with either of them could 

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significantlyaffect our financial condition and results of operations. Additionally, adeterioration in the financial condition of one or more of our customers couldhave a material adverse effect on our results of operations. 

***Failure toeffectively manage growth could impair our business.***

Since fiscal 2000, we have experienced rapid growthand expansion, largely due to internal growth initiatives. Our revenuesincreased from $195.6 million for our fiscal year ended September 30, 2000to $496.7 million for our fiscal year ended September 30, 2005. Our numberof employees increased by approximately 300 individuals during the same period.

It may be difficultto manage such rapid growth in the future, and our future success depends onour ability to implement and/or maintain: 

·       salesand marketing programs; 

·       customerservice levels; 

·       currentand new product and service lines and vendor relationships; 

·       technologicalsupport which equals or exceeds our competitors; 

·       recruitmentand training of new personnel; and 

·       operationaland financial control systems. 

Our ability to successfully offer products andservices and implement our business plan in a rapidly evolving market requiresan effective planning and management process. We expect that we will need tocontinue to improve our financial and managerial controls and reporting systemsand procedures and to expand the training of our work force. While we believeour current systems have sufficient capacity to meet our projected needs, wemay need to increase the capacity of our current systems to meet additional orunforeseen demands. 

If we are not able tomanage our rapid growth, there is a risk our customer service quality coulddeteriorate which may in turn lead to decreased sales or profitability. Also,the cost of our operations could increase faster than growth in our revenues,negatively impacting our profitability. 

***Difficulties withthe integration of acquisitions may impose substantial costs and delays andcause other unanticipated problems for us.***

Acquisitionsinvolve a number of risks relating to our ability to integrate an acquiredbusiness into our existing operations. The process of integrating theoperations of an acquired business, particularly its personnel, could causeinterruptions to our business. Some of the risks we face include: 

·       theneed to spend substantial operational, financial and management resources inintegrating new businesses, technologies and products, and difficultiesmanagement may encounter in integrating the operations, personnel or systems ofthe acquired business; 

·       retentionof key personnel, customers and vendors of the acquired business; 

·       theoccurrence of a material adverse effect on our existing business relationshipswith customers or vendors, or both, resulting from future acquisitions orbusiness combinations could lead to a termination of or otherwise affect ourrelationships with such customers or vendors; 

·       impairmentsof goodwill and other intangible assets; and 

·       contingentand latent risks associated with the past operations of, and otherunanticipated costs and problems arising in, an acquired business. 

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If we are unable tosuccessfully integrate the operations of an acquired business into ouroperations, we could be required to undertake unanticipated changes. Thesechanges could have a material adverse effect on our business. 

***Increases inover-the-counter sales of animal health products could adversely affect ourbusiness.***

We rely, and will continueto rely, on animal owners who purchase their animal health products directlyfrom veterinarians, which we refer to as the ethical channel. There can be noassurance that animal owners will continue to use the ethical channel with thesame frequency as they have in the past, and will not increasingly purchaseanimal health products from sources other than veterinarians, such as theInternet and other over-the-counter channels. Increased competition from anydistributor of animal health products making use of an over-the-counter channelcould significantly reduce our market share and adversely impact our financialresults. 

***If we fail tocomply with or become subject to more onerous government regulations, ourbusiness could be adversely affected.***

The veterinary distribution industry is subject tochanging political and regulatory influences. Both state and federal governmentagencies regulate the distribution of certain animal health products and we aresubject to regulation, either directly or indirectly, by the FDA, the USDA, theEPA, the DEA and state boards of pharmacy as well as comparable state agencies.The regulatory stance these agencies take could change. Our vendors are subjectto regulation by the FDA, the USDA, the EPA and the DEA, as well as otherfederal and state agencies, and material changes to the applicable regulationscould affect our vendors’ ability to manufacture certain products, which couldadversely impact our product supply. In addition, some of our customers mayrely, in part, on farm and agricultural subsidy programs. Changes in theregulatory positions that impact the availability of funding for such programscould have an adverse impact on our customers’ financial positions, which couldlead to decreased sales. 

We strive to maintaincompliance with these laws and regulations. For example, we have hired aManager of Regulatory Compliance and we have engaged an outside consultant toassist us in meeting and complying with the various state licensurerequirements to which we are subject. If we are unable to maintain or achievecompliance with these laws and regulations, we could be subject to substantialfines or other restrictions on our ability to provide competitive distributionservices, which could have an adverse impact on our financial condition.

We cannot assure you thatexisting laws and regulations will not be revised or that new, more restrictivelaws will not be adopted or become applicable to us or the products that we distributeor dispense. We cannot assure you that the vendors of products that may becomesubject to more stringent laws will not try to recover any or all increasedcosts of compliance from us by increasing the prices at which we purchaseproducts from them, or, that we will be able to recover any such increasedprices from our customers. We also cannot assure you that our business andfinancial condition will not be materially and adversely affected by futurechanges in applicable laws and regulations. 

***Loss of keymanagement or sales representatives could harm our business.***

Our future success depends to a significant extent onthe skills, experience and efforts of management, including our President andChief Executive Officer, Mr. James F. Cleary, Jr. While we have notexperienced problems in the past attracting and maintaining members of ourmanagement team, the loss of any or all of these individuals could adverselyimpact our business. We do not carry key-man life insurance on any member ofmanagement. In addition we do not have employment agreements with our keymembers of the senior management team. We must continue to develop and retain acore group of individuals if we are to realize our goal of continued expansionand growth. We cannot assure you that we will be able to do so in the future. 

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Also, due to thespecialized nature of our products and services, generally only highlyqualified and trained sales representatives have the necessary skills to marketour products and provide our services. These individuals develop relationshipswith our customers that could be damaged if these employees are not retained.We face intense competition for the hiring of these professionals. Any failureon our part to hire, train and retain a sufficient number of qualifiedprofessionals would damage our business. We do not generally enter intoagreements that contain non-competition provisions with any of our employees,other than with members of our senior management team. 

***Failure of, orsecurity problems with, our information systems could damage our business.***

Our information systemsare dependent on third party software, global communications providers,telephone systems and other aspects of technology and Internet infrastructurethat are susceptible to failure. Though we have implemented security measuresand some redundant systems, our customer satisfaction and our business could beharmed if we or our vendors experience any system delays, failures, loss ofdata, power outages, computer viruses, break-ins or similar disruptions. Wecurrently process all customer transactions and data at our facilities inMeridian, Idaho. Although we have safeguards for emergencies, including,without limitation, sophisticated back-up systems, the occurrence of a majorcatastrophic event or other system failure at any of our distributionfacilities could interrupt data processing or result in the loss of storeddata. This may result in the loss of customers or a reduction in demand for ourservices. Only some of our systems are fully redundant and although we do carrybusiness interruption insurance, it may not be sufficient to compensate us forlosses that may occur as a result of system failures. If a disruption occurs,our profitability and results of operations may suffer. 

***The outbreak of aninfectious disease within either the production animal or companion animalpopulation could have a significant adverse effect on our business and ourresults of operations.***

An outbreak of diseaseaffecting animals, such as foot-and-mouth disease, avian influenza and bovinespongiform encephalopathy, commonly referred to as “mad cow disease,” couldresult in the widespread destruction of affected animals and consequentlyresult in a reduction in demand for animal health products. In addition,outbreaks of these or other diseases or concerns of such diseases could createadverse publicity that may have a material adverse effect on consumer demandfor meat, dairy and poultry products, and, as a result, on our customers’demand for the products we distribute. The outbreak of a disease among thecompanion animal population which could cause a reduction in the demand forcompanion animals could also adversely affect our business. Although we havenot been adversely impacted by the outbreak of a disease in the past, there canbe no assurance that a future outbreak of an infectious disease will not havean adverse effect on our business. 

***We may be subjectto product liability and other claims in the ordinary course of business.***

Our business involves arisk of product liability and other claims in the ordinary course of business.We maintain general liability insurance with policy limits of $1 million perincident and $2 million in the aggregate, and in many cases we haveindemnification rights against such claims from the manufacturers of theproducts we distribute. We do not maintain a separate product liabilityinsurance policy because we do not currently manufacture any of the productsthat we sell. Our ability to recover under insurance or indemnificationarrangements is subject to the financial viability of the insurers andmanufacturers. We cannot assure you that our insurance coverage or themanufacturers’ indemnity will be available or sufficient in any future casesbrought against us. 

***Aprolonged economic downturn could materially adversely affect our business.***

Our business may bematerially adversely affected by prolonged, negative trends in the generaleconomy that could reduce consumer discretionary spending on animal healthproducts. Our business 

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ultimatelydepends on the ability and willingness of animal owners to pay for ourproducts. This dependence could make us more vulnerable to any reduction inconsumer confidence or disposable income than companies in other industriesthat are less reliant on consumer spending, such as the human health careindustry, in which a large portion of payments are made by insurance programs. 

***We may not be ableto raise needed capital in the future on favorable terms or at all.***

We expect that ourexisting sources of cash, together with any funds generated from operations,will be sufficient to meet our anticipated capital needs for at least the nexttwelve months. However, we may require additional capital to finance our growthstrategies or other activities in the future. Our capital requirements willdepend on many factors, including the costs associated with our growth andexpansion. Additional financing may not be available when needed and, if suchfinancing is available, it may not be available on terms favorable to us. Ourfailure to raise capital when needed could have an adverse effect on ourbusiness, financial condition and results of operations. 

***Our variable rateindebtedness subjects us to interest rate risk, which could cause our debtservice obligations to increase significantly.***

Certain of our borrowings,primarily borrowings on the revolving credit facility under our amended creditagreement, are at variable rates of interest and expose us to interest raterisk based on market rates. In the last year there has been a general increasein borrowing rates in the United States. If interest rates continue toincrease, our debt service obligations on our variable rate indebtedness wouldincrease even though the amount borrowed remained the same, and our net incomeand cash available for servicing our indebtedness would decrease. Our variablerate debt as of September 30, 2005 was approximately $25.2 million(comprised of $24.7 million credit facility and $487,000 promissory note) andour interest expense for 2005 was $2.5 million, excluding $4.1 million ofaccretion of our Series A preferred stock dividends which was redeemed in August 2005.

***Item 1B.****                  UnresolvedStaff Comments.*

None.

***Item 2.****                          Properties.*

The table belowprovides a summary of the Company’s principal facilities as of September 30,2005:

| **Location**             | ** ** | **Total Square  Feet** | ** ** | **Leased or  Owned** | ** ** | **Principal Function**                        |
|--------------------------|------------|------------------------|------------|----------------------|------------|-----------------------------------------------|
| Meridian, Idaho          |       | 30,827                 |       | Leased               |       | Headquarters and call center                  |
| Atlanta, Georgia         |       | 25,200                 |       | Leased               |       | Distribution center                           |
| Denver, Colorado         |       | 24,000                 |       | Owned                |       | Distribution center and call center           |
| Denver, Colorado(1)      |       | 58,737                 |       | Leased               |       | Distribution center and call center           |
| Fife, Washington         |       | 30,000                 |       | Leased               |       | Distribution center                           |
| Glendale, Arizona        |       | 15,700                 |       | Leased               |       | Distribution center                           |
| Grand Prairie, Texas     |       | 35,000                 |       | Leased               |       | Distribution center, call center and pharmacy |
| Harrisburg, Pennsylvania |       | 25,000                 |       | Leased               |       | Distribution center and pharmacy              |
| Holland, Michigan        |       | 25,000                 |       | Leased               |       | Distribution center and call center           |
| Nampa, Idaho             |       | 30,250                 |       | Leased               |       | Distribution center and pharmacy              |
| San Antonio, Texas       |       | 19,200                 |       | Leased               |       | Distribution center and call center           |
| Visalia,  California     |       | 52,000                 |       | Leased               |       | Distribution  center                          |

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(1)*         *Thedistribution center and call center located in Denver, Colorado is expected tobe operational by January 2006.

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***Item. 3.****                       LegalProceedings.*

MWI is not a party to anymaterial pending legal proceedings and is not aware of any claims that couldhave a material adverse effect on its financial position, results ofoperations, or cash flows.

***Item 4.****                          Submissionof Matters to a Vote of Security Holders.*

On July 27, 2005, inanticipation of the Company’s initial public offering, a majority of theCompany’s stockholders who were eligible to vote on such matters adoptedseveral resolutions by written consent. The stockholders first approved anamendment to the Company’s Amended and Restated Certificate of Incorporationthat provided that the number of authorized shares of the Company’s commonstock was increased to 20,000,000 shares. The stockholders also approved theamendment and restatement of the Company’s certificate of incorporation andbylaws each in their entirety, to be effective upon the consummation of theCompany’s initial public offering. Finally, the stockholders approved theadoption of the Company’s 2005 Stock Incentive Plan. Further informationregarding the above-referenced matters is available in the Company’sRegistration Statement on Form S-1, as amended (Registration No. 333-124264).

**PART II**

***Item 5.****                          Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities.*

The Company’s common stockis quoted on the Nasdaq National Market under the symbol MWIV. As of November 22,2005 there were approximately 14 holders of record. The Company completed itsinitial public offering in August 2005. The Company’s common stock hasbeen quoted, as reported by Nasdaq, at a high of $24.18 and a low of $17.00 pershare during the period of August 2, 2005 to September 30, 2005.

MWI has never paid ordeclared any dividends on its common stock. MWI does not anticipate paying anydividends on its common stock in the foreseeable future. MWI’s amended creditagreement prohibits the Company from declaring or paying dividends on itscommon stock. MWI intends to retain future earnings to finance the ongoingoperations and growth of the Company’s business. Any future determinationrelating to the Company’s dividend policy will be made at the discretion of theboard of directors and will depend on then existing conditions, including MWI’sfinancial condition, results of operations, contractual restrictions, capitalrequirements, business prospects and other factors the board of directors maydeem relevant.

Information concerning theCompany’s stock repurchases during each month in the quarter ended September 30,2005 is as follows:

**IssuerPurchases of Equity Securities**

| **Period**                                       | ** ** | **(a)  Total Number  of Shares (Or  Units)  Purchased** | ** ** | **(b)  Average Price  Paid Per Share  (Or Unit)** | ** ** | **(c)  Total Number Of  Shares (Or  Units) Purchased  As Part Of  Publicly  Announced  Plans Or  Programs** | ** ** | **(d)  Maximum Number  (Or Approximate  Dollar Value) Of  Shares (Or Units)  That May Yet Be  Purchased Under  The Plans Or  Programs** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1, – July 31,  2005          |       |                                                                   | 5,451      | (1)                                                                   |       |                                                                                                                                           | $          | 0.18                                                                                                                                                                                                |       |   |   | — |   |   |   | $ | — |   |   |
| August 1 – August 31,  2005       |       |                                                                   | —     |                                                                  |       |                                                                                                                                           | —     |                                                                                                                                                                                                |       |   | — |   |   |   | — |   |   |
| September 1 – September 30,  2005 |       |                                                                   | —     |                                                                  |       |                                                                                                                                           | —     |                                                                                                                                                                                                |       |   | — |   |   |   | — |   |   |

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(1)          Sharesrepurchased represent unvested restricted stock repurchased as a result of anemployee termination

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***Equity Compensation Plan Information***

Thefollowing table provides information as of September 30, 2005 about thecommon stock that may be issued under all of the Company’s existing equitycompensation plans, including the 2002 Stock Option and 2005 Stock-BasedIncentive Compensation Plans. Both of these plans have been approved by our stockholders.

| ** **                                                  | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  Remaining available for  future issuance under equity  compensation plans  (excluding securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |                                                                                                                                                      | 580,335    |                                                                                                                 |       |                                                                                                                                                                                                                  | $          | 4.37 |   |   |   | 1,125,943 |   |   |
| Equity compensation plans not approved by security  holders |       |                                                                                                                                                      | —     |                                                                                                                 |       |                                                                                                                                                                                                                  | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                                                                                                                      | 580,335    |                                                                                                                 |       |                                                                                                                                                                                                                  | $          | 4.37 |   |   |   | 1,125,943 |   |   |

 

***Item 6.****                          SelectedFinancial Data.*

The selectedconsolidated financial and operating data below are derived from the followingsources:

·       Theconsolidated financial statements as of and for the fiscal years ended September 30,2005, 2004 and 2003 and for the period from June 18, 2002 to September 30,2002 which have been audited by an independent registered public accountingfirm.

·       Theconsolidated financial statements of the Company while it was operated by AgriBeef Co. (which is referred to as the Company’s Predecessor) for the periodfrom October 1, 2001 to June 17, 2002 and for the year ended September 30,2001. The Predecessor’s financial statements have been audited by anindependent registered public accounting firm.

All dollars and share amounts are presented inthousands, except per share amounts.

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Theselected consolidated financial and operating data below represent portions ofthe Company’s consolidated financial statements and are not complete. Youshould read this information together with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the Company’sconsolidated financial statements and the related notes to these statements.Historical results are not necessarily indicative of future performance.

| ** **                                        | ** ** | **2005**                                                    | ** ** | **2004**   | ** ** | **2003**        | ** ** | **2002**                                                      | ** ** | **2001**   | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|------------|------------|-----------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **Successor**                                               | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
| ** **                                        | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** **      | ** ** | **June 18, 2002 –   September 30,  2002** | ** ** | ** ** | ** ** | **October 1,  2001 – June 17,  2002** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Dollars and shares in thousands, except  per share data** | ** ** |
| Operating Results:                                |       |                                                        |       |       |       |            |       |                                                          |       | * *   |       |   |   |   |   | * * |   |   |   |
| Product sales                                     |       | $                                                           | 463,272    |       | $          | 367,863         |       | $                                                             | 315,738    |       |       | $ | 84,467 | * * |   |   |   |   | $ | 177,135 | * * |   | $ | 219,407 |   |
| Product  sales—related party                 |       | 28,473                                                      |       | 22,163     |       | 22,960          |       |                                                          | 7,329      | * *   |       |   |   |   | 9,947 | * * |   | — |   |
| Commissions                                       |       | 4,910                                                       |       | 4,256      |       | 3,011           |       |                                                          | 1,009      | * *   |       |   |   |   | 1,268 | * * |   | 2,006 |   |
| Total revenues                                    |       | 496,655                                                     |       | 394,282    |       | 341,709         |       |                                                          | 92,805     | * *   |       |   |   |   | 188,350 | * * |   | 221,413 |   |
| Cost of product  sales                            |       | 426,709                                                     |       | 338,684    |       | 294,692         |       |                                                          | 80,032     | * *   |       |   |   |   | 161,840 | * * |   | 188,260 |   |
| Gross profit                                      |       | 69,946                                                      |       | 55,598     |       | 47,017          |       |                                                          | 12,773     | * *   |       |   |   |   | 26,510 | * * |   | 33,153 |   |
| *Gross profit as  percent of total revenues*      | * *   | *14.1*                                                      | *%*        | *14.1*     | *%*        | *13.8*          | *%*        | * *                                                      | *13.8*     | *%*        | * *   | * * | * * | * * | *14.1* | *%* | * * | *15.0* | *%* |
| Selling, general  and administrative  expenses(1) |       | 52,647                                                      |       | 41,872     |       | 35,886          |       |                                                          | 11,115     | * *   |       |   |   |   | 20,082 | * * |   | 25,009 |   |
| Depreciation and  amortization                    |       | 1,528                                                       |       | 1,146      |       | 976             |       |                                                          | 285        | * *   |       |   |   |   | 577 | * * |   | 835 |   |
| Operating income                                  |       | 15,771                                                      |       | 12,580     |       | 10,155          |       |                                                          | 1,373      | * *   |       |   |   |   | 5,851 | * * |   | 7,309 |   |
| Other income (expense):                           |       |                                                        |       |       |       |            |       |                                                          |       | * *   |       |   |   |   |   | * * |   |   |   |
| Interest expense(2)                               |       | (6,515                                                      | )          | (6,098     | )          | (3,034          | )          |                                                          | (644       | )          |       |   |   |   | (731 | ) |   | (1,255 | ) |
| Other income  (expense)                           |       | 399                                                         |       | 322        |       | 324             |       |                                                          | 59         | * *   |       |   |   |   | 203 | * * |   | (146 | ) |
| Total other  income (expense)                     |       | (6,116                                                      | )          | (5,776     | )          | (2,710          | )          |                                                          | (585       | )          |       |   |   |   | (528 | ) |   | (1,401 | ) |
| Income before taxes                               |       | 9,655                                                       |       | 6,804      |       | 7,445           |       |                                                          | 788        | * *   |       |   |   |   | 5,323 |   |   | 5,908 |   |
| Income taxes                                      |       | (5,098                                                      | )          | (4,280     | )          | (3,116          | )          |                                                          | (297       | )          |       |   |   |   | (2,043 | ) |   | (2,246 | ) |
| Net income                                        |       | 4,557                                                       |       | 2,524      |       | 4,329           |       |                                                          | 491        | * *   |       |   |   |   | 3,280 | * * |   | 3,662 |   |
| Accretion of  redeemable preferred stock          |       | —                                                      |       | —     |       | (2,714          | )          |                                                          | (995       | )          |       |   |   |   | — | * * |   | — |   |
| Income (loss)  available to common stockholders   |       | $                                                           | 4,557      |       | $          | 2,524           |       | $                                                             | 1,615      |       |       | $ | (504 | ) |   |   |   |   | $ | 3,280 | * * |   | $ | 3,662 |   |
| Earnings per  share:                              |       |                                                        |       |       |       |            |       |                                                          |       | * *   |       |   |   |   |   | * * |   |   |   |
| Basic                                             |       | $                                                           | 0.76       |       | $          | 0.50            |       | $                                                             | 0.32       |       |       | $ | (0.10 | ) |   |   |   |   | NM | * * |   | NM |   |
| Diluted                                           |       | 0.68                                                        |       | 0.43       |       | 0.28            |       |                                                          | (0.10      | )          |       |   |   |   | NM | * * |   | NM |   |
| Shares used in computing earnings per share:      |       |                                                        |       |       |       |            |       |                                                          |       | * *   |       |   |   |   |   | * * |   |   |   |
| Basic                                             |       | 5,970                                                       |       | 5,038      |       | 5,013           |       |                                                          | 4,978      | * *   |       |   |   |   | NM | * * |   | NM |   |
| Diluted                                           |       | 6,697                                                       |       | 5,878      |       | 5,745           |       |                                                          | 4,978      | * *   |       |   |   |   | NM | * * |   | NM |   |

 

| ** **                             | ** ** | **Successor** | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
|----------------------------------------|------------|---------------|------------|------------|------------|-----------------|------------|
| **As of September 30,** | ** ** | ** **    | ** ** | **2005**   | ** ** | **2004**        | ** ** | **2003** | ** ** | **2002** | ** ** | ** ** | ** ** | **2001** | ** ** |
| Financial Position                     |       |          |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Cash                                   |       | $             | 31         |       | $          | 28              |       | $ | 36 |   | $ | 36 |   |   |   |   | $ | 33 |   |   |
| Working  capital(3)                    |       | 47,899        |       | 5,853      |       | (1,027          | )          | (6,694 | ) |   |   |   | 16,000 |   |   |
| Total assets                           |       | 188,244       |       | 146,565    |       | 122,270         |       | 115,070 |   |   |   |   | 79,715 |   |   |
| Total debt                             |       | 25,177        |       | 50,149     |       | 33,972          |       | 41,719 |   |   |   |   | 14,155 |   |   |
| Redeemable  preferred stock            |       | —        |       | 35,733     |       | 31,494          |       | 27,495 |   |   |   |   | — |   |   |
| Total stockholders’ equity        |       | 86,694        |       | 4,632      |       | 2,113           |       | 353 |   |   |   |   | 17,962 |   |   |
|                                        |            |               |            |            |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                       | ** ** | **2005**      | ** ** | **2004**   | ** ** | **2003**        | ** ** | **2002**                                                      | ** ** | **2001**   | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|------------|------------|-----------------|------------|---------------------------------------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Successor** | ** ** | ** ** | ** ** | **Predecessor** | ** ** |
| ** **                                                       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **      | ** ** | **June 18, 2002 –   September 30,  2002** | ** ** | ** ** | ** ** | **October 1,  2001 – June 17,  2002** | ** ** | ** ** | ** ** |
| Other Year End Statistics                                        |       |          |       |       |       |            |       |                                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales  from Internet as a percentage of product sales(4) |       |          | 21         | %          |       |            | 18         | %                                                             |       |       | 18         | % |   |   | 19 | % |   |   |   |   | 16 | % |   |   | — |   |   |
| Field sales  representatives (at end of period)                  |       |          | 134        |       |       |            | 111        |                                                          |       |       | 94         |   |   |   | 82 |   |   |   |   |   | 82 |   |   |   | 71 |   |   |
| Telesales  representatives (at end of period)                    |       |          | 93         |       |       |            | 79         |                                                          |       |       | 75         |   |   |   | 69 |   |   |   |   |   | 63 |   |   |   | 47 |   |   |
| Distribution  centers (at end of period)                         |       |          | 10         |       |       |            | 9          |                                                          |       |       | 8          |   |   |   | 8 |   |   |   |   |   | 8 |   |   |   | 7 |   |   |
| Fill rate(5)                                                     |       |          | 98         | %          |       |            | 98         | %                                                             |       |       | 98         | % |   |   | 98 | % |   |   |   |   | 98 | % |   |   | 98 | % |   |

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“NM,” as used in the tableabove, means not meaningful because of the substantial changes to the Company’scapital structure resulting from the acquisition of MWI Veterinary Supply Co.from Agri Beef Co. effective as of June 18, 2002.

(1)    Includes management fees expense of $2,456, $386, $250, and $72for the fiscal years ended 2005, 2004, 2003 and for the period June 18,2002 to September 30, 2002, respectively, as a result of payments toBruckmann, Rosser, Sherrill & Co. LLC and Agri Beef Co. This managementand consulting services agreement was terminated in August 2005 andresulted in a $2,000 charge in the Company’s fourth quarter of 2005 which isincluded in the $2,456 expense for the fiscal year ended 2005.

(2)    Includes accretion of the Company’sSeries A preferred stock dividends beginning on July 1, 2003, whichis non-deductible for income tax purposes.

(3)    Defined as current assets minus currentliabilities.

(4)    Information for the Company’s fiscal yearended September 30, 2001 is not readily available.

(5)    Defined as, forany period, the dollar value of orders shipped the same day they were placedfrom any distribution center expressed as a percentage of the total dollarvalue of the orders placed by customers in the period.

***Item 7.****                          Management’sDiscussion and Analysis of Financial Condition and Results of Operations.*

*All dollars are presented herein in thousands, exceptper share amounts.*

**Overview**

MWI is a leading distributor of animal health productsto veterinarians across the United States. MWI markets its products toveterinarians in both the companion and production animal markets. Companionanimals include dogs, cats, other pets and horses, while production animalsinclude cattle and other food-producing animals. MWI’s growth hasprimarily been from internal growth initiatives and, to a lesser extent,selective acquisitions.

Approximately two-thirds of MWI’s total revenues havebeen generated from sales of companion animal products and one-third fromproduction animal products. While MWI intends to continue to support productionanimal veterinarians with a broad range of products and value-added services,the increasing maturity of the production animal market results in lowermargins on product sales relative to the companion animal market. MWI intendsto increase its focus on the companion animal market, which the Companybelieves is growing due to the increasing number of households with companionanimals, increased expenditures on animal health and preventative care, anaging pet population, advancements in pharmaceuticals and diagnostic testingand extensive marketing programs sponsored by companion animal nutrition andpharmaceutical companies. See “Item 1—Business”. While the average order sizefor companion animal health products is often smaller than production animalhealth products, companion animal health products typically have highermargins. MWI will continue to grow sales in the production animal marketorganically and through selected acquisitions, as we believe this market isimportant to the Company’s overall business.

MWI sells products that it sources from vendors to itscustomers through either a “buy/sell” transaction or an agency relationshipwith its vendors. In a “buy/sell” transaction, MWI purchases or takes inventoryof products from the vendor. When a customer places an order with MWI, theCompany picks, 

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packs, ships and invoicesthe customer for the order. MWI recognizes revenue from “buy/sell”transactions, which account for the vast majority of the Company’s business, assales in conformity with accounting principles generally accepted in the UnitedStates. In an agency relationship, MWI does not purchase and take inventory ofproducts from its vendors. When MWI receives an order from a customer, MWItransmits the order to the vendor, who picks, packs and ships the order to thecustomer. In some cases, the vendor invoices and collects payment from thecustomer, while in other cases MWI invoices and collects payment from thecustomer on behalf of the vendor. MWI receives a commission payment forsoliciting the order from the customer and for providing other customer serviceactivities. The aggregate revenue MWI receives in agency transactionsconstitute the “commissions” line item on the statement of income and is recordedin conformity with accounting principles generally accepted in the UnitedStates. MWI vendors determine the method used to sell their products. Historically,vendors have occasionally switched between the “buy/sell” and agency models forparticular products in response to market conditions related to that particularproduct. A switch between models can impact the Company’s revenues andoperating income. MWI cannot know in advance when a vendor will switch betweenthe “buy/sell” and agency models or what impact, if any, such a change mayhave. A switch can occur even with vendors with whom MWI has writtenagreements, because most of the agreements with vendors have relatively shortterms and are terminable with or without cause on short notice, normally 30 to90 days. The impact of any individual change from a “buy/sell” to anagency model depends on the costs and expenses associated with a particularproduct, and can have either a positive or a negative effect on ourprofitability.

When MWI negotiates vendorcontracts for the upcoming year, vendors typically establish sales growth goalsfor the Company to meet to receive performance rebates. Since many of thevendors’ rebate programs are based on a calendar year, historically the threemonths ended December 31 has been the most significant quarter forrecognition of rebates. Vendor rebates based on sales are classified in theaccompanying consolidated statements of income as a reduction to cost ofproduct sales at the time the sales performance measures are achieved. Purchaserebates are measured against inventory purchases from the vendors and are areduction of inventory until the product is sold. When the inventory is sold,purchase rebates are recognized as a reduction to cost of product sales.

***InitialPublic Offering***

In August 2005, aRegistration Statement relating to the Company’s initial public offering ofcommon stock was declared effective by the Securities and Exchange Commission.As a result, the Company issued 4,983,334 shares (including the exercise of theunderwriters’ over-allotment option) of common stock that were subsequentlysold to the public for $17 per share. The Company received estimated netproceeds of $77,159 after deducting the underwriting discounts and offeringexpenses. The Company used the net proceeds to redeem all of the Company’s Series Apreferred stock and accrued dividends for approximately $39,789 and to repayapproximately $37,370 of borrowings on the revolving credit facility under theamended credit agreement.

***Acquisitions***

On November 1, 2004, the Company acquired certainassets of Memorial Pet Care, Inc., a pet crematorium located in Meridian,Idaho. Memorial Pet Care presently operates in southwestern Idaho and easternOregon and serves veterinary practices and their clients by providing petcremation services.

On January 3, 2005,the Company acquired substantially all of the assets of Vetpo Distributors, Inc.(“Vetpo”), a regional animal health products distributor located in Holland,Michigan. This acquisition has enabled the Company to substantially expand itsmarket presence and improve the Company’s distribution capabilities inMichigan, Illinois, Indiana, Ohio and Wisconsin.

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**Results of Operations**

The following tablesummarizes MWI’s historical results of operations for its fiscal years ended September 30,2005, 2004 and 2003 on an actual basis and as a percentage of total revenues.

***SummaryConsolidated Results of Operations Table***

| ** **                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                                  |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Product sales                                              |       | $        | 463,272    |     | 93.3       | %        | $          | 367,863 |   | 93.3 | % | $ | 315,738 |   | 92.4 | % |
| Product sales to related  party                            |       | 28,473   |       | 5.7      |       | 22,163   |       | 5.6 |   | 22,960 |   | 6.7 |   |
| Commissions                                                |       | 4,910    |       | 1.0      |       | 4,256    |       | 1.1 |   | 3,011 |   | 0.9 |   |
| Total  revenues                                            |       | 496,655  |       | 100.0    |       | 394,282  |       | 100.0 |   | 341,709 |   | 100.0 |   |
| Cost  of product sales                                     |       | 426,709  |       | 85.9     |       | 338,684  |       | 85.9 |   | 294,692 |   | 86.2 |   |
| Gross  profit                                              |       | 69,946   |       | 14.1     |       | 55,598   |       | 14.1 |   | 47,017 |   | 13.8 |   |
| Selling,  general and administrative expenses(1)           |       | 52,647   |       | 10.6     |       | 41,872   |       | 10.6 |   | 35,886 |   | 10.5 |   |
| Depreciation  and amortization                             |       | 1,528    |       | 0.3      |       | 1,146    |       | 0.3 |   | 976 |   | 0.3 |   |
| Operating  income                                          |       | 15,771   |       | 3.2      |       | 12,580   |       | 3.2 |   | 10,155 |   | 3.0 |   |
| Other income (expense):                                    |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Interest  expense(2)                                       |       | (6,515   | )          | (1.3     | )          | (6,098   | )          | (1.6 | ) | (3,034 | ) | (0.9 | ) |
| Earnings  of equity method investees                       |       | 131      |       | —   |       | 104      |       | — |   | 106 |   | — |   |
| Other                                                      |       | 268      |       | 0.1      |       | 218      |       | 0.1 |   | 218 |   | 0.1 |   |
| Total  other expense                                       |       | (6,116   | )          | (1.2     | )          | (5,776   | )          | (1.5 | ) | (2,710 | ) | (0.8 | ) |
| Income  before taxes                                       |       | 9,655    |       | 2.0      |       | 6,804    |       | 1.7 |   | 7,445 |   | 2.2 |   |
| Income  tax expense                                        |       | (5,098   | )          | (1.0     | )          | (4,280   | )          | (1.1 | ) | (3,116 | ) | (0.9 | ) |
| Net  income                                                |       | 4,557    |       | 1.0      |       | 2,524    |       | 0.6 |   | 4,329 |   | 1.3 |   |
| Redeemable  preferred stock accretion(2)                   |       | —   |       | —   |       | —   |       | — |   | (2,714 | ) | (0.8 | ) |
| Net  income to common stockholders                         |       | $        | 4,557      |     | 1.0        | %        | $          | 2,524 |   | 0.6 | % | $ | 1,615 |   | 0.5 | % |
| Earnings Per Share:                                        |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Basic                                                      |       | $        | 0.76       |     |       |     | $          | 0.50 |   |   |   | $ | 0.32 |   |   |   |
| Dilutive                                                   |       | $        | 0.68       |     |       |     | $          | 0.43 |   |   |   | $ | 0.28 |   |   |   |
| Shares used in earnings per  share calculation:            |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Basic                                                      |       | 5,970    |       |     |       | 5,038    |       |   |   | 5,013 |   |   |   |
| Dilutive                                                   |       | 6,697    |       |     |       | 5,878    |       |   |   | 5,745 |   |   |   |
| **Other Data:**                                            |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Product  sales from Internet as a percentage of sales |       | 21       | %          |     |       | 18       | %          |   |   | 18 | % |   |   |
| Field  sales representatives (at end of  period)           |       | 134      |       |     |       | 111      |       |   |   | 94 |   |   |   |
| Telesales  representatives (at end of  period)             |       | 93       |       |     |       | 79       |       |   |   | 75 |   |   |   |
| Fill rate(3)                                               |       | 98       | %          |     |       | 98       | %          |   |   | 98 | % |   |   |

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(1)          Includes management feesexpense of $2,456, $386 and $250 for fiscal years ended September 30,2005, 2004 and 2003, respectively, as a result of payments to Bruckmann,Rosser, Sherrill & Co. LLC and Agri Beef Co. The parties signed anagreement whereby the management and consulting services agreement wasterminated in August 2005 for a termination fee of $2,000 that is includedin the management fee expense of $2,456 for fiscal year endedSeptember 30, 2005.

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(2)          Includes accretion ofour Series A preferred stock dividends beginning on July 1, 2003,which is nondeductible for income tax purposes. Accretion expense included as acomponent of interest expense was $4,055, $4,239 and $999 for fiscal yearsended September 30, 2005, 2004 and 2003, respectively. The Company used aportion of the proceeds from its initial public offering in August 2005 toredeem all the Series A preferred stock and accrued dividends.

(3)          Definedas, for any period, the dollar value of orders shipped the same day they wereplaced from any distribution center expressed as a percentage of the totaldollar value of the orders placed by customers in the period.

**Fiscal 2005 Compared to Fiscal 2004**

*TotalRevenues.**  *Totalrevenues increased $102,373, or 26.0%, to $496,655 for the fiscal year ended September 30,2005 (“2005”) from $394,282 for the fiscal year ended September 30, 2004 (“2004”).This increase was attributable to an increase in product sales volumes of awide variety of products to both existing and new customers. The amount of theincrease in product sales attributable to customers obtained subsequent to theend of the prior comparative period was approximately $32,727 with theremaining increase attributable to existing customers. Revenues improved in2005 as compared to the prior year as a result of the conversion to a buy/sellarrangement for an equine West Nile Virus vaccine that was a commission-basedagency relationship in the prior year, the addition of new cattle antibioticsand the addition of a leading non-steroidal anti-inflammatory drug for dogs. TheCompany increased the number of field sales representatives to 134 at September 30,2005 from 111 at September 30, 2004, allowing the Company to targetadditional customers and to extend geographic reach, principally in thenortheast and southeast regions of the United States. On January 3, 2005,the Company acquired substantially all the assets of Vetpo. This acquisitionhas enabled the Company to substantially expand the Company’s market presencein Michigan, Illinois, Indiana, Ohio and Wisconsin. From the acquisition datethrough September 30, 2005, the field sales representatives who joined theCompany from Vetpo produced sales of approximately $13,700 (which is includedin the product sales attributable to customers obtained subsequent to the endof the prior comparative period of $32,727 discussed above).

*GrossProfit.*   Gross profit increased by $14,348, or25.8%, to $69,946 for 2005 from $55,598 for 2004. Vendor rebates contributed tothe gross profit dollar improvement by $2,699 for the year ended September 30,2005 as compared to the prior year. Gross profit as a percentage of totalrevenues for the year ended September 30, 2005 remained consistent withthat of the prior year at 14.1% for 2005.

*Selling,General and Administrative (“SG&A”).*   SG&Aexpenses increased by $10,775, or 25.7%, to $52,647 for 2005 from $41,872 for2004. SG&A expenses as a percentage of total revenues for the year ended September 30,2005 remained consistent with that of the prior year at 10.6% of total revenues.During the fourth quarter ended September 30, 2005, the Company incurred a$2,000 charge related to the termination of a management services andconsulting agreement. This charge contributed to the increase in SG&Aexpense, both in dollars and as a percentage of total revenues. Partiallyoffsetting this charge, SG&A for the year benefited from increased salesleverage. The dollar increase in 2005 was also due to increased compensationcosts, outside fees and services, location and travel costs, and occupancycosts. Compensation costs increased as a result of additional headcount of 98team members during the year. Compensation costs also increased as a result ofincreased sales commissions that are directly correlated with the sales growthand annual performance wage increases. The increase in outside fees andservices was primarily due to increased credit card and other bank fees,increased usage of temporary workforce costs used to support the Company’ssales growth in the Company’s distribution center facilities and increasedprofessional services fees related to the Company’ efforts to become a publiccompany. Increases in location, travel and occupancy costs were due to theincreased number of team members and increased sales volume, the opening of anew facility in Harrisburg, Pennsylvania in April 2004 and the facilityacquired in the Vetpo acquisition located in Holland, Michigan. Management feesincluded in SG&A were 

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$2,456 in 2005, comparedto $386 for the same period in the prior year and are the result of amanagement and consulting services agreement between MWI, BRS and Agri Beef Co.that was terminated in August 2005.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased 33.3%, or $382, to $1,528 in 2005 from$1,146 in 2004. This increase was due primarily to amortization of intangibleassets acquired with the purchases of Vetpo and Memorial Pet Care. In addition,depreciation expense increased as a result of the new facilities in Harrisburg,Pennsylvania; Holland, Michigan and Nampa, Idaho.

*OtherIncome (Expense).*   Other expenses increased $340,or 5.9%, to $6,116 in 2005 from $5,776 in 2004. The increase in other expenseswas primarily due to an increase in interest expense of $417 to $6,515 in 2005from $6,098 for the same period in the prior year. Included in interest expenseis the accretion of dividends on the Series A preferred stock of $4,055and $4,239 in 2005 and 2004, respectively, that was redeemed in August 2005with a portion of the proceeds from the initial public offering. Going forwardthe Company expects interest expense to decline as compared to historicalamounts as a result of the redemption of all the Series A preferred stockand the pay down of the revolving credit facility.

*Income Tax Expense.*   TheCompany’s effective tax rate was 52.8% and 62.9% in 2005 and 2004,respectively. The decrease in the effective tax rate was primarily attributableto the lower nondeductible accretion of dividends on the Series Apreferred stock in 2005 due to the redemption of all of the Series Apreferred stock in August 2005 and due to actual state income tax expensebeing less than estimated due to the utilization of state tax credits.

**Fiscal 2004 Compared to Fiscal 2003**

*TotalRevenues.**  *Totalrevenues increased $52,573, or 15.4%, to $394,282 in 2004 from $341,709 for thefiscal year ended September 30, 2003 (“2003”). This increase wasattributable to an increase in product sales volumes of a wide variety of theCompany’s products to both new and existing customers. The amount of theincrease in product sales attributable to customers obtained subsequent to theend of the prior comparative period was approximately $14,072 with theremaining increase attributable to existing customers. The Company increasedthe number of its field sales representatives to 111 at September 30, 2004from 94 at September 30, 2003, allowing MWI to target additional customersand to extend its geographic reach, principally in the northeast and southeastregions of the United States. The growth in total revenues was partially offsetby a transition in the selling arrangement of certain products by certainvendors from a “buy/sell” to an agency relationship, under which onlycommissions are recorded as revenues. These vendor lines represented $3,800 oftotal revenues, including product sales and commissions, in 2004 and $14,100 oftotal revenues, including product sales and commissions, in 2003.

*GrossProfit.**  *Grossprofit increased by $8,581, or 18.3%, to $55,598 in 2004 from $47,017 in 2003.Gross profit as a percentage of total revenues was 14.1% in 2004, compared to13.8% in the prior year. The Company’s gross profit margin benefited from anincrease in vendor rebates of $3,062 as a result of attaining certain growthgoals and a decrease in freight expense as a percentage of total revenues,partially offset by a decreased margin due to changes in product mix and toincreased pricing pressure.

*Selling,General and Administrative Expenses.**  *SG&A increased by $5,986, or16.7%, to $41,872 in 2004, from $35,886 in 2003. This increase was primarilydue to the addition of 46 employees, including 17 field salesrepresentatives, and new facilities in Harrisburg, Pennsylvania; Meridian,Idaho and Fife, Washington. The Company relocated to a larger distributioncenter in Visalia, California in order to expand its capacity. The incrementalexpense from these facilities in 2004 was $507 when compared to the prior year.Selling, general and administrative expenses as a percentage of total revenuesincreased slightly to 10.6% in 2004 compared to 10.5% in the prior year.Management fees included in selling, general and administrative expenses were$386 in 2004 compared to $250 in the prior year.

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*Depreciationand Amortization.**  *Depreciationand amortization expense increased $170, or 17.4%, to $1,146 in 2004 from $976in 2003. This increase was due primarily to capital expenditures for deliverytrucks used at the Company’s distribution center facilities to support itssales growth.

*OtherIncome (Expense).**  *Otherexpenses increased $3,066, or 113.1%, to $5,776 in 2004, from $2,710 in 2003.The increase in other expenses was primarily due to an increase in interestexpense of $3,064 to $6,098 in 2004, from $3,034 in the prior year. Thisincrease was due principally to the accretion of the Series A redeemablepreferred stock dividends which was reflected as interest expense commencingwith the adoption of a new accounting standard effective July 1, 2003.

*Income Tax Expense.**  *The Company’s effective tax ratewas 62.9% and 41.9% in 2004 and 2003, respectively. The increase in theeffective tax rate was primarily attributable to the nondeductible accretion ofdividends on the Series A preferred stock, beginning on July 1, 2003.

**Liquidity and Capital Resources**

The Company’s principal sources of liquidity are cashflow generated from operations and borrowings on the revolving credit facilityunder the amended credit agreement. The Company uses capital primarily to fundday-to-day operations and to maintain sufficient inventory levels in order topromptly fulfill customer orders and to expand the Company’s operations andsales growth.

In August 2005 a Registration Statement relatingto the Company’s initial public offering of common stock was declared effectiveby the Securities and Exchange Commission. As a result, the Company issued4,983,334 shares (including the exercise of the underwriters’ over-allotmentoption) of common stock that was subsequently sold to the public for $17 pershare. The Company received estimated net proceeds of $77,159 after deductingthe underwriting discounts and offering expenses. The Company used these netproceeds to redeem all of the Company’s Series A preferred stock andaccrued dividends for approximately $39,789 and to repay approximately $37,370of borrowings on the revolving credit facility under the amended creditagreement.

*OperatingActivities.**  *For2005 cash used in operations was $5,611 and was primarily attributable toincreases in inventories of $17,334 and accounts receivable of $15,276. Thisamount was partially offset by an increase in accounts payable of $15,837,non-cash accretion of the Series A preferred stock dividends of $4,055(included in interest expense) and net income of $4,557. The increased levelsof inventory and accounts payable resulted from moving certain products theCompany sells from a commission-based agency arrangement to a buy/sellarrangement, increased sales growth requiring higher levels of inventory andnew product offerings. Increased accounts receivables are directly related tothe increase in sales. Additionally, the Company provided extended paymentterms to production animal veterinarians in June and July of 2005 inresponse to market conditions.

For 2004 net cash used by operating activities was$13,889 and was primarily attributable to increases of $12,668 in inventoriesand $10,071 in accounts receivable. The increase in inventories was primarilyrelated to supporting increased sales growth and adding a distribution centerin Harrisburg, Pennsylvania. During this time period, the Company offeredextended payment terms to production animal veterinarians in response to marketconditions and experienced increased sales that led to the increase in accountsreceivable balances. The increase in inventories and accounts receivable werepartially offset by non-cash accretion of the Series A preferred stockdividends of $4,239 (included in interest expense) and net income of $2,524.

For 2003 net cash provided by operating activities was$8,781 and was primarily attributable to net income of $4,329, a decrease of$1,555 in inventories, non-cash accretion of the Company’s Series Apreferred stock dividends of $999 and a positive net effect of $923 of an$8,536 increase in accounts receivable offset by a $9,459 increase in accountspayable. The decrease in inventories related primarily to 

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two product lines movingfrom a buy/sell to an agency arrangement. The increase in both accountsreceivable and accounts payable are a reflection of sales growth and theyoffset with a minimal effect on operating activities.

*InvestingActivities.*   For 2005 net cash used in investingactivities was $6,529 and was primarily attributable to the acquisition ofcertain assets of Vetpo and Memorial Pet Care, Inc. In addition, in April 2005,the Company relocated from an existing distribution center facility to a largerdistribution center facility in Nampa, Idaho. The capital expenditures for theequipment for this facility were approximately $657. The Company also began therelocation of the Company’s Denver, Colorado distribution center to a new,larger, 58,737 square-foot facility that is expected to be operational by January of2006.

Net cash used by investing activities was $1,251 in2004 and was primarily attributable to investments in equipment, including thepurchase of office, distribution center and computer equipment. In November 2003,the Company relocated from an existing distribution center facility to a largerdistribution center facility in Visalia, California. The capital expenditurefor the equipment for this facility was approximately $507. In December 2003,the Company signed a new distribution center lease for a Harrisburg,Pennsylvania location. The capital expenditure for the equipment for thisfacility was approximately $696. The Company uses these facilities to shipproducts to its customers in their respective areas of the United States. Alsoin 2004, the Company upgraded its enterprise information system at a cost of approximately$283. The implementation was effective July 2004.

Net cash used by investing activities was $1,307 in2003 and was primarily attributable to investments in equipment, including thepurchase of office, distribution center and computer equipment.

*FinancingActivities.**  *For 2005 net cash provided by financingactivities was $12,143 and was primarily due to the net proceeds of $77,159received from the Company’s initial public offering in August 2005. Theseproceeds were used to redeem all of the Company’s Series A preferred stockand accrued dividends for $39,789 and to pay down the Company’s revolvingcredit facility.

For 2004 net cash provided by financing activities was$15,132 and for 2003 net cashused by financing activities was $7,474. Changes in cash flows from financingactivities for 2004 and 2003 were primarily due to borrowings from and paymentsto the Company’s revolving credit facility, which is used to finance theCompany’s working capital requirements and fluctuates based on timing ofpayables and collection of receivables.

*CapitalResources.**  *TheCompany has a line-of-credit agreement with two lenders for a credit facilitythat allows for borrowings up to $70,000. The line-of-credit is secured by asecurity interest in substantially all of the Company’s assets and terminateson June 18, 2007. Interest is due monthly at the following rates: 1) theLondon Interbank Offered Rate (LIBOR) plus a margin (5.41% at September 30,2005); or 2) the prime rate (6.75% at September 30, 2005). The lendersalso receive an unused line fee and letter of credit fee equal to 0.375% of theunused amount of the revolving credit facility. The Company’s outstandingbalance on this facility at September 30, 2005 was $24,690 of which$10,000 carried an interest rate at LIBOR and $14,690 carried an interest rateat the prime rate. The line-of-credit contains certain restrictive financialcovenants as well as restrictions on dividend payments and future debtborrowings. In December 2003, the Company amended the line-of-creditagreement to include borrowings for up to $2,500 on a loan for capitalequipment purchases. The line-of-credit was secured by a security interest insubstantially all of the Company’s assets. Interest was due monthly at thefollowing rates: 1) LIBOR plus a margin; or 2) the prime rate plus a margin. Allborrowings under this capital equipment line were paid off in August 2005and the line was terminated.

From time to time the Company issues letters of creditto act as guarantee of payment to specified third parties. At September 30,2005, the Company had three letters of credit totaling $300 and at 

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September 30, 2004the Company had two letters of credit totaling $3,100. There were nooutstanding borrowings on these letters of credit at September 30, 2005 or2004.

The credit agreement required us to maintain aninterest rate swap on a minimum notional amount of $12,000 of borrowings underour revolving credit facility. On each of July 7, 2004 and July 7,2003, the Company entered into interest rate swap agreements for $12,000 of itsborrowings under the revolving credit facility. Under these swap agreements,MWI received interest at a floating rate based on LIBOR and paid interest at afixed rate. The interest rate paid under these swap agreements was 2.49%, and1.33%, respectively. Net payments due under the swaps were settled monthly. Thishad the effect of reducing the Company’s exposure to fluctuations in variableinterest rates to which MWI would otherwise be subject. For the Company’sfiscal year ended September 30, 2005, 2004 and 2003, the impact of thisinterest swap was interest expense of $1, $37 and $127, respectively. TheCompany’s most recent swap agreement expired on July 7, 2005 and was notrenewed. MWI received a waiver from the lenders allowing the Company to notrenew its obligation to maintain an interest rate swap.

The Company expects its interest expense will decreasein future periods as a result of redeeming all of its Series A preferredstock with a portion of the net proceeds from its initial public offering. TheCompany expects that capital expenditures for the fiscal year ended September 30,2006 will approximate $2,500 and will be concentrated in equipment andleasehold improvements for new and existing distribution centers.

In January 2005, the Company issued anon-negotiable promissory note in the aggregate principal amount of $487 inpartial consideration for the purchase of substantially all the assets ofVetpo. The note bears interest at the prime rate, payable quarterly. Theprincipal of the note is payable in five equal annual installments, beginningon January 1, 2006.

The Company believes itscapital resources will be sufficient to meet its anticipated cash needs for atleast the next twelve months.

**ContractualObligations and Guarantees**

***ContractualObligations***

MWI’scontractual obligations at September 30, 2005 mature as follows:

| ** **                                              | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **Total**                                 | ** ** | **1 Year  or less** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Line-of-credit to  banks(1)                             |       | $                                         | 24,690     |   | $ | — |   | $ | 24,690 |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating lease  commitments                            |       | 6,903                                     |       | 1,494 |   | 2,630 |   |   | 1,893 |   |   |   | 886 |   |   |
| Long-term debt  obligations (including current portion) |       | 487                                       |       | 97 |   | 195 |   |   | 195 |   |   |   | — |   |   |
| Interest on  long-term debt and line-of-credit(2)       |       | 2,985                                     |       | 1,731 |   | 1,243 |   |   | 11 |   |   |   | — |   |   |
| Total contractual  obligations                          |       | $                                         | 35,065     |   | $ | 3,322 |   | $ | 28,758 |   |   | $ | 2,099 |   |   |   | $ | 886 |   |   |

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(1)          For the purposes of theContractual Obligations table above the line-of-credit is assumed to be paid atthe credit facility’s termination date of June 18, 2007. For financialstatement purposes line-of-credit is classified as a current liability.

(2)          Futureinterest payments are calculated based on the assumption that all debt isoutstanding until maturity. For debt instruments with variable interest ratesand unused commitment fees, interest has been calculated for all future periodsusing the rates in effect at September 30, 2005.

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***Guarantees***

The Company provides guarantees, indemnifications andassurances to others in the ordinary course of its business. The Company hasevaluated its agreements that contain guarantees and indemnification clauses inaccordance with the guidance of Financial Accounting Standards Board (“FASB”)Interpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*.

The Company enters into awide range of indemnification arrangements in the ordinary course of business. Theseinclude tort indemnities, tax indemnities, indemnities against third partyclaims arising out of arrangements to provide services to the Company,indemnities in merger and acquisition agreements and indemnities in agreementsrelated to the sale of Company securities. Also, governance documents of theCompany and substantially all of its subsidiaries provide for theindemnification of individuals made party to any suit or proceeding by reasonof the fact that the individual was acting as an officer, director or agent ofthe relevant company or as a fiduciary of a company-sponsored welfare benefitplan. The Company also provides guarantees and indemnifications for the benefitof its wholly owned subsidiaries for the satisfaction of performanceobligations, including certain lease obligations. It is difficult to quantifythe maximum potential liability under these indemnification arrangements;however, at September 30, 2005 the Company was not aware of any material liabilitiesarising from these indemnification arrangements.

**Inflation**

Most of MWI’s operatingexpenses are inflation-sensitive, with inflation generally producing increasedcosts of operations. During the past three years, the most significant effectsof inflation have been on employee wages and benefits, costs of products andfuel-intensive costs including freight, travel and utilities. The Companymanaged the effects of inflation by controlling increases in compensationexpense, renegotiating freight carrier contracts and utilizing a central sourcefor distribution center shipping supplies.

**Critical Accounting Policies**

The Company’sdiscussion and analysis of its financial condition and results of operationsare based upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses and related disclosure of contingentassets and liabilities. On an ongoing basis, the Company evaluates itsestimates, including those related to sales returns, allowance for doubtfulaccounts, customer incentives, vendor rebates, inventories, goodwill andintangible assets, income taxes, impairment of long-lived assets, depreciationand amortization, employee benefits, unearned income and contingencies. TheCompany bases its estimates on historical experience and on various otherassumptions and factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. The Company, based on its ongoing review, will makeadjustments to its judgments and estimates where facts and circumstancesdictate. Historically, actual results have not significantly deviated fromthose determined using the estimates described above.

The Company believes the following critical accounting policiesare important to understand the Company’s financial condition and results ofoperations and require management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain.

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***Revenue Recognition***

MWI sells products that itsources from vendors to its customers through either a “buy/sell” transactionor an agency relationship with its vendors. In a “buy/sell” transaction, MWIpurchases or takes inventory of products from the vendor. When a customerplaces an order with MWI, the Company picks, packs, ships and invoices thecustomer for the order. MWI recognizes revenue from “buy/sell” transactions asproduct sales when the product is delivered to the customer. The Companyaccepts product returns from its customers. The Company estimates returns basedon historical experience, and returns are recognized as a reduction of productsales. Product returns have not been significant to the Company’s financialstatements. In an agency relationship, MWI does not purchase and take inventoryof products from its vendors. MWI receives an order from a customer, transmitsthe 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 MWI invoices and collects payment from the customer onbehalf of the vendor. MWI receives a commission payment for soliciting theorder from the customer and for providing other customer service activities.Commissions are recognized when the services upon which the commissions arebased are complete.

***Vendor Rebates***

Vendor rebates are recorded based on the terms of thecontracts or programs with each vendor and in accordance with the provisions ofEmerging Issues Task Force (EITF) Issue No. 02-16, *Accounting by a Customer (Including a Reseller) forCertain Consideration Received from a Vendor.*The Company primarilyreceives quarterly and annual performance-based rebates from third partyvendors based upon attainment of certain sales and/or purchase goals. Salesrebates are classified in the accompanying consolidated statements of income asa reduction to cost of product sales at the time the sales performance measuresare achieved. Purchase rebates are measured against inventory purchases fromthe vendors and are a reduction of inventory until the product is sold. Whenthe inventory is sold and purchase measures are achieved, purchase rebates arerecognized as a reduction to cost of product sales.

Historically, actualresults have not significantly deviated from those determined using theestimates described above. The Company expects that its estimates in the futurewill continue to be reasonable as rebates are based on specific vendor programgoals and are principally recorded upon achievement of sales performancemeasures.

***Customer Incentives***

Customer incentives areaccrued based on the terms of the contracts with each customer and inaccordance with the provisions of EITF Issue No. 01-9, *Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products).*Theseincentive programs provide that the customer receives an incentive based ontheir product purchases or attainment of performance goals. Incentives areestimated based on the specific terms in each agreement, historical experienceand product growth rates.

***Goodwill***

The Companyassesses the potential impairment of goodwill annually and on an interim basiswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors that MWI considers important and may trigger aninterim impairment review, include:

·       Significantunderperformance relative to expected historical or projected future operatingresults;

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·       Significant changes in themanner of the Company’s use of acquired assets or the strategy for the Company’soverall business; and

·       Significantnegative industry or economic trends.

If MWI determines through the impairment reviewprocess that goodwill is impaired, an impairment charge is recognized in theconsolidated statement of income.

Goodwill was tested forimpairment in the Company’s fourth quarter and it was determined that therecorded amounts were not impaired. The fair value calculations used for thesetests require the Company to make assumptions about items that are inherentlyuncertain. Assumptions related to future market demand, market prices andproduct costs could vary from actual results, and the impact of such variationscould be material. Factors that could affect the assumptions include changes ineconomic conditions, changes in government regulations, success in marketingproducts and competitive conditions in MWI’s industry. The factors that mostsignificantly affect the fair value calculation are market multiples andestimates of future cash flows. Fair value was determined by an independentthird-party appraiser who primarily used the discounted cash flow method andthe guideline company method.

***Stock Options***

The Company accounts for stock-based awards toemployees using the intrinsic value method in accordance with AccountingPrinciples Bulletin (APB) No. 25, *Accountingfor Stock Issued to Employees*(APB 25). MWI has adopted thedisclosure-only requirements of SFAS No. 123, *Accounting for Stock-Based Compensation*(SFAS 123),for stock-based awards to employees. Accordingly, no compensation expense isrecognized in the consolidated financial statements upon grant of employee stockawards when the exercise price is equal to fair market value at the date ofgrant.

SFAS 123 requires the disclosure of pro forma netincome or loss as if the Company had adopted the fair value method sinceinception. Under SFAS 123, the fair value of stock-based awards toemployees is calculated through the use of option pricing models, even thoughsuch models were developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which significantly differ fromthe characteristics of our stock option awards. These models also requiresubjective assumptions, including expected time to exercise, which greatlyaffect the calculation.

During 2003, the Company granted 543,951 stock optionsto certain of its executives under the Company’s 2002 Stock Option Plan (the “2002Plan”). The Company has concluded that these options were non-compensatory inaccordance with the provisions of APB 25. The options vest in variousamounts over three to five-year periods beginning upon the achievement ofannual financial targets as established by the 2002 Stock Option Plan beginningwith its fiscal year ended September 30, 2002 and ending with its fiscalyear ending September 30, 2006. All unvested options as of June 18,2009 under the 2002 Plan become fully vested if the option holder is employedwith the Company on such date. Vesting of options under the 2002 Plan wherefinancial targets have been achieved were accelerated upon the completion of aninitial public offering in August 2005 and resulted in the vesting of232,182 common stock options. Options generally lapse ten years after issuanceor 90 to 120 days after the option holder ceases to be an employee,depending upon the cause of termination. At September 30, 2005, the Companyhad 253,848 exercisable options to purchase common stock under the 2002 Plan.

During 2005, option holders exercised 36,267 vestedoptions and 60,436 were forfeited under the 2002 Plan. During 2004 and 2003, noshares were exercised or forfeited under the 2002 Plan. During 2005, theCompany adopted the 2005 Stock-Based Incentive Compensation Plan (the “2005Plan”). The Company reserved 1,200,000 shares of common stock for issuance ofcommon stock options, restricted stock, deferred stock or deferred stock units.The plan expires in 2015. In 2005, the Company granted 135,103 options topurchase MWI’s common stock under the 2005 Plan with a grant price equal to thefair market 

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value as of the date ofgrant. These options were vested by September 30, 2005 and the Company hasconcluded that these options are non-compensatory in accordance with theprovisions of APB 25. During the fourth quarter of 2005, option holdersexercised 1,410 vested options and 606 were forfeited under the 2005 Plan.

In December 2004, theFASB issued SFAS No. 123 (Revised), *Share-BasedPayment*(SFAS 123-R). SFAS 123-R replacesSFAS 123 and supersedes APB 25. Adoption of SFAS 123-Rwill require the Company to record a non-cash expense for the Company’s stockcompensation plans using the fair value method. SFAS 123-R iseffective for the Company on October 1, 2005. Based on options outstandingat September 30, 2005 and their expected vesting dates, the adoption ofSFAS 123-R is not expected to have a material effect on theconsolidated financial statements.

***Recently Issued and New Accounting Pronouncements***

In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*. This Statementestablishes standards for how the Company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires the Company to classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Many of thoseinstruments were previously classified as equity. The Company adopted SFAS 150on July 1, 2003. As a result, the Company reclassified its redeemablepreferred stock as a liability (previously classified as mezzanine equity) andrecorded dividend accretion on a prospective basis as interest expense.Dividend accretion included in interest expense was $4,055, $4,239 and $999 in2005, 2004 and 2003, respectively. In August 2005, the Company redeemedall of the Series A preferred stock with a portion of the proceeds fromits initial public offering.

In December 2003,FASB issued Interpretation No. 46(R), *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51*.This Interpretation clarifies the application of Accounting Research Bulletin No. 51,*Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolled financial interest or in which equity investors do not bear theresidual economic risks. The adoption of this Interpretation did not have amaterial effect on the Company’s financial statements.

In November 2004, the FASB issued SFAS No. 151,*Inventory Costs*, *an Amendment of ARB No. 43, Chapter 4*(“SFAS 151”).SFAS 151 clarifies that inventory costs that are “abnormal” are requiredto be charged to expense as incurred as opposed to being capitalized intoinventory as a product cost. SFAS 151 provides examples of “abnormal”costs which include costs of idle facilities, excess freight and handlingcosts, and wasted material (spoilage). SFAS 151 is effective for theCompany’s fiscal year beginning October 1, 2005. The impact ofSFAS 151 is not expected to have a material effect on the Company’sconsolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(Revised), *Share-Based Payment*(SFAS 123-R).SFAS 123-R replaces SFAS 123 and supersedes APB 25.Adoption of SFAS 123-R will require the Company to record a non-cashexpense for the Company’s stock compensation plans using the fair value method.SFAS 123-R is effective for the Company on October 1, 2005.Based on options outstanding at September 30, 2005 and their expectedvesting dates, the adoption of SFAS 123-R is not expected to have amaterial effect on the Company’s consolidated financial statements.

In December 2004,the FASB issued SFAS No. 153, *Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29*(“SFAS 153”), which eliminates the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. The Company is required to adopt SFAS 153 fornonmonetary asset exchanges occurring in the first quarter of 2006 and itsadoption is not expected to have a significant effect on the Company’s consolidatedfinancial statements.

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In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*(“SFAS 154”)*.*SFAS 154 replaces FASB Statement No. 3,*Reporting Accounting Changes in InterimFinancial Statements*, and replaces ABP Opinion No. 20, *Accounting Changes.*SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and will be effective for the Company for itsfiscal year ending September 30, 2007. The impact of SFAS 154 is notexpected to have a material effect on the Company’s consolidated financialstatements.

In September 2005,the Emerging Issues Task Force issued EITF No. 04-13, *Accounting for Purchases and Sales of Inventory withthe Same Counterparty*(“EITF 04-13”). EITF 04-13requires that purchases and sales of inventory with the same counterparty beaccounted for as a nonmonetary transaction within the scope of APB Opinion No. 29,*Accounting for Nonmonetary Transactions.*EITF04-13 is effective for new arrangements entered into, or modifications orrenewals of existing arrangements, beginning in the first interim or annualreporting period beginning after March 15, 2006. The impact of EITF 04-13is not expected to have a material effect on the Company’s consolidatedfinancial statements.

**Credit Agreement**

On June 18, 2002, the Company entered into acredit agreement with two lenders, Bank of America, N.A. and Fleet CapitalCorporation which was later replaced by General Electric Capital Corporation,for a $70,000 credit facility. The credit agreement is secured by a securityinterest in substantially all of the Company’s assets, including the stock ofits subsidiaries, and terminates on June 18, 2007. The credit agreementcontains certain restrictive financial covenants as well as restrictions ondividend payments and future debt borrowings. Interest is due monthly at thefollowing rates: LIBOR plus a margin on the portion converted to LIBOR inaccordance with the Company’s amended credit agreement (5.41% at September 30,2005), or the prime rate (6.75% at September 30, 2005). During 2004, theCompany amended the credit agreement and negotiated a reduction in the marginover LIBOR from 2.0% to 1.75%. The lenders also receive an unused line fee andletter of credit fee equal to 0.375% of the unused amount of the revolvingcredit facility. As of September 30, 2005, the effective interest rate forall borrowings under the revolving credit facility was 6.21% per annum. Theoutstanding balance on this facility at September 30, 2005 was $24,690 ofwhich $10,000 carried an interest rate at LIBOR and $14,690 carried an interestrate at the prime rate. Under the amended credit agreement, up to $10,000 isavailable for letters of credit. During 2004, the Company established twoletters of credit totaling $3,100. During 2005, the $3,000 letter of creditexpired and was not renewed and two additional letters of credit were issuedfor $100 each, for a total of $300. At September 30, 2005, there were nooutstanding borrowings on these letters of credit. As part of the creditagreement, the Company was required to maintain an interest rate swap on aminimum notional amount of $12,000 of borrowings under the revolving creditfacility. Under the most recent swap agreement that expired on July 7,2005, the Company received interest at a floating rate based on LIBOR and paidinterest at a fixed rate of 2.49%. This had the effect of reducing the Company’sexposure to fluctuations in variable interest rates to which MWI wouldotherwise be subject. The Company has received a waiver for its obligation tomaintain an interest rate swap from the lenders effective as of July 7,2005. For our fiscal year ended September 30, 2005, 2004 and 2003, theimpact of this interest swap was interest expense of $1, $37 and $127,respectively.

In addition, in December 2003,the Company amended the credit agreement to include borrowings of up to $2,500on a capital loan for capital equipment purchases only. Interest was duemonthly at the following rates: LIBOR plus a margin on the portion converted toLIBOR in accordance with the amended credit agreement, or the prime rate plus amargin. The capital loan was payable in monthly principal payments of $41, plusinterest. In August 2005, the Company terminated the capital loan and paidoff the outstanding balance.

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**Promissory Note**

In January 2005, theCompany issued a non-negotiable promissory note in the aggregate principalamount of $487 in partial consideration for the purchase of substantially allthe assets of Vetpo. The note bears interest at the prime rate, payablequarterly. The principal of the note is payable in five equal annualinstallments, beginning on January 1, 2006.

***Item 7A.****                  Quantitativeand Qualitative Disclosures About Market Risk.*

The Company is exposed to market risks primarily fromchanges in interest rates in the United States. The Company has managed thisrisk by, pursuant to the terms of the amended credit agreement, converting theinterest rate payable on the majority of the outstanding loan balance on therevolving credit facility into a lower LIBOR interest rate. The Company doesnot engage in financial transactions for trading or speculative purposes.

The interest payable on the revolving credit facilityunder the amended credit agreement is based on variable interest rates and istherefore affected by changes in market interest rates. If the weighted averageinterest rate on the variable rate indebtedness rose 62 basis points (a 10.0%change from the calculated weighted average interest rate as of September 30,2005), assuming no change in the outstanding balance on the revolving creditfacility under the amended credit agreement (approximately $24,690), theannualized income before taxes and cash flows from operating activities woulddecline by approximately $153. If the weighted average interest rate on thevariable rate indebtedness decreased 62 basis points (a 10.0% change from thecalculated weighted average interest rate as of September 30, 2005),assuming no change in the outstanding balance on the revolving credit facilityunder the amended credit agreement, the annualized income before taxes and cashflows from operating activities would increase by approximately $153.

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***Item 8.****                          FinancialStatements and Supplementary Data.*

**MWI VeterinarySupply, Inc.Index to Consolidated Financial Statements**

|                                                                                                                   | ** ** | **Page  Number** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------|
| Report of Independent  Registered Public Accounting Firm                                                          |       | 42               |
| Consolidated Statements of  Income for the years ended September 30, 2005, 2004 and 2003                     |       | 43               |
| Consolidated Statements of  Comprehensive Income for the years ended September 30, 2005,  2004 and 2003 |       | 44               |
| Consolidated Balance Sheets as of  September 30, 2005 and 2004                                               |       | 45               |
| Consolidated Statements of  Stockholders’ Equity for the years ended September 30, 2005, 2004 and  2003 |       | 46               |
| Consolidated Statements of  Cash Flows for the years ended September 30, 2005, 2004 and 2003                 |       | 47               |
| Notes  to Consolidated Financial Statements                                                                       |       | 48               |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofMWI Veterinary Supply, Inc.

We have audited the accompanying consolidated balancesheets of MWI Veterinary Supply, Inc. and subsidiaries (the “Company”) asof September 30, 2005 and 2004, and the related consolidated statements ofincome, comprehensive income, stockholders’ equity, and cash flows for each ofthe three years in the period ended September 30, 2005. Our audits alsoincluded the consolidated financial statement schedule listed in the Index atItem 15. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of MWIVeterinary Supply, Inc. and subsidiaries as of September 30, 2005 and2004, and the results of their operations and their cash flows for each of thethree years in the period ended September 30, 2005, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such consolidated financial statement schedule, when consideredin relation to the consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.

Asdiscussed in Note 2, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*, effective July 1, 2003.
| *DELOITTE & TOUCHE LLP* |
|----------------------------------|
| Boise, Idaho                     |
| November 22,  2005          |

 

 

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**MWI VETERINARY SUPPLY, INC.CONSOLIDATED STATEMENTS OF INCOMEFor the Years Ended September 30, 2005, 2004 and 2003Dollars and shares in thousands, except per share amounts**

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                    |       |     |       |     |       |     |       |
| Product sales                                |       | $        | 463,272    |     | $          | 367,863  |       | $ | 315,738 |   |
| Product sales to related party               |       | 28,473   |       | 22,163   |       | 22,960   |       |
| Commissions                                  |       | 4,910    |       | 4,256    |       | 3,011    |       |
| Total revenues                               |       | 496,655  |       | 394,282  |       | 341,709  |       |
| Cost of product sales                        |       | 426,709  |       | 338,684  |       | 294,692  |       |
| Gross profit                                 |       | 69,946   |       | 55,598   |       | 47,017   |       |
| Selling, general and administrative expenses |       | 52,647   |       | 41,872   |       | 35,886   |       |
| Depreciation and  amortization               |       | 1,528    |       | 1,146    |       | 976      |       |
| Operating income                             |       | 15,771   |       | 12,580   |       | 10,155   |       |
| Other income  (expense):                     |       |     |       |     |       |     |       |
| Interest expense                             |       | (6,515   | )          | (6,098   | )          | (3,034   | )          |
| Earnings of equity method investees          |       | 131      |       | 104      |       | 106      |       |
| Other                                        |       | 268      |       | 218      |       | 218      |       |
| Total other expense                          |       | (6,116   | )          | (5,776   | )          | (2,710   | )          |
| Income before taxes                          |       | 9,655    |       | 6,804    |       | 7,445    |       |
| Income tax  expense                          |       | (5,098   | )          | (4,280   | )          | (3,116   | )          |
| Net income                                   |       | 4,557    |       | 2,524    |       | 4,329    |       |
| Redeemable  preferred stock accretion        |       | —   |       | —   |       | (2,714   | )          |
| Income available to common stockholders      |       | $        | 4,557      |     | $          | 2,524    |       | $ | 1,615 |   |
| Earnings Per  Share:                         |       |     |       |     |       |     |       |
| Basic                                        |       | $        | 0.76       |     | $          | 0.50     |       | $ | 0.32 |   |
| Diluted                                      |       | $        | 0.68       |     | $          | 0.43     |       | $ | 0.28 |   |
| Weighted average  common shares outstanding: |       |     |       |     |       |     |       |
| Basic                                        |       | 5,970    |       | 5,038    |       | 5,013    |       |
| Diluted                                      |       | 6,697    |       | 5,878    |       | 5,745    |       |

 

See Notes to Consolidated Financial Statements

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**MWIVETERINARY SUPPLY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFor the Years Ended September 30, 2005, 2004 and 2003Dollars in thousands**

| ** **                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                         |       | $        | 4,557      |     | $          | 2,524    |       | $ | 4,329 |   |
| Other comprehensive  loss:                                         |       |     |       |     |       |     |       |
| Interest rate  swap:                                               |       |     |       |     |       |     |       |
| Change in fair value, net of tax of $0, $9, and $6,  respectively  |       | —   |       | (14      | )          | (9       | )          |
| Amount reclassified into net income, net of tax of  $9, $6 and $42 |       | 14       |       | 9        |       | 67       |       |
| Total  comprehensive income                                        |       | $        | 4,571      |     | $          | 2,519    |       | $ | 4,387 |   |

 

See Notes to Consolidated Financial Statements

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**MWI VETERINARY SUPPLY, INC.CONSOLIDATED BALANCE SHEETSAs of September 30, 2005 and 2004Dollars in thousands, except per share amounts**

| ** **                                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                      |       |     |       |     |       |
| Current Assets:                                                                                                                 |       |     |       |     |       |
| Cash                                                                                                                            |       | $        | 31         |     | $          | 28 |   |
| Receivables, net                                                                                                                |       | 77,099   |       | 59,720   |       |
| Inventories                                                                                                                     |       | 68,786   |       | 49,525   |       |
| Prepaid expenses and other current assets                                                                                       |       | 2,011    |       | 1,196    |       |
| Deferred income taxes                                                                                                           |       | 482      |       | 244      |       |
| Total current assets                                                                                                            |       | 148,409  |       | 110,713  |       |
| Property and equipment, net                                                                                                     |       | 6,919    |       | 6,007    |       |
| Goodwill                                                                                                                        |       | 29,739   |       | 28,287   |       |
| Intangibles, net                                                                                                                |       | 1,644    |       | —   |       |
| Other assets, net                                                                                                               |       | 1,533    |       | 1,558    |       |
| Total assets                                                                                                                    |       | $        | 188,244    |     | $          | 146,565 |   |
| **Liabilities  And Stockholders’ Equity**                                                                                  |       |     |       |     |       |
| Current  Liabilities:                                                                                                           |       |     |       |     |       |
| Line-of-credit                                                                                                                  |       | $        | 24,690     |     | $          | 49,129 |   |
| Accounts payable                                                                                                                |       | 69,382   |       | 50,966   |       |
| Accrued expenses                                                                                                                |       | 6,341    |       | 4,454    |       |
| Interest rate swap                                                                                                              |       | —   |       | 23       |       |
| Current maturities of long-term debt                                                                                            |       | 97       |       | 288      |       |
| Total current liabilities                                                                                                       |       | 100,510  |       | 104,860  |       |
| Deferred income taxes                                                                                                           |       | 650      |       | 608      |       |
| Long-term debt                                                                                                                  |       | 390      |       | 732      |       |
| Redeemable preferred stock                                                                                                      |       | —   |       | 35,733   |       |
| Commitments and  contingencies                                                                                                  |       |     |       |     |       |
| **Stockholders’  Equity**                                                                                                  |       |     |       |     |       |
| Common stock $0.01 par value, 20,000,000 authorized;  10,575,957 and 5,560,401 shares issued and outstanding, respectively |       | 106      |       | 56       |       |
| Additional paid in capital                                                                                                      |       | 78,396   |       | 955      |       |
| Accumulated other comprehensive income (loss)                                                                                   |       | —   |       | (14      | )          |
| Retained earnings                                                                                                               |       | 8,192    |       | 3,635    |       |
| Total stockholders’ equity                                                                                                 |       | 86,694   |       | 4,632    |       |
| Total liabilities and  stockholders’ equity                                                                                |       | $        | 188,244    |     | $          | 146,565 |   |

 

See Notes to Consolidated Financial Statements

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**MWIVETERINARY SUPPLY, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the Years Ended September 30, 2005, 2004 and 2003Dollars and shares in thousands**

| ** **                                                 | ** ** | **Shares** | ** ** | ** ** | ** ** | ** **       | ** ** | **Notes**        | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                 | ** ** | **of**     | ** ** | ** ** | ** ** | **Additional**   | ** ** | **Receivable**   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Common** | ** ** | **Common** | ** ** | **Paid in** | ** ** | **From**         | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Stock**  | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Stockholders** | ** ** | **(Loss)/Income** | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| **Balance  at September 30, 2002**               | ** ** |       | **5,500**  | ** ** |       |             | **$**      | **55**           | ** ** |              |       | **$**        | **945**    | ** ** |       |   | **$** | **(76** | **)** |   |   | **$** | **(67** | **)** |   |   | **$** | **(504** | **)** |   | **$** | **353** | ** ** |
| Net income                                                 |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | 4,329 | ** ** |   | 4,329 |   |
| Issuance of common stock                                   |       |       | 60         | ** ** |       |             | 1          | ** **       |       |              | 10         | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 11 |   |
| Interest earned on notes receivable                   |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | (1         | **)** |   |   | — | ** ** |   |   | — | ** ** |   | (1 | ) |
| Collection of notes receivable                             |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | 77         | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 77 |   |
| Other comprehensive income                                 |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | 58 | ** ** |   |   | — | ** ** |   | 58 |   |
| Accretion of dividends on redeemable preferred stock       |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | (2,714 | **)** |   | (2,714 | ) |
| **Balance  at September 30, 2003**               | ** ** |       | **5,560**  | ** ** |       |             | **56**     | ** **       |       |              | **955**    | ** **   |       |       | **—** | ** ** |   |   | **(9** | **)** |   |   | **1,111** | ** ** |   | **2,113** | ** ** |
| Net income                                                 |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | 2,524 | ** ** |   | 2,524 |   |
| Other comprehensive loss                                   |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | (5 | **)** |   |   | — | ** ** |   | (5 | ) |
| **Balance  at September 30, 2004**               | ** ** |       | **5,560**  | ** ** |       |             | **56**     | ** **       |       |              | **955**    | ** **   |       |       | **—** | ** ** |   |   | **(14** | **)** |   |   | **3,635** | ** ** |   | **4,632** | ** ** |
| Net income                                                 |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | 4,557 | ** ** |   | 4,557 |   |
| Issuance of common  stock, net of issuance costs of $7,558 |       |       | 4,983      | ** ** |       |             | 50         | ** **       |       |              | 77,109     | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 77,159 |   |
| Exercises of  common stock options                         |       |       | 33         | ** ** |       |             | —     | ** **       |       |              | 30         | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 30 |   |
| Tax benefit of  common stock options                       |       |       |       | ** ** |       |             | —     | ** **       |       |              | 302        | ** **   |       |       | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   | 302 |   |
| Other  comprehensive income                                |       |       |       | ** ** |       |             | —     | ** **       |       |              | —     | ** **   |       |       | —     | ** ** |   |   | 14 | ** ** |   |   | — | ** ** |   | 14 |   |
| **Balance at September 30, 2005**                | ** ** |       | **10,576** | ** ** |       |             | **$**      | **106**          | ** ** |              |       | **$**        | **78,396** | ** ** |       |   | **$** | **—** | ** ** |   |   | **$** | **—** | ** ** |   |   | **$** | **8,192** | ** ** |   | **$** | **86,694** | ** ** |

 

See Notes to Consolidated Financial Statements

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**MWI VETERINARY SUPPLY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended September 30, 2005, 2004 and 2003Dollars in thousands**

| ** **                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash Flows From Operating  Activities:**                                                    |       |     |       |     |       |     |       |
| Net income                                                                                    |       | $        | 4,557      |     | $          | 2,524    |       | $ | 4,329 |   |
| Adjustments  to reconcile net income to net cash provided by/(used in) operating  activities: |       |     |       |     |       |     |       |
| Accretion of redeemable preferred stock                                                       |       | 4,055    |       | 4,239    |       | 999      |       |
| Depreciation and amortization                                                                 |       | 1,536    |       | 1,146    |       | 976      |       |
| Amortization of debt issuance costs                                                           |       | 140      |       | 140      |       | 140      |       |
| Deferred income taxes                                                                         |       | (205     | )          | 335      |       | 13       |       |
| Earnings of equity method investees                                                           |       | (131     | )          | (105     | )          | (106     | )          |
| Distribution from equity method investee                                                      |       | 43       |       | —   |       | 50       |       |
| Gain on disposal of property and equipment                                                    |       | (6       | )          | (8       | )          | (3       | )          |
| Changes in  operating assets and liabilities (net of effects of acquisitions):                |       |     |       |     |       |     |       |
| Receivables                                                                                   |       | (15,276  | )          | (10,071  | )          | (8,536   | )          |
| Inventories                                                                                   |       | (17,334  | )          | (12,668  | )          | 1,555    |       |
| Prepaid expenses and other current assets                                                     |       | (714     | )          | (359     | )          | (415     | )          |
| Accounts payable                                                                              |       | 15,837   |       | 653      |       | 9,459    |       |
| Accrued expenses                                                                              |       | 1,887    |       | 285      |       | 320      |       |
| Net cash (used in)/provided by operating activities                                           |       | (5,611   | )          | (13,889  | )          | 8,781    |       |
| **Cash  Flows From Investing Activities:**                                                    |       |     |       |     |       |     |       |
| Business acquisitions                                                                         |       | (5,033   | )          | —   |       | —   |       |
| Purchases of property and equipment                                                           |       | (2,022   | )          | (1,254   | )          | (1,321   | )          |
| Sale of property and equipment                                                                |       | 564      |       | 13       |       | 14       |       |
| Purchase of investments                                                                       |       | —   |       | (10      | )          | —   |       |
| Other                                                                                         |       | (38      | )          | —   |       | —   |       |
| Net cash used in investing activities                                                         |       | (6,529   | )          | (1,251   | )          | (1,307   | )          |
| **Cash  Flows From Financing Activities:**                                                    |       |     |       |     |       |     |       |
| Issuance of common stock, net of issuance costs                                               |       | 77,159   |       | —   |       | 11       |       |
| Tax benefit of common stock options                                                           |       | 302      |       | —   |       | —   |       |
| Proceeds from stock options                                                                   |       | 30       |       | —   |       | —   |       |
| Proceeds from issuance of debt                                                                |       | 836      |       | 208      |       | —   |       |
| Issuance of preferred stock                                                                   |       | —   |       | —   |       | 286      |       |
| Collection of notes receivable                                                                |       | —   |       | —   |       | 76       |       |
| Redemption of preferred stock and accrued dividends                                           |       | (39,789  | )          | —   |       | —   |       |
| Net (payments) borrowings on line-of-credit                                                   |       | (24,439  | )          | 15,157   |       | (7,747   | )          |
| Payment on debt                                                                               |       | (1,856   | )          | (133     | )          | -        |       |
| Debt issuance costs                                                                           |       | (100     | )          | (100     | )          | (100     | )          |
| Net cash provided by/(used in) financing activities                                           |       | 12,143   |       | 15,132   |       | (7,474   | )          |
| **Increase (Decrease) in Cash**                                                               |       | 3        |       | (8       | )          | —   |       |
| Cash at Beginning of Period                                                                   |       | 28       |       | 36       |       | 36       |       |
| Cash at End of  Period                                                                        |       | $        | 31         |     | $          | 28       |       | $ | 36 |   |

 

See Notes to Consolidated Financial Statements

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**MWI VETERINARY SUPPLY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDollars in thousands, except share and per share data**

**1.   Business Description and Basis ofPresentation**

MWI Veterinary Supply, Inc. is a leadingdistributor of animal health products to veterinarians across the UnitedStates. The Company markets its products to veterinarians in both the companionand production animal markets. MWI Veterinary Supply, Inc.operates ten distribution centers located in the Western United States, Texas,Michigan, Georgia and Pennsylvania. The Company also provides supplies toFeeders’ Advantage, L.L.C. (“Feeders Advantage”), a 50% owned entity that sellsto various feedlot companies.

MWI Veterinary Supply, Inc. (formerly named MWI Holdings, Inc.)was formed on June 18, 2002 for the sole purpose of acquiring all of theoutstanding stock of MWI Veterinary Supply Co. (“MWI Co.”) from its owner, AgriBeef Co. (“Agri Beef”). The significant aspects of this transaction follow:

·       517,931 shares of MWI Co. stockheld by Agri Beef were redeemed for cash of $21,033.

·       MWI Co. obtained a line-of-credit(See Note 7) and used the proceeds to repay existing debt held by Agri Beef andredeem shares held by Agri Beef as discussed above.

·       MWI Veterinary Supply, Inc.issued 3,982,000 shares of its common stock and 18,852.23 shares of redeemablepreferred stock to a new investor for total cash proceeds of $19,576.

·       MWI Veterinary Supply, Inc.acquired the remaining 482,069 shares of MWI Co. from Agri Beef for cash of$19,576 and 995,500 shares of MWI Veterinary Supply, Inc. common stock and7,167.77 shares of MWI Veterinary Supply, Inc. redeemable preferredstock with a collective value of $7,349.

·       MWI Veterinary Supply, Inc.issued 522,500 shares of its common stock and 480 shares of its redeemablepreferred stock to employees for cash of $500 and notes receivable of $75.

·       MWI Veterinary Supply, Inc.and MWI Co. incurred capitalizable transaction costs of $2,277 recognizedas part of purchase price.

The acquisition of MWI Co. by MWI Veterinary Supply, Inc. wasaccounted for in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 141, *BusinessCombinations*. Accordingly, MWI Co.’s assets and liabilities wereadjusted to fair value based on the purchase price paid by MWI VeterinarySupply, Inc. The principal effects of these adjustments were an increaseto property and equipment of $590, an increase to investments of $232 and therecording of goodwill of $28,615. During 2003, the Company resolved apreacquisition contingency related to tax liabilities resulting in a reductionof goodwill of $328.

**2.   Summary of Significant AccountingPolicies**

*Principlesof Consolidation*—Theaccompanying consolidated financial statements consist of MWI VeterinarySupply, Inc. and its wholly owned subsidiaries, collectively referred toherein as “the Company” or “MWI”. All significant intercompany transactionshave been eliminated. The Company uses the equity method of accounting for itsinvestments in entities in which it has significant influence; generally thisrepresents an ownership interest between 20% and 50%. The Company’s share ofincome or loss from these investments is reported as increases or decreases inthe respective investment with a corresponding amount reported as other income.

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*Basisof Accounting and Use of Estimates*—The accompanying consolidated financial statements have beenprepared on the accrual basis of accounting using accounting principlesgenerally accepted in the United States. In preparing financial information,the Company uses certain estimates and assumptions that may affect the reportedamounts 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 from these estimates. Estimates are used whenaccounting for sales returns, allowance for doubtful accounts, customerincentives, vendor rebates, inventories, goodwill and intangible assets, incometaxes, impairment of long-lived assets, depreciation and amortization, employeebenefits, unearned income and contingencies. The estimates of fair value ofassets and liabilities and the disclosure of contingent assets and liabilitiesas of the balance sheet date and reported amounts of revenue and expenses forthe periods are based on assumptions that the Company believes to be reasonable.

*SegmentInformation*—TheCompany is a distributor of animal health products to veterinarians. Theseoperations are within a single reporting segment and are located within theUnited States.

*Revenue Recognition*—MWIsells products that it sources from vendors to its customers through either a “buy/sell”transaction or an agency relationship with its vendors. In a “buy/sell”transaction, MWI purchases or takes inventory of products from the vendor.When a customer places an order with MWI, the Company picks, packs, ships andinvoices the customer for the order. MWI recognizes revenue from “buy/sell”transactions as product sales when the product is delivered to the customer. TheCompany accepts product returns from its customers. The Company estimatesreturns based on historical experience and recognizes these estimated returnsas a reduction of product sales. Product returns have not been significant tothe Company’s financial statements. In an agency relationship, MWI does notpurchase and take inventory of products from its vendors. MWI receives an orderfrom a customer, then transmits the order to the vendor, who picks, packs andships the order to the customer. In some cases, the vendor invoices andcollects payment from the customer, while in other cases MWI invoices andcollects payment from the customer on behalf of the vendor. MWI receives acommission payment for soliciting the order from the customer and for providingother customer service activities. Commissions are recognized when the servicesupon which the commissions are based are complete. Gross billings from agencycontracts were $102,883, $86,657 and $68,697 for the years ended September 30,2005, 2004 and 2003, respectively, and generated commission revenue of $4,910,$4,256 and $3,011, respectively.

*VendorRebates*—Vendorrebates are recorded based on the terms of the contracts or programs with eachvendor. The Company primarily receives quarterly and annual performance-basedrebates from third party vendors based upon attainment of certain sales and/orpurchase goals. Sales rebates are classified in the accompanying consolidatedstatements of income as a reduction to cost of product sales at the time thesales performance measures are achieved. Purchase rebates are measured againstinventory purchases from the vendors and are classified as a reduction ofinventory until the product is sold. When the inventory is sold and purchasemeasures are achieved, purchase rebates are recognized as a reduction to costof product sales.

*CustomerIncentives*—Customerincentives are accrued based on the terms of the contracts with each customer*.* These incentive programs provide thatthe customer receive an incentive based on their product purchases orattainment of performance goals. Incentives are estimated based on the specificterms in each agreement, historical experience and product growth rates.

*Cash*—For the purposes of the statementsof cash flows, cash consists of cash on hand. The Company’s bankingarrangements allow the Company to fund outstanding checks when presented to thefinancial institution for payment. This cash management practice frequentlyresults in a net cash book overdraft position, which occurs when total issuedchecks exceed available cash balances at a single financial institution. TheCompany has recorded its cash disbursement accounts with a net cash book 

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overdraft position in accounts payable. At September 30, 2005and 2004, the Company had net cash book overdrafts of $9,581 and $239,respectively, classified in accounts payable.

*Inventories*—Inventories, consisting of pharmaceuticals,vaccines, parasiticides, diagnostics, capital equipment, supplies andnutritional products, arestated at the lower of cost (on a moving-average basis) or market.

*Property and Equipment*—Property and equipment are statedat cost and depreciation is computed using the straight-line method over theestimated useful lives of the related assets as follows:

| Buildings                          |   | 25 years                                       |   |
|------------------------------------|--------|------------------------------------------------|--------|
| Machinery, furniture and equipment |   | 5 to 7 years                                   |   |
| Computer equipment                 |   | 3 to 5 years                                   |   |
| Leasehold improvements             |   | Shorter of  useful life or  life of lease term |   |

 

The cost andaccumulated depreciation of items sold or retired are removed from the propertyaccounts and any resulting gain or loss is reflected in net income. Repairs andmaintenance are expensed as incurred and renewals and improvements arecapitalized.

The Companyperiodically reviews long-lived assets for impairment when events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable.If the sum of the undiscounted expected future cash flows from an asset is lessthan the carrying value of the asset, an asset impairment must be recognized inthe financial statements by writing down the asset to its fair value.

*Goodwill*—The Company recognizes the excesspurchase price over the fair value of net assets acquired and liabilitiesassumed in a business combination as goodwill on the consolidated balance sheet.Goodwill is not amortized, but instead tested for impairment at least annually.The Company performs an annual impairment test as of September 30 eachyear and concluded that goodwill was not impaired at September 30, 2005and 2004. Goodwill impairment tests will continue to be performed at leastannually, and more frequently if circumstances indicate a possible impairment. Thefollowing table summarizes the goodwill recognized in connection with eachbusiness combination.

| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| MWI Veterinary Supply Co.     |       | $        | 28,287     |     | $          | 28,287 |   |
| Memorial Pet Care, Inc.       |       | 66       |       | —   |       |
| Vetpo Distributors, Inc. |       | 1,386    |       | —   |       |
|                          |       | $        | 29,739     |     | $          | 28,287 |   |

 

*OtherAssets*—Includedin other assets are investments that consist of the Company’s equity methodinvestment in one entity and two entities accounted for under the cost methodof accounting. Other assets also consist of debt issuance costs that are beingamortized over the life of the related debt.

*EarningsPer Share*—Basicearnings per share is calculated based on the weighted-average number ofoutstanding common shares during the applicable period. Diluted earnings pershare is based on the weighted-average number of outstanding common shares plusthe weighted-average number of potential outstanding common shares. Potentialcommon shares that would increase earnings per share amounts or decrease lossper share amounts are antidilutive and are, therefore, excluded from theearnings per share computations. Earnings per share is computed separately foreach period presented.

*IncomeTaxes*—Incometaxes are accounted for under the asset and liability method. Deferred incometaxes are recognized to provide for temporary differences between the financialreporting and tax basis of 

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assets and liabilities. Deferred taxes are measured using enactedtax rates in effect during the years in which the temporary differences areexpected to reverse.

*Concentrationsof Risk*—TheCompany’s financial instruments that are exposed to concentrations of creditrisk consist primarily of its receivables. Customers of the Company aregeographically dispersed throughout the United States. The Company routinelyassesses the financial strength of its customers and reviews their credithistory before extending credit. In addition, the Company establishes anallowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends and other information.

Product sales toone customer were approximately 10% of the Company’s total product sales in2005, 2004 and 2003, respectively. Product sales to another customer, a relatedparty (See Note 14), were approximately 6%, 6% and 7% of the Company’s totalproduct sales in 2005, 2004 and 2003, respectively.

*ComprehensiveIncome*—Componentsof the Company’s comprehensive income include net income and changes in fairvalue of interest rate swaps.

*Advertising*—Advertising costs are expensedwhen incurred and are included as part of selling, general and administrativeexpenses. Advertising costs were $142, $413, and $409 in 2005, 2004 and 2003,respectively.

*DerivativeFinancial Instruments*—The Company records all derivatives at fair value and designatesderivative instruments as being used to hedge changes in fair value or changesin cash flows. Changes in the fair value of derivatives that offset changes incash flows of a hedged item are recorded initially in other comprehensiveincome. Amounts recorded in other comprehensive income are subsequentlyreclassified into earnings during the same period in which the hedged itemaffects earnings. Any portion of the changes in fair value of derivativesdesignated as a hedge that is deemed ineffective is recorded in earnings. TheCompany entered into interest rate swap agreements to manage its interest rateexposure (See Note 7). Interest rate swaps are agreements to exchangeinterest rate payment streams based on a notional principal amount. The Companydesignated the swaps as a cash flow hedge. Accordingly, these swap agreementsresulted in the recognition of derivative liabilities as well as amountsrecorded in other comprehensive income. The Company had no interest rate swapsat September 30, 2005.

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*Stock-Based Compensation*—The Company accounts forstock-based awards to employees using the intrinsic value method in accordancewith Accounting Principles Bulletin (“APB”) No. 25, *Accounting for Stock Issued to Employees*.The Company has adopted the disclosure-only requirements of SFAS No. 123, *Accounting for Stock-Based Compensation*,for stock-based awards to employees. Accordingly, the Company records nocompensation expense in the consolidated financial statements upon grant ofemployee stock awards when the exercise price is equal to fair market value atthe date of grant.

SFAS 123 requires the disclosure of proforma net income or loss as if the Company had adopted the fair value methodsince inception. Under SFAS 123, the fair value of stock-based awards toemployees is calculated through the use of option pricing models, even thoughsuch models were developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which significantly differfrom the characteristics of the Company’s stock option awards. These modelsalso require subjective assumptions, including expected time to exercise, whichgreatly affect the calculation. The following table summarizes the effect onnet income and earnings per share if the Company had adopted the provisions ofSFAS 123.

| ** **                                                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                                                                                                        |       | $        | 4,557      |     | $          | 2,524    |       | $ | 4,329 |   |
| Deduct:  Stock-based employee compensation expense determined under  fair-value-based method for all awards, net of related tax effects |       | (602     | )          | (1       | )          | (1       | )          |
| Add: Stock-based  employee compensation expense included in reported net income, net of  related tax effects                                 |       | —   |       | —   |       | —   |       |
| Pro Forma net  income                                                                                                                             |       | $        | 3,955      |     | $          | 2,523    |       | $ | 4,328 |   |
| Basic Earnings  Per Share:                                                                                                                        |       |     |       |     |       |     |       |
| As Reported                                                                                                                                       |       | $        | 0.76       |     | $          | 0.50     |       | $ | 0.32 |   |
| Pro Forma                                                                                                                                         |       | $        | 0.66       |     | $          | 0.50     |       | $ | 0.32 |   |
| Diluted Earnings Per Share:                                                                                                                       |       |     |       |     |       |     |       |
| As Reported                                                                                                                                       |       | $        | 0.68       |     | $          | 0.43     |       | $ | 0.28 |   |
| Pro Forma                                                                                                                                         |       | $        | 0.59       |     | $          | 0.43     |       | $ | 0.28 |   |

 

Calculations of the pro forma fair valueof stock-based awards granted through August 2, 2005 were based on asingle option valuation approach as a non-public company. Forfeitures arerecognized as they occur. The Company’s calculations were made using theminimum value method with the following weighted average assumptions at September 30,2003 (there were no grants in 2004):

| Risk-free interest rate |   | 2.97 | %      |
|-------------------------|--------|------|--------|
| Expected life in years  |   | 5    |   |
| Expected volatility     |   | None |   |
| Dividends               |   | None |   |

 

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In the Company’s fourth quarter of 2005the Company granted 135,103 nonqualified options to purchase the Company’scommon stock that were fully vested by September 30, 2005. The Companyutilized the Black-Scholes option valuation model to value these post initialpublic offering grants for pro forma presentation of net income and earningsper share as if the fair value-based accounting method in SFAS 123 had beenused. The Company’s computations used the following assumptions to derive theoptions fair value and related compensation expense:

| Risk-free interest rate |   | 4.1% to 4.2 | %      |
|-------------------------|--------|-------------|--------|
| Expected life in years  |   | 5           |   |
| Expected volatility     |   | 36.7        | %      |
| Dividends               |   | None        |   |

 

*Reclassifications*—Certainreclassifications have been made, none of which affected results of operations,to present the financial statements on a consistent basis.

*Recently Issued andNew Accounting Pronouncements*—In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity* (“SFAS 150”). This Statementestablishes standards for how the Company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires the Company to classify a financial instrument that is within itsscope as a liability (or an asset in some circumstances). Many of thoseinstruments were previously classified as equity. The Company adopted SFAS 150on July 1, 2003. As a result, the Company reclassified its redeemablepreferred stock as a liability (previously classified as mezzanine equity) andrecorded dividend accretion on a prospective basis as interest expense.Dividend accretion included in interest expense was $4,055, $4,239 and $999 in2005, 2004 and 2003, respectively. In August 2005, the Company redeemedall of the Series A preferred stock with a portion of the proceeds fromits initial public offering (See Note 8).

In December 2003,FASB issued Interpretation No. 46(R), *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51*.This Interpretation clarifies the application of Accounting Research Bulletin No. 51,*Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolled financial interest or in which equity investors do not bear theresidual economic risks. The adoption of this Interpretation did not have amaterial effect on the Company’s financial statements.

In November 2004,the FASB issued SFAS No. 151, *InventoryCosts, an Amendment of ARB No. 43, Chapter 4* (“SFAS151”). SFAS 151 clarifies that inventory costs that are “abnormal” are requiredto be charged to expense as incurred as opposed to being capitalized intoinventory as a product cost. SFAS 151 provides examples of “abnormal” costswhich include costs of idle facilities, excess freight and handling costs andwasted material (spoilage). SFAS 151 is effective for the Company’s fiscal yearbeginning October 1, 2005. The impact of SFAS 151 will not have a materialeffect on the Company’s consolidated financial statements.

In December 2004,the FASB issued SFAS No. 123 (Revised), *Share-BasedPayment* (“SFAS 123-R”). SFAS 123-R replaces SFAS 123 andsupersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”). Adoption of SFAS123-R will require the Company to record a non-cash expense for its stockcompensation plans using the fair value method. Historically, the Companyrecorded its compensation cost in accordance with APB No. 25, which doesnot require the recording of an expense for its equity related compensationplans if stock awards were granted at a price equal to the fair market value ofMWI’s common stock on the grant date. SFAS 123-R is effective for theCompany’s fiscal year beginning October 1, 2005. At October 1, 2005,the Company had no unvested stock awards that would be required to be recordedunder the provisions of SFAS 123-R and therefore SFAS 123-R is notexpected to have a material impact on the Company’s consolidated financialstatements.

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In December 2004,the FASB issued SFAS No. 153, *Exchangesof Nonmonetary Assets—An Amendment of APB Opinion No. 29*(“SFAS 153”),which eliminates the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. The Company is required to adoptSFAS 153 for nonmonetary asset exchanges occurring in the first quarter of 2006and its adoption is not expected to have a significant effect on the Company’sconsolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*(“SFAS 154”)*.*SFAS 154 replaces FASB Statement No. 3,*Reporting Accounting Changes in InterimFinancial Statements*, and replaces ABP Opinion No. 20, *Accounting Changes.*SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and will be effective for the Company for itsfiscal year ending September 30, 2007. The impact of SFAS 154 is notexpected to have a material effect on the Company’s consolidated financialstatements.

In September 2005,the Emerging Issues Task Force issued EITF No. 04-13, *Accounting for Purchases and Sales of Inventory withthe Same Counterparty*(“EITF 04-13”). EITF 04-13 requires that purchases and sales ofinventory with the same counterparty be accounted for as a nonmonetarytransaction within the scope of APB Opinion No. 29, *Accounting for Nonmonetary Transactions.*EITF04-13 is effective for new arrangements entered into, or modifications orrenewals of existing arrangements, beginning in the first interim or annualreporting period beginning after March 15, 2006. The impact of EITF 04-13is not expected to have a material effect on the Company’s consolidatedfinancial statements.

**3.   BusinessAcquisitions**

On November 1,2004, the Company purchased certain assets of Memorial Pet Care, Inc., apet crematorium, for $400 cash (plus approximately $32 of direct acquisitioncosts).

On January 3, 2005, the Company purchased substantially allof the assets of Vetpo Distributors, Inc. (“Vetpo”), a regional animalhealth products distributor located in Holland, Michigan, for $4,500 in cash(plus approximately $101 of direct acquisition costs) and the issuance of anote payable for $487.

Thefollowing table summarizes the preliminary estimated fair values of the assetsacquired and liabilities assumed at the date of acquisition. These preliminarypurchase price allocations are based on a combination of third-party valuationsand internal analyses and may be adjusted during the allocation period asdefined in SFAS No. 141, *BusinessCombinations*.

| ** **                | ** ** | **Memorial Pet  Care, Inc.** | ** ** | **Vetpo  Distributors, Inc.** | ** ** |
|---------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| Receivables               |       |                                   | $          | 24                                 |       |   |   | $ | 2,068 |   |   |
| Inventories               |       |                                   | —     |                               |       |   | 1,927 |   |   |
| Property and  equipment   |       |                                   | 107        |                               |       |   | 91 |   |   |
| Goodwill                  |       |                                   | 66         |                               |       |   | 1,386 |   |   |
| Intangibles               |       |                                   | 246        |                               |       |   | 1,543 |   |   |
| Total assets acquired     |       |                                   | 443        |                               |       |   | 7,015 |   |   |
| Accounts payable          |       |                                   | 11         |                               |       |   | 1,927 |   |   |
| Note payable              |       |                                   | —     |                               |       |   | 487 |   |   |
| Total liabilities assumed |       |                                   | 11         |                               |       |   | 2,414 |   |   |
| Net assets  acquired      |       |                                   | $          | 432                                |       |   |   | $ | 4,601 |   |   |

 

The $1,452 recorded in goodwill is expected to be deductible fortax purposes over 15 years.

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**4.**   Receivables

Receivables consist of the following at September 30:

| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Trade                             |       | $        | 69,969     |     | $          | 55,682 |   |
| Vendor rebates  and programs      |       | 6,882    |       | 4,237    |       |
| Related  party—(See Note 14) |       | 1,429    |       | 366      |       |
|                              |       | 78,280   |       | 60,285   |       |
| Allowance for  doubtful accounts  |       | (1,181   | )          | (565     | )          |
|                              |       | $        | 77,099     |     | $          | 59,720 |   |

 

Approximately 7% and 8% of the Company’s trade receivablesresulted from transactions with a single customer as of September 30, 2005and 2004, respectively.

**5.**   Property and Equipment

Property and equipment consists of thefollowing at September 30:

| ** **                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Land                                      |       | $        | 169        |     | $          | 322 |   |
| Buildings and  leasehold improvements     |       | 2,293    |       | 3,183    |       |
| Machinery,  furniture and equipment       |       | 8,140    |       | 6,960    |       |
| Computer  equipment                       |       | 2,759    |       | 2,939    |       |
| Construction in  progress                 |       | 630      |       | —   |       |
|                                      |       | 13,991   |       | 13,404   |       |
| Accumulated depreciation and amortization |       | (7,072   | )          | (7,397   | )          |
|                                      |       | $        | 6,919      |     | $          | 6,007 |   |

 

The Company recorded depreciation expense of $1,392, $1,146 and $971for the years ended September 30, 2005, 2004 and 2003, respectively.

**6.**   Intangibles

Intangible assets consists of thefollowing at September 30:

| ** **               | ** ** | **Useful Life** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------------------|------------|----------|------------|----------|------------|
| Amortizing:              |       |                 |       |     |       |     |       |   |   |   |   |
| Customer lists           |       |                 | 10 years   |     |       | $        | 1,589      |   |   | $ | — |   |   |
| Covenants not to compete |       |                 | 5 years    |     |       | 112      |       |   | — |   |   |
| Other                    |       |                 | 5 years    |     |       | 36       |       |   | — |   |   |
|                     |       |                 |       |     |       | 1,737    |       |   | — |   |   |
| Accumulated amortization |       |                 |       |     |       | (145     | )          |   | — |   |   |
|                     |       |                 |       |     |       | 1,592    |       |   | — |   |   |
| Non-Amortizing:          |       |                 |       |     |       |     |       |   |   |   |   |
| Trade names              |       |                 |       |     |       | 52       |       |   | — |   |   |
|                     |       |                 |       |     |       | $        | 1,644      |   |   | $ | — |   |   |

 

Projected amortization expense for existing intangible assets is$189 for each of the fiscal years ending 2006, 2007, 2008 and 2009 and $166 forthe fiscal year ending 2010.

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**7.**   Line-of-Credit and Long-Term Debt

Line-of-Credit—TheCompany has a line-of-credit agreement with two lenders for a credit facilitythat allows for borrowings up to $70,000. The line-of-credit is secured by asecurity interest in substantially all of the Company’s assets and terminateson June 18, 2007. Interest is due monthly at the following rates: 1) LIBORplus a margin (5.41% at September 30, 2005); or 2) the prime rate (6.75%at September 30, 2005). The lenders also receive an unused line feeand letter of credit fee equal to 0.375% of the unused amount of the revolvingcredit facility. TheCompany’s outstanding balance on this facility at September 30, 2005 and2004 was $24,690 and $49,129, respectively. The line-of-credit contains certainrestrictive financial covenants as well as restrictions on dividend paymentsand future debt borrowings. The credit agreement allows the Company to issue upto $10,000 in letters of credit. The letters of credit typically act asguarantee of payment to certain third parties in accordance with specifiedterms and conditions. The Company had three letters of credit totaling $300 andtwo letters of credit totaling $3,100 at September 30, 2005 and 2004,respectively. There were no outstanding borrowings on these letters of creditat September 30, 2005 or 2004.

As part of thecredit agreement, the Company was required to maintain an interest rate swap ona minimum notional amount of $12,000 of borrowings under its revolving creditfacility. On July 7, 2004 and 2003, the Company entered into interest rateswap agreements for $12,000 of its line-of-credit borrowings. Under the swaps,the Company received interest at a floating rate based on LIBOR and paidinterest at a fixed rate of 2.49% and 1.33%, respectively. Net payments dueunder the swaps were settled monthly and the swaps expired on July 7, 2005and 2004, respectively. The Company received a waiver from its lenders for therequirement to maintain an interest rate swap effective as of July 7,2005.

Long-Term Debt—In December 2003the Company amended the line-of-credit agreement to include borrowings up to$2,500 on a loan for capital equipment purchases only. The capital equipmentline-of-credit was secured by a security interest in substantiallyall of the Company’s assets. Interest was due monthly at the following rates:1) the LIBOR plus a margin; or 2) the prime rate plus a margin. In August 2005the Company terminated the capital equipment line-of-credit and paid off theoutstanding balance.

On January 3, 2005, the Companyissued an unsecured non-negotiable promissory note in the aggregate principalamount of $487 in partial consideration for the purchase of substantially allthe assets of Vetpo (See Note 3). The note bears interest at the prime rate(6.75% at September 30, 2005), payable quarterly. The principal of thenote is payable in five equal annual installments, beginning January 1,2006.

| ** **                                                                                                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Capital equipment  note payable, monthly principal payments of $24, plus interest, interest rate  5.25% at September 30, 2004                                                              |       | $        | —     |     | $          | 1,020 |   |
| Unsecured  non-negotiable promissory note, annual principal payments of $97 beginning  January 1, 2006, interest paid quarterly, interest rate 6.75% at September 30,  2005 |       | 487      |       | —   |       |
|                                                                                                                                                                                            |       | 487      |       | 1,020    |       |
| Current portion                                                                                                                                                                                 |       | (97      | )          | (288     | )          |
| Total long-term  debt                                                                                                                                                                           |       | $        | 390        |     | $          | 732 |   |

 

**8.**   Redeemable Preferred Stock

The Company had authorized 30,000 shares of $1 par value Series Apreferred stock, with 26,786 shares issued and outstanding at September 30,2004. The redeemable preferred stock was subject to mandatory redemption on June 18,2012 and had a liquidation preference of $1,000 per share (plus accumulated,accrued and unpaid dividends). The holders of redeemable preferred stock wereentitled to a 

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cumulative 13% annual dividend based onthe liquidation preference. The Company had the right to redeem any outstandingshares at any time but all shares were required to be redeemed no later than June 18,2012. In August 2005, the Company used a portion of the proceeds from itsinitial public offering (See Note 9) to redeem all of the redeemable preferredstock and accrued dividends.

**9.**   Common Stock and Stock Options

On July 28, 2005, theCompany amended its Amended and Restated Certificate of Incorporation toauthorize 20 million shares of common stock and declared a 5.5-to-1common stock split in the form of a common stock dividend. All numbers ofcommon stock and per share data in the accompanying consolidated financialstatements and related notes have been retroactively restated to give effect tothe amendment of the Amended and Restated Certificate of Incorporation andstock split.

*Initial PublicOffering*

In August 2005 aRegistration Statement relating to the Company’s initial public offering ofcommon stock was declared effective by the Securities and Exchange Commission.As a result, the Company issued 4,983,334 shares of common stock (including theexercise of the underwriters’ over-allotment option of 650,000 shares) thatwere subsequently sold to the public for $17 per share. The Company receivedestimated net proceeds of $77,159 after deducting the underwriting discountsand offering expenses. The Company used these net proceeds to redeem all of theCompany’s Series A preferred stock and accrued dividends for approximately$39,789 and to repay approximately $37,370 of borrowings on the revolvingcredit facility under the amended credit agreement.

*2002 Stock Option Plan*

The Company has a 2002 Stock Option Plan (the “2002 Plan”) toprovide its directors, executives and other key employees with additionalincentives by allowing them to acquire an ownership interest in the Companyand, as a result, encouraging them to contribute to its success. At September 30,2005 the Company had 507,688 shares of its common stock reserved for issuanceunder the 2002 Plan. The options granted under the 2002 Plan are nonqualifiedstock options that have an exercise price per share equal to fair market valueof the common stock at the time of grant. The term of each option is determinedby the Company’s board of directors or by a designated committee of the boardbut the term of any option may not exceed ten years from the date of grant. In2003, the Company granted 543,951 nonqualified stock options with an exerciseprice of $0.18 per share under the 2002 Plan. The stock options generally lapseten years after issuance or 120 days after the option holder ceases to be anemployee depending upon the cause of termination. The options vest in variousamounts over three to five-year periods beginning upon the achievement ofannual financial targets as established by the option agreement beginning withthe year ended September 30, 2002 and ending with the year ended September 30,2006. All unvested options as of June 18, 2009 become fully vested if theoption holder is employed with the Company on such date. Shares issued uponexercise of options granted under the 2002 Plan had a repurchase right, whichexpired in August 2005 in connection with the Company’s initial publicoffering. Unvested options for which the annual financial targets had beenachieved became fully vested upon the completion of the Company’s initialpublic offering in August 2005. In 2005, no options were granted under the2002 Plan, 36,267 options were exercised and 60,436 were forfeited. At September 30,2005 the Company had outstanding 447,248 stock options under the 2002 Plan with253,848 vested and exercisable.

*2005 Stock Option Plan*

In July 2005the Company adopted the 2005 Stock-Based Award and Incentive Compensation Plan(the “2005 Plan”). Under the 2005 Plan, the Company may offer restricted sharesof its common stock and grant options to purchase shares of its common stock toselected employees. The purpose of the 2005 Plan 

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is to promote the Company’s long-term financial success byattracting, retaining and rewarding eligible participants. The number of sharesreserved for issuance under the stock incentive plan is 1,200,000 shares. At September 30,2005 the Company had 1,198,590 shares of its common stock available forissuance under the 2005 Plan.

The 2005 Planpermits the Company to grant stock options (both incentive stock options andnon-qualified stock options), restricted stock and deferred stock. Thecompensation committee will determine the number and type of stock-based awardsto each participant, the exercise price of each award, the duration of theaward (not to exceed ten years), vesting provisions and all other terms andconditions of such award in individual award agreements. The 2005 Plan providesthat upon termination of employment with the Company, unless determinedotherwise by the compensation committee at the time options are granted, theexercise period for vested awards will generally be limited, provided thatvested awards will be canceled immediately upon a termination for cause orvoluntary termination. The 2005 Plan provides for the cancellation of allunvested awards upon termination of employment with the Company, unlessdetermined otherwise by the compensation committee at the time awards aregranted.

The 2005 Plan provides that upon a change in control, thecompensation committee may, at its discretion:

·       fully vest any award under the 2005Plan;

·       cancel any outstanding award inexchange for a payment in cash of an amount equal to the excess of the changein control price over the exercise price of the award;

·       after giving the holder anopportunity to exercise any outstanding award, cancel or terminate anyunexercised award; or,

·       provide that any such award will behonored or assumed, or new rights substituted therefore by the new employer ona substantially similar basis and in accordance with the terms and conditionsof the 2005 Stock Plan.

During the fourthquarter of 2005, the Company granted 135,103 nonqualified stock options with aweighted average exercise price of $18.43 and a term of ten years. The optionswere fully vested by September 30, 2005. During the fourth quarterof 2005, option holders exercised 1,410 vested options and 606 were forfeitedunder the 2005 Plan.

A summary of activity under the 2002 and2005 Plans are as follows:

| ** **                       | ** ** | **2005**                   | ** ** | **2004**                               | ** ** | **2003**                   | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Number  of Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  of Shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  of Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
| Outstanding at beginning of year |       | 543,951                    |       |                                   | $          | 0.18                       |       |   | 543,951 |   |   | $ | 0.18 |   |   | — |   |   | $ | — |   |   |
| Granted                          |       | 135,103                    |       |                                   | 18.43      |                       |       | — |   |   | — |   |   | 543,951 |   |   | 0.18 |   |   |
| Exercised                        |       | (37,677                    | )          |                                   | 0.81       |                       |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Cancelled or expired             |       | (61,042                    | )          |                                   | 0.35       |                       |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Outstanding at end of year       |       | 580,335                    |       |                                   | $          | 4.37                       |       |   | 543,951 |   |   | $ | 0.18 |   |   | 543,951 |   |   | $ | 0.18 |   |   |
| Exercisable at end of year       |       | 386,935                    |       |                                   | $          | 6.47                       |       |   | 65,283 |   |   | $ | 0.18 |   |   | 21,761 |   |   | $ | 0.18 |   |   |

 

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| ** **                                  | ** ** | **Outstanding options** | ** ** | **Exercisable options** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of exercise prices** | ** ** | ** **                   | ** ** | **Number  of Shares**   | ** ** | **Weighted  average  remaining  contractual  life (in years)** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  of Shares** | ** ** | **Weighted  average  exercise  price** | ** ** |
| $  0.18 - $16.99                  |       | 447,248                      |       |                         | 6.7        |   |   |   | $ | 0.18 |   |   | 253,848 |   |   | $ | 0.18 |   |   |
| $17.00 - $19.99                             |       | 99,137                       |       |                         | 9.8        |   |   |   | $ | 17.03 |   |   | 99,137 |   |   | $ | 17.03 |   |   |
| $20.00 - $23.06                             |       | 33,950                       |       |                         | 10.0       |   |   |   | $ | 22.61 |   |   | 33,950 |   |   | $ | 22.61 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**10.**   Computation Of Earnings Per Share *(In thousands except per share data)*

| ** **                                     | ** ** | **2005**  | ** ** | **2004**    | ** ** | **2003**  | ** ** |
|------------------------------------------------|------------|-----------|------------|-------------|------------|-----------|------------|
| ** **                                     | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                     |       | $         | 4,557      |        | $          | 4,557     |       | $ | 2,524 |   | $ | 2,524 |   | $ | 1,615 |   | $ | 1,615 |   |
| Weighted average common shares  outstanding    |       | 5,970     |       | 5,970       |       | 5,038     |       | 5,038 |   | 5,013 |   | 5,013 |   |
| Effect of diluted securities:                  |       |      |       |        |       |      |       |   |   |   |   |   |   |
| Contingent stock                               |       |      |       | 412         |       |      |       | 522 |   |   |   | 522 |   |
| Stock options                                  |       |      |       | 315         |       |      |       | 318 |   |   |   | 210 |   |
| Weighted average shares outstanding            |       |      |       | 6,697       |       |      |       | 5,878 |   |   |   | 5,745 |   |
| Earnings per share                             |       | $         | 0.76       |        | $          | 0.68      |       | $ | 0.50 |   | $ | 0.43 |   | $ | 0.32 |   | $ | 0.28 |   |
| Anti-dilutive shares excluded from calculation |       |      |       | 34          |       |      |       | — |   |   |   | — |   |

 

**11.**   Income Taxes

The components of the U.S. Federal andstate income tax expense consist of the following:

| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| Current payable: |       |     |       |     |       |     |       |
| U.S. Federal     |       | $        | 4,601      |     | $          | 3,268    |       | $ | 2,579 |   |
| State            |       | 702      |       | 677      |       | 524      |       |
|             |       | 5,303    |       | 3,945    |       | 3,103    |       |
| Deferred:        |       |     |       |     |       |     |       |
| U.S. Federal     |       | (168     | )          | 278      |       | 11       |       |
| State            |       | (37      | )          | 57       |       | 2        |       |
|             |       | (205     | )          | 335      |       | 13       |       |
|             |       | $        | 5,098      |     | $          | 4,280    |       | $ | 3,116 |   |

 

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The Company’s deferred tax assets andliabilities consist of the following at September 30:

| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:           |       |     |       |     |       |
| Investments                     |       | $        | 144        |     | $          | 148 |   |
| Allowance for doubtful accounts |       | 451      |       | 216      |       |
| Inventories                     |       | 199      |       | 132      |       |
| Revenue recognition             |       | 56       |       | 75       |       |
| Other                           |       | 96       |       | 9        |       |
| Total deferred tax assets       |       | 946      |       | 580      |       |
| Deferred tax  liabilities:      |       |     |       |     |       |
| Property and equipment          |       | (786     | )          | (755     | )          |
| Prepaid expenses                |       | (316     | )          | (189     | )          |
| Other                           |       | (12      | )          | —   |       |
| Total deferred tax liabilities  |       | (1,114   | )          | (944     | )          |
| Net deferred tax  liabilities   |       | $        | (168       | )        | $          | (364 | ) |

 

The Companybelieves that realization of these deferred assets is more likely than not.Accordingly, no valuation allowance has been recorded.

Income tax expense differed from incometaxes at the U.S. federal statutory tax rate of 34% for all periods presentedas follows:

| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Taxes computed at  statutory rate                       |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  taxes (net of federal) income tax benefit |       | 4.3      |       | 7.1      |       | 3.9      |       |
| Redeemable  preferred stock dividend accretion          |       | 14.3     |       | 21.2     |       | 4.6      |       |
| Other                                                   |       | 0.2      |       | 0.6      |       | (0.6     | )          |
|                                                    |       | 52.8     | %          | 62.9     | %          | 41.9     | %          |

 

The decrease in theeffective tax rate for the year ended September 30, 2005 as compared tothe year ended September 30, 2004 was primarily attributable to the lowernondeductible accretion of dividends on the Series A preferred stock in2005 due to the redemption of all of the Series A preferred stock in August 2005and due to actual state income tax expense being less than estimated due to theutilization of state tax credits. The increase in the effective rate for theyear ended September 30, 2004 as compared to September 30, 2003 wasattributable to the nondeductible accretion of dividends on the Series Apreferred stock beginning on July 1, 2003.

**12.   Statement of Cash Flow—Supplementaland Noncash Disclosures**

| ** **                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| *Supplemental Disclosures*                                    |       |     |       |     |       |     |       |
| Cash paid for  interest                                       |       | $        | 2,034      |     | $          | 1,719    |       | $ | 1,894 |   |
| Cash paid for  income taxes                                   |       | 4,122    |       | 4,448    |       | 3,155    |       |
| *Noncash  Activities*                                         |       |     |       |     |       |     |       |
| Increase (decrease)  in the fair value of interest rate swaps |       | —   |       | 8        |       | (93      | )          |
| Accretion of  redeemable preferred stock                      |       | —   |       | —   |       | 2,714    |       |
| Equipment  acquisitions financed with note payable            |       | —   |       | 945      |       | —   |       |
| Equipment acquisitions  financed with accounts payable        |       | 642      |       | —   |       | —   |       |
|                                                               |            |          |            |          |            |          |            |  |  |  |

 

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**13.   Commitmentsand Contingencies**

The Company hasoperating leases for office and distribution center space and equipment forvarying periods. Certain leases have renewal options and require contingentpayments for increases, including executory costs, in property taxes, insuranceand certain other costs in excess of a base year amount. Total rent expense forthe years ended September 30, 2005, 2004 and 2003 were $1,800, $1,316 and$766, respectively.

The aggregate future noncancelable minimumrental payments on operating leases at September 30, 2005 are as follows:

| 2006       |   | $1,494 |   |
|------------|--------|--------|--------|
| 2007       |   | 1,433  |   |
| 2008       |   | 1,197  |   |
| 2009       |   | 1,054  |   |
| 2010       |   | 839    |   |
| Thereafter |   | 886    |   |
|       |   | $6,903 |   |

 

The Company is not a partyto any material pending legal proceedings and is not aware of any claims thatcould have a material adverse effect on our financial position, results ofoperations, or cash flows.

**14.   RelatedParty Transactions**

On June 18,2002, the Company entered into a management services and consulting agreement(the “agreement”) with Bruckmann, Rosser, Sherrill & Co. LLC (“BRS”),a major shareholder, and Agri Beef Co. (“Agri Beef”), a major shareholder. Theagreement stated that BRS would provide certain management, consulting andfinancial planning services to the Company’s board of directors and management.Under the terms of the agreement, BRS received an annual fee equal to thegreater of $250 or two and one-half percent of the Company’s EBITDA, asdefined in the agreement, each fiscal year. The agreement also stipulated thatAgri Beef was entitled to 20% of the fee owed to BRS. In August 2005, theCompany, BRS and Agri Beef terminated the agreement for a termination fee of$1,600 to BRS and $400 to Agri Beef. BRS received $365, $309 and $200 andAgri Beef received $91, $77 and $50 for services performed under theagreement in 2005, 2004 and 2003, respectively. In 2003, the Company also paidAgri Beef $76 for data processing expenses.

MWI Co., a subsidiary of the Company, holds a 50% membershipinterest in Feeders’ Advantage that is accounted for as an investment using theequity method. Sales of products to Feeders’ Advantage were $28,473, $22,163and $22,960 in 2005, 2004 and 2003, respectively. MWI Co. charged Feeders’Advantage for certain operating and administrative services of $428, $421 and$390 in 2005, 2004 and 2003, respectively. The Company’s President and ChiefExecutive Officer and a member of the Company’s Board of Directors are eachmembers of the board of managers of Feeders’ Advantage.

**15.   EmployeeBenefit Plans**

Through March 31,2004, the Company, along with Feeders’ Advantage and Agri Beef, participated ina multi-employer defined contribution profit sharing plan with a 401(k) arrangementcovering all employees of the Company. On April 1, 2004, the Company,along with Feeders’ Advantage, established a new multi-employer definedcontribution profit sharing plan with a 401(k) arrangement and the accountbalances for all eligible employees were transferred to this plan.

To become eligiblefor the profit sharing portion of the plan, an employee must complete two yearsof service and attain the age of twenty-one. Participation is automatic. Tobecome eligible for the 

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401(k) portion of the plan, the employee must complete threemonths of service and attain the age of twenty-one.

Both portions ofthe plan allow for employer matching contributions. The Company is required tomatch 50% of the employee’s contribution to the 401(k) portion of the planup to 6% of the employee’s salary. The Company’s combined matchingcontributions for the 401(k) portion of the plan were $549, $444 and $431in 2005, 2004 and 2003, respectively. Employee’s contributions are fully vestedimmediately while employer contributions vest over a five-year period.

Contributions to the profit sharing portion of the Plans arediscretionary, ranging from 0 to 3%, and are approved by the Company’s Board ofDirectors. Total combined contributions for 2005, 2004 and 2003 were $598,$448, and $423, respectively. Employer contributions are fully vestedimmediately.

**16.   FinancialInstruments**

*FinancialInstruments*—Thefollowing disclosure of the estimated fair value of financial instruments ismade in accordance with the requirements of SFAS No. 107, *Disclosures About Fair Value of Financial Instruments*.The estimated fair value amounts have been determined by the Company, usingavailable market information and appropriate valuation methodologies. However,considerable judgment is required in interpreting market data to develop theestimate of fair value. Accordingly, the estimates presented herein are notnecessarily indicative of the amounts that the Company could realize in acurrent market exchange. The use of different market assumptions and/orestimation methodologies may have a material effect on the estimated fair valueamounts.

The carryingamounts of receivables, investments, accounts payable, long-term debt and theline-of-credit are a reasonable estimate of their fair value.

*Derivative Financial Instruments*—The Company entered into interestrate swaps that qualified as derivatives and were designated as cash flowhedges. The Company’s interest rate swaps expired on July 7, 2005 and werenot renewed. At September 30, 2004, the fair value of the swap was aliability of $23. The Company recorded this liability with a correspondingcharge to other comprehensive loss (reduced by deferred tax assets of $9).Ineffectiveness of the hedges was not significant. The entire amount includedin accumulated other comprehensive loss at September 30, 2004 wasreclassified to income during 2005 as the related interest rate swap expired onJuly 7, 2005.

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**17.   Quarterly Financial Data(Unaudited)**

| ** **                                                                                          | ** ** | **Three-Months Ended**                                                                    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **Dec. 31,**                                                                              | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Year** | ** ** |
| ** **                                                                                          | ** ** | **Dollars and shares in thousands, except  per share data** | ** ** |
| **2005**                                                                                            |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                      |       | $                                                                                              | 108,994    |   | $ | 116,410 |   | $ | 137,987 |   | $ | 133,264 |   | $ | 496,655 |   |
| Gross profit                                                                                        |       | 16,624                                                                                         |       | 16,472 |   | 18,032 |   | 18,818 |   | 69,946 |   |
| Operating income(1)                                                                                 |       | 5,268                                                                                          |       | 3,282 |   | 4,422 |   | 2,799 |   | 15,771 |   |
| Net income(1)                                                                                       |       | 1,656                                                                                          |       | 595 |   | 1,407 |   | 899 |   | 4,557 |   |
| Earnings per share—diluted(2)                                                                  |       | $                                                                                              | 0.28       |   | $ | 0.10 |   | $ | 0.24 |   | $ | 0.10 |   | $ | 0.68 |   |
| Weighted average common shares outstanding used in the  diluted earnings per share calculation |       | 5,882                                                                                          |       | 5,878 |   | 5,876 |   | 9,113 |   | 6,697 |   |
| **2004**                                                                                            |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                                      |       | $                                                                                              | 90,054     |   | $ | 94,163 |   | $ | 106,186 |   | $ | 103,879 |   | $ | 394,282 |   |
| Gross profit                                                                                        |       | 13,725                                                                                         |       | 13,632 |   | 14,205 |   | 14,036 |   | 55,598 |   |
| Operating income                                                                                    |       | 3,603                                                                                          |       | 2,920 |   | 3,324 |   | 2,733 |   | 12,580 |   |
| Net income                                                                                          |       | 841                                                                                            |       | 542 |   | 717 |   | 424 |   | 2,524 |   |
| Earnings per share—diluted(3)                                                                  |       | $                                                                                              | 0.14       |   | $ | 0.09 |   | $ | 0.12 |   | $ | 0.07 |   | $ | 0.43 |   |
| Weighted average common shares outstanding used in the  diluted earnings per share calculation |       | 5,878                                                                                          |       | 5,878 |   | 5,878 |   | 5,878 |   | 5,878 |   |

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(1)          Operating income for thefourth quarter of 2005 includes a $2,000 pretax charge ($1,220 after-taxcharge) related to the termination of a management services and consultingagreement.

(2)          The sum of the quarterlyearnings per share amounts does not agree to the year-to-date earnings pershare amount as a result of the issuance of 4,983 of common stock in August 2005upon the completion of the Company’s initial public offering.

(3)          The sum of the quarterlyearnings per share amounts does not agree to the year-to-date earnings pershare amount as a result of rounding.

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***Item 9.***           Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

***Item 9A.***   Controlsand Procedures.

Management of the Company,including the Chief Executive Officer and Chief Financial Officer of theCompany, have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of September 30,2005. Based on this evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective to provide reasonable assurance that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified by the SEC ‘s rules and forms. There were no changes inthe Company’s internal control over financial reporting that occurred duringthe Company’s most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

***Item 9B.***   OtherInformation.

None.

**PART III**

***Item 10.***    Directorsand Executive Officers of the Registrant.

The information regarding directors and nominees fordirectors of the Company, including identification of the audit committee andaudit committee financial expert, is presented under the headings “CorporateGovernance—Committees of the Board of Directors,” and “Election of Directors—NomineesFor Directors” in the Company’s definitive proxy statement for use inconnection with the 2006 Annual Meeting of Stockholders (the “Proxy Statement”)to be filed within 120 days after the end of the Company’s fiscal year ended September 30,2005. The information contained under these headings is incorporated herein byreference. Information regarding the executive officers of the Company isincluded in this Annual Report on Form 10-K under Item 1 of Part Ias permitted by Instruction 3 to Item 401(b) of Regulation S-K.

The Company has adopted acode of conduct that applies to its Chief Executive Officer and Chief FinancialOfficer. This code of conduct is available on the Company’s Web site at ***www.mwivet.com****.*If the Company makes any amendments to this code other than technical,administrative or other non-substantive amendments, or grants any waivers,including implicit waivers, from a provision of this code to the Company’sChief Executive Officer or Chief Financial Officer, the Company will disclosethe nature of the amendment or waiver, its effective date and to whom itapplies in a report on Form 8-K filed with the SEC.

***Item 11.***    ExecutiveCompensation.

Information concerningexecutive compensation is presented under the headings “Executive Compensation”in the Proxy Statement. Information concerning director compensation ispresented under the heading “Corporate Governance—Director Compensation” in theProxy Statement. The information contained under these headings is incorporatedherein by reference.

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***Item 12.***    SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.

Information with respectto security ownership of certain beneficial owners and management is set forthunder the heading “Security Ownership of Certain Beneficial Owners andDirectors and Officers” in the Proxy Statement. Information with respect toequity compensation plans is set forth under the heading “Equity CompensationPlan Information” in this Annual Report on Form 10-K under Item 5 ofPart II. The information contained under these headings is incorporatedherein by reference.

***Item 13.***    CertainRelationships and Related Transactions.

Information concerningrelated transactions is presented under the heading “Certain Relationships andRelated Transactions” in the Proxy Statement. The information contained underthis heading is incorporated herein by reference.

***Item 14.***    PrincipalAccountant Fees and Services.

Information concerningprincipal accountant fees and services is presented under the heading “Ratificationof Appointment of Independent Registered Public Accountant” in the ProxyStatement. The information contained under this heading is incorporated hereinby reference.

**PART IV**

***Item 15.***    Exhibitsand Financial Statement Schedules.

(a)           The following documentsare filed as part of this report:

1)              ConsolidatedFinancial Statements: See Index to Consolidated Financial Statements atItem 8 on page 41 of this report.

2)              Financial StatementSchedule: Schedule II—Consolidated Valuation and Qualifying Accounts

3)              Exhibitsare incorporated herein by reference or are filed with this report as set forthin the Index to Exhibits on pages 68 through 71 hereof.

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**MWIVETERINARY SUPPLY, INC.SCHEDULE II—CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS(Amounts in thousands)**

| ** **                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions/  Write-offs** | ** ** | **Balance at  End of Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|
| *Allowance for Doubtful Accounts*   |       |                                           |       |                                                      |       |                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Year ended  September 30, 2005 |       |                                           | $          | 565                                                       |       |                        |       | $                                            | 978        |   |   |   | $ | (362 | ) |   |   | $ | 1,181 |   |   |
| Year ended  September 30, 2004 |       |                                           | 544        |                                                      |       |                        | 430        |                                         |       |   | (409 | ) |   |   | 565 |   |   |
| Year ended  September 30, 2003 |       |                                           | 406        |                                                      |       |                        | 345        |                                         |       |   | (207 | ) |   |   | 544 |   |   |
|                                     |            |                                                |            |                                                           |            |                             |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                          | Mwi  VETERINARY SUPPLY, INC.                               |
|-------------------------------|------------------------------------------------------------|
|                          | By: /s/ MARY  PATRICIA  B. THOMPSON                   |
|                          | Mary Patricia B. Thompson                                  |
|                          | *(Vice President, Chief Financial  Officer and Secretary)* |
| Date: November 30,  2005 | * *                                                   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated as of November 30, 2005.

| /s/ JAMES F. CLEARY, JR.                                                                              |   | /s/ MARY PATRICIA B. THOMPSON                                                                                                                       |
|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| James F. Cleary, Jr.**Director, President and  Chief Executive Officer  (Principal Executive Officer) |   | Mary Patricia B.  Thompson  Vice President, Secretary and  Chief Financial Officer  (Principal Financial Officer and Principal  Accounting Officer) |
| /s/  KEITH E. ALESSI                                                                                       |   | /s/  BRUCE C. BRUCKMANN                                                                                                                             |
| Keith E. Alessi  (Director)                                                                                |   | Bruce C.  Bruckmann (Director)                                                                                                                      |
| /s/  JOHN F. MCNAMARA                                                                                      |   | /s/  BRETT A. PERTUZ                                                                                                                                |
| John F. McNamara  (Director)                                                                               |   | Brett A. Pertuz  (Director)                                                                                                                         |
| /s/  ROBERT N. REBHOLTZ                                                                                    |   | /s/  STEPHEN C. SHERRILL                                                                                                                            |
| Robert N.  Rebholtz (Director)                                                                             |   | Stephen C.  Sherrill (Director)                                                                                                                     |

 

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**Index to Exhibits**

**Filed with the Annual Reporton Form 10-K for theYear Ended September 30, 2005**
| Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                | ** ** | **Description** |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1    |       | Form of Amended and  Restated Certificate of Incorporation of MWI Veterinary Supply, Inc.,  incorporated herein by reference to Exhibit 3.1 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                      |
| 3.2    |       | Form of  Amended and Restated Bylaws of MWI Veterinary Supply, Inc., incorporated  herein by reference to Exhibit 3.2 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).                                                                                                                       |
| 4.1    |       | Form of MWI  Veterinary Supply, Inc. common stock certificate, incorporated herein by  reference to Exhibit 4.1 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                                                                                                                             |
| 4.2    |       | Stockholders  Agreement dated as of June 18, 2002 by and among MWI  Holdings, Inc., Bruckmann, Rosser, Sherrill & Co. II, L.P.,  Agri Beef Co. and the other parties thereto, incorporated herein by reference  to Exhibit 4.2 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).          |
| 4.3    |       | Registration  Rights Agreement dated as of June 18, 2002 by and between MWI  Holdings, Inc., Bruckmann, Rosser, Sherrill & Co. II, L.P.,  Agri Beef Co. and the other parties thereto, incorporated herein by reference  to Exhibit 4.3 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264). |
| 4.4    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Cleary, incorporated herein by  reference to Exhibit 4.4 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                             |
| 4.5    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and Jeff Danielson, incorporated herein by  reference to Exhibit 4.5 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                           |
| 4.6    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Hay, incorporated herein by reference  to Exhibit 4.6 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).*                                                                |
| 4.7    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Ross, incorporated herein by reference  to Exhibit 4.7 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).*                                                               |
| 4.8    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and Mary Pat Thompson, incorporated herein by  reference to Exhibit 4.8 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                        |
| 4.9    |       | First Amendment to  Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary  Supply, Inc., MWI Veterinary Supply Co. and James F. Cleary, Jr.,  incorporated herein by reference to Exhibit 4.9 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*                 |

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| 4.10 |   | First Amendment to  Executive Stock Agreement dated as of May 5, 2005 by and among MWI Veterinary  Supply, Inc., MWI Veterinary Supply Co. and Jeffrey J. Danielson,  incorporated herein by reference to Exhibit 4.10 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*        |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.11 |   | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary  Supply, Inc., MWI Veterinary Supply Co. and James S. Hay, incorporated  herein by reference to Exhibit 4.11 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).*           |
| 4.12 |   | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary  Supply, Inc., MWI Veterinary Supply Co. and James M. Ross, incorporated  herein by reference to Exhibit 4.12 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).*          |
| 4.13 |   | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary  Supply, Inc., MWI Veterinary Supply Co. and Mary Patricia B. Thompson,  incorporated herein by reference to Exhibit 4.13 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*   |
| 10.1 |   | Credit Agreement  dated as of June 18, 2002 among the financial institutions from time to  time parties thereto, Bank of America, N.A. and MWI Veterinary Supply Co.,  incorporated herein by reference to Exhibit 10.1 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                  |
| 10.2 |   | First Amendment  to Credit Agreement dated as of August 13, 2002 by and between MWI Veterinary  Supply Co., the Lenders and Bank of America, N.A., incorporated herein by  reference to Exhibit 10.2 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                           |
| 10.3 |   | Second Amendment  to Credit Agreement dated as of December 19, 2003 by and among MWI Veterinary  Supply Co., the Lenders and Bank of America, N.A., incorporated herein by  reference to Exhibit 10.3 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                               |
| 10.4 |   | Third Amendment  to Credit Agreement dated as of September 1, 2004 by and between MWI Veterinary  Supply Co., the Lenders and Bank of America, N.A., incorporated herein by  reference to Exhibit 10.4 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                         |
| 10.5 |   | Fourth Amendment  to Credit Agreement dated as of September 28, 2004 by and among MWI   Veterinary Supply Co., the Lenders and Bank of America, N.A., incorporated  herein by reference to Exhibit 10.5 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).                        |
| 10.6 |   | Subsidiary  Borrower Joinder Agreement dated as of December 15, 2004 by Memorial Pet  Care, Inc. and Bank of America, N.A., incorporated herein by reference  to Exhibit 10.6 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).                                                       |
| 10.7 |   | Fifth Amendment to  Credit Agreement dated as of March 28, 2005 by and among MWI Veterinary  Supply Co. and Memorial Pet Care, Inc., the Lenders and Bank of America,  N.A., incorporated herein by reference to Exhibit 10.14 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264). |

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| 10.8  |   | Sixth Amendment to  Credit Agreement, Consent and Waiver, dated as of April 20, 2005 by and  among MWI Veterinary Supply Co. and Memorial Pet Care, Inc., the Lenders  and Bank of America, N.A., incorporated herein by reference to  Exhibit 10.15 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264). |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Note in the  amount of $45,862,069 from MWI Veterinary Supply Co. and Memorial Pet  Care, Inc. to Bank of America, N.A. dated December 15, 2004,  incorporated herein by reference to Exhibit 10.9 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                              |
| 10.10 |   | Note in the  amount of $24,137,931 from MWI Veterinary Supply Co. and Memorial Pet  Care, Inc. to General Electric Capital Corporation dated  December 15, 2004, incorporated herein by reference to  Exhibit 10.10 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).                                  |
| 10.11 |   | 2002 Stock Option  Plan, incorporated herein by reference to Exhibit 10.11 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*                                                                                                                                                                                    |
| 10.12 |   | Lease Agreement  dated June 20, 2003 between Rafanelli and Nahas and MWI Veterinary  Supply Co., incorporated herein by reference to Exhibit 10.13 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                        |
| 10.13 |   | Ethical  Distribution Agreement dated as of January 1, 2004 by and between Fort  Dodge Animal Health and MWI Veterinary Supply Co., as amended, incorporated  herein by reference to Exhibit 10.16 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).                                                   |
| 10.14 |   | Livestock  Products Agreement effective as of January 1, 2005 by and between  Pfizer Inc. and MWI Veterinary Supply Co., incorporated herein by  reference to Exhibit 10.17 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                                                                          |
| 10.15 |   | Termination of  Management and Consulting Services Agreement dated as of June 3, 2005  between MWI Veterinary Supply Co., Bruckmann, Rosser, Sherrill &  Co., L.L.C. and Agri Beef Co., incorporated herein by reference to  Exhibit 10.18 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).       |
| 10.16 |   | Agreement for  Product Purchases dated as of June 30, 2005 by and between MWI  Veterinary Supply Co. and Medical Management International, Inc., dba  Banfield, The Pet Hospital®, incorporated herein by reference to  Exhibit 10.19 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).†     |
| 10.17 |   | Agreement for  Logistics Services dated as of June 30, 2005 by and between MWI  Veterinary Supply Co. and Medical Management International, Inc., dba  Banfield, The Pet Hospital®, incorporated herein by reference to  Exhibit 10.20 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).†    |
| 10.18 |   | MWI Veterinary  Supply, Inc. 2005 Stock-Based Incentive Compensation Plan, adopted  July 27, 2005, incorporated herein by reference to Exhibit 10.21 of  the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*                                                                                                |
| 10.19 |   | Form of  Option Letter, incorporated herein by reference to Exhibit 10.22 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                                                                                                 |
| 21.1  |   | Subsidiaries of  MWI Veterinary Supply, Inc.                                                                                                                                                                                                                                                                                                             |
| 23    |   | Consent of  Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                   |

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| 31.1 |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                      |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                      |
| 32   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

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*                    Identifiesmanagement contracts or compensatory plans or arrangements required to be filedas an exhibit hereto.

†                    Certainportions of the exhibit have been omitted pursuant to a confidential treatmentrequest submitted to and approved by the SEC.

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