**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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** **

**FORM 10-Q**

 

**QuarterlyReport Pursuant to Section 13 or 15(d)**

**of theSecurities Exchange Act of 1934**

 

**For the Quarter Ended:  June 30, 2006**

**Commission File Number:  000-51468**

 

 

**MWI VETERINARY SUPPLY, INC.**

(Exact name of Registrantas specified in its Charter)

 

| **Delaware**                                              | ** ** | **02-0620757**                           |
|-----------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction)                            |       | (I.R.S. Employer  Identification Number) |
|                                                      |       |                                     |
| **651 S.  Stratford Drive, Suite 100**                    | ** ** | ** **                               |
| **Meridian,  ID**                                         | ** ** | **83642**                                |
| (Address of  principal executive offices)                 |       | (Zip Code)                               |
|                                                      |       |                                     |
| **(800)  824-3703**                                       |
| (Registrant’s  telephone number,including area code) |

 

 

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

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

The number of shares of the registrant’s common stock,$0.01 par value, outstanding at August 3, 2006 was 11,536,577.

 

 

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**MWIVETERINARY SUPPLY, INC.**

**INDEX**

 
| **PART I.**   | ** ** | **FINANCIAL INFORMATION**                                                                                             |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                                  |
| **Item  1.**  | ** ** | **Financial  Statements (Unaudited)**                                                                                 |
|          |       | Condensed Consolidated Statements of Income for the  three and nine-months ended June 30, 2006 and 2005               |
|          |       |                                                                                                                  |
|          |       | Condensed Consolidated Statements of Comprehensive  Income for the three and nine-months ended June 30, 2006 and 2005 |
|          |       |                                                                                                                  |
|          |       | Condensed Consolidated Balance Sheets as of June 30,  2006 and September 30, 2005                                     |
|          |       |                                                                                                                  |
|          |       | Condensed Consolidated Statements of Cash Flows for  the nine-months ended June 30, 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**                                                                                                          |

 

 

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**PARTI.  FINANCIAL INFORMATION**

**Item 1.    Financial Statements**

**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share data)(unaudited)**
| ** **                                    | ** ** | **Three-months ended June 30,** | ** ** | **Nine-months ended June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                       | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                     |       |                                           |       |                                          |       |   |   |   |   |
| Product sales                                 |       | $                                              | 154,295    |                                          | $          | 130,377 |   | $ | 414,598 |   | $ | 340,525 |   |
| Product sales to  related party               |       | 7,467                                          |       | 6,433                                         |       | 24,823 |   | 19,380 |   |
| Commissions                                   |       | 2,190                                          |       | 1,177                                         |       | 5,696 |   | 3,486 |   |
| Total revenues                                |       | 163,952                                        |       | 137,987                                       |       | 445,117 |   | 363,391 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Cost of product sales                         |       | 141,041                                        |       | 119,955                                       |       | 379,526 |   | 312,263 |   |
| Gross profit                                  |       | 22,911                                         |       | 18,032                                        |       | 65,591 |   | 51,128 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Selling, general and  administrative expenses |       | 16,389                                         |       | 13,217                                        |       | 46,040 |   | 37,036 |   |
| Depreciation and  amortization                |       | 495                                            |       | 393                                           |       | 1,410 |   | 1,120 |   |
| Operating income                              |       | 6,027                                          |       | 4,422                                         |       | 18,141 |   | 12,972 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Other income (expense):                       |       |                                           |       |                                          |       |   |   |   |   |
| Interest expense                              |       | (466                                           | )          | (1,849                                        | )          | (1,599 | ) | (5,394 | ) |
| Earnings of  equity method investees          |       | 35                                             |       | 30                                            |       | 117 |   | 89 |   |
| Other                                         |       | 84                                             |       | 60                                            |       | 250 |   | 184 |   |
| Total other  expense                          |       | (347                                           | )          | (1,759                                        | )          | (1,232 | ) | (5,121 | ) |
| Income before taxes                           |       | 5,680                                          |       | 2,663                                         |       | 16,909 |   | 7,851 |   |
| Income tax expense                            |       | (1,911                                         | )          | (1,256                                        | )          | (6,346 | ) | (4,193 | ) |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Net income                                    |       | $                                              | 3,769      |                                          | $          | 1,407 |   | $ | 10,563 |   | $ | 3,658 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Earnings per share:                           |       |                                           |       |                                          |       |   |   |   |   |
| Basic                                         |       | $                                              | 0.36       |                                          | $          | 0.28 |   | $ | 1.00 |   | $ | 0.72 |   |
| Diluted                                       |       | $                                              | 0.35       |                                          | $          | 0.24 |   | $ | 0.97 |   | $ | 0.62 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |
| Weighted average common  shares outstanding:  |       |                                           |       |                                          |       |   |   |   |   |
| Basic                                         |       | 10,610                                         |       | 5,063                                         |       | 10,592 |   | 5,062 |   |
| Diluted                                       |       | 10,916                                         |       | 5,876                                         |       | 10,888 |   | 5,878 |   |
|                                          |       |                                           |       |                                          |       |   |   |   |   |

 

See Notes toCondensed Consolidated Financial Statements

3

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**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)(unaudited)**
| ** **                                                    | ** ** | **Three-months ended June 30,** | ** ** | **Nine-months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                       | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                          |       |                                           |       |                                          |       |   |   |   |   |
| Net income                                                    |       | $                                              | 3,769      |                                          | $          | 1,407 |   | $ | 10,563 |   | $ | 3,658 |   |
| Other  comprehensive income (loss):                           |       |                                           |       |                                          |       |   |   |   |   |
| Interest rate swap:                                           |       |                                           |       |                                          |       |   |   |   |   |
| Change in fair value, net of tax of $5 and $11,  respectively |       | —                                         |       | (8                                            | )          | — |   | 19 |   |
| Total comprehensive income                                    |       | $                                              | 3,769      |                                          | $          | 1,399 |   | $ | 10,563 |   | $ | 3,677 |   |

 

See Notes toCondensed Consolidated Financial Statements

4

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**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(dollars and shares in thousands, except per share data) (unaudited)**
| ** **                                                   | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| **Assets**                                                   | ** ** | ** **        | ** ** | ** **             | ** ** |
| Current Assets:                                              |       |              |       |                   |       |
| Cash                                                         |       | $                 | 53         |                   | $          | 31 |   |
| Receivables, net                                             |       | 91,507            |       | 77,099                 |       |
| Inventories                                                  |       | 79,695            |       | 68,786                 |       |
| Prepaid expenses and other current assets                    |       | 1,680             |       | 2,011                  |       |
| Deferred income taxes                                        |       | 739               |       | 482                    |       |
| Total current assets                                         |       | 173,674           |       | 148,409                |       |
|                                                         |       |              |       |                   |       |
| Property and  equipment, net                                 |       | 6,627             |       | 6,919                  |       |
| Goodwill                                                     |       | 31,554            |       | 29,739                 |       |
| Intangibles, net                                             |       | 2,459             |       | 1,644                  |       |
| Other assets,  net                                           |       | 2,982             |       | 1,533                  |       |
| Total assets                                                 |       | $                 | 217,296    |                   | $          | 188,244 |   |
|                                                         |       |              |       |                   |       |
| **Liabilities  And Stockholders’ Equity**               | ** ** | ** **        | ** ** | ** **             | ** ** |
| Current  Liabilities:                                        |       |              |       |                   |       |
| Line-of-credit                                               |       | $                 | 29,767     |                   | $          | 24,690 |   |
| Accounts payable                                             |       | 80,871            |       | 69,382                 |       |
| Accrued expenses                                             |       | 7,001             |       | 6,341                  |       |
| Current maturities of long-term debt                         |       | 97                |       | 97                     |       |
| Total current liabilities                                    |       | 117,736           |       | 100,510                |       |
|                                                         |       |              |       |                   |       |
| Deferred income  taxes                                       |       | 585               |       | 650                    |       |
| Long-term debt                                               |       | 292               |       | 390                    |       |
| Commitments and  contingencies                               |       |              |       |                   |       |
|                                                         |       |              |       |                   |       |
| **Stockholders’  Equity**                               | ** ** | ** **        | ** ** | ** **             | ** ** |
| Common stock $0.01 par value, 20,000 authorized;  10,626 and |       |              |       |                   |       |
| 10,576 shares issued and outstanding, respectively           |       | 106               |       | 106                    |       |
| Additional paid in capital                                   |       | 79,822            |       | 78,396                 |       |
| Retained earnings                                            |       | 18,755            |       | 8,192                  |       |
| Total stockholders’ equity                              |       | 98,683            |       | 86,694                 |       |
| Total  liabilities and stockholders’ equity             |       | $                 | 217,296    |                   | $          | 188,244 |   |

 

See Notes toCondensed Consolidated Financial Statements

5

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**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) (unaudited)**
| ** **                                                                         | ** ** | **Nine-months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                             | 10,563     |   | $ | 3,658 |   |
| Adjustments to reconcile net income to net cash  provided by  operating activities |       |                                          |       |   |   |
| Depreciation and amortization                                                      |       | 1,417                                         |       | 1,126 |   |
| Amortization of debt issuance costs                                                |       | 105                                           |       | 105 |   |
| Deferred income taxes                                                              |       | (322                                          | )          | (144 | ) |
| Earnings of equity method investees                                                |       | (117                                          | )          | (89 | ) |
| Gain on disposal of property and equipment                                         |       | (61                                           | )          | (6 | ) |
| Accretion of redeemable preferred stock                                            |       | —                                        |       | 3,510 |   |
| Distribution of equity method investee                                             |       | —                                        |       | 43 |   |
| Other                                                                              |       | (3                                            | )          | — |   |
| Changes in operating assets and liabilities (net of  effects of acquisitions):     |       |                                          |       |   |   |
| Receivables                                                                        |       | (13,104                                       | )          | (8,231 | ) |
| Inventories                                                                        |       | (9,727                                        | )          | (8,936 | ) |
| Prepaid expenses and other current assets                                          |       | 331                                           |       | (2,125 | ) |
| Accounts payable                                                                   |       | 11,232                                        |       | 19,707 |   |
| Accrued expenses                                                                   |       | 690                                           |       | 820 |   |
| Net cash provided by operating activities                                          |       | 1,004                                         |       | 9,438 |   |
|                                                                               |       |                                          |       |   |   |
| **Cash  Flows From Investing Activities:**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Business acquisitions                                                              |       | (3,549                                        | )          | (5,033 | ) |
| Purchases of property and equipment                                                |       | (2,830                                        | )          | (1,559 | ) |
| Deposit for property and equipment acquisition                                     |       | (1,429                                        | )          | — |   |
| Sale of property and equipment                                                     |       | 1,455                                         |       | 564 |   |
| Other                                                                              |       | 2                                             |       | (39 | ) |
| Net cash used in investing activities                                              |       | (6,351                                        | )          | (6,067 | ) |
|                                                                               |       |                                          |       |   |   |
| **Cash  Flows From Financing Activities:**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net borrowings (payments) on line-of-credit                                        |       | 5,077                                         |       | (3,828 | ) |
| Proceeds from stock options                                                        |       | 353                                           |       | — |   |
| Tax benefit of common stock options                                                |       | 72                                            |       | — |   |
| Payment on long-term debt                                                          |       | (133                                          | )          | (276 | ) |
| Debt issuance costs                                                                |       | —                                        |       | (100 | ) |
| Proceeds from issuance of long-term debt                                           |       | —                                        |       | 836 |   |
| Net cash provided by/(used in) financing activities                                |       | 5,369                                         |       | (3,368 | ) |
|                                                                               |       |                                          |       |   |   |
| **Increase  in Cash**                                                              |       | 22                                            |       | 3 |   |
|                                                                               |       |                                          |       |   |   |
| Cash at  Beginning of Period                                                       |       | 31                                            |       | 28 |   |
|                                                                               |       |                                          |       |   |   |
| Cash at End of  Period                                                             |       | $                                             | 53         |   | $ | 31 |   |
|                                                                               |       |                                          |       |   |   |
| *Supplemental  Disclosures:*                                                       | * *   | * *                                      | * *   | * * | * * |
| Cash paid for  interest                                                            |       | $                                             | 1,433      |   | $ | 1,478 |   |
| Cash paid for income  tax                                                          |       | 6,296                                         |       | 3,825 |   |

See Notes toCondensed Consolidated Financial Statements

 

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

## **NOTE1 — GENERAL**

**Basisof Presentation**

The accompanying unaudited condensed consolidatedfinancial statements include the results of operations, statements ofcomprehensive income, financial position and cash flows of MWI VeterinarySupply, Inc., formerly named MWI Holdings, Inc., and its wholly-ownedsubsidiaries (“the Company”).  Allmaterial intercompany balances have been eliminated.

In theopinion 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 andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to 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 thethree and nine-months ended June 30, 2006 are not necessarily indicative ofresults to be expected for the entire fiscal year.

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

**Use ofEstimates**

The preparation of the Company’s consolidatedfinancial statements, in conformity with accounting principles generallyaccepted in the United States, requires management to make estimates andassumptions. Some of these estimates require difficult, subjective or complexjudgments about matters that are inherently uncertain.  As a result, actual results could differ fromthese estimates.  These estimates andassumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.

 

**RevenueRecognition**

MWI sells products that it sources from vendors to itscustomers through either a “buy/sell” transaction or an agency relationshipwith its vendors. In a “buy/sell” transaction, MWI purchases or takes inventoryof products from the vendor. When a customer places an order with MWI, theCompany picks, packs, ships and invoices the customer for the order. MWIrecognizes revenue from “buy/sell” transactions as product sales when theproduct is delivered to the customer. The Company accepts product returns fromits customers. The Company estimates returns based on historical experience andrecognizes these estimated returns as a reduction of product sales. Productreturns have not been significant to the Company’s financial statements. In anagency relationship, MWI does not purchase and take inventory of products fromits vendors. MWI receives an order from a customer, then transmits the order tothe vendor, who picks, packs and ships the order to the customer. In somecases, the vendor invoices and collects payment from the customer, while inother cases MWI invoices and collects payment from the customer on behalf ofthe vendor. MWI receives a commission payment for soliciting the order from thecustomer and for providing other customer service activities. Commissions arerecognized when the services upon which the commissions are based are complete.Gross billings from agency contracts were $40,675 and $25,953 for thethree-months ended June 30, 2006 and 2005, respectively, and generatedcommission revenue of $2,190 and $1,177, respectively. Gross billings fromagency contracts were $112,895 and $74,015 for the nine-months ended June 30,2006 and 2005, respectively, and generated commission revenue of $5,696 and$3,486, respectively.

 

**Cost ofProduct Sales and Vendor Rebates**

Cost of product sales includes the Company’s inventoryproduct cost, including shipping costs to and from its distribution centers.Vendor rebates are recorded based on the terms of the contracts or programswith each vendor. The Company primarily receives quarterly, trimester andannual performance-based rebates from third-party vendors based upon attainmentof certain sales and/or purchase goals. Sales rebates are classified in theaccompanying consolidated statements of income as a reduction to cost ofproduct sales at the time the sales performance measures are achieved. Purchaserebates are measured against inventory purchases from the vendors and areclassified as a reduction of inventory until the product is sold. When theinventory is sold and purchase measures are achieved, purchase rebates arerecognized as a reduction to cost of product sales.

7

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**Goodwill**

The Company recognizesthe excess purchase price over the fair value of net assets acquired andliabilities assumed in a business combination as goodwill on the consolidatedbalance sheet. Goodwill is not amortized, but instead tested for impairment atleast annually. The Company performs an annual impairment test as ofSeptember 30 each year and concluded that goodwill was not impaired atSeptember 30, 2005. Goodwill impairment tests will continue to be performedat least annually, and more frequently if circumstances indicate a possibleimpairment. The following table summarizes the goodwill recognized inconnection with each business combination.

 

|                                                 | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| MWI Veterinary  Supply Co.                      |       | $                 | 28,287     |                   | $          | 28,287 |   |
| Memorial Pet  Care, Inc.                        |       | 66                |       | 66                     |       |
| Vetpo  Distributors, Inc.                       |       | 1,386             |       | 1,386                  |       |
| Northland  Veterinary Supply, Ltd. (See Note 3) |       | 1,815             |       | —                 |       |
|                                            |       | $                 | 31,554     |                   | $          | 29,739 |   |

 

## **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, *Accounting forStock-based Compensation* (“SFAS 123”), as amended by SFASNo. 148, *Accounting for Stock BasedCompensation—Transition and Disclosure* and supersedes AccountingPrinciples Board Opinion (“APB”) No. 25, *Accountingfor Stock Issued to Employees*. Adoption of SFAS 123 R requires theCompany to record non-cash expense for the Company’s stock compensation plansusing the fair value method. SFAS 123 R was effective for the Company on October1, 2005 and the adoption of SFAS 123 R did not have a material effect on theCompany’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.

In May2005, 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 Company adopted EITF 04-13as of April 1, 2006 and the adoption did not have a material effect on theCompany’s consolidated financial statements.

In July 2006, theFASB issued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with FASB Statement No. 109, *Accountingfor Income Taxes*. FIN 48 provides guidance on the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosures, and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company is currently evaluating the impact ofthis standard on the consolidated financial statements.

8

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**NOTE 3 — BUSINESS ACQUISITION**

In May 2006 the Company acquired substantially all of the assets ofNorthland Veterinary Supply, Ltd. (“Northland”) for approximately $4,544consisting of $3,549 in cash (including direct acquisition costs ofapproximately $115) and 28,744 shares of unregistered restricted common stockvalued at the time of issuance at approximately $995.  Based in Clear Lake, Wisconsin, Northland isa distributor of animal health products to veterinary practices and producersacross the Midwestern portion of the United States.

The following table summarizes the preliminary estimated fair values ofthe assets acquired and liabilities assumed at the date of acquisition.  These preliminary purchase price allocationsare based on a combination of third-party valuations and internal analyses andmay be adjusted during the allocation period as defined in SFAS No. 141, *Business Combinations*.

| Receivables                |   | $      | 1,304  |   |
|----------------------------|--------|--------|--------|--------|
| Inventories                |   | 1,182  |   |
| Property and  equipment    |   | 137    |   |
| Intangibles                |   | 965    |   |
| Goodwill                   |   | 1,815  |   |
| Other assets               |   | 25     |   |
| Total assets  acquired     |   | 5,428  |   |
|                       |   |   |   |
| Accounts payable           |   | 849    |   |
| Other  liabilities         |   | 35     |   |
| Total  liabilities assumed |   | 884    |   |
|                       |   |   |   |
| Net assets acquired        |   | $      | 4,544  |   |

 

Acquiredintangible assets include $821 assigned to customer relationships and $144assigned to covenants not to compete and are amortized on a straight-line basisover their expected useful lives of 9 years and 5 years, respectively.

**NOTE 4**—**RECEIVABLES**

|                                  | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| Trade                            |       | $                 | 83,919     |                   | $          | 69,969 |   |
| Vendor rebates  and programs     |       | 8,442             |       | 6,882                  |       |
| Related party                    |       | 211               |       | 1,429                  |       |
|                             |       | 92,572            |       | 78,280                 |       |
| Allowance for  doubtful accounts |       | (1,065            | )          | (1,181                 | )          |
|                             |       | $                 | 91,507     |                   | $          | 77,099 |   |

 

Productsales resulting from transactions with a single customer were 10% during thethree and nine-months ended June 30, 2006 and 2005. Approximately 11% and 7% ofthe Company’s trade receivables resulted from transactions with this singlecustomer as of June 30, 2006 and September 30, 2005, respectively.

Productsales resulting from transactions with Feeders’ Advantage LLC (“FeedersAdvantage”), a related party, were 5% during the three-months ended June 30,2006 and 6% during the nine-months ended June 30, 2006.  Product sales resulting from transactionswith Feeders Advantage were 5% during the three and nine-months ended June 30,2005.

9

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**NOTE 5**—**PROPERTY AND EQUIPMENT**

|                                            | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| Land                                       |       | $                 | 20         |                   | $          | 169 |   |
| Buildings and  leasehold improvements      |       | 1,502             |       | 2,293                  |       |
| Machinery,  furniture and equipment        |       | 9,222             |       | 8,140                  |       |
| Computer  equipment                        |       | 2,877             |       | 2,759                  |       |
| Construction in  progress                  |       | 295               |       | 630                    |       |
|                                       |       | 13,916            |       | 13,991                 |       |
| Accumulated  depreciation and amortization |       | (7,289            | )          | (7,072                 | )          |
|                                       |       | $                 | 6,627      |                   | $          | 6,919 |   |

Depreciationexpense for the three-months ended June 30, 2006 and 2005 was $440 and $347,respectively, and $1,266 and $1,028 for the nine-months ended June 30, 2006 and2005, respectively.

Duringthe fiscal year 2006 the Company relocated from its existing, owneddistribution center to a new larger leased facility located in Denver, Coloradoand sold the owned distribution center. The sale of the distribution centerclosed in February 2006 resulting in a gain of approximately $62.

**NOTE 6**—**INTANGIBLES**

|                           | ** ** | ** **           | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|----------------------|------------|-------------------|------------|------------------------|------------|
| ** **                | ** ** | **Useful Life** | ** ** | **2006**          | ** ** | **2005**               | ** ** |
| Amortizing:               |       |                 |       |              |       |                   |       |
| Customer lists            |       | 9 - 10 years         |       | $                 | 2,410      |                   | $          | 1,589 |   |
| Covenants not to compete  |       | 5 years              |       | 256               |       | 112                    |       |
| Other                     |       | 5 years              |       | 36                |       | 36                     |       |
|                      |       |                 |       | 2,702             |       | 1,737                  |       |
| Accumulated  amortization |       |                 |       | (295              | )          | (145                   | )          |
|                      |       |                 |       | 2,407             |       | 1,592                  |       |
| Non-Amortizing:           |       |                 |       |              |       |                   |       |
| Trade names               |       |                 |       | 52                |       | 52                     |       |
|                      |       |                 |       | $                 | 2,459      |                   | $          | 1,644 |   |

Projectedamortization expense for existing intangible assets is $235 for the fiscal yearending 2006, $299 for each of the fiscal years ending 2007, 2008, and 2009 and$277 for the fiscal year ending 2010.

**NOTE 7**—**LINE-OF-CREDIT AND LONG-TERM DEBT**

**Line-of-Credit**—The Company has aline-of-credit agreement with two lenders for a credit facility that allows forborrowings up to $70,000. The line-of-credit is secured by a security interestin substantially all of the Company’s assets and terminates on June 18, 2007.Interest is due monthly at the following rates: 1) LIBOR plus a margin (6.89%at June 30, 2006); or 2) the prime rate (8.25% at June 30, 2006). The lendersalso receive an unused line fee and letter of credit fee equal to 0.375% of theunused amount of the revolving credit facility. The Company’s outstandingbalance on this facility at June 30, 2006 was $29,767. The line-of-creditcontains certain restrictive financial covenants as well as restrictions ondividend payments and future debt borrowings. The credit agreement allows theCompany to issue up to $10,000 in letters of credit. The letters of credittypically act as guarantee of payment to certain third parties in accordancewith specified terms and conditions. The Company had six letters of credittotaling $600 at June 30, 2006. There were no outstanding borrowings on theseletters of credit at June 30, 2006.

**Long-Term Debt**—In January 2005, the Companyissued an unsecured non-negotiable promissory note in the aggregate principalamount of $487 in partial consideration for the acquisition of a business. Thenote bears interest at the prime rate (8.25% at June 30, 2006), payablequarterly. The principal of the note is payable in five equal annualinstallments and matures on January 1, 2010. The balance on this promissory note was $389 at June 30, 2006.

10

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**NOTE 8**—**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”).  The 2005 Plan allows the Company’s Board ofDirectors to grant common stock options, restricted stock, deferred units andother stock-based awards to executives 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 June 30, 2006, the Company had 553,801options to purchase common stock outstanding (360,401 vested and exercisable)with a weighted average exercise price of $3.69 and expiring through September2015.  During the three and nine-monthsended June 30, 2006 the Company granted 1,000 and 2,923 shares of restrictedstock, respectively, which vest annually for up to 5 years.  At June 30, 2006, the Company had 1,684,248shares available to be issued under its stock-based award plans.

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.  At October 1, 2005, all of the Company’soptions to purchase common stock were either vested and exercisable or wereinitially valued using the minimum value method and therefore no compensationexpense was recognized for these stock-based awards in fiscal 2006.  During the three and nine-months ended June30, 2006 the Company recognized $6 and $7, respectively, of compensationexpense related to restricted stock granted during the nine-months ended June30, 2006.  During the three andnine-months ended June 30, 2005, compensation expense that would have beenrecorded had the Company adopted the fair value method (all of which would havebeen determined using the minimum value method) was not significant.

**NOTE 9**—**INCOME TAXES**

TheCompany’s effective tax rate for the three-months ended June 30, 2006 and 2005was 33.6% and 47.2%, respectively.  TheCompany’s effective tax rate for the nine-months ended June 30, 2006 and 2005was 37.5% and 53.4%, respectively.  Thedecrease in the effective rate in the three and nine-months ended June 30, 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 anddue to changes in estimates of state income taxes.

## **NOTE10 — COMPUTATION OF EARNINGS PER SHARE**

|                                                 | ** ** | **Three-months ended June 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **Basic**                                      | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                              | 3,769      |   | $ | 3,769 |   | $ | 1,407 |   | $ | 1,407 |   |
| Weighted average  common shares outstanding     |       | 10,610                                         |       | 10,610 |   | 5,063 |   | 5,063 |   |
| Effect of  diluted securities                   |       |                                           |       |   |   |   |   |   |   |
| Stock options and restricted stock              |       |                                           |       | 306 |   |   |   | 316 |   |
| Contingent stock                                |       |                                           |       | — |   |   |   | 497 |   |
| Weighted average  shares outstanding            |       |                                           |       | 10,916 |   |   |   | 5,876 |   |
| Earnings per  share                             |       | $                                              | 0.36       |   | $ | 0.35 |   | $ | 0.28 |   | $ | 0.24 |   |
| Anti-dilutive shares excluded  from calculation |       |                                           |       | 1 |   |   |   | — |   |

 

11

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|                                                 | ** ** | **Nine-months ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **Basic**                                     | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                             | 10,563     |   | $ | 10,563 |   | $ | 3,658 |   | $ | 3,658 |   |
| Weighted average  common shares outstanding     |       | 10,592                                        |       | 10,592 |   | 5,062 |   | 5,062 |   |
| Effect of  diluted securities                   |       |                                          |       |   |   |   |   |   |   |
| Stock options and restricted stock              |       |                                          |       | 296 |   |   |   | 318 |   |
| Contingent stock                                |       |                                          |       | — |   |   |   | 498 |   |
| Weighted average  shares outstanding            |       |                                          |       | 10,888 |   |   |   | 5,878 |   |
| Earnings per  share                             |       | $                                             | 1.00       |   | $ | 0.97 |   | $ | 0.72 |   | $ | 0.62 |   |
| Anti-dilutive shares excluded  from calculation |       |                                          |       | 1 |   |   |   | — |   |

 

**NOTE 11**—**RELATED PARTIES**

MWI VeterinarySupply Co. (“MWI Co.”), a wholly-owned subsidiary of the Company, holds a 50.0%membership interest in Feeders’ Advantage. MWI Co. charged Feeders’ Advantagefor certain operating and administrative services of $120 and $92 for thethree-months ended June 30, 2006 and 2005, respectively, and $398 and $288 forthe nine-months ended June 30, 2006 and 2005, respectively.  Sales of products to Feeders’ Advantage were$7,467 and $6,433 for the three-months ended June 30, 2006 and 2005,respectively, and $24,822 and $19,380 for the nine-months ended June 30, 2006and 2005, respectively.

MWI Co. providesFeeders’ Advantage with a line-of-credit to finance its day-to-day operations.This line-of-credit bears interest at the prime rate. The interest due on theline-of-credit is calculated and charged to Feeders’ Advantage on the last dayof each month. Conversely, to the extent MWI Co. has a payable balance due toFeeders’ Advantage, the payable balance accrues interest in favor of Feeders’Advantage at the average federal funds rates in effect for that month.

TheCompany had a management and consulting services agreement with Bruckmann,Rosser, Sherrill & Co. LLC (“BRS LLC”) and Agri Beef Co., both relatedparties, which was terminated in August 2005. For the three and nine-monthsended June 30, 2005 the Company expensed $85 and $351 in management and otherservice fees under the agreement with BRS LLC and Agri Beef Co.

**NOTE 12**—**CONTINGENCIES AND COMMITMENTS**

From time to time, in thenormal course of business, the Company may become a party to legal proceedingsthat may have an adverse effect on the Company’s financial position, results ofoperations and cash flows.  At June 30,2006 the Company was not a party to any material pending legal proceedings andwas not aware of any claims that could have a material adverse effect on theCompany’s financial position, results of operations, or cash flows.

**NOTE 13**—**SUBSEQUENT EVENT**

On July 19, 2006 theCompany announced the pricing of its previously announced offering of commonstock.  As a result, on July 25, 2006 theCompany issued 869,565 shares of common stock and certain selling stockholderssold 2,117,814 shares of common stock which were subsequently sold to thepublic for $32.25 per share.  The Companyreceived estimated net proceeds of $25,900 after deducting the underwritingdiscounts and offering expenses.  TheCompany did not receive any of the proceeds from the shares of common stocksold by the selling stockholders.  Underthe terms of the underwriting agreement, the Company and the sellingstockholders granted the underwriters a thirty day over-allotment option topurchase an additional 130,435 shares of common stock from the Company and317,671 shares from the selling stockholders on the same terms as the originaloffering.   On July 28, 2006, theunderwriters exercised a portion of their over-allotment option that requiredthe Company to sell an additional 39,281 shares for estimated net proceeds of$1,200 after deducting the underwriting discounts, and the selling stockholdersto sell to the underwriters an additional 95,669 shares.  This transaction was completed on August 2,2006.  The Company used the net proceedsfrom these transactions to repay borrowings on its revolving credit facilityunder the amended credit agreement and for general corporate purposes.

12

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**REPORT OF INDEPENDENTREGISTERED 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 June 30, 2006and the related condensed consolidated statements of income and ofcomprehensive income for the three-month and nine-month periods ended June 30,2006 and June 30, 2005, and of cash flows for the nine-month periods ended June30, 2006 and 2005. These interim financial statements are the responsibility ofthe 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 thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken 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                   |   |
| August 1, 2006                 |   |

 

13

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**MWIVETERINARY SUPPLY, INC.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**(dollars in thousands, except pershare data)**

**Item 2.    Management’s Discussion and Analysis ofFinancial 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 operatingincome.  For more information on theCompany’s business see the Company’s Annual Report on Form 10-K filed with theSecurities Exchange Commission on December 1, 2005.

*Northland Veterinary Supply, Ltd.Acquisition*

OnMay 8, 2006 the Company acquired substantially all of the assets of NorthlandVeterinary Supply, Ltd. (“Northland”) for approximately $4,544 consisting of$3,549 in cash (including direct acquisition costs of approximately $115) and 28,744shares of unregistered restricted common stock valued at the time of issuanceat approximately $995.  Based in ClearLake, Wisconsin, Northland is a distributor of animal health products toveterinary practices and producers across the Midwestern portion of the UnitedStates.  Preliminary estimated fairvalues of the assets acquired and liabilities assumed at the date ofacquisition are discussed in the consolidated financial statements Note 3Business Acquisitions.

*Common Stock Offering*

On July 19, 2006 the Company announced the pricing of its previouslyannounced offering of common stock.  As aresult, on July 25, 2006 the Company issued 869,565 shares of common stock andcertain selling stockholders sold 2,117,814 shares of common stock which were subsequentlysold to the public for $32.25 per share. The Company received estimated net proceeds of $25,900 after deductingthe underwriting discounts and offering expenses.  The Company did not receive any of theproceeds from the shares of common stock sold by the selling stockholders.  Under the terms of the underwritingagreement, the Company and the selling stockholders granted the underwriters athirty day over-allotment option to purchase an additional 130,435 shares ofcommon stock from the Company and 317,671 shares from the selling stockholderson the same terms as the original offering.  On July 28, 2006, the underwriters exercised a portion of theirover-allotment option that required the Company to sell an additional 39,281shares for estimated net proceeds of $1,200 after deducting the underwritingdiscounts, and the selling stockholders to sell to the underwriters anadditional 95,669 shares.  Thistransaction was completed on August 2, 2006. The Company used the net proceeds from these transactions to repayborrowings on its revolving credit facility under the amended credit agreementand for general corporate purposes.

14

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**Results of Operations**

The following table summarizes theCompany’s results of operations for the three and nine-months ended June 30,2006 and 2005 in dollars and as a percentage of total revenues.
| ** **                                           | ** ** | **Three-Months Ended June 30,** | ** ** | **Nine-Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                       | ** ** | **%**                                         | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| Revenues:                                            |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                        |       | $                                              | 154,295    |                                          | 94.1       | % | $ | 130,377 |   | 94.5 | % | $ | 414,598 |   | 93.1 | % | $ | 340,525 |   | 93.7 | % |
| Product sales to related party                       |       | 7,467                                          |       | 4.6                                           | %          | 6,433 |   | 4.7 | % | 24,823 |   | 5.6 | % | 19,380 |   | 5.3 | % |
| Commissions                                          |       | 2,190                                          |       | 1.3                                           | %          | 1,177 |   | 0.8 | % | 5,696 |   | 1.3 | % | 3,486 |   | 1.0 | % |
| Total revenues                                       |       | 163,952                                        |       | 100.0                                         | %          | 137,987 |   | 100.0 | % | 445,117 |   | 100.0 | % | 363,391 |   | 100.0 | % |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product  sales                               |       | 141,041                                        |       | 86.0                                          | %          | 119,955 |   | 86.9 | % | 379,526 |   | 85.3 | % | 312,263 |   | 85.9 | % |
| Gross profit                                         |       | 22,911                                         |       | 14.0                                          | %          | 18,032 |   | 13.1 | % | 65,591 |   | 14.7 | % | 51,128 |   | 14.1 | % |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses        |       | 16,389                                         |       | 10.0                                          | %          | 13,217 |   | 9.6 | % | 46,040 |   | 10.3 | % | 37,036 |   | 10.2 | % |
| Depreciation and  amortization                       |       | 495                                            |       | 0.3                                           | %          | 393 |   | 0.3 | % | 1,410 |   | 0.3 | % | 1,120 |   | 0.3 | % |
| Operating income                                     |       | 6,027                                          |       | 3.7                                           | %          | 4,422 |   | 3.2 | % | 18,141 |   | 4.1 | % | 12,972 |   | 3.6 | % |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other income  (expense):                             |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense (1)                                 |       | (466                                           | )          | -0.3                                          | %          | (1,849 | ) | -1.3 | % | (1,599 | ) | -0.4 | % | (5,394 | ) | -1.5 | % |
| Earnings of equity method investees                  |       | 35                                             |       | 0.0                                           | %          | 30 |   | 0.0 | % | 117 |   | 0.0 | % | 89 |   | 0.0 | % |
| Other                                                |       | 84                                             |       | 0.1                                           | %          | 60 |   | 0.0 | % | 250 |   | 0.1 | % | 184 |   | 0.1 | % |
| Total other expense                                  |       | (347                                           | )          | -0.2                                          | %          | (1,759 | ) | -1.3 | % | (1,232 | ) | -0.3 | % | (5,121 | ) | -1.4 | % |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before  taxes                                 |       | 5,680                                          |       | 3.5                                           | %          | 2,663 |   | 1.9 | % | 16,909 |   | 3.8 | % | 7,851 |   | 2.2 | % |
| Income tax  expense                                  |       | (1,911                                         | )          | -1.2                                          | %          | (1,256 | ) | -0.9 | % | (6,346 | ) | -1.4 | % | (4,193 | ) | -1.2 | % |
| Net income                                           |       | $                                              | 3,769      |                                          | 2.3        | % | $ | 1,407 |   | 1.0 | % | $ | 10,563 |   | 2.4 | % | $ | 3,658 |   | 1.0 | % |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  share:                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       | $                                              | 0.36       |                                          |       |   | $ | 0.28 |   |   |   | $ | 1.00 |   |   |   | $ | 0.72 |   |   |   |
| Dilutive                                             |       | $                                              | 0.35       |                                          |       |   | $ | 0.24 |   |   |   | $ | 0.97 |   |   |   | $ | 0.62 |   |   |   |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares used in  earnings per share calculation:      |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       | 10,610                                         |       |                                          |       | 5,063 |   |   |   | 10,592 |   |   |   | 5,062 |   |   |   |
| Dilutive                                             |       | 10,916                                         |       |                                          |       | 5,876 |   |   |   | 10,888 |   |   |   | 5,878 |   |   |   |
|                                                 |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Data:                                          |       |                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product sales from Internet as a percentage of sales |       | 22                                             | %          |                                          |       | 21 | % |   |   | 23 | % |   |   | 21 | % |   |   |
| Field sales representatives (at end of period)       |       | 146                                            |       |                                          |       | 132 |   |   |   | 146 |   |   |   | 132 |   |   |   |
| Telesales representatives (at end of period)         |       | 99                                             |       |                                          |       | 91 |   |   |   | 99 |   |   |   | 91 |   |   |   |
| Fill rate (2)                                        |       | 98                                             | %          |                                          |       | 98 | % |   |   | 98 | % |   |   | 98 | % |   |   |

 

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(1)          Thethree and nine-months ended June 30, 2005 includes $1,195 and $3,510,respectively, accretion of our Series A preferred stock dividends, whichwas non-deductible for income tax purposes, as a component of interestexpense.  The Company redeemed all theSeries A preferred stock in August 2005.

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

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**Three-months Ended June 30, 2006 Compared to Three-monthsEnded June 30, 2005**

*Total Revenues*. Total revenues increased 18.8% to $163,952 for the three-months endedJune 30, 2006 from $137,987 for the three-months ended June 30, 2005.  This increase was attributable to an increasein product sales volumes of a wide variety of products to both new and existingcustomers.  Revenues attributable to newcustomers represented approximately 53% of the growth in total revenues duringthree-months ended June 30, 2006. Included in the new customer growth wereapproximately $1.4 million of revenues attributable to new customers acquiredas a result of the acquisition of Northland that was completed on May 8, 2006.Revenues attributable to existing customers represented approximately 47% ofthe growth in total revenues during the three-months ended June 30, 2006.  For the purpose of calculating growth ratesof new and existing customer revenue, the Company has defined a new customer asa customer that did not purchase product from MWI in the corresponding fiscalquarter of the prior year, with the remaining customer base being considered anexisting customer. Contributing to the growth in revenues to both new andexisting customers for the three-months ended June 30, 2006 as compared to thecorresponding period in the prior year was the addition of new cattleantibiotics.

*Gross Profit*. Gross profit increased by 27.1% to $22,911 for the three-months endedJune 30, 2006 from $18,032 for the three-months ended June 30, 2005.  The increase in gross profit was a result ofincreased total revenues as discussed above and increases in vendor rebatesearned during the quarter ended June 30, 2006 as compared to the quarter endedJune 30, 2005.  Gross profit as apercentage of total revenues increased approximately 0.9% to 14.0% for thethree-months ended June 30, 2006 as compared to 13.1% for the same period inthe prior year.  This increase wasprimarily due to increased vendor rebates and commission revenue, partiallyoffset by increased freight costs as a result of rising fuel and transportationcosts. Vendor rebate dollars grew approximately $1,436 contributing to thegross profit dollar improvement for the three-months ended June 30, 2006 ascompared to three-months ended June 30, 2005. Vendor rebates were benefited by approximately $710 ($440 after-tax), or$0.04 per diluted share, during the quarter ended June 30, 2006 as a result ofvendors’ modifying their rebate programs from annual-weighted calendar yeargrowth targets to either quarterly or trimester growth targets and resulted ina shift of rebates that historically would have been earned in our first fiscalquarter of fiscal 2007 ending on December 31, 2006.

*Selling, General and Administrative (“SG&A”)*.  SG&A increased 24.0% to $16,389 for thethree-months ended June 30, 2006 from $13,217 for the three-months ended June30, 2005.  The dollar increase wasprimarily due to increased compensation costs, outside fees and services,location and occupancy costs. Compensation costs increased as a result of additional headcount of 124team members (including 17 team members that joined the Company as a result ofthe acquisition of Northland), primarily in the Company’s distribution centers,corporate offices and sales.  Compensationcosts also increased as a result of increased sales commissions that aredirectly correlated with the sales growth. The increase in outside fees and services was primarily due to theCompany’s professional services fees related to operating as a public company,increased credit card and other bank fees and the use of temporary workforce tosupport its sales growth and demands in its distribution centers.  Increases in location costs are a result ofincreased costs for distribution supplies. Increases in occupancy costs were due primarily to the addition of theClear Lake, Wisconsin and Orlando, Florida distribution centers during thethird quarter of 2006 and the relocation of the Company’s distribution centerin Denver, Colorado from an owned property to leased property.

*Depreciation and Amortization. *Depreciation and amortization expenseincreased 26.0% to $495 for the three-months ended June 30, 2006 from $393 forthe three-months ended June 30, 2005. The increase in depreciation expense was a result of the addition of theOrlando, Florida distribution center and equipment upgrades at the Denver,Colorado facility in December 2005. Amortization expense increased as a result of amortization expense onacquired intangibles purchased in connection with the Northland acquisition.

*Other Expenses*. Other expenses decreased 80.3% to $347 for the three-months ended June30, 2006 from $1,759 for the three-months ended June 30, 2005. The decrease inother expenses was primarily due to a reduction in interest expense of $1,383in the three-months ended June 30, 2006 as compared to the same period in theprior year. Included in interest expense for the three-months ended June 30,2005 is accretion of dividends on the Series A preferred stock of $1,195. TheSeries A preferred stock was redeemed in August 2005. The Company expectsinterest expense to decline as compared to historical amounts as a result ofthe pay down of the revolving credit facility with proceeds from the sale ofcommon stock (See Item 2.Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Overview Section).

*Income Tax Expense*.  The Company’s effective tax rate for thethree-months ended June 30, 2006 and 2005 was 33.6% and 47.2%,respectively.  The decrease in theeffective rate in the three-months ended June 30, 2006 as compared to the sameperiods in the prior year was primarily a result of the elimination of thenon-deductible accretion of dividends, recorded as interest expense, on theSeries A preferred stock that was redeemed in August 2005 and due to changes inestimates of state income taxes.

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**Nine-months ended June 30, 2006 Compared to Nine-months endedJune 30, 2005**

*Total Revenues*. Total revenues increased 22.5% to $445,117 for the nine-months endedJune 30, 2006 from $363,391 for the nine-months ended June 30, 2005.  This increase was attributable to an increasein product sales volumes of a wide variety of products to both existing and newcustomers.  Revenues attributable to newcustomers represented approximately 47% of the growth in total revenues duringnine-months ended June 30, 2006. Revenues attributable to existing customersrepresented approximately 53% of the growth in total revenues during thenine-months ended June 30, 2006.  For thepurpose of calculating growth rates of new and existing customer revenue, theCompany has defined a new customer as a customer that did not purchase productfrom MWI in the corresponding fiscal quarter of the prior year, with theremaining customer base being considered an existing customer. Revenues fromnew customers for each fiscal quarter are summed to arrive at the estimatedyear-to-date revenue for new customers. Contributing to the growth in revenues to both new and existingcustomers for the nine-months ended June 30, 2006 as compared to thecorresponding period in the prior year was the addition of new cattleantibiotics, the addition of non-steroidal anti-inflammatory drugs for dogs inMarch 2005, and to a lesser extent the addition and the conversion in January2005 to a “buy/sell” arrangement for an equine West Nile Virus vaccine that wasa commission-based agency relationship in the comparative period in the prioryear.

*Gross Profit*. Gross profit increased by 28.3% to $65,591 for the nine-months ended June30, 2006 from $51,128 for the nine-months ended June 30, 2005.  The increase in gross profit is a result ofincreased total revenues as discussed above and increased vendor rebates.Vendor rebates contributed to the gross profit dollar improvement by $4,365 forthe nine-months ended June 30, 2006 as compared to the nine-months ended June30, 2005.  Vendor rebates have historically been highest during the Company’s first fiscalquarter ended December 31, since certain significant vendor rebate programs aredesigned to include annual targets to be achieved based on the calendaryear.  The growth in vendor rebatesduring the nine-months ended June 30, 2006 as compared to the nine-months endedJune 30, 2005 was attributable to the Company’s calendar year sales growth withkey vendors and the addition of new programs related to new productofferings.  Additionally, vendorrebates were benefited by approximately $975 ($600 after-tax), or $0.06 perdiluted share, during the nine-months ended June 30, 2006 as a result ofvendors’ modifying their rebate programs from annual-weighted calendar yeargrowth targets to either quarterly or trimester growth targets and resulted ina shift of rebates that historically would have been earned in our first fiscalquarter of fiscal 2007 ending on December 31, 2006.  Gross profit as a percentage of totalrevenues was 14.7% for the nine-months ended June 30, 2006, compared to 14.1%for the same period in the prior year. The increase in the Company’s gross profit as a percentage of totalrevenues was primarily due to an increase in vendor rebates and an increase incommission revenue on agency products sold. Partially offsetting theseimprovements were increases in freight costs as a result of higher fuel andtransportation costs.

*Selling, General and Administrative (“SG&A”)*.  SG&A increased 24.3% to $46,040 for thenine-months ended June 30, 2006 from $37,036 for the nine-months ended June 30,2005.  The dollar increase was primarilydue to increased compensation costs, outside fees and services, location andtravel and occupancy costs.  Compensationcosts increased as a result of additional headcount of 124 team membersprimarily in the Company’s distribution centers, corporate offices and salesforce. Additionally, the increase in compensation cost was affected by 17 teammembers that joined the Company in May 2006 in connection with the acquisitionof Northland and 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.  Theincrease in outside fees and services was primarily due to increased professionalservices fees related to operating as a public company, increased credit cardand other bank fees and the Company’s use of temporary workforce to support itssales growth and demands in its distribution centers.  Increases in location and travel cost are dueto increased headcount and costs to support the Company’s sales growth.  Increases in occupancy costs are dueprimarily to the distribution centers acquired in the Northland and Vetpoacquisitions and the relocation of the Company’s distribution centers in Nampa,Idaho and Denver, Colorado from owned properties to leased properties.

*Depreciation and Amortization. *Depreciation and amortization expenseincreased 25.9% to $1,410 for the nine-months ended June 30, 2006 from $1,120for the nine-months ended June 30, 2005. Depreciation expense increased as a result of the distribution centerequipment upgrades at its Nampa, Idaho and Denver, Colorado facilities in April2005 and December 2005, respectively, and as a result of the facilitiesacquired in the purchase of Vetpo and Northland and the new distribution centeropened in June 2006 in Orlando, Florida. In addition, amortization expense increased as a result of intangibleassets acquired in the purchase of Vetpo and Northland.

*Other Expenses*. Other expenses decreased 75.9% to $1,232 for the nine-months ended June30, 2006 from $5,121 for the nine-months ended June 30, 2005. The decrease inother expenses was primarily due to a reduction in interest expense of $3,795in the nine-months ended June 30, 2006 as compared to the same period in theprior year. Included in interest expense 

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forthe nine-months ended June 30, 2005 is accretion of dividends on the Series Apreferred stock of $3,510. The Series A preferred stock was redeemed in August2005.

*Income Tax Expense*.  The Company’s effective tax rate for thenine-months ended June 30, 2006 and 2005 was 37.5% and 53.4 %,respectively.  The decrease in theeffective rate in the nine-months ended June 30, 2006 as compared to the sameperiods in the prior year was primarily a result of the elimination of thenon-deductible accretion of dividends, recorded as interest expense, on theSeries A preferred stock that was redeemed in August 2005 and due to changes inestimates of state income taxes.

**CriticalAccounting 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.  The accompanying condensed consolidatedfinancial statements are prepared using the same critical accounting policiesdiscussed in the Company’s Annual Report on Form 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 facilitythat allows for borrowings up to $70,000. The line-of-credit is secured by asecurity interest in substantially all of the Company’s assets and terminateson June 18, 2007. Interest is due monthly at the following rates: 1) the LondonInterbank Offered Rate (LIBOR) plus a margin (6.89% at June 30, 2006); or 2)the prime rate (8.25% at June 30, 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’soutstanding balance on this facility at June 30, 2006 was $29,767 of which$16,000 carried an interest rate at LIBOR and $13,767 carried an interest rateat the prime rate.  The line-of-creditcontains certain restrictive financial covenants as well as restrictions ondividend payments and future debt borrowings.

From timeto time the Company issues letters of credit to act as guarantee of payment tospecified third parties. At June 30, 2006, the Company had six letters ofcredit totaling $600 and at September 30, 2005 the Company had three letters ofcredit totaling $300.  There were nooutstanding borrowings on these letters of credit at June 30, 2006 or September30, 2005.

*Operating Activities*.  For the nine-months ended June 30, 2006, cashprovided by operations was $1,004 and was primarily attributable to net incomeof $10,563 and an increase in accounts payable of $11,232, partially offset byincreases in receivables of $13,104 and inventories of $9,727.  The increase in net income is a result of thefactors discussed above in Results of Operations.  The increase in accounts payable is directlytied to the increase in inventory levels as a result of the Company purchasingproducts in advance of vendor price increases and purchases related to the newdistribution center from the Northland acquisition and the opening of a newdistribution center located in Orlando, Florida.  Increases in receivables are a result of theCompany’s sales growth and due to extended payment terms to production animalveterinarians in response to market conditions. For the nine-months ended June30, 2005 net cash provided by operating activities was $9,438, and wasprimarily attributable to an increase in accounts payable of $19,707 and netincome partially offset by increases in inventories of $8,936 and accountsreceivable of $8,231. The increase in accounts payable was a result of timingof inventory purchases and the increase in accounts receivable was due to salesgrowth.

*Investing Activities.*  For the nine-months ended June 30, 2006, netcash used in investing activities was $6,351. Significant transactions impacting cash used in investing activitiesduring the nine-months ended June 30, 2006 include the acquisition of Northlandfor $3,549 in cash, capital expenditures of $2,830 primarily related torelocating the Company’s existing distribution center to a new largerdistribution center in Denver, Colorado and due to the purchase of equipmentfor a new distribution center in Orlando, Florida.  During the three-months ended March 31, 2006the Company completed its sale of a distribution center previously operated inDenver, Colorado for $1,455.  Net cashused in investing activities for the nine-months ended June 30, 2005 was$6,067, primarily attributable to the acquisitions of Memorial Pet Care, Inc.and Vetpo Distributors, Inc. for approximately $5,033 and capital expendituresof $1,559.

*Financing Activities.*  Forthe nine-months ended June 30, 2006, net cash provided by financing activitieswas $5,369, and was primarily attributable to borrowing on the Company creditfacility.  For the nine-months ended June30, 2005, net cash used in financing activities was $3,368, which was primarilya result of payments on the Company’s revolving credit facility.  

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TheCompany’s revolving credit facility is used to finance the Company workingcapital requirements and fluctuates based on timing of payables and collectionof receivables.

**Contractual Obligations andGuarantees**

For information on contractualobligations and guarantees, see the Company’s 2005 Annual Report on Form 10-K.During the nine-months ended June 30, 2006 the Company entered into thefollowing leasing arrangements:

·                  InNovember 2005 we entered into a lease agreement, expiring in year 2013, for anapproximately 30,000 square foot distribution center located in Orlando,Florida with an average annual lease expense of $183 per year.

·                  InMay 2006 we leased an additional 15,200 square feet, expiring in 2013, for ourHarrisburg, PA distribution center for an additional $140 per year.

·                  InMay 2006 we entered into a lease agreement, expiring in year 2013, for an approximately25,000 square foot distribution center located in Clear Lake, Wisconsin with anannual lease expense of $86 per year.

·                  InMay 2006 we leased an additional 3,000 square feet, expiring in year 2011, forour corporate offices located in Meridian, Idaho for an additional $32 peryear.

**Item3.  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 75 basis points (a 10.0% change from thecalculated weighted average interest rate as of June 30, 2006), assuming nochange in the outstanding balance on the revolving credit facility under theamended credit agreement ($29,767 as of June 30, 2006), the annualized incomebefore taxes and cash flows from operating activities would decline byapproximately $224. If the weighted average interest rate on the variable rateindebtedness decreased 75 basis points (a 10.0% change from the calculatedweighted average interest rate as of June 30, 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 $224.

**Item4.  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 June 30, 2006.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures, including the accumulation and communication ofdisclosures to the Company’s Chief Executive Officer and Chief FinancialOfficer, are effective to provide reasonable assurance that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified by the Securities and ExchangeCommission’s rules and forms.

There were nochanges in the Company’s internal control over financial reporting thatoccurred during the Company’s most recently completed fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

**Cautionary Statement for Purposesof “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of1995***This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of the federal securitieslaws. Statements that are not historical facts, including statements about theCompany’s beliefs and expectations, are forward-looking statements.Forward-looking statements include statements preceded by, followed by or thatinclude the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,”“plan,” “estimate,” “target,” “project,” “intend” and similar expressions.These statements include, among others, statements regarding the Company’sexpected business outlook, anticipated financial and operating results, theCompany’s business strategy and means to implement its strategy, the Company’sobjectives, the amount and timing of capital expenditures, the amount andtiming of interest expense, the likelihood of the Company’s success inexpanding the Company’s business, financing plans, budgets, working capitalneeds and sources of liquidity.*

*Forward-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;changes in the way vendors introduce products to market; the recall of asignificant product by one of the Company’s vendors; seasonality; the impact ofgeneral economic trends on the Company’s business; the timing and effectivenessof marketing 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 the securitieslaws of the United States and the rules and regulations of the Securities andExchange Commission, or SEC, the Company is under no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of any newinformation, future events or otherwise. Potential investors should not placeundue reliance on the Company’s forward-looking statements. Before you investin the Company’s common stock, you should be aware that the occurrence of theevents described in the “Risk Factors” section in Section 1A of Part II OtherInformation in this Form 10-Q and filed in the Company’s Annual Report on Form10-K could harm the Company’s business, prospects, operating results, andfinancial condition. Although the Company believes that the expectationsreflected in the forward-looking statements are reasonable, the Company cannotguarantee future results or performance.*

## **Item1.  Legal Proceedings**

## The Company isnot currently a party to any material pending legal proceedings and is notaware of any claims that could have a materially adverse effect on the Company’sfinancial position, results of operations, or cash flows.

**Item1A.  Risk Factors.**

***In addition to the factors discussedelsewhere in this Form 10 Q and those discussed in our Annual Report of Form10-K, the following are important factors which could cause actual results orevents to differ materially from those contained in any forward-lookingstatements made by or on behalf of the Company***

***Our operating results may fluctuate due to factors outsideof management’s control.***

Our future revenues and results of operations may significantlyfluctuate due to a combination of factors,many of which are outside of management’s control. The most notable of thesefactors include:

·                  vendor rebates based upon attaining certaingrowth goals;

·                  changes in or availability of vendor rebateprograms;

·                  changes in the way vendors introduceproducts to market;

·                  the recall of a significant product by oneof our vendors;

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

·                  seasonality;

·                  the impact of general economic trends on ourbusiness;

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

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

·                  competition.

These factors could adversely impact our results of operations andfinancial condition. We may be unable to reduce operating expenses quicklyenough to offset any unexpected shortfall in revenues or gross profit. If wehave a shortfall in revenues or gross profit without a corresponding reductionto expenses, operating results may suffer. Our operating results for anyparticular fiscal year or quarter may not be indicative of future operatingresults. You should not rely on year-to-year or quarter-to-quarter comparisonsof results of operations as an indication of our future performance.

An adverse change in vendor rebates could negatively affect ourbusiness. The terms on which we purchase or sell products from many vendors ofanimal health products entitle us to receive a rebate based on the attainmentof certain growth goals. Vendors may adversely change the terms of some or allof these rebate programs. Because the amount of rebates we earn is directlyrelated to the attainment of pre-determined sales growth goals, and because thenature of the rebate programs and the amount of rebates available aredetermined by the vendors, there can be no assurance as to the amount ofrebates that we will earn in any given year. Historically, we have beensuccessful in achieving most rebate growth goals and have not experienced anymaterial adverse impact on our results of operations and financial conditiondue to a change in a rebate program. Changes to any rebate program initiated byour vendors may have a material effect on our gross profit and our operatingresults in any given quarter or year. Vendors may reduce the amount of rebatesoffered under their programs, or increase the growth goals or other conditionswe must meet to earn rebates to levels that we cannot achieve. During calendaryear 2006, certain of our vendors modified their rebate programs with us. Theserebate program modifications changed the revenue growth targets fromannual-weighted calendar year targets to either quarterly or trimester growthtargets. These modifications will result in rebates previously expected to beearned and recognized in our first fiscal quarter 2007 ending on December 31(orthe fourth calendar quarter) to be recognized earlier in our fiscal year 2006.

Additionally, factors outside of our control, such as customerpreferences or vendor supply issues, can have a material impact on our abilityto achieve the growth goals established by our vendors, which may reduce theamount of rebates we receive. The occurrence of any of these events could havean adverse impact on our results of operations.

***Our quarterly operating results may fluctuate significantly,and these fluctuations may cause our stock price to fall.***

Our quarterly revenues and operating results have varied significantlyin the past, and may continue to do so in the future. While we accrue rebatesfrom vendors as they are earned, our rebates have historically been highestduring the quarter ended December 31, since most of our vendors’ rebateprograms were designed to include targets to be achieved during the calendaryear. 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 31 (or the fourth calendar quarter) to be recognized earlier in ourfiscal year 2006. Historically, our revenues have been seasonal, with peaksales in the spring and fall months. The seasonal nature of our business isdirectly tied to the buying patterns of veterinarians for production animalhealth products used for certain medical procedures performed on productionanimals during the spring and fall months. These buying patterns can also beaffected by vendors’ and distributors’ marketing programs launched during thesummer months, particularly in June, which can cause veterinarians to purchaseproduction animal health products earlier than those products are used. Thiskind of early purchasing may reduce our sales in the months these purchaseswould have otherwise been made. While companion animal products tend to have adifferent product use cycle than production animal health products, andapproximately two-thirds of our revenues have been generated from the sale ofcompanion animal products, we cannot assure you that our revenues and operatingresults will not continue to fluctuate on a quarter-to-quarter basis. Webelieve period-to-period comparisons of our results of operations are notnecessarily meaningful as our future revenue and results of operations may varysubstantially. It is also possible that in future quarters our results ofoperations will be below the expectations of securities analysts and investors.In either case, the price of our common stock could decline, possiblymaterially.

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***Our market is highly competitive. Failure to competesuccessfully could have a material adverse effect on our business, financialcondition and results of operations.***

The market for veterinary distribution services is highly competitive,continually evolving and subject to technological change. We compete withnumerous vendors and distributors based on customer relationships, service anddelivery, product selection, price and e-business capabilities including:

·                  Butler Animal Health Supply;

·                  Henry Schein, Inc.;

·                  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 andspecialty distributors.

Some of our competitors may have more customers, stronger brandrecognition or greater financial and other resources than we do. Most of ourproducts are available from several sources, including other distributors andvendors, and our customers typically have relationships with severaldistributors and vendors. Many of our competitors have comparable productlines, technical expertise or distribution strategies that directly competewith us. Our competitors could obtain exclusive rights to distribute certainproducts, eliminating our ability to distribute those products. The entry ofnew distributors in the industry could also have a material adverse effect onour ability to compete. Additionally, some of our vendors may decide to competewith us by selling their products directly to our customers. If we do notcompete successfully against these organizations, it could have a material andadverse effect on our business, financial condition and results of operations.

***Consolidation in the veterinary distribution business andveterinary practices may decrease our revenues and profitability.***

Consolidation in the veterinary distribution business could result inexisting competitors increasing their market share, which could give themgreater pricing power, decrease our revenues and profitability, and increasethe competition for customers. Consolidation of the many small, privately-heldveterinary practices would result in an increasing number of larger veterinarypractices, which could have increased purchasing leverage and the ability tonegotiate lower product costs. This could reduce our operating margins andnegatively impact our revenues and profitability. Any of these developmentscould result in increased marketing expenses and have a material adverse effecton our business, financial condition and results of operations.

***Our business, financial condition and results of operationsdepend upon maintaining our relationships with vendors.***

At June 30, 2006 we distributed more than 10,000 products sourced frommore than 400 vendors to over 15,000 veterinary practices. We currently do notmanufacture any of our products and are dependent on these vendors for oursupply of products. Our top three vendors, Fort Dodge, Pfizer and Vedco,supplied products that accounted for approximately 45% of our revenues for ourfiscal year ended September 30, 2005 and 47% for the nine-months ended June 30,2006. Our ten largest vendors supplied products that accounted forapproximately 73% of our revenues for our fiscal year ended September 30, 2005and 74% for the nine-months ended June 30, 2006.

Our ability to sustain our gross profits has been, and will continue tobe, dependent in part upon our ability to obtain favorable terms and access tonew and existing products from our vendors. These terms may be subject tochanges from time to time by vendors, such as changing from a “buy/sell” to anagency relationship, or from an agency to a “buy/sell” relationship. In a “buy/sell”transaction, we purchase or take inventory of products from our vendors. Underan agency relationship, when we receive orders for products from a customer, wetransmit the order to the vendor who then picks, packs and ships the products.Any changes from “buy/sell” to agency or from agency to “buy/sell” couldadversely affect our revenues and operating income. The loss of one or more ofour large vendors, a material reduction in their supply of products to us ormaterial changes in the terms we obtain from them could have a material adverseeffect on our business, financial condition and results of operations.

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Some of our current and future vendors may decide to compete with us inthe future by pursuing or increasing their efforts in direct marketing andsales of their products. These vendors could sell their products at lowerprices and maintain a higher gross margin on their product sales than we can.In this event, veterinarians or animal owners may elect to purchase animalhealth products directly from these vendors. Increased competition from anyvendor of animal health products could significantly reduce our market shareand adversely impact our financial results.

In addition, we may not be able to establish relationships with keyvendors in the animal health industry if we have established relationships withcompetitors of these key vendors. We have written agreements with approximately30 of our vendors, including Fort Dodge and Pfizer. Some of our agreements withvendors are for one-year periods. Upon expiration, we may not be able to renewour existing agreements on favorable terms, or at all. If we lose the right todistribute products under such agreements, we may lose access to certainproducts and lose a competitive advantage. Potential competitors could sellproducts from vendors that we fail to continue with and erode our market share.

***We rely substantially on third-party vendors, and the lossof products or delays in product availability from one or more third-partyvendors could substantially harm our business.***

We must contract for the supply of current and future products ofappropriate quantity, quality and cost. These products must be available on atimely basis and be in compliance with any regulatory requirements. Failure todo so could substantially harm our business.

We often purchase products from our vendors under agreements thattypically have a term of one year and can be terminated on a periodic basis.There can be no assurance, however, that our vendors will be able to meet theirobligations under these agreements or that we will be able to compel them to doso. Risks of relying on vendors include:

·                  If an existing agreement expires or acertain product line is discontinued or recalled, then we would not be able tocontinue to offer our customers the same breadth of products and our sales andoperating results would likely suffer unless we are able to find an alternatesupply of a similar product.

·                  Agreements we may negotiate in the futuremay commit us to certain minimum purchase levels or other spending obligations.It is 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 products to our customersand interruptions in their operations could harm our business, financialcondition and results of operations.***

We use United Parcel Service, Inc., or UPS, as our primary deliveryservice for our air and ground shipments of products to our customers. If therewere any significant service interruptions, there can be no assurance that wecould engage alternative service providers to deliver these products in eithera timely or cost-efficient manner, particularly in rural areas where many ofour

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customers are located. Any labor disputes, slowdowns, transportationdisruptions or other adverse conditions in the transportation industryexperienced by UPS could impair or disrupt our ability to deliver our productsto our customers on a timely basis, and could have a material adverse effectupon our customer relationships, business, financial condition and results ofoperations. For example, during the strike by members of the InternationalBrotherhood of Teamsters against UPS in August 1997, many of our salesrepresentatives, some traveling hundreds of miles, were required to makedeliveries to customers for which no alternative delivery service provider wasavailable on a timely basis. In addition, rising fuel costs may result incontinued increases in shipping costs charged by UPS, or other delivery serviceproviders, and could have an adverse effect on our financial condition andresults of operations.

***The loss of one or more significant customers couldadversely affect our profitability.***

Banfield — The Pet Hospital (“Banfield”) and Feeders’ Advantage L.L.C.(“Feeders’ Advantage”), a related party, our two largest customers, accountedfor approximately 10% and 6% of our product sales for our fiscal year endedSeptember 30, 2005, respectively, and 10% and 6% for the nine-months ended June30, 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 nine-months ended June 30,2006. 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 currently selldirectly from the vendors or from one or more of our competitors. Furthermore,our customers are not required to purchase any minimum amount of products fromus. The loss of Banfield or Feeders’ Advantage or a deterioration in ourrelations 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 could impair ourbusiness.***

Since fiscal 2000, we have experienced rapid growth and expansion,largely due to internal growth initiatives. Our revenues increased from $195.6million for our fiscal year ended September 30, 2000 to $496.7 million for ourfiscal year ended September 30, 2005. Our number of employees increased byapproximately 300 individuals during the same period.

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

·                  sales and marketing programs;

·                  customer service levels;

·                  current and new product and service linesand vendor relationships;

·                  technological support which equals orexceeds our competitors;

·                  recruitment and training of new personnel;and

·                  operational and financial control systems.

Our ability to successfully offer products and services and implementour business plan in a rapidly evolving market requires an effective planningand management process. We expect that we will need to continue to improve ourfinancial and managerial controls and reporting systems and procedures and toexpand the training of our work force. While we believe our current systemshave sufficient capacity to meet our projected needs, we may need to increasethe capacity of our current systems to meet additional or unforeseen demands.

If we are not able to manage our rapid growth, there is a risk ourcustomer service quality could deteriorate which may in turn lead to decreasedsales or profitability. Also, the cost of our operations could increase fasterthan growth in our revenues, negatively impacting our profitability.

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***Difficulties with the integration of acquisitions may imposesubstantial costs and delays and cause other unanticipated problems for us.***

Acquisitions involve a number of risks relating to our ability tointegrate an acquired business into our existing operations.****The process of integrating the operations of an acquiredbusiness, particularly its personnel, could cause interruptions to ourbusiness. Some of the 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, resultingfrom future acquisitions or business combinations could lead to a terminationof or otherwise affect our relationships with such customers or vendors;

·                  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 integrate the operations of anacquired business into our operations, we could be required to undertakeunanticipated changes. These changes could have a material adverse effect onour business.

***Increases in over-the-counter sales of animal healthproducts could adversely affect our business.***

We rely, and will continue to rely, on animal owners who purchase theiranimal health products directly from veterinarians, which we refer to as theethical channel. There can be no assurance that animal owners will continue touse the ethical channel with the same frequency as they have in the past, andwill not increasingly purchase animal health products from sources other thanveterinarians, such as the Internet and other over-the-counter channels.Increased competition from any distributor of animal health products making useof an over-the-counter channel could significantly reduce our market share andadversely impact our financial results.

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

The veterinary distribution industry is subject to changing politicaland regulatory influences. Both state and federal government agencies regulatethe distribution of certain animal health products and we are subject toregulation, either directly or indirectly, by the FDA, the USDA, the EPA, theDEA and state boards of pharmacy as well as comparable state agencies. Theregulatory stance these agencies take could change. Our vendors are subject toregulation by the FDA, the USDA, the EPA and the DEA, as well as other federaland state agencies, and material changes to the applicable regulations couldaffect our vendors’ ability to manufacture certain products, which couldadversely impact our product supply. In addition, some of our customers mayrely, in part, on farm and agricultural subsidy programs. Changes in the regulatorypositions that impact the availability of funding for such programs could havean adverse impact on our customers’ financial positions, which could lead todecreased sales.

We strive to maintain compliance with these and all other applicablelaws 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 and regulations will not berevised or that new, more restrictive laws will not be adopted or becomeapplicable to us or the products that we distribute or dispense. We cannotassure you that the vendors of products that may become subject to morestringent laws will not try to recover any or all increased costs of compliancefrom us by increasing the prices at which we purchase products from them, or,that we will be able to recover any such increased prices

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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 sales representatives could harmour business.***

Our future success depends to a significant extent on the skills,experience and efforts of management, including our President and ChiefExecutive Officer, Mr. James F. Cleary, Jr. While we have not experiencedproblems in the past attracting and maintaining members of our management team,the loss of any or all of these individuals could adversely impact ourbusiness. We do not carry key-man life insurance on any member of management.In addition we do not have employment agreements with key members of our seniormanagement team. We must continue to develop and retain a core group ofindividuals if we are to realize our goal of continued expansion and growth. Wecannot assure you that we will be able to do so in the future.

Also, due to the specialized nature of our products and services,generally only highly qualified and trained sales representatives have thenecessary skills to market our products and provide our services. Theseindividuals develop relationships with our customers that could be damaged ifthese employees are not retained. We face intense competition for the hiring ofthese professionals. Any failure on our part to hire, train and retain asufficient number of qualified professionals would damage our business. We donot generally enter into agreements that contain non-competition provisionswith any of our employees, other than with members of our senior managementteam.

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

Our information systems are dependent on third party software, globalcommunications providers, telephone systems and other aspects of technology andInternet infrastructure that are susceptible to failure. Though we haveimplemented security measures and some redundant systems, our customer satisfactionand our business could be harmed if we or our vendors experience any systemdelays, failures, loss of data, power outages, computer viruses, break-ins orsimilar disruptions. We currently process all customer transactions and data atour facilities in Meridian, Idaho. Although we have safeguards for emergencies,including, without limitation, sophisticated back-up systems, the occurrence ofa major catastrophic 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 within either theproduction 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-mouthdisease, avian influenza or bovine spongiform encephalopathy, commonly referredto as “mad cow disease,” could result in the widespread destruction of affectedanimals and consequently result in a reduction in demand for animal healthproducts. In addition, outbreaks of these or other diseases or concerns of suchdiseases could create adverse publicity that may have a material adverse effecton consumer demand for meat, dairy and poultry products, and, as a result, onour customers’ demand for the products we distribute. The outbreak of a diseaseamong the companion animal population which could cause a reduction in thedemand for companion animals could also adversely affect our business. Althoughwe have not been adversely impacted by the outbreak of a disease in the past,there can be no assurance that a future outbreak of an infectious disease willnot have an adverse effect on our business.

***We may be subject to product liability and other claims inthe ordinary course of business.***

Our business involves a risk of product liability and other claims inthe ordinary course of business, for example arising from shipping mislabeledor outdated product. We maintain general liability insurance with policy limitsof $1 million per incident and $2 million in the aggregate, and in many caseswe have indemnification rights against such claims from the manufacturers ofthe products we distribute. We do not maintain a separate product liabilityinsurance policy because we do not currently manufacture any of the productsthat we sell. Our ability to recover under insurance or indemnificationarrangements is subject to the financial viability of the insurers andmanufacturers. We cannot assure you that our insurance coverage or themanufacturers’ indemnity will be available or sufficient in any future casesbrought against us.

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***A prolonged economic downturn could materially adverselyaffect our business.***

Our business may be materially adversely affected by prolonged,negative trends in the general economy that could reduce consumer discretionaryspending on animal health products. Our business ultimately depends on theability and willingness of animal owners to pay for our products. Thisdependence could make us more vulnerable to any reduction in consumerconfidence or disposable income than companies in other industries that areless reliant on consumer spending, such as the human health care industry, inwhich a large portion of payments are made by insurance programs.We may not be able to raise needed capital in the future on favorable terms orat all. We expect that our existing sources of cash, together with any fundsgenerated from operations, will be sufficient to meet our anticipated capitalneeds for at least the next twelve months. However, we may require additionalcapital to finance our growth strategies or other activities in the future. Ourcapital requirements will depend on many factors, including the costsassociated with our growth and expansion. Additional financing may not beavailable when needed and, if such financing is available, it may not beavailable on terms favorable to us. Our failure to raise capital when neededcould have an adverse effect on our business, financial condition and resultsof operations.

***Our variable rate indebtedness subjects us to interest raterisk, which could cause our debt service obligations to increase significantly.***

Certain of our borrowings, primarily borrowings on the revolving creditfacility under our amended credit agreement, are or will be at variable ratesof interest and expose us to interest rate risk based on market rates. In thelast year there has been a general increase in borrowing rates in the UnitedStates. If interest rates continue to increase, our debt service obligations onany future variable rate indebtedness we may incur on our revolving creditfacility would increase even if the amount borrowed remained the same, and ournet income and cash available for servicing our indebtedness would decrease.Our variable rate debt as of June 30, 2006 was approximately $30.2 million(comprised of $29.8 million credit facility and $389,232 promissory note). Ourinterest expense for fiscal year 2005 was $2.5 million (excluding $4.1 millionof accretion of our Series A preferred stock dividends) and was $1.6 millionfor the nine-months ended June 30, 2006. A 1% increase in the average interestrate would increase future interest expense by approximately $302,000 per yearassuming an average outstanding balance on our revolving credit facility of$30.2 million.

***The requirements of being a public company may strain ourresources and distract our management.***

As a public company, we are subject to the reporting requirements ofthe Securities Exchange Act of 1934, as amended, or the Exchange Act, and theSarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. These requirements placea strain on our systems and resources. The Exchange Act requires that we fileannual, quarterly and current reports with respect to our business andfinancial condition. The Sarbanes-Oxley Act requires that we maintain effectivedisclosure controls and procedures and internal controls for financialreporting. We are in the process of documenting and testing our internalcontrol procedures in order to satisfy the requirements of Section 404 of theSarbanes-Oxley Act, which requires annual management assessments of theeffectiveness of our internal controls over financial reporting and a report byour independent registered public accountants addressing these assessments.During the course of our testing, we may identify deficiencies which we may notbe able to remediate in time to meet the deadline imposed by the Sarbanes-OxleyAct for compliance with the requirements of Section 404.

We will be required to comply with the requirements of Section 404 forour fiscal year ending September 30, 2006. In addition, if we fail to achieveand maintain the adequacy of our internal controls, as such standards aremodified, supplemented or amended from time to time, we may not be able toensure that we can conclude on an ongoing basis that we have effective internalcontrols over financial reporting in accordance with Section 404 of theSarbanes-Oxley Act.

As well, in order to maintain and improve the effectiveness of ourdisclosure controls and procedures and internal control over financialreporting, significant resources and management oversight will be required.This may divert management’s attention from other business concerns, whichcould have a material adverse effect on our business, financial condition,results of operations and cash flows.

## **Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

OnApril 26, 2006 the Board of Directors approved a grant of 1,000 shares ofunregistered restricted common stock to A. Craig Olson in partial considerationfor his services as a member of the Company’s Board of Directors. Therestricted stock vests 1/3 annually over three years.  The grant of restricted stock is subject tothe ratification by Company stockholders of an amendment to the Company’s 2005Stock Based Incentive Compensation Plan (“Plan”) to allow non-employeedirectors to receive awards

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underthe Plan.  In the event the stockholdersdo not ratify the proposed Plan amendment, the shares will be canceled andforfeited.

OnMay 8, 2006 the Company issued 28,744 shares of unregistered restricted stockto Northland Veterinary Supply, Ltd. (“Northland”) in partial consideration forthe purchase of substantially all Northland’s assets.

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

None.

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

None.

## **Item5.  Other Information**

None.

**Item 6.  Exhibits**

| 15     |   | Letter re: Unaudited Interim Financial Information.                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
| 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

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                      |     | MWI Veterinary  Supply, Inc.                               |     |
|----------------------|----------|------------------------------------------------------------|----------|
|                 |     | (Registrant)                                               |     |
|                 |     |                                                       |     |
|                 |     |                                                       |     |
| Date: August 4, 2006 |     | /s/ Mary Patricia B. Thompson                              |     |
|                 | * * | Mary Patricia B. Thompson                                  | * * |
|                 | * * | *Vice  President, Secretary and   Chief Financial Officer* | * * |

 

 

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