**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **Quarterly  Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|-----------------------------------------------------------------------------------------------|
| **For the Quarter Ended: March 31, 2006**                                                     | ** ** | **Commission File Number: 000-51468** |

 

 

**MWI VETERINARY SUPPLY, INC.**(Exact name of Registrant as 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) |

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. Large acceleratedfiler oAccelerated filer  o                Non-acceleratedfiler  ý

 

Indicate bycheck mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No ý

 

The number ofshares of the registrant’s common stock, $0.01 par value, outstanding at May 1,2006 was 10,593,842.

 

 

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**MWI VETERINARY SUPPLY, INC.**

**INDEX**

 
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                             | ** ** |
|---------------|-----------------------------------------------------------------------------------------------------------------------|------------|
|          |                                                                                                                  |       |
| **Item 1.**   | **Financial Statements (Unaudited)**                                                                                  |       |
|          | Condensed  Consolidated Statements of Income for the three and six-months ended March  31, 2006 and 2005              |       |
|          |                                                                                                                  |       |
|          | Condensed Consolidated Statements of Comprehensive Income for the  three and six-months ended March 31, 2006 and 2005 |       |
|          |                                                                                                                  |       |
|          | Condensed Consolidated Balance Sheets as of March 31, 2006 and  September 30, 2005                                    |       |
|          |                                                                                                                  |       |
|          | Condensed Consolidated Statements of Cash Flows for the six-months  ended March 31, 2006 and 2005                     |       |
|          |                                                                                                                  |       |
|          | Notes to Condensed Consolidated Financial Statements                                                                  |       |
|          |                                                                                                                  |       |
|          | Report of Independent Registered Public Accounting Firm                                                               |       |
|          |                                                                                                                  |       |
| **Item 2.**   | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations**                       |       |
|          |                                                                                                                  |       |
| **Item 3.**   | **Quantitative and Qualitative Disclosures About Market Risk**                                                        |       |
|          |                                                                                                                  |       |
| **Item 4.**   | **Controls and Procedures**                                                                                           |       |
|          |                                                                                                                  |       |
| **PART  II**  | **OTHER  INFORMATION**                                                                                                |       |
|          |                                                                                                                  |       |
| ** **    | **Cautionary Statement**                                                                                              | ** ** |
|          |                                                                                                                  |       |
| **Item  1.**  | **Legal  Proceedings**                                                                                                |       |
|          |                                                                                                                  |       |
| **Item  1A.** | **Risk  Factors**                                                                                                     |       |
|          |                                                                                                                  |       |
| **Item 2.**   | **Unregistered Sales of Equity Securities and Use of Proceeds**                                                       |       |
|          |                                                                                                                  |       |
| **Item 3.**   | **Defaults Upon Senior Securities**                                                                                   |       |
|          |                                                                                                                  |       |
| **Item 4.**   | **Submission of Matters to a Vote of Security Holders**                                                               |       |
|          |                                                                                                                  |       |
| **Item  5.**  | **Other  Information**                                                                                                |       |
|          |                                                                                                                  |       |
| **Item 6.**   | **Exhibits**                                                                                                          |       |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements**

 

**MWIVETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share data)(unaudited)**

 
| ** **                                    | ** ** | **Three-months ended March 31,** | ** ** | **Six-months ended March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                     |       |                             |       |                           |       |   |   |   |   |
| Product sales                                 |       | $                                | 133,255    |                           | $          | 108,888 |   | $ | 260,303 |   | $ | 210,148 |   |
| Product sales to related party                |       | 8,001                            |       | 6,142                          |       | 17,356 |   | 12,947 |   |
| Commissions                                   |       | 2,093                            |       | 1,380                          |       | 3,506 |   | 2,309 |   |
| Total revenues                                |       | 143,349                          |       | 116,410                        |       | 281,165 |   | 225,404 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Cost of  product sales                        |       | 123,421                          |       | 99,938                         |       | 238,485 |   | 192,308 |   |
| Gross profit                                  |       | 19,928                           |       | 16,472                         |       | 42,680 |   | 33,096 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Selling,  general and administrative expenses |       | 15,159                           |       | 12,803                         |       | 29,712 |   | 23,819 |   |
| Depreciation  and amortization                |       | 473                              |       | 387                            |       | 915 |   | 727 |   |
| Operating  income                             |       | 4,296                            |       | 3,282                          |       | 12,053 |   | 8,550 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                      |       |                             |       |                           |       |   |   |   |   |
| Interest expense                              |       | (578                             | )          | (1,776                         | )          | (1,133 | ) | (3,545 | ) |
| Earnings of equity method investees           |       | 37                               |       | 27                             |       | 82 |   | 59 |   |
| Other                                         |       | 137                              |       | 57                             |       | 227 |   | 124 |   |
| Total other expense                           |       | (404                             | )          | (1,692                         | )          | (824 | ) | (3,362 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Income  before taxes                          |       | 3,892                            |       | 1,590                          |       | 11,229 |   | 5,188 |   |
| Income tax  expense                           |       | (1,537                           | )          | (995                           | )          | (4,435 | ) | (2,937 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net income                                    |       | $                                | 2,355      |                           | $          | 595 |   | $ | 6,794 |   | $ | 2,251 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Earnings per  share:                          |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | $                                | 0.22       |                           | $          | 0.12 |   | $ | 0.64 |   | $ | 0.44 |   |
| Diluted                                       |       | $                                | 0.22       |                           | $          | 0.10 |   | $ | 0.62 |   | $ | 0.38 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted  average common shares outstanding:  |       |                             |       |                           |       |   |   |   |   |
| Basic                                         |       | 10,586                           |       | 5,062                          |       | 10,582 |   | 5,062 |   |
| Diluted                                       |       | 10,884                           |       | 5,878                          |       | 10,873 |   | 5,880 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

3

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**MWIVETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)(unaudited)**

 
| ** **                                                    | ** ** | **Three-months ended March 31,** | ** ** | **Six-months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                    |       | $                                | 2,355      |                           | $          | 595 |   | $ | 6,794 |   | $ | 2,251 |   |
| Other  comprehensive loss:                                    |       |                             |       |                           |       |   |   |   |   |
| Interest rate swap:                                           |       |                             |       |                           |       |   |   |   |   |
| Change in fair value, net of tax of $2 and  $17, respectively |       | —                           |       | 4                              |       | — |   | 27 |   |
| Total comprehensive income                                    |       | $                                | 2,355      |                           | $          | 599 |   | $ | 6,794 |   | $ | 2,278 |   |

 

See Notes to Condensed Consolidated Financial Statements

 

4

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**MWIVETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(dollars and shares in thousands, except per share data)(unaudited)**

 
| ** **                                                                                                      | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| **Assets**                                                                                                      | ** ** | ** **          | ** ** | ** **              | ** ** |
| ** **                                                                                                      | ** ** | ** **          | ** ** | ** **              | ** ** |
| Current  Assets:                                                                                                |       |                |       |                    |       |
| Cash                                                                                                            |       | $                   | 34         |                    | $          | 31 |   |
| Receivables, net                                                                                                |       | 82,291              |       | 77,099                  |       |
| Inventories                                                                                                     |       | 63,827              |       | 68,786                  |       |
| Prepaid expenses and other current assets                                                                       |       | 1,797               |       | 2,011                   |       |
| Deferred income taxes                                                                                           |       | 581                 |       | 482                     |       |
| Total current assets                                                                                            |       | 148,530             |       | 148,409                 |       |
|                                                                                                            |       |                |       |                    |       |
| Property and  equipment, net                                                                                    |       | 6,298               |       | 6,919                   |       |
| Goodwill                                                                                                        |       | 29,739              |       | 29,739                  |       |
| Intangibles,  net                                                                                               |       | 1,551               |       | 1,644                   |       |
| Other  assets, net                                                                                              |       | 2,962               |       | 1,533                   |       |
| Total assets                                                                                                    |       | $                   | 189,080    |                    | $          | 188,244 |   |
|                                                                                                            |       |                |       |                    |       |
| **Liabilities  And Stockholders’ Equity**                                                                  | ** ** | ** **          | ** ** | ** **              | ** ** |
| ** **                                                                                                      | ** ** | ** **          | ** ** | ** **              | ** ** |
| Current  Liabilities:                                                                                           |       |                |       |                    |       |
| Line-of-credit                                                                                                  |       | $                   | 24,654     |                    | $          | 24,690 |   |
| Accounts payable                                                                                                |       | 63,040              |       | 69,382                  |       |
| Accrued expenses                                                                                                |       | 6,583               |       | 6,341                   |       |
| Current maturities of long-term debt                                                                            |       | 97                  |       | 97                      |       |
| Total current liabilities                                                                                       |       | 94,374              |       | 100,510                 |       |
|                                                                                                            |       |                |       |                    |       |
| Deferred income  taxes                                                                                          |       | 601                 |       | 650                     |       |
|                                                                                                            |       |                |       |                    |       |
| Long-term  debt                                                                                                 |       | 292                 |       | 390                     |       |
|                                                                                                            |       |                |       |                    |       |
| Commitments  and contingencies                                                                                  |       |                |       |                    |       |
|                                                                                                            |       |                |       |                    |       |
| **Stockholders’  Equity**                                                                                  | ** ** | ** **          | ** ** | ** **              | ** ** |
| Common stock $0.01 par value, 20,000  authorized; 10,593 and 10,576 shares issued and outstanding, respectively |       | 106                 |       | 106                     |       |
| Additional paid in capital                                                                                      |       | 78,721              |       | 78,396                  |       |
| Retained earnings                                                                                               |       | 14,986              |       | 8,192                   |       |
| Total stockholders’ equity                                                                                 |       | 93,813              |       | 86,694                  |       |
| Total  liabilities and stockholders’ equity                                                                |       | $                   | 189,080    |                    | $          | 188,244 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

5

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**MWIVETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands, except per share data)(unaudited)**

 
| ** **                                                                         | ** ** | **Six-months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 6,794      |   | $ | 2,251 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 918                            |       | 731 |   |
| Amortization of debt issuance costs                                                |       | 70                             |       | 70 |   |
| Deferred income taxes                                                              |       | (148                           | )          | (149 | ) |
| Earnings of equity method investees                                                |       | (82                            | )          | (60 | ) |
| Gain on disposal of property and equipment                                         |       | (62                            | )          | (4 | ) |
| Accretion of redeemable preferred stock                                            |       | —                         |       | 2,315 |   |
| Distribution of equity method investee                                             |       | —                         |       | 43 |   |
| Other                                                                              |       | (9                             | )          | — |   |
| Changes in operating assets and liabilities  (net of effects of acquisitions):     |       |                           |       |   |   |
| Receivables                                                                        |       | (5,192                         | )          | (522 | ) |
| Inventories                                                                        |       | 4,959                          |       | 15 |   |
| Prepaid expenses and other current assets                                          |       | 214                            |       | 101 |   |
| Accounts payable                                                                   |       | (5,731                         | )          | 5,370 |   |
| Accrued expenses                                                                   |       | 272                            |       | 510 |   |
| Net cash provided by operating activities                                          |       | 2,003                          |       | 10,671 |   |
|                                                                               |       |                           |       |   |   |
| **Cash  Flows From Investing Activities:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                |       | (2,238                         | )          | (1,165 | ) |
| Deposit for property and equipment  acquisition                                    |       | (1,414                         | )          | — |   |
| Business acquisitions                                                              |       | —                         |       | (5,032 | ) |
| Sale of property and equipment                                                     |       | 1,455                          |       | 4 |   |
| Other                                                                              |       | 6                              |       | (16 | ) |
| Net cash used in investing activities                                              |       | (2,191                         | )          | (6,209 | ) |
|                                                                               |       |                           |       |   |   |
| **Cash  Flows From Financing Activities:**                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from stock options                                                        |       | 271                            |       | — |   |
| Tax benefit of common stock options                                                |       | 53                             |       | — |   |
| Payment on debt                                                                    |       | (97                            | )          | (164 | ) |
| Net payments on line-of-credit                                                     |       | (36                            | )          | (4,995 | ) |
| Proceeds from issuance of debt                                                     |       | —                         |       | 700 |   |
| Net cash provided by/(used in) financing  activities                               |       | 191                            |       | (4,459 | ) |
|                                                                               |       |                           |       |   |   |
| **Increase  in Cash**                                                              |       | 3                              |       | 3 |   |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash at  Beginning of Period                                                       |       | 31                             |       | 28 |   |
|                                                                               |       |                           |       |   |   |
| Cash at End  of Period                                                             |       | $                              | 34         |   | $ | 31 |   |
|                                                                               |       |                           |       |   |   |
| *Supplemental  Disclosures:*                                                       | * *   | * *                       | * *   | * * | * * |
| Cash paid  for interest                                                            |       | $                              | 1,013      |   | $ | 1,109 |   |
| Cash paid  for income tax                                                          |       | 3,992                          |       | 2,498 |   |

 

SeeNotes to Condensed Consolidated Financial Statements

 

6

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**MWIVETERINARY SUPPLY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(dollars and shares in thousands, except per share data)(unaudited)**

 

## **NOTE1 – GENERAL**

## ** **

**Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements include theresults of operations, statements of comprehensive income, financial positionand cash flows of MWI Veterinary Supply, Inc., formerly named MWI Holdings,Inc., and its wholly-owned subsidiaries (“the Company”). All materialintercompany balances have been eliminated.

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments necessary to present fairly, inall material respects, the results of the Company for the periods presented.These condensed consolidated financial statements have been prepared by theCompany pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto such rules and regulations. These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and accompanying notes included in the Company’s 2005 Annual Reporton Form 10-K filed with the Securities Exchange Commission on December 1, 2005.The results of operations for the three and six-months ended March 31, 2006 arenot necessarily indicative of results to be expected for the entire fiscalyear.

 

TheCompany’s unaudited Condensed Consolidated Balance Sheet as of September 30, 2005has been derived from the audited Consolidated Balance Sheet as of that date.

 

**Use of Estimates**

 

Thepreparation of the Company’s consolidated financial statements, in conformitywith accounting principles generally accepted in the United States, requiresmanagement to make estimates and assumptions. Some of these estimates requiredifficult, subjective or complex judgments about matters that are inherentlyuncertain. As a result, actual results could differ from these estimates. Theseestimates and assumptions affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.

 

**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. Whena 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.The Company 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 and collectspayment from the customer, while in other cases MWI invoices and collectspayment from the customer on behalf of the vendor. MWI receives a commissionpayment for soliciting the order from the customer and for providing othercustomer service activities. Commissions are recognized when the services uponwhich the commissions are based are complete. Gross billings from agencycontracts were $45,350 and $29,597 for the three-months ended March 31, 2006and 2005, respectively, and generated commission revenue of $2,093 and $1,380,respectively. Gross billings from agency contracts were $72,220 and $48,063 forthe six-months ended March 31, 2006 and 2005, respectively, and generatedcommission revenue of $3,506 and $2,309, respectively.

 

**Cost of Product Sales and Vendor Rebates**

 

Costof product sales includes the Company’s inventory product cost; includingshipping costs to and from its distribution centers. Vendor rebates arerecorded based on the terms of the contracts or programs with each vendor. TheCompany primarily receives quarterly and annual performance-based rebates fromthird-party vendors based upon attainment of certain sales and/or purchasegoals. Sales rebates are classified in the accompanying consolidated statementsof income as a reduction to cost of product sales at the time the salesperformance 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.

 

7

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## **NOTE2 – EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

## ** **

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 151, *Inventory Costs, an Amendment of ARB No. 43, Chapter4* (“SFAS 151”). SFAS 151 clarifies that inventory costs that are “abnormal”are required to be charged to expense as incurred as opposed to beingcapitalized into inventory as a product cost. SFAS 151 provides examples of “abnormal”costs that include costs of idle facilities, excess freight and handling costs,and wasted material (spoilage). SFAS 151 was effective for the Company’s fiscalyear beginning October 1, 2005 and did not have a material effect on theCompany’s consolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised), *Share-Based Payment* (“SFAS 123 R”). SFAS123 R replaces SFAS No.123, *Accountingfor Stock-based Compensation* (“SFAS 123”), as amended by SFASNo. 148, *Accounting for Stock BasedCompensation—Transition and Disclosure* and supersedes Accounting Principles Board Opinion (“APB”)No. 25, *Accounting for Stock Issued toEmployees*. Adoption of SFAS123 R requires the Company to record non-cash expense for the Company’s stockcompensation plans using the fair value method. SFAS 123 R was effective forthe Company on October 1, 2005 and the adoption of SFAS 123 R did not have amaterial effect on the Company’s consolidated financial statements.

 

InDecember 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 adopted SFAS 153 asof October 1, 2005 and the adoption did not have a material effect on theCompany’s consolidated financial statements.

 

InMay 2005, the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections* (“SFAS 154”). SFAS 154 replaces FASBStatement No. 3, *Reporting AccountingChanges in Interim Financial Statements*, and replaces ABP 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 its fiscalyear beginning October 1, 2006. The adoption of SFAS 154 is not expected tohave a material effect on the Company’s consolidated financial statements.

 

InSeptember 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 thatpurchases and sales of inventory with the same counterparty be accounted for asa nonmonetary transaction within the scope of APB No. 29, *Accounting for Nonmonetary Transactions*.EITF 04-13 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 adoption of EITF 04-13 isnot expected to have a material effect on the Company’s consolidated financialstatements.

 

**NOTE 3 – RECEIVABLES**

 
| ** **                       | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|----------------------------------|------------|---------------------|------------|-------------------------|------------|
| Trade                            |       | $                   | 76,045     |                    | $          | 69,969 |   |
| Vendor  rebates and programs     |       | 7,123               |       | 6,882                   |       |
| Related  party                   |       | 14                  |       | 1,429                   |       |
|                             |       | 83,182              |       | 78,280                  |       |
| Allowance  for doubtful accounts |       | (891                | )          | (1,181                  | )          |
|                             |       | $                   | 82,291     |                    | $          | 77,099 |   |

 

Productsales resulting from transactions with a single customer were 9% during thethree and six-months ended March 31, 2006, and 10% for the three and six-monthsended March 31, 2005. Approximately 10% and 7% of the Company’s tradereceivables resulted from transactions with this single customer as of March31, 2006 and September 30, 2005, respectively.

 

Productsales resulting from transactions with Feeders’ Advantage LLC, a related party,were 6% during the three and six-months ended March 31, 2006, 5% during thethree-months ended March 31, 2005 and 6% during the six-months ended March 31,2005.

 

8

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**NOTE 4 – PROPERTY AND EQUIPMENT**

 
| ** **                                 | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| Land                                       |       | $                   | —     |                    | $          | 169 |   |
| Buildings  and leasehold improvements      |       | 1,427               |       | 2,293                   |       |
| Machinery,  furniture and equipment        |       | 8,466               |       | 8,140                   |       |
| Computer  equipment                        |       | 2,793               |       | 2,759                   |       |
| Construction  in progress                  |       | 463                 |       | 630                     |       |
|                                       |       | 13,149              |       | 13,991                  |       |
| Accumulated  depreciation and amortization |       | (6,851              | )          | (7,072                  | )          |
|                                       |       | $                   | 6,298      |                    | $          | 6,919 |   |

 

Depreciationexpense for the three-months ended March 31, 2006 and 2005 was $429 and $340,respectively, and $826 and $681 for the six-months ended March 31, 2006 and2005, respectively.

 

Duringthe three-months ended March 31, 2006 the Company relocated from its existing,owned distribution center to a new larger leased facility located in Denver,Colorado and sold the owned distribution center. The sale of the distributioncenter closed in February 2006 resulting in a gain of approximately $62 that isrecorded in other income (expense) in the condensed consolidated statement ofincome.

 

**NOTE 5 – INTANGIBLES**

 
| ** **                | ** ** | **Useful Life** | ** ** | **March 31,   2006** | ** ** | **September 30,  2005** | ** ** |
|---------------------------|------------|-----------------|------------|----------------------|------------|-------------------------|------------|
| Amortizing:               |       |            |       |                 |       |                    |       |
| Customer lists            |       | 10 years        |       | $                    | 1,589      |                    | $          | 1,589 |   |
| Covenants not to compete  |       | 5 years         |       | 112                  |       | 112                     |       |
| Other                     |       | 5 years         |       | 36                   |       | 36                      |       |
|                      |       |            |       | 1,737                |       | 1,737                   |       |
| Accumulated  amortization |       |            |       | (238                 | )          | (145                    | )          |
|                      |       |            |       | 1,499                |       | 1,592                   |       |
| Non-Amortizing:           |       |            |       |                 |       |                    |       |
| Trade names               |       |            |       | 52                   |       | 52                      |       |
|                      |       |            |       | $                    | 1,551      |                    | $          | 1,644 |   |

 

Projectedamortization expense for existing intangible assets is $189 for each of thefiscal years ending 2006, 2007, 2008, and 2009 and $166 for the fiscal yearending 2010.

 

**NOTE 6 – LINE-OF-CREDIT AND LONG-TERM DEBT**

 

**Line-of-Credit**—The Company has a line-of-credit agreementwith two lenders for a credit facility that allows for borrowings up to$70,000. The line-of-credit is secured by a security interest in substantiallyall of the Company’s assets and terminates on June 18, 2007. Interest is duemonthly at the following rates: 1) LIBOR plus a margin (6.3% at March 31,2006); or 2) the prime rate (7.75% at March 31, 2006). The lenders also receivean unused line fee and letter of credit fee equal to 0.375% of the unusedamount of the revolving credit facility. The Company’s outstanding balance onthis facility at March 31, 2006 was $24,654. The line-of-credit containscertain restrictive financial covenants as well as restrictions on dividendpayments and future debt borrowings. The credit agreement allows the Company toissue up to $10,000 in letters of credit. The letters of credit typically actas guarantee of payment to certain third parties in accordance with specifiedterms and conditions. The Company had six letters of credit totaling $600 atMarch 31, 2006. There were no outstanding borrowings on these letters of creditat March 31, 2006.

 

**Long-Term Debt**—In January 2005, the Company issued anunsecured non-negotiable promissory note in the aggregate principal amount of$487 in partial consideration for the acquisition of a business. The note bearsinterest at the prime rate (7.75% at March 31, 2006), payable quarterly. Theprincipal of the note is payable in five equal annual installments and matureson January 1, 2010. The balance on this promissory note was $389 at March 31,2006.

 

9

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**NOTE 7 – STOCK OPTIONS**

 

TheCompany has two stock-based award plans, the 2002 Stock Option Plan and the2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”). The2005 Plan allows the Company’s Board of Directors to grant common stockoptions, restricted stock, deferred units and other stock-based awards toexecutives and other key employees. These plans have been developed to provideadditional incentives by allowing equity ownership in the Company and, as aresult, encouraging them to contribute to its success. At March 31, 2006, theCompany had 559,048 options to purchase common stock outstanding (365,648vested and exercisable) with a weighted average exercise price of $3.84 andexpiring through September 2015. In March 2006 the Company granted 1,923 sharesof restricted stock which vest annually over 5 years. At March 31, 2006, theCompany had 1,689,442 shares available to be issued under its stock-based awardplans.

 

Effective October 1, 2005, the Company adopted the provisions ofSFAS No. 123 R for its share-based compensation plans. The Companypreviously accounted for these plans under the recognition and measurementprincipals of APB No. 25 and related interpretations and disclosurerequirements established by SFAS 123, as amended by SFAS No. 148*.*Under APB No. 25, no compensationexpense was recorded in earnings for the Company’s stock-based awards grantedunder the Company’s stock-based award plans. The pro forma effects on netincome and earnings per share for stock-based awards were instead disclosed ina footnote to the financial statements. Under SFAS 123 R, all share-basedcompensation is measured at the grant date, based on the fair value of theaward, and is recognized as an expense in earnings over the requisite serviceperiod.

 

TheCompany adopted SFAS 123 R using the modified prospective method. Under thistransition method, compensation expense includes the expense for allshare-based awards granted prior to, but not yet vested as of October 1, 2005excluding those options initially valued using the minimum value method. AtOctober 1, 2005, all of the Company’s options to purchase common stock wereeither vested and exercisable or were initially valued using the minimum valuemethod and therefore no compensation expense was recognized for thesestock-based awards in fiscal 2006. During the three-months ended March 31, 2006the Company recognized $1 of compensation expense related to restricted stockgranted during the quarter. During the three and six-months ended March 31,2005, compensation expense that would have been recorded had the Companyadopted the fair value method (all of which would have been determined usingthe minimum value method) was not significant.

 

**NOTE 8**–**INCOME TAXES**

 

TheCompany’s effective tax rate for the three-months ended March 31, 2006 and 2005was 39.5% and 62.6%, respectively. The Company’s effective tax rate for thesix-months ended March 31, 2006 and 2005 was 39.5% and 56.6%, respectively. Thedecrease in the effective rate in the three and six-months ended March 31, 2006as compared to the same periods in the prior year was primarily a result of theelimination of the non-deductible accretion of dividends, recorded as interestexpense, on the Series A preferred stock that was redeemed in August 2005.

 

## **NOTE9 – COMPUTATION OF EARNINGS PER SHARE**

## ** **

| ** **                                      | ** ** | **Three-months ended March 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **Basic**                        | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                | 2,355      |   | $ | 2,355 |   | $ | 595 |   | $ | 595 |   |
| Weighted  average common shares outstanding     |       | 10,586                           |       | 10,586 |   | 5,062 |   | 5,062 |   |
| Effect of  diluted securities                   |       |                             |       |   |   |   |   |   |   |
| Stock options and restricted stock              |       |                             |       | 298 |   |   |   | 317 |   |
| Contingent stock                                |       |                             |       | — |   |   |   | 499 |   |
| Weighted  average shares outstanding            |       |                             |       | 10,884 |   |   |   | 5,878 |   |
| Earnings per  share                             |       | $                                | 0.22       |   | $ | 0.22 |   | $ | 0.12 |   | $ | 0.10 |   |
| Anti-dilutive  shares excluded from calculation |       |                             |       | 2 |   |   |   | — |   |

 

10

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|                                            |       | **Six-months ended March 31,** |       |
|-------------------------------------------------|------------|--------------------------------|------------|
|                                            |       | **2006**                       |       | **2005** |   |
| ** **                                      | ** ** | **Basic**                      | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                              | 6,794      |   | $ | 6,794 |   | $ | 2,251 |   | $ | 2,251 |   |
| Weighted average common shares outstanding      |       | 10,582                         |       | 10,582 |   | 5,062 |   | 5,062 |   |
| Effect of diluted securities                    |       |                           |       |   |   |   |   |   |   |
| Stock options and restricted stock              |       |                           |       | 291 |   |   |   | 319 |   |
| Contingent stock                                |       |                           |       | — |   |   |   | 499 |   |
| Weighted average shares outstanding             |       |                           |       | 10,873 |   |   |   | 5,880 |   |
| Earnings per share                              |       | $                              | 0.64       |   | $ | 0.62 |   | $ | 0.44 |   | $ | 0.38 |   |
| Anti-dilutive shares excluded from  calculation |       |                           |       | 2 |   |   |   | — |   |

 

**NOTE 10 – RELATED PARTIES**

 

MWI Veterinary Supply Co. (“MWI Co.”), a subsidiary of the Company,holds a 50.0% membership interest in Feeders’ Advantage, L.L.C (“Feeders’Advantage”). MWI Co. charged Feeders’ Advantage for certain operating andadministrative services of $126 and $87 for the three-months ended March 31,2006 and 2005, respectively, and $278 and $192 for the six-months ended March31, 2006 and 2005, respectively. Sales of products to Feeders’ Advantage were$8,001 and $6,142 for the three-months ended March 31, 2006 and 2005,respectively, and $17,355 and $12,947 for the six-months ended March 31, 2006and 2005, respectively.

 

MWI Co. provides Feeders’ Advantage with a line-of-credit to financeits day-to-day operations. This line-of-credit bears interest at the primerate. The interest due on the line-of-credit is calculated and charged toFeeders’ Advantage on the last day of each month. Conversely, to the extent MWICo. has a payable balance due to Feeders’ Advantage, the payable balance accruesinterest in favor of Feeders’ Advantage at the average federal funds rates ineffect for that month.

 

TheCompany had a management and consulting services agreement with Bruckmann,Rosser, Sherrill & Co. LLC (“BRS LLC”) and Agri Beef Co., both related parties,which was terminated in August 2005. For the three and six-months ended March31, 2005 the Company expensed $127 and $266 in management and other servicefees under the agreement with BRS LLC and Agri Beef Co.

 

**NOTE 11 – CONTINGENCIES AND COMMITMENTS**

 

From time to time, in the normal course of business, the Company maybecome a party to legal proceedings that may have an adverse effect on theCompany’s financial position, results of operations and cash flows. At March31, 2006 the Company was not a party to any material pending legal proceedingsand was not aware of any claims that could have a material adverse effect onthe Company’s financial position, results of operations, or cash flows.

 

11

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

Tothe Board of Directors and Stockholders of MWI Veterinary Supply, Inc.

Meridian,Idaho

 

Wehave reviewed the accompanying condensed consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries (the “Company”) as of March 31, 2006and the related condensed consolidated statements of income and ofcomprehensive income for the three-month and six-month periods ended March 31,2006 and March 31, 2005, and of cash flows for the six-month periods endedMarch 31, 2006 and 2005. These interim financial statements are theresponsibility of the Company’s management.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the objectiveof which is the expression of an opinion regarding the financial statementstaken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such condensed consolidated interim financial statements for them to bein conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet ofMWI Veterinary Supply, Inc. and subsidiaries as of September 30, 2005, and therelated consolidated statements of income, comprehensive income, stockholders’equity, and cash flows for the year then ended (not presented herein); and inour report dated November 22, 2005, we expressed an unqualified opinion onthose consolidated financial statements. In our opinion, the information setforth in the accompanying condensed consolidated balance sheet as of September30, 2005, is fairly stated, in all material respects, in relation to theconsolidated balance sheet from which it has been derived.

 
| /s/  DELOITTE & TOUCHE LLP |   |
|--------------------------------|--------|
| Boise,  Idaho                  |
| May  1, 2006                   |

 

12

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**MWI VETERINARY SUPPLY, INC.MANAGEMENT’S DISCUSSIONAND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS(dollars in thousands, except per share data)**

 

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

TheCompany is a leading distributor of animal health products to veterinariansacross the United States. The Company markets its products to veterinarians inboth the companion and production animal markets. The Company’s growth hasprimarily been from internal growth initiatives and, to a lesser extent,selective acquisitions.

 

TheCompany sells products that it sources from its vendors to its customersthrough either a “buy/sell” transaction or an agency relationship with itsvendors. In a “buy/sell” transaction, the Company purchases or takes inventoryof products from its vendors. When a customer places an order, the Companypicks, packs, ships and invoices the customer for the order. The Companyrecords sales from “buy/sell” transactions, which account for the vast majorityof the Company’s business, as revenue in conformity with generally acceptedaccounting principles in the United States. In an agency relationship, theCompany does not purchase and take inventory of products from vendors. When theCompany receives an order from a customer, the Company transmits the order tothe vendor, who picks, packs and ships the order to the Company’s customer. Insome cases, the vendor invoices and collects payment from the customer, whilein other cases the Company invoices and collects payment from the customer onbehalf of the vendor. The Company receives a commission payment for solicitingthe order from the customer and for providing other customer serviceactivities. The aggregate revenue the Company receives in agency transactionsconstitute the “commissions” line item on the Company’s statement of income andis recorded in conformity with accounting principles generally accepted in theUnited States. The vendor determines the method the Company uses to sell itsproducts. Historically, vendors have occasionally switched between the “buy/sell”and agency models for particular products in response to market conditionsrelated to that particular product. A switch between models can impact theCompany’s revenues, gross margin, gross margin percentage and operating income.For more information on the Company’s business see the Company’s Annual Reporton Form 10-K filed with the Securities Exchange Commission on December 1, 2005.

 

13

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**Results of Operations**

 

Thefollowing table summarizes the Company’s results of operations for the threeand six-months ended March 31, 2006 and 2005 in dollars and as a percentage oftotal revenues.

 
| ** **                                            | ** ** | **Three-Months Ended March 31,** | ** ** | **Six-Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **2006**                         | ** ** | **%**                          | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| Revenues:                                             |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                         |       | $                                | 133,255    |                           | 93.0       | % | $ | 108,888 |   | 93.5 | % | $ | 260,303 |   | 92.6 | % | $ | 210,148 |   | 93.2 | % |
| Product sales to related party                        |       | 8,001                            |       | 5.5                            | %          | 6,142 |   | 5.3 | % | 17,356 |   | 6.2 | % | 12,947 |   | 5.8 | % |
| Commissions                                           |       | 2,093                            |       | 1.5                            | %          | 1,380 |   | 1.2 | % | 3,506 |   | 1.2 | % | 2,309 |   | 1.0 | % |
| Total  revenues                                       |       | 143,349                          |       | 100.0                          | %          | 116,410 |   | 100.0 | % | 281,165 |   | 100.0 | % | 225,404 |   | 100.0 | % |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of  product sales                                |       | 123,421                          |       | 86.1                           | %          | 99,938 |   | 85.9 | % | 238,485 |   | 84.8 | % | 192,308 |   | 85.3 | % |
| Gross profit                                          |       | 19,928                           |       | 13.9                           | %          | 16,472 |   | 14.1 | % | 42,680 |   | 15.2 | % | 33,096 |   | 14.7 | % |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses         |       | 15,159                           |       | 10.6                           | %          | 12,803 |   | 11.0 | % | 29,712 |   | 10.6 | % | 23,819 |   | 10.6 | % |
| Depreciation  and amortization                        |       | 473                              |       | 0.3                            | %          | 387 |   | 0.3 | % | 915 |   | 0.3 | % | 727 |   | 0.3 | % |
| Operating  income                                     |       | 4,296                            |       | 3.0                            | %          | 3,282 |   | 2.8 | % | 12,053 |   | 4.3 | % | 8,550 |   | 3.8 | % |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income  (expense):                              |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  expense (1)                                 |       | (578                             | )          | -0.4                           | %          | (1,776 | ) | -1.5 | % | (1,133 | ) | -0.4 | % | (3,545 | ) | -1.6 | % |
| Earnings of equity method investees                   |       | 37                               |       | 0.0                            | %          | 27 |   | 0.0 | % | 82 |   | 0.0 | % | 59 |   | 0.0 | % |
| Other                                                 |       | 137                              |       | 0.1                            | %          | 57 |   | 0.0 | % | 227 |   | 0.1 | % | 124 |   | 0.1 | % |
| Total other  expense                                  |       | (404                             | )          | -0.3                           | %          | (1,692 | ) | -1.5 | % | (824 | ) | -0.3 | % | (3,362 | ) | -1.5 | % |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  before taxes                                  |       | 3,892                            |       | 2.7                            | %          | 1,590 |   | 1.3 | % | 11,229 |   | 4.0 | % | 5,188 |   | 2.3 | % |
| Income tax  expense                                   |       | (1,537                           | )          | -1.1                           | %          | (995 | ) | -0.8 | % | (4,435 | ) | -1.6 | % | (2,937 | ) | -1.3 | % |
| Net income                                            |       | $                                | 2,355      |                           | 1.6        | % | $ | 595 |   | 0.5 | % | $ | 6,794 |   | 2.4 | % | $ | 2,251 |   | 1.0 | % |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  share:                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                 |       | $                                | 0.22       |                           |       |   | $ | 0.12 |   |   |   | $ | 0.64 |   |   |   | $ | 0.44 |   |   |   |
| Dilutive                                              |       | $                                | 0.22       |                           |       |   | $ | 0.10 |   |   |   | $ | 0.62 |   |   |   | $ | 0.38 |   |   |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in earnings per share  calculation:       |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                 |       | 10,586                           |       |                           |       | 5,062 |   |   |   | 10,582 |   |   |   | 5,062 |   |   |   |
| Dilutive                                              |       | 10,884                           |       |                           |       | 5,878 |   |   |   | 10,873 |   |   |   | 5,880 |   |   |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Data:                                           |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales from Internet as a percentage  of sales |       | 23                               | %          |                           |       | 20 | % |   |   | 23 | % |   |   | 21 | % |   |   |
| Field sales representatives (at end of  period)       |       | 142                              |       |                           |       | 135 |   |   |   | 142 |   |   |   | 135 |   |   |   |
| Telesales representatives (at end of  period)         |       | 95                               |       |                           |       | 90 |   |   |   | 95 |   |   |   | 90 |   |   |   |
| Fill rate (2)                                         |       | 97                               | %          |                           |       | 98 | % |   |   | 98 | % |   |   | 98 | % |   |   |

 

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(1)          Thethree and six-months ended March 31, 2005 includes $1,181 and $2,315,respectively, accretion of our Series A preferred stock dividends, whichwas non-deductible for income tax purposes, as a component of interest expense.The Company redeemed all the Series A preferred stock in August 2005.

 

(2)          Defined as,for any 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.

 

14

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**Three-months Ended March 31, 2006 Compared to Three-monthsEnded March 31, 2005**

 

*Total Revenues*. Total revenues increased 23.1% to$143,349 for the three-months ended March 31, 2006 from $116,410 for thethree-months ended March 31, 2005. This increase was attributable to anincrease in product sales volumes of a wide variety of products to both new andexisting customers. Revenues attributable to new customers representedapproximately 43% of the growth in total revenues during three-months endedMarch 31, 2006. Revenues attributable to existing customers represented approximately57% of the growth in total revenues during the three-months ended March 31,2006. For the purpose of calculating growth rates of new and existing customerrevenue, the Company has defined a new customer as a customer that did notpurchase product from MWI in the corresponding fiscal quarter of the prioryear, with the remaining customer base being considered an existing customer.Contributing to the growth in revenues to both new and existing customers forthe three-months ended March 31, 2006 as compared to the corresponding periodin the prior year was the addition of non-steroidal anti-inflammatory drugs fordogs and the addition of new cattle antibiotics.

 

*Gross Profit*. Gross profit increased by 21.0% to$19,928 for the three-months ended March 31, 2006 from $16,472 for thethree-months ended March 31, 2005. The increase in gross profit was a result ofincreased total revenues as discussed above. Gross profit as a percentage oftotal revenues decline approximately 0.2% to 13.9% for the three-months endedMarch 31, 2006 as compared to 14.1% for the same period in the prior year. Thisdecline was primarily due to a decrease in vendor rebates as a percent of totalrevenues, partially offset by strong commission revenue growth. Vendor rebatesdollars grew slightly; contributing $92 to the gross profit dollar improvementfor the three-months ended March 31, 2006 as compared to three-months endedMarch 31, 2005. The decline in vendor rebates as a percent of total revenueswas a result of a manufacturer’s reduced payment under their rebate program.

 

*Selling, General and Administrative (“SG&A”)*. SG&Aincreased 18.4% to $15,159 for the three-months ended March 31, 2006 from$12,803 for the three-months ended March 31, 2005. The dollar increase wasprimarily due to increased compensation costs, outside fees and services,location and occupancy costs. Compensation costs increased as a result ofadditional headcount of 74 team members primarily in the Company’s distributioncenters, corporate offices and sales. Compensation costs also increased as aresult of increased sales commissions that are directly correlated with thesales growth. The increase in outside fees and services were primarily due tothe Company’s professional services fees related to operating as a publiccompany, the use of temporary workforce to support its sales growth and demandsin its distribution centers and increased credit card and other bank fees. Increasesin location costs are a result in increased headcount and costs to support theCompany’s sales growth. Increases in occupancy costs are due primarily to therelocation of the Company’s distribution centers in Nampa, Idaho and Denver,Colorado from owned properties to leased properties.

 

*Depreciation and Amortization.*Depreciationand amortization expense increased 22.2% to $473 for the three-months endedMarch 31, 2006 from $387 for the three-months ended March 31, 2005. Theincrease in depreciation expense was a result of the distribution centerequipment upgrades at it Nampa, Idaho and Denver, Colorado facilities in April2005 and December 2005, respectively. The Company expects that depreciation andamortization expense related to leasehold improvements will increase as aresult of the Company’s new distribution center located in Orlando, Floridathat is expected to open by June 2006.

 

*Other Expenses*. Other expenses decreased 76.1% to $404for the three-months ended March 31, 2006 from $1,692 for the three-monthsended March 31, 2005. The decrease in other expenses was primarily due to areduction in interest expense of $1,198 in the three-months ended March 31,2006 as compared to the same period in the prior year. Included in interestexpense for the three-months ended March 31, 2005 is accretion of dividends onthe Series A preferred stock of $1,181. The Series A preferred stock wasredeemed in August 2005.

 

*Income Tax Expense*. TheCompany’s effective tax rate was 39.5% and 62.6% for the three-months endedMarch 31, 2006 and 2005, respectively. The decrease in the effective rate in thequarter ended March 31, 2006 as compared to the same quarter in the prior yearwas primarily a result of the elimination of the non-deductible accretion ofdividends on the Series A preferred stock that was redeemed in August 2005.

 

**Six-months Ended March 31, 2006 Compared to Six-months EndedMarch 31, 2005**

 

*Total Revenues*. Total revenues increased 24.7% to$281,165 for the six-months ended March 31, 2006 from $225,404 for thesix-months ended March 31, 2005. This increase was attributable to an increase inproduct sales volumes of a wide variety of products to both existing and newcustomers. Revenues attributable to new customers represented approximately 44%of the growth in total revenues during six-months ended March 31, 2006.Revenues attributable to existing customers represented approximately 56% ofthe growth in total revenues during the six-months ended March 31, 2006. Forthe purpose of calculating growth rates of new and existing customer revenue,the Company has defined a new customer as a customer that did not purchaseproduct from MWI in the corresponding fiscal quarter of the prior year, withthe remaining customer base being considered an existing customer. Revenuesfrom new customers for each fiscal quarter are summed to arrive at the estimated

 

15

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year-to-daterevenue for new customers. Contributing to the growth in revenues to both newand existing customers for the six-months ended March 31, 2006 as compared tothe corresponding period in the prior year was the addition of non-steroidalanti-inflammatory drugs for dogs, the addition of new cattle antibiotics andthe conversion to a “buy/sell” arrangement for an equine West Nile Virusvaccine that was a commission-based agency relationship in the comparativeperiod in the prior year.

 

*Gross Profit*. Gross profit increased by 29.0% to$42,680 for the six-months ended March 31, 2006 from $33,096 for the six-monthsended March 31, 2005. The increase in gross profit is a result of increasedtotal revenues as discussed above and increased vendor rebates. Vendor rebatescontributed to the gross profit dollar improvement by $2,929 for the six-monthsended March 31, 2006 as compared to the six-months ended March 31, 2005. Vendorrebates have historically been highestduring the Company’s first fiscal quarter ended December 31, since certainsignificant vendor rebate programs are designed to include annual targets to beachieved based on the calendar year. The growth in vendor rebates during thesix-months ended March 31, 2006 as compared to the six-months ended March 31,2005 was attributable to the Company’s calendar year sales growth with keyvendors and the addition of new programs related to new product offerings. Grossprofit as a percentage of total revenues was 15.2% for the six-months endedMarch 31, 2006, compared to 14.7% for the same period in the prior year. Theincrease in the Company’s gross profit as a percentage of total revenues wasprimarily due to an increase in vendor rebates and an increase in commissionrevenue on agency products sold. Partially offsetting these improvements wereincreases in freight costs as a result of higher fuel and transportation costs.

 

*Selling, General and Administrative (“SG&A”)*. SG&Aincreased 24.7% to $29,712 for the six-months ended March 31, 2006 from $23,819for the six-months ended March 31, 2005. The dollar increase was primarily dueto increased compensation costs, outside fees and services, location and traveland occupancy costs. Compensation costs increased as a result of additionalheadcount of 74 team members primarily in the Company’s distribution centers,corporate offices and sales force. Additionally, the increase in compensationcost was affected by 50 team members that joined the Company in January 2005 inconnection with the acquisition of Vetpo Distributors, Inc. Compensation costsalso increased as a result of increased sales commissions that are directlycorrelated with the sales growth. The increase in outside fees and serviceswere primarily due to the Company’s use of temporary workforce to support itssales growth and demands in its distribution centers, increased professionalservices fees related to operating as a public company and increased creditcard and other bank fees. Increases in location and travel cost are due toincreased headcount and costs to support the Company’s sales growth. Increasesin occupancy costs are due primarily to the distribution center acquired in theVetpo acquisition and the relocation of the Company’s distribution centers inNampa, Idaho and Denver, Colorado from owned properties to leased properties.

 

*Depreciation and Amortization.*Depreciationand amortization expense increased 25.9% to $915 for the six-months ended March31, 2006 from $727 for the six-months ended March 31, 2005. Depreciationexpense increased as a result of the distribution center equipment upgrades atits Nampa, Idaho and Denver, Colorado facilities in April 2005 and December2005, respectively, and as a result of the facility acquired in the purchase ofVetpo. In addition, amortization expense increased as a result of intangibleassets acquired in the purchase of Vetpo. The Company expects that depreciationand amortization expense related to leasehold improvements will increase as aresult of the Company’s new distribution center located in Orlando, Floridathat is expected to open by June 2006.

 

*Other Expenses*. Other expenses decreased 75.5% to $824for the six-months ended March 31, 2006 from $3,362 for the six-months endedMarch 31, 2005. The decrease in other expenses was primarily due to a reductionin interest expense of $2,412 in the six-months ended March 31, 2006 ascompared to the same period in the prior year. Included in interest expense forthe six-months ended March 31, 2005 is accretion of dividends on the Series Apreferred stock of $2,315. The Series A preferred stock was redeemed in August2005.

 

*Income Tax Expense*. TheCompany’s effective tax rate was 39.5% and 56.6% for the six-months ended March31, 2006 and March 31, 2005, respectively. The decrease in the effective ratein the quarter ended March 31, 2006 as compared to the same quarter in theprior year was primarily a result of the elimination of the non-deductibleaccretion of dividends on the Series A preferred stock that was redeemed inAugust 2005.

 

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**Critical Accounting Policies**

 

Thepreparation of financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and related disclosure of contingent assets and liabilities. Theaccompanying condensed consolidated financial statements are prepared using thesame critical accounting policies discussed in the Company’s Annual Report onForm 10-K.

 

**Liquidity and Capital Resources**

 

TheCompany’s principal sources of liquidity are cash flow generated fromoperations and borrowings on the revolving credit facility under the amendedcredit agreement. The Company uses capital primarily to fund day-to-dayoperations and to maintain sufficient inventory levels in order to promptlyfulfill customer orders and to expand the Company’s operations and salesgrowth.

 

TheCompany has a line-of-credit agreement with two lenders for a credit facility thatallows 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) the LondonInterbank Offered Rate (LIBOR) plus a margin (6.3% at March 31, 2006); or 2)the prime rate (7.75% at March 31, 2006). The lenders also receive an unusedline fee and letter of credit fee equal to 0.375% of the unused amount of therevolving credit facility. The Company’s outstanding balance on this facilityat March 31, 2006 was $24,654 of which $20,000 carried an interest rate atLIBOR and $4,654 carried an interest rate at the prime rate. The line-of-creditcontains certain restrictive financial covenants as well as restrictions ondividend payments and future debt borrowings.

 

Fromtime to time the Company issues letters of credit to act as guarantee ofpayment to specified third parties. At March 31, 2006, the Company had sixletters of credit totaling $600 and at September 30, 2005 the Company had threeletters of credit totaling $300. There were no outstanding borrowings on theseletters of credit at March 31, 2006 or September 30, 2005.

 

*Operating Activities*.For the six-months ended March 31, 2006, cash provided by operations was$2,003, and was primarily attributable to net income of $6,794 and a reductionin inventories of $4,959. The increase in net income is a result of the factorsdiscussed above in Results of Operations. The decrease in inventories fromSeptember 30, 2005 to March 31, 2006 are a result of higher inventory levels atSeptember 30, 2005 due to seasonal purchases related to production animals anddue to purchases of products in advance of price increases. For the six-monthsended March 31, 2005 net cash provided by operating activities was $10,671, andwas primarily attributable to an increase in accounts payable of $5,370 and netincome. The increase in accounts payable was a result of timing of inventorypurchases.

 

*Investing Activities.*Forthe six-months ended March 31, 2006, net cash used in investing activities was$2,191 compared to net cash used by investing activities of $6,209 for thesix-months ended March 31, 2005. Net cash used by investing activities for thesix-months ended March 31, 2006 was primarily due to capital expenditures of$2,238 related to relocating the Company’s existing distribution center to anew larger distribution center in Denver, Colorado and due to the purchase ofequipment for a new distribution center in Orlando, Florida. During thethree-months ended March 31, 2006 the Company completed its sale of adistribution center previously operated in Denver, Colorado for $1,455. Netcash used in investing activities for the six-months ended March 31, 2005 was$6,209, primarily attributable to the acquisitions of Memorial Pet Care, Inc.and Vetpo Distributors, Inc. and capital expenditures.

 

*FinancingActivities.*For the six-months ended March 31, 2006,net cash provided by financing activities was $191, and was primarily attributableto proceeds from the exercise of stock options and the related tax benefits. Forthe six-months ended March 31, 2005, net cash used in financing activities was$4,459, which was a result of payments on the Company’s revolving creditfacility. The Company’s revolving credit facility is used to finance theCompany working capital requirements and fluctuates based on timing of payablesand collection of receivables.

 

**Contractual Obligations and Guarantees**

 

For information on contractualobligations and guarantees, see the Company’s 2005 Annual Report on Form 10-K.During the three-months ended March 31, 2006 the Company entered into a leaseagreement for an approximate 29,000 square foot distribution center located inOrlando, Florida. The Company’s average annual lease expense for the Orlandodistribution center is $183 per year and the lease expires in 2013.

 

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**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

 

TheCompany is exposed to market risks primarily from changes in interest rates inthe United States. The Company does not engage in financial transactions fortrading or speculative purposes.

 

Theinterest payable on the revolving credit facility under the amended creditagreement is based on variable interest rates and is therefore affected bychanges in market interest rates. If the weighted average interest rate on thevariable rate indebtedness rose 66 basis points (a 10.0% change from thecalculated weighted average interest rate as of March 31, 2006), assuming nochange in the outstanding balance on the revolving credit facility under theamended credit agreement ($24,654 as of March 31, 2006), the annualized incomebefore taxes and cash flows from operating activities would decline byapproximately $162. If the weighted average interest rate on the variable rateindebtedness decreased 66 basis points (a 10.0% change from the calculatedweighted average interest rate as of March 31, 2006), assuming no change in theoutstanding balance on the revolving credit facility under the amended creditagreement, the annualized income before taxes and cash flows from operatingactivities would increase by approximately $162.

 

**Item 4. Controls and Procedures**

 

Managementof the Company, including the Chief Executive Officer and the Chief FinancialOfficer of the Company, have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934) as of March 31, 2006. Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures, including theaccumulation and communication of disclosures to the Company’s Chief ExecutiveOfficer and Chief Financial Officer, are effective to provide reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedby the Securities and Exchange Commission’s rules and forms.

 

There were no changes in the Company’s internal control over financialreporting that occurred during the Company’s most recently completed fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

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

 

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

 

*Forward-looking statements are only predictions and are notguarantees of performance. These statements are based on management’s beliefsand assumptions, which in turn are based on currently available information.Important assumptions relating to the forward-looking statements include, amongothers assumptions regarding demand for the Company’s products, the expansionof product offerings geographically or through new applications, the timing andcost of planned capital expenditures, competitive conditions and generaleconomic conditions. These assumptions could prove inaccurate. Forward-lookingstatements also involve known and unknown risks and uncertainties, which couldcause actual results that differ materially from those contained in anyforward-looking statement. Many of these factors are beyond the Company’sability to control or predict. Such factors include, but are not limited to,the following: vendor rebates based upon attaining certain growth goals; changesin the way vendors introduce products to market; the recall of a significantproduct by one of the Company’s vendors; seasonality; the impact of generaleconomic trends on the Company’s business; the timing and effectiveness ofmarketing programs offered by the Company’s vendors; the timing of theintroduction of new products and services by the Company’s vendors; andcompetition.*

 

*Except as required by applicable law, including thesecurities laws of the United States and the rules and regulations of theSecurities and Exchange Commission, or SEC, the Company is under no obligationto publicly update or revise any forward-looking statements, whether as aresult of any new information, future events or otherwise. Potential investorsshould not place undue reliance on the Company’s forward-looking statements.Before you invest in the Company’s common stock, you should be aware that theoccurrence of the events described in the “Risk Factors” section in Section 1Aof Part II Other Information in this Form 10-Q and filed in the Company’sAnnual Report on Form 10-K could harm the Company’s business, prospects,operating results, and financial condition. Although the Company believes thatthe expectations reflected in the forward-looking statements are reasonable,the Company cannot guarantee future results or performance.*

 

## **Item1. Legal Proceedings**

## ** **

## **The Company is not currentlya party to any material pending legal proceedings and is not aware of anyclaims that could have a materially adverse effect on the Company’s financialposition, results of operations, or cash flows.**

## ** **

**Item 1A. Risk Factors.**

 

***In addition to the factors discussed elsewhere in this Form10 Q and those discussed in our Annual Report of Form 10-K, the following areimportant factors which could cause actual results or events to differmaterially from those contained in any forward-looking statements made by or onbehalf of the Company. Material changes in the Company’s risk factors fromthose previously disclosed in MWI’s Form 10-Q for the three-months endedDecember 31, 2005 and those discussed in our Annual Report on Form10-K for the year ended September 30, 2005 are included in the risk factor “Anadverse change in vendor rebates could negatively affect our business” and “Ourquarterly operating results may fluctuate significantly.”***

** **

***Our operating results may fluctuate due tofactors outside of management’s control.***

 

Our future revenues and results of operationsmay significantly fluctuate due to a combination of factors, many of which areoutside of management’s control. The most notable of these factors include:

 

•                  vendor rebates based upon attaining certaingrowth goals;

•                  changes in the way vendors introduce productsto market;

•                  the recall of a significant product by one ofour vendors;

•                  extended shortage or backorder of asignificant product by one of our vendors;

•                  seasonality;

•                  the impact of general economic trends on ourbusiness;

•                  the timing and effectiveness of marketingprograms offered by our vendors;

•                  the timing of the introduction of newproducts and services by our vendors; and

•                  competition.

 

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These factors could adversely impact ourresults of operations and financial condition. We may be unable to reduceoperating expenses quickly enough to offset any unexpected shortfall inrevenues or gross profit. If we have a shortfall in revenues or gross profitwithout a corresponding reduction to expenses, operating results may suffer.Our operating results for any particular fiscal year or quarter may not beindicative of future operating results. You should not rely on year-to-year orquarter-to-quarter comparisons of results of operations as an indication of ourfuture performance.

 

***An adverse change in vendor rebates couldnegatively affect our business.***

 

The terms on which we purchase or sellproducts from many vendors of animal health products entitle us to receive arebate based on the attainment of certain growth goals. Vendors may adverselychange the terms of some or all of these rebate programs. Because the amount ofrebates we earn is directly related to the attainment of pre-determined salesgrowth goals, and because the nature of the rebate programs and the amount ofrebates available are determined by the vendors, there can be no assurance asto the amount of rebates that we will earn in any given year. Historically, wehave been successful in achieving most rebate growth goals and have notexperienced any material adverse impact on our results of operations andfinancial condition due to a change in a rebate program. Changes to any rebateprogram initiated by our vendors may have a material effect on our gross profitand our operating results in any given quarter or year. Vendors may reduce theamount of rebates offered under their programs, or increase the growth goals orother conditions we must meet to earn rebates to levels that we cannot achieve.During calendar year 2006, certain of our vendors modified their rebateprograms with us. These rebate program modifications changed the revenue growthtargets from annual-weighted calendar year targets to either quarterly ortrimester growth targets. These modifications will result in rebates previouslyexpected to be earned and recognized in our first fiscal quarter 2007 ending onDecember 31st (or the fourth calendar quarter) to be recognizedearlier in our fiscal year 2006.

 

Additionally, factors outside of our control,such as customer preferences or vendor supply issues, can have a materialimpact on our ability to achieve the growth goals established by our vendors,which may reduce the amount of rebates we receive. The occurrence of any ofthese events could have an adverse impact on our results of operations.

 

***Ourquarterly operating results may fluctuate significantly.***

** **

Our quarterly revenues and operating resultshave varied significantly in the past, and may continue to do so in the future.While we accrue rebates from vendors as they are earned, our rebates havehistorically been highest during the quarter ended December 31, since most ofour vendors’ rebate programs were designed to include targets to be achievedbased on a calendar year. During calendar year 2006, certain of our vendorsmodified their rebate programs with us. These rebate program modificationschanged the revenue growth targets from annual-weighted calendar year targetsto either quarterly or trimester growth targets. These modifications willresult in rebates previously expected to be earned and recognized in our firstfiscal quarter 2007 ending on December 31st (or the fourth calendarquarter) to be recognized earlier in our fiscal year 2006. Historically, ourrevenues have been seasonal, with peak sales in the spring and fall months. Theseasonal nature of our business is directly tied to the buying patterns ofveterinarians for production animal health products used for certain medicalprocedures performed on production animals during the spring and fall months.These buying patterns can also be affected by vendors’ and distributors’marketing programs launched during the summer months, particularly in June,which can cause veterinarians to purchase production animal health productsearlier than those products are used. This kind of early purchasing may reduceour sales in the months these purchases would have otherwise been made. Whilecompanion animal products tend to have a different product use cycle thanproduction animal health products, and approximately two-thirds of our revenueshave been generated from the sale of companion animal products, we cannotassure you that our revenues and operating results will not continue tofluctuate on a quarter-to-quarter basis.

 

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

 

The market for veterinary distributionservices is highly competitive, continually evolving and subject totechnological change. We compete with numerous vendors and distributors basedon customer relationships, service and delivery, product selection, price ande-business capabilities including:

 

•                  Butler Animal Health Supply;

•                  Lextron Animal Health, Inc.;

•                  Professional Veterinary Products, Ltd.;

•                  Vet Pharm, Inc.;

•                  Walco International, Inc.;

•                  Webster Veterinary Supply, a division ofPatterson Companies, Inc.; and

•                  other national, regional, local and specialtydistributors.

 

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Someof our competitors may have more customers, stronger brand recognition orgreater 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, eliminatingour ability to distribute those products. The entry of new distributors in theindustry could also have a material adverse effect on our ability tocompete.  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,financial condition and results of operations.

 

***Consolidation in the veterinary distributionbusiness and veterinary practices may decrease our revenues and profitability.***

 

Consolidation in the veterinary distributionbusiness could result in existing competitors increasing their market share,which could give them greater pricing power, decrease our revenues andprofitability, and increase the competition for customers.  Consolidation of the many small,privately-held veterinary practices would result in an increasing number oflarger veterinary practices, which could have increased purchasing leverage andthe ability to negotiate lower product costs. This could reduce our operatingmargins and negatively impact our revenues and profitability. Any of thesedevelopments could result in increased marketing expenses and have a materialadverse effect on our business, financial condition and results of operations. 

 

***Our business, financial condition and resultsof operations depend upon maintaining our relationships with vendors.***

 

At March 31, 2006 we distributed more than10,000 products sourced from more than 400 vendors to over 15,000 veterinarypractices. We currently do not manufacture any of our products and aredependent on these vendors for our supply of products. Our top three vendors,Fort Dodge, Pfizer and Vedco, supplied products that accounted forapproximately 47% of our revenues for our six-months ended March 31, 2006. Ourten largest vendors supplied products that accounted for approximately 72% ofour revenues for our six-months ended March 31, 2006.

 

Our ability to sustain our gross profits hasbeen, and will continue to be, dependent in part upon our ability to obtainfavorable terms and access to new and existing products from our vendors. Theseterms may be subject to changes from time to time by vendors, such as changingfrom 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 ofproducts from our vendors. Under an agency relationship, when we receive ordersfor products from a customer, we transmit the order to the vendor who thenpicks, packs and ships the products. Any changes from “buy/sell” to agency orfrom agency to “buy/sell” could adversely affect our revenues and operatingincome. The loss of one or more of our large vendors, a material reduction intheir supply of products to us or material changes in the terms we obtain fromthem could have a material adverse effect on our business, financial conditionand results of operations.

Some of our current and future vendors maydecide to compete with us in the future by pursuing or increasing their effortsin direct marketing and sales of their products. These vendors could sell theirproducts at lower prices and maintain a higher gross margin on their productsales than we can. In this event, veterinarians or animal owners may elect topurchase animal health products directly from these vendors. Increasedcompetition from any vendor of animal health products could significantlyreduce our market share and adversely impact our financial results.

 

In addition, we may not be able to establishrelationships with key vendors in the animal health industry if we haveestablished relationships with competitors of these key vendors. We havewritten agreements with approximately 30 of our vendors, including Fort Dodgeand Pfizer. Some of our agreements with vendors are for one-year periods. Uponexpiration, we may not be able to renew our existing agreements on favorableterms, or at all. If we lose the right to distribute products under suchagreements, 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 rely substantially on third-party vendors,and the loss of products or delays in product availability from one or morethird-party vendors could substantially harm our business.***

 

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

 

We often purchase products from our vendorsunder agreements that typically have a term of one year and can be terminatedon a periodic basis. There can be no assurance, however, that our vendors willbe able to meet their obligations under these agreements or that we will beable to compel them to do so. Risks of relying on vendors include:

 

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•                  If an existing agreement expires or a certainproduct line is discontinued or recalled, then we would not be able to continueto offer our customers the same breadth of products and our sales and operatingresults would likely suffer unless we are able to find an alternate supply of asimilar product.

•                  Agreements we may negotiate in the future maycommit us to certain minimum purchase levels or other spending obligations. Itis possible we will not be able to create the market demand to meet suchobligations, which would create an increased drain on our financial resourcesand liquidity.

•                  If market demand for our products increasessuddenly, our current vendors might not be able to fulfill our commercialneeds, which would require us to seek new manufacturing arrangements or fundnew sources of supply, and may result in substantial delays in meeting marketdemand. If we consistently generate more demand for a product than a givenvendor is capable of handling, it could lead to large backorders andpotentially lost sales to competitive products that are more readily available.

•                  We may not be able to control or adequatelymonitor the quality of products we receive from our vendors. Poor qualityproducts could damage our reputation with our customers.

•                  Some of our third party vendors are subjectto ongoing periodic unannounced inspection by regulatory authorities, includingthe Food and Drug Administration (“FDA”), the US Department of Agriculture (“USDA”),the Environmental Protection Agency (“EPA”), the Drug Enforcement Agency (“DEA”)and other 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 with vendors such as thosediscussed above could substantially decrease sales of our products, lead tohigher costs and damage our reputation with our customers.

 

***We rely upon third parties to ship productsto our customers and interruptions in their operations could harm our business,financial condition and results of operations.***

 

We use United Parcel Service, Inc., or UPS,as our primary delivery service for our air and ground shipments of products toour customers. If there were any significant service interruptions, there canbe no assurance that we could engage alternative service providers to deliverthese products in either a timely or cost-efficient manner, particularly inrural areas where many of our customers are located. Any labor disputes,slowdowns, transportation disruptions or other adverse conditions in thetransportation industry experienced by UPS could impair or disrupt our abilityto deliver our products to our customers on a timely basis, and could have amaterial adverse effect upon our customer relationships, business, financialcondition and results of operations. For example, during the strike by membersof the International Brotherhood of Teamsters against UPS in August 1997, manyof our sales representatives, some traveling hundreds of miles, were requiredto make deliveries to customers for which no alternative delivery serviceprovider was available on a timely basis. In addition, rising fuel costs mayresult in continued increases in shipping costs charged by UPS, or otherdelivery service providers, and could have an adverse effect on our financialcondition and results of operations.

 

***The loss of one or more significant customerscould adversely affect our profitability.***

 

Banfield – The Pet Hospital (“Banfield”) andFeeders’ Advantage, a related party, our two largest customers, accounted forapproximately 10% and 6% of our product sales for our fiscal year endedSeptember 30, 2005, respectively, and 9% and 6% for the six-months ended March31, 2006, respectively. Our ten largest customers, excluding Banfield andFeeders’ Advantage, accounted for approximately 6% of our product sales for ourfiscal year ended September 30, 2005 and 6% for the six-months ended March 31,2006. 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 significantly affect our financialcondition and results of operations. Additionally, a deterioration in thefinancial condition of one or more of our customers could have a materialadverse effect on our results of operations.

 

***Failure to effectively manage growth couldimpair our business.***

 

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

It may be difficult to manage such rapidgrowth in the future, and our future success depends on our ability toimplement and/or maintain:

 

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•                  sales and marketing programs;

•                  customer service levels;

•                  current and new product and service lines andvendor relationships;

•                  technological support which equals or exceedsour competitors;

•                  recruitment and training of new personnel;and

•                  operational and financial control systems.

 

Our ability to successfully offer productsand services and implement our business plan in a rapidly evolving marketrequires an effective planning and management process. We expect that we willneed to continue to improve our financial and managerial controls and reportingsystems and procedures and to expand the training of our work force. While webelieve our current systems have sufficient capacity to meet our projectedneeds, we may need to increase the capacity of our current systems to meetadditional or unforeseen demands.

 

If we are not able to manage our rapidgrowth, there is a risk our customer service quality could deteriorate whichmay in turn lead to decreased sales or profitability. Also, the cost of ouroperations could increase faster than growth in our revenues, negativelyimpacting our profitability.

 

***Difficulties with the integration ofacquisitions may impose substantial costs and delays and cause otherunanticipated problems for us.***

 

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

 

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

 

•                  retention of key personnel, customers andvendors of the acquired business;

 

•                  the occurrence of a material adverse effecton our existing business relationships with customers or vendors, or both,resulting from future acquisitions or business combinations could lead to atermination of or otherwise affect our relationships with such customers orvendors;

 

•                  impairments of goodwill and other intangibleassets; and

 

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

 

If we are unable to successfully integratethe operations of an acquired business into our operations, we could berequired to undertake unanticipated changes. These changes could have amaterial adverse effect on our business.

 

***Increases in over-the-counter sales of animalhealth products could adversely affect our business.***

 

We rely, and will continue to rely, on animalowners who purchase their animal health products directly from veterinarians,which we refer to as the ethical channel. There can be no assurance that animalowners will continue to use the ethical channel with the same frequency as theyhave in the past, and will not increasingly purchase animal health productsfrom sources other than veterinarians, such as the Internet and otherover-the-counter channels. Increased competition from any distributor of animalhealth products making use of an over-the-counter channel could significantlyreduce our market share and adversely impact our financial results.

 

***If we fail to comply with or become subjectto more onerous government regulations, our business could be adverselyaffected.***

 

The veterinary distribution industry issubject to changing political and regulatory influences. Both state and federalgovernment agencies regulate the distribution of certain animal health productsand we are subject to regulation, either directly or indirectly, by the FDA,the USDA, the EPA, the DEA and state boards of pharmacy as well as comparablestate agencies. The regulatory stance these agencies take could change. Ourvendors are subject to regulation by the FDA, the USDA, the EPA and the DEA, aswell as other federal and state agencies, and material changes to theapplicable regulations could affect our vendors’ ability to manufacture certainproducts, which could adversely impact our product supply. In addition, some ofour

 

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customers may rely, in part, on farm andagricultural subsidy programs. Changes in the regulatory positions that impactthe availability of funding for such programs could have an adverse impact onour customers’ financial positions, which could lead to decreased sales.

 

We strive to maintain compliance with theselaws and regulations. For example, we have hired a Manager of RegulatoryCompliance and we have engaged an outside consultant to assist us in meetingand complying with the various state licensure requirements to which we aresubject. If we are unable to maintain or achieve compliance with these laws andregulations, we could be subject to substantial fines or other restrictions onour ability to provide competitive distribution services, which could have anadverse impact on our financial condition.

 

We cannot assure you that existing laws andregulations will not be revised or that new, more restrictive laws will not beadopted or become applicable to us or the products that we distribute ordispense. 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 key management or salesrepresentatives could harm our business.***

 

Our future success depends to a significantextent on the skills, experience and efforts of management, including ourPresident and Chief Executive Officer, Mr. James F. Cleary, Jr. While we havenot experienced 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 key membersof our senior management team. We must continue to develop and retain a coregroup of individuals if we are to realize our goal of continued expansion andgrowth. We cannot assure you that we will be able to do so in the future.

 

Also, due to the specialized nature of ourproducts and services, generally only highly qualified and trained salesrepresentatives have the necessary skills to market our products and provideour services. These individuals develop relationships with our customers thatcould be damaged if these employees are not retained. We face intensecompetition for the hiring of these professionals. Any failure on our part tohire, train and retain a sufficient number of qualified professionals woulddamage our business. We do not generally enter into agreements that containnon-competition provisions with any of our employees, other than with membersof our senior management team.

 

***Failure of, or security problems with, ourinformation systems could damage our business.***

 

Our information systems are dependent onthird party software, global communications providers, telephone systems andother aspects of technology and Internet infrastructure that are susceptible tofailure. Though we have implemented security measures and some redundantsystems, our customer satisfaction and our business could be harmed if we orour vendors experience any system delays, failures, loss of data, poweroutages, computer viruses, break-ins or similar disruptions. We currentlyprocess all customer transactions and data at our facilities in Meridian,Idaho. Although we have safeguards for emergencies, including, withoutlimitation, 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 an infectious disease withineither the production animal or companion animal population could have a significantadverse effect on our business and our results of operations.***

 

An outbreak of disease affecting animals,such as foot-and-mouth disease, avian influenza and bovine spongiformencephalopathy, commonly referred to as “mad cow disease,” could result in thewidespread destruction of affected animals and consequently result in areduction in demand for animal health products. In addition, outbreaks of theseor other diseases or concerns of such diseases could create adverse publicitythat may have a material adverse effect on consumer demand for meat, dairy andpoultry products, and, as a result, on our customers’ demand for the productswe distribute. The outbreak of a disease among the companion animal populationwhich could cause a reduction in the demand for companion animals could alsoadversely affect our business. Although we have not been adversely impacted bythe outbreak of a disease in the past, there can be no assurance that a futureoutbreak of an infectious disease will not have an adverse effect on ourbusiness.

 

***We may be subject to product liability andother claims in the ordinary course of business.***

 

Our business involves a risk of productliability and other claims in the ordinary course of business. We maintaingeneral liability insurance with policy limits of $1 million per incident and$2 million in the aggregate, and in many cases we have

 

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indemnification rights against such claimsfrom the manufacturers of the products we distribute. We do not maintain aseparate product liability insurance policy because we do not currentlymanufacture any of the products that we sell. Our ability to recover underinsurance or indemnification arrangements is subject to the financial viabilityof the insurers and manufacturers. We cannot assure you that our insurancecoverage or the manufacturers’ indemnity will be available or sufficient in anyfuture cases brought against us.

 

***A prolonged economic downturn couldmaterially adversely affect our business.***

 

Our business may be materially adverselyaffected by prolonged, negative trends in the general economy that could reduceconsumer discretionary spending on animal health products. Our businessultimately depends on the ability and willingness of animal owners to pay forour products. 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 care industry,in which a large portion of payments are made by insurance programs.

 

***We may not be able to raise needed capital inthe future on favorable terms or at all.***

 

We expect that our existing sources of cash,together with any funds generated from operations, will be sufficient to meetour anticipated capital needs for at least the next twelve months. However, wemay require additional capital to finance our growth strategies or otheractivities in the future. Our capital requirements will depend on many factors,including the costs associated with our growth and expansion. Additionalfinancing may not be available when needed and, if such financing is available,it may not be available on terms favorable to us. Our failure to raise capitalwhen needed could have an adverse effect on our business, financial conditionand results of operations.

 

***Our variable rate indebtedness subjects us tointerest rate risk, which could cause our debt service obligations to increasesignificantly.***

 

Certain of our borrowings, primarilyborrowings on the revolving credit facility under our amended credit agreement,are at variable rates of interest and expose us to interest rate risk based onmarket rates. In the last year there has been a general increase in borrowingrates in the United States. If interest rates continue to increase, our debtservice obligations on our variable rate indebtedness would increase eventhough the amount borrowed remained the same, and our net income and cashavailable for servicing our indebtedness would decrease. Our variable rate debtas of March 31, 2006 was approximately $25.0 million (comprised of $24.7million credit facility and $389,232 promissory note). Our interest expense forfiscal year 2005 was $2.5 million (excluding $4.1 million of accretion of ourSeries A preferred stock dividends) and was $577,893 and $1.1 million for thethree and six-months ended March 31, 2006, respectively.

 

## **Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

## ** **

None.

 

## **Item3. Defaults Upon Senior Securities**

## ** **

None.

 

## **Item4. Submission of Matters to a Vote of Security Holders**

## ** **

The Company held its Annual Meeting of Stockholders on February 9,2006, and transacted the following business:

 

1)              Election of Directors

 
| **Nominee**             | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------|------------|---------------|------------|--------------------|------------|
| James F. Cleary, Jr.    |       | 8,047,461     |       | 2,532,061          |       |
| Keith E. Alessi         |       | 10,024,202    |       | 555,320            |       |
| Bruce C. Bruckmann      |       | 7,899,242     |       | 2,680,280          |       |
| John F. McNamara        |       | 10,050,002    |       | 529,520            |       |
| Robert N. Rebholtz, Jr. |       | 7,813,061     |       | 2,766,461          |       |

 

 

2)              Ratification of Appointment ofIndependent Registered Public Accountant

 
| **Votes For** | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** |
|---------------|------------|-------------------|------------|-----------------|------------|
| 10,357,954    |       | 20,650            |       | 200,618         |       |

 

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## **Item5. Other Information**

## ** **

None.

 

**Item 6. Exhibits**

 
| 10.1   |   | Livestock Products Agreement effective as of January 1, 2006 by and  between Pfizer Inc. and MWI Veterinary Supply Co., incorporated herein by  reference to Exhibit 10.1 of the Current Report on Form 8-K filed on  March 31, 2006. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                       |
| 15     |   | Letter re: Unaudited Interim Financial Statements.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of CFO 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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SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|              | MWI Veterinary Supply, Inc.                               |
|-------------------|-----------------------------------------------------------|
|              | (Registrant)                                              |
|              |                                                      |
|              |                                                      |
| Date: May 5, 2006 | /s/ Mary Patricia B. Thompson                             |
|              | Mary Patricia B. Thompson                                 |
|              | *Vice President,  Secretary and  Chief Financial Officer* |

 

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