**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarter ended December 31, 2007**

 

**OR**

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

 

**For the transition periodfrom                 to                 **

 

**Commission File Number: 000-51468**

 

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**MWIVETERINARY SUPPLY, INC.**

(Exact name of Registrantas specified in its Charter)

 

| **Delaware**                                               |   | **02-0620757**                           |
|------------------------------------------------------------|--------|------------------------------------------|
| (State of  Incorporation)                                  |   | (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) |

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes x No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 
| Large Accelerated Filer | o |   | Accelerated Filer | x |   | Non-Accelerated Filer | o |
|-------------------------|---|--------|-------------------|---|--------|-----------------------|---|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theAct). Yes o No x

 

The number of shares ofthe Registrant’s common stock, $0.01 par value, outstanding as of January 29,2008 was 12,049,344.

 

 

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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 months ended December 31,  2007 and 2006     |   | 3      |
|         |       |                                                                                                    |   |   |
|         |       | Condensed  Consolidated Balance Sheets as of December 31, 2007 and September 30, 2007                   |   | 4      |
|         |       |                                                                                                    |   |   |
|         |       | Condensed  Consolidated Statements of Cash Flows for the three months ended December 31,  2007 and 2006 |   | 5      |
|         |       |                                                                                                    |   |   |
|         |       | Notes to  Condensed Consolidated Financial Statements                                                   |   | 6      |
|         |       |                                                                                                    |   |   |
|         |       | Report of  Independent Registered Public Accounting Firm                                                |   | 12     |
|         |       |                                                                                                    |   |   |
| **Item 2.**  | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**         |   | 13     |
|         |       |                                                                                                    |   |   |
| **Item 3.**  | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                                         |   | 18     |
|         |       |                                                                                                    |   |   |
| **Item 4.**  | ** ** | **Controls and  Procedures**                                                                            |   | 18     |
|         |       |                                                                                                    |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                   |   |   |
|         |       |                                                                                                    |   |   |
|         |       | **Cautionary Statement**                                                                                |   | 19     |
|         |       |                                                                                                    |   |   |
| **Item 1.**  | ** ** | **Legal Proceedings**                                                                                   |   | 20     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 1A.** | ** ** | **Risk Factors**                                                                                        |   | 20     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 2.**  | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                        |   | 20     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 3.**  | ** ** | **Defaults Upon  Senior Securities**                                                                    |   | 21     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 4.**  | ** ** | **Submission of Matters  to a Vote of Security Holders**                                                |   | 21     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 5.**  | ** ** | **Other Information**                                                                                   |   | 21     |
| ** **   | ** ** | ** **                                                                                              |   |   |
| **Item 6.**  | ** ** | **Exhibits**                                                                                            |   | 21     |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**Dollarsand shares in thousands, except per share data(unaudited)**

 
| ** **                                    | ** ** | **Three months ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Revenues:                                     |       |                                                    |       |   |   |
| Product sales                                 |       | $                                                       | 189,303    |   | $ | 149,787 |   |
| Product sales to  related party               |       | 11,117                                                  |       | 9,559 |   |
| Commissions                                   |       | 2,941                                                   |       | 1,699 |   |
| Total revenues                                |       | 203,361                                                 |       | 161,045 |   |
|                                          |       |                                                    |       |   |   |
| Cost of product  sales                        |       | 173,576                                                 |       | 135,296 |   |
| Gross profit                                  |       | 29,785                                                  |       | 25,749 |   |
|                                          |       |                                                    |       |   |   |
| Selling, general  and administrative expenses |       | 21,303                                                  |       | 17,694 |   |
| Depreciation and  amortization                |       | 747                                                     |       | 569 |   |
| Operating income                              |       | 7,735                                                   |       | 7,486 |   |
|                                          |       |                                                    |       |   |   |
| Other income  (expense):                      |       |                                                    |       |   |   |
| Interest expense                              |       | (51                                                     | )          | (269 | ) |
| Earnings of  equity method investees          |       | 51                                                      |       | 45 |   |
| Other                                         |       | 235                                                     |       | 90 |   |
| Total other  income (expense), net            |       | 235                                                     |       | (134 | ) |
|                                          |       |                                                    |       |   |   |
| Income before  taxes                          |       | 7,970                                                   |       | 7,352 |   |
| Income tax  expense                           |       | (3,270                                                  | )          | (2,748 | ) |
|                                          |       |                                                    |       |   |   |
| Net income                                    |       | $                                                       | 4,700      |   | $ | 4,604 |   |
|                                          |       |                                                    |       |   |   |
| Earnings per  common share:                   |       |                                                    |       |   |   |
| Basic                                         |       | $                                                       | 0.39       |   | $ | 0.40 |   |
| Diluted                                       |       | $                                                       | 0.38       |   | $ | 0.39 |   |
|                                          |       |                                                    |       |   |   |
| Weighted average  common shares outstanding:  |       |                                                    |       |   |   |
| Basic                                         |       | 12,046                                                  |       | 11,559 |   |
| Diluted                                       |       | 12,296                                                  |       | 11,860 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

3

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**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

**Dollars and shares in thousands, except per sharedata(unaudited)**

 
| ** **                                                                                                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                       | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| **Assets**                                                                                                       |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| Current Assets:                                                                                                  |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                       |       | $                     | 62         |                   | $          | 8,599 |   |
| Receivables, net                                                                                                 |       | 117,595               |       | 111,676                |       |
| Inventories                                                                                                      |       | 114,772               |       | 94,623                 |       |
| Prepaid expenses  and other current assets                                                                       |       | 1,821                 |       | 2,362                  |       |
| Deferred income  taxes                                                                                           |       | 712                   |       | 518                    |       |
| Total current  assets                                                                                            |       | 234,962               |       | 217,778                |       |
|                                                                                                             |       |                  |       |                   |       |
| Property and  equipment, net                                                                                     |       | 8,950                 |       | 9,206                  |       |
| Goodwill                                                                                                         |       | 34,608                |       | 32,964                 |       |
| Intangibles, net                                                                                                 |       | 7,596                 |       | 5,014                  |       |
| Other assets,  net                                                                                               |       | 2,221                 |       | 2,232                  |       |
| Total assets                                                                                                     |       | $                     | 288,337    |                   | $          | 267,194 |   |
|                                                                                                             |       |                  |       |                   |       |
| **Liabilities  And Stockholders’ Equity**                                                                   |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| Current  Liabilities:                                                                                            |       |                  |       |                   |       |
| Line-of-credit                                                                                                   |       | $                     | 244        |                   | $          | — |   |
| Accounts payable                                                                                                 |       | 112,768               |       | 98,724                 |       |
| Accrued expenses                                                                                                 |       | 9,238                 |       | 7,693                  |       |
| Current  maturities of long-term debt                                                                            |       | 97                    |       | 97                     |       |
| Total current  liabilities                                                                                       |       | 122,347               |       | 106,514                |       |
|                                                                                                             |       |                  |       |                   |       |
| Deferred income  taxes                                                                                           |       | 409                   |       | 474                    |       |
|                                                                                                             |       |                  |       |                   |       |
| Long-term debt                                                                                                   |       | 195                   |       | 195                    |       |
|                                                                                                             |       |                  |       |                   |       |
| Other long-term  liabilities                                                                                     |       | 249                   |       | —                 |       |
|                                                                                                             |       |                  |       |                   |       |
| Commitments and  contingencies                                                                                   |       |                  |       |                   |       |
|                                                                                                             |       |                  |       |                   |       |
| **Stockholders’  Equity**                                                                                   |       |                  |       |                   |       |
| Common stock $0.01  par value, 40,000 authorized; 12,049 and 12,024 shares issued and  outstanding, respectively |       |                  |       |                   |       |
|                                                                                                             | 120        |                  | 120        |                   |
| Additional paid  in capital                                                                                      |       | 121,672               |       | 120,988                |       |
| Retained  earnings                                                                                               |       | 43,345                |       | 38,903                 |       |
| Total  stockholders’ equity                                                                                 |       | 165,137               |       | 160,011                |       |
| Total  liabilities and stockholders’ equity                                                                 |       | $                     | 288,337    |                   | $          | 267,194 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

4

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**MWI VETERINARY SUPPLY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Dollars in thousands (unaudited)**

 
| ** **                                                                                    | ** ** | **Three months ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                                                    |       |                                                    |       |   |   |
| Net income                                                                                    |       | $                                                       | 4,700      |   | $ | 4,604 |   |
| Adjustments to  reconcile net income to net cash provided by/(used in)  operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                                                |       | 750                                                     |       | 571 |   |
| Amortization of  debt issuance costs                                                          |       | 11                                                      |       | 31 |   |
| Stock-based  compensation                                                                     |       | 17                                                      |       | 20 |   |
| Deferred income  taxes                                                                        |       | (259                                                    | )          | (180 | ) |
| Earnings of  equity method investees                                                          |       | (51                                                     | )          | (45 | ) |
| Tax benefit of  common stock options                                                          |       | (112                                                    | )          | (67 | ) |
| Other                                                                                         |       | —                                                  |       | (10 | ) |
| Changes in  operating assets and liabilities (net of effects of acquisitions):                |       |                                                    |       |   |   |
| Receivables                                                                                   |       | (5,177                                                  | )          | 9,744 |   |
| Inventories                                                                                   |       | (19,915                                                 | )          | (13,546 | ) |
| Prepaid expenses  and other current assets                                                    |       | 542                                                     |       | 557 |   |
| Accounts payable                                                                              |       | 14,140                                                  |       | 6,844 |   |
| Accrued expenses                                                                              |       | 1,503                                                   |       | 1,075 |   |
| Net cash  provided by/(used in) operating activities                                          |       | (3,851                                                  | )          | 9,598 |   |
|                                                                                          |       |                                                    |       |   |   |
| **Cash  Flows From Investing Activities:**                                                    |       |                                                    |       |   |   |
| Business  acquisitions                                                                        |       | (4,556                                                  | )          | — |   |
| Purchases of  property and equipment                                                          |       | (597                                                    | )          | (977 | ) |
| Other                                                                                         |       | 61                                                      |       | 30 |   |
| Net cash used in  investing activities                                                        |       | (5,092                                                  | )          | (947 | ) |
|                                                                                          |       |                                                    |       |   |   |
| **Cash  Flows From Financing Activities:**                                                    |       |                                                    |       |   |   |
| Proceeds from  stock options                                                                  |       | 50                                                      |       | 85 |   |
| Tax benefit of  common stock options                                                          |       | 112                                                     |       | 67 |   |
| Net borrowings/(payments)  on line-of-credit                                                  |       | 244                                                     |       | (8,679 | ) |
| Debt issuance  costs                                                                          |       | —                                                  |       | (124 | ) |
| Net cash  provided by/(used in) financing activities                                          |       | 406                                                     |       | (8,651 | ) |
|                                                                                          |       |                                                    |       |   |   |
| **Decrease  in Cash and Cash Equivalents**                                                    |       | (8,537                                                  | )          | — |   |
|                                                                                          |       |                                                    |       |   |   |
| Cash and Cash  Equivalents at Beginning of Period                                             |       | 8,599                                                   |       | 37 |   |
|                                                                                          |       |                                                    |       |   |   |
| Cash and Cash  Equivalents at End of Period                                                   |       | $                                                       | 62         |   | $ | 37 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

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** **

**MWI VETERINARY SUPPLY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**Dollars in thousands, except per share data(unaudited)**

 

## **NOTE1 — GENERAL**

##  

**Basisof Presentation**

 

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

 

In the opinion of ourmanagement, the accompanying unaudited condensed consolidated financialstatements include all adjustments necessary to present fairly, in all materialrespects, our results for the periods presented. These condensed consolidatedfinancial statements have been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed 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 our 2007 Annual Report on Form 10-Kfiled with the SEC on November 21, 2007. The results of operations for the three months ended December 31,2007 are not necessarily indicative of results to be expected for the entirefiscal year.

 

Our unaudited condensedconsolidated balance sheet as of September 30, 2007 has been derived fromthe audited consolidated balance sheet as of that date.

 

**Useof Estimates**

 

*The*accompanying unaudited condensedconsolidated financial statements have been prepared on the accrual basis ofaccounting using accounting principles generally accepted in the United States.In preparing financial information, we use certain estimates and assumptionsthat may affect the reported amounts and disclosures. Some of these estimatesrequire difficult, subjective and complex judgments about matters that areinherently uncertain. As a result, actual results could differ from theseestimates. Estimates are used when accounting for sales returns, allowance fordoubtful accounts, customer incentives, vendor rebates, inventories, goodwilland intangible assets, income taxes, impairment of long-lived assets,depreciation and amortization, employee benefits, unearned income andcontingencies. The estimates of fair value of assets and liabilities and thedisclosure of contingent assets and liabilities as of the balance sheet dateand reported amounts of revenue and expenses for the periods are based onassumptions that we believe to be reasonable.

 

**RevenueRecognition**

 

*We sell products we source from vendors to our customersthrough either a “buy/sell” transaction or an agency relationship with ourvendors. In a “buy/sell” transaction, we purchase or take inventory of productsfrom the vendor. When a customer places an order with us, we pick, pack, shipand invoice the customer for the order. We recognize revenue from “buy/sell”transactions as product sales when the product is delivered to the customer. Weaccept product returns from our customers. We estimate returns based onhistorical experience and recognize these estimated returns as a reduction ofproduct sales. Product returns have not been significant to our financialstatements. We record revenues net of sales tax.  In an agency relationship, we generally donot purchase and take inventory of products from vendors. We receive an orderfrom a customer, then transmit the order to the vendor, who picks, packs andships the order to the customer. In some cases, the vendor invoices andcollects payment from the customer, while in other cases we invoice and collectpayment from the customer on behalf of the vendor. We receive a commissionpayment for soliciting the order from the customer and for providing othercustomer service activities. Commissions are recognized when the services uponwhich the commissions are based are complete.*Grossbillings from agency contracts were $40,817 and $30,484 for the three monthsended December 31, 2007 and 2006, respectively, and generated commissionrevenue of $2,941 and $1,699, respectively.

 

**Costof Product Sales and Vendor Rebates**

 

*Cost of product salesconsist of our inventory product cost, including shipping costs to and from ourdistribution centers. Vendor rebates are recorded based on the terms of thecontracts or programs with each vendor. We receive quarterly, trimester,semi-annual and annual performance-based rebates from third-party vendors basedupon attainment of certain sales and/or purchase goals. Sales rebates areclassified in the accompanying consolidated statements of income as a reductionto cost of product sales at the time the sales performance measures areachieved. Purchase rebates are measured against*

 

6

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*inventory purchases fromthe vendors and are classified as a reduction of inventory until the product issold. When the inventory is sold and purchase measures are achieved, purchaserebates are recognized as a reduction to cost of product sales.*

 

*Historically, actualresults have not significantly deviated from those determined using theestimates described above. We expect that our estimates in the future willcontinue to be reasonable as our rebates are based on specific vendor programgoals and are principally recorded upon achievement of sales or purchaseperformance measures. Vendors may change rebate programs from year to year.*

 

**NOTE 2 —EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

On October 1, 2007, we adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”).  See Note 9 – Income Taxes.

 

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, *Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements* (“SAB 108”), which providesguidance on quantifying and evaluating the materiality of unrecordedmisstatements.  SAB 108 was effective forour fiscal year beginning October 1, 2007. The adoption of SAB 108 did not have a material effect on ourconsolidated financial statements.

 

In September 2006, the FASB issued SFAS 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value according to generally accepted accountingprinciples, and expands disclosure requirements regarding fair valuemeasurements.  This statement emphasizesthat fair value should be determined based on assumptions market participantswould use to price the asset or liability. SFAS 157 is effective for our fiscal year and interim period beginning October 1,2008.  We are currently evaluating theimpact, if any, that SFAS 157 will have on our consolidated financialstatements.

 

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assetsand liabilities at fair value. The provisions of SFAS 159 are effective for ourfiscal year beginning October 1, 2008. We are currently evaluating theexpected impact, if any, that SFAS 159 will have on our consolidated financialstatements.

 

In December 2007, the FASB issued SFAS No. 141(Revised), *Business Combinations* (“SFAS 141-R”).  SFAS 141-R retains the purchase method ofaccounting for acquisitions, but requires a number of changes, includingchanges in the way assets and liabilities are recognized in the purchaseaccounting. It changes the recognition of assets acquired and liabilitiesassumed arising from contingencies, requires the capitalization of in-processresearch and development at fair value, and requires the expensing ofacquisition-related costs as incurred, among other items. The statement willapply prospectively to business combinations occurring in our fiscal yearbeginning October 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated FinancialStatements, an amendment of ARB 51* (“SFAS 160”).  This statement amends Accounting ResearchBulletin No. 51, *Consolidated FinancialStatements*, to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. Noncontrolling interests shall be reclassified to equity,consolidated net income shall be adjusted to include net income attributable tononcontrolling interests and consolidated comprehensive income shall beadjusted to include comprehensive income attributable to the noncontrollinginterests.  SFAS 160 is effective for ourfiscal year beginning October 1, 2009. We are currently evaluating the expected impact, if any, that SFAS 160will have on our consolidated financial statements.

 

**NOTE 3****— BUSINESS ACQUISITION**

 

InOctober 2007, we acquired substantially all of the assets of Tri VServices, Inc. (“Tri V”) for approximately $5,111, consisting of $4,606 incash (including direct acquisition costs of approximately $106) and 12,692shares of restricted common stock valued at the time of the issuance atapproximately $505.  Based nearDetroit, Michigan, Tri V was a distributor with an 11-year history of providinganimal health products to approximately 850 veterinary practices, with aparticular focus on emergency clinics and ophthalmology specialists.

 

Thefollowing table summarizes the preliminary estimated fair values of the assetsacquired and liabilities assumed at the date of the 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*.

 

7

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| Receivables                |   | $      | 750    |   |
|----------------------------|--------|--------|--------|--------|
| Inventories                |   | 235    |   |
| Intangibles                |   | 2,710  |   |
| Goodwill                   |   | 1,693  |   |
| Total assets  acquired     |   | 5,388  |   |
|                       |   |   |   |
| Accounts payable           |   | 277    |   |
| Total  liabilities assumed |   | 277    |   |
|                       |   |   |   |
| Net assets  acquired       |   | $      | 5,111  |   |

 

**NOTE 4****— RECEIVABLES**

 
| ** **                       | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Trade                            |       | $                     | 104,286    |                   | $          | 100,422 |   |
| Vendor rebates  and programs     |       | 14,183                |       | 11,725                 |       |
| Interest                         |       | —                |       | 61                     |       |
| Related party                    |       | 2                     |       | 342                    |       |
|                             |       | 118,471               |       | 112,550                |       |
| Allowance for  doubtful accounts |       | (876                  | )          | (874                   | )          |
|                             |       | $                     | 117,595    |                   | $          | 111,676 |   |

 

Product sales resultingfrom transactions with a single customer were 8% and 9% of total product salesduring the three months ended December 31, 2007 and 2006, respectively.Approximately 9% and 10% of our trade receivables resulted from transactionswith this single customer as of December 31, 2007 and September 30,2007, respectively.

 

Product sales resultingfrom transactions with Feeders’ Advantage LLC (“Feeders’ Advantage”), a relatedparty, were 6% of total product sales during the three months ended December 31,2007 and 2006.

 

**NOTE 5****— PROPERTY AND EQUIPMENT**

 
| ** **                                 | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Land                                       |       | $                     | 20         |                   | $          | 20 |   |
| Buildings and  leasehold improvements      |       | 2,958                 |       | 2,257                  |       |
| Machinery,  furniture and equipment        |       | 11,689                |       | 10,744                 |       |
| Computer  equipment                        |       | 2,914                 |       | 3,825                  |       |
| Construction in  progress                  |       | 92                    |       | 1,586                  |       |
|                                       |       | 17,673                |       | 18,432                 |       |
| Accumulated  depreciation and amortization |       | (8,723                | )          | (9,226                 | )          |
|                                       |       | $                     | 8,950      |                   | $          | 9,206 |   |

 

Depreciation expense forthe three months ended December 31, 2007 and 2006 was $623 and $494,respectively.

 

8

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**NOTE 6****— INTANGIBLES**

 
| ** **                | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|---------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| Amortizing:               |       |                  |       |                   |       |
| Customer lists            |       | $                     | 5,245      |                   | $          | 3,186 |   |
| Covenants not to  compete |       | 666                   |       | 356                    |       |
| Other                     |       | 248                   |       | 168                    |       |
|                      |       | 6,159                 |       | 3,710                  |       |
| Accumulated  amortization |       | (825                  | )          | (698                   | )          |
|                      |       | 5,334                 |       | 3,012                  |       |
| Non-Amortizing:           |       |                  |       |                   |       |
| Trade names and  patents  |       | 2,262                 |       | 2,002                  |       |
|                      |       | $                     | 7,596      |                   | $          | 5,014 |   |

 

Amortization expense was$127 and $77 for the three months ended December 31, 2007 and 2006,respectively.  Intangible assets areamortized over their expected useful life, which generally ranges from 5-20years.  Estimated future annualamortization expense related to intangible assets as of December 31, 2007follows:

 
| ** **         | ** ** | **Amount** | ** ** |
|--------------------|------------|------------|------------|
| Remainder of  2008 |       | $          | 433        |   |
| 2009               |       | 577        |       |
| 2010               |       | 555        |       |
| 2011               |       | 537        |       |
| 2012               |       | 512        |       |
| Thereafter         |       | 2,720      |       |
|               |       | $          | 5,334      |   |

 

Theabove projection of amortization expense includes preliminary estimates ofintangible assets and lives associated with the acquisition of substantiallyall of the assets of Tri V.  Theseamounts may be adjusted during the allocation period as defined in SFAS No. 141,*Business Combinations*.

 

**NOTE 7****— CREDIT FACILITY ANDLONG-TERM DEBT**

 

**Line-of-Credit**—OnDecember 13, 2006, MWI Veterinary Supply Co., (our wholly-ownedsubsidiary) as borrower, entered into an unsecured credit agreement with us andMemorial Pet Care, Inc., as guarantors, and Bank of America, N.A. andWells Fargo Bank, N.A., (collectively, the “lenders”) for the provision of arevolving credit facility (the “facility”). The facility allows for borrowings in the aggregate of $70,000, with theright to request an increase in the commitment of the lenders to $100,000.  The facility has a maturity date of December 1,2011 and a variable interest rate equal to the Daily LIBOR Floating Rate or theLIBOR 1-month fixed rate (at our option) plus a margin ranging from 0.7% to1.25%.  The lenders also receive anunused line fee and letter of credit fee equal to 0.125% of the unused amountof the facility. Our outstanding balance on the facility at December 31,2007 was $244 and the interest rate for the facility was 5.52% as of thatdate.  This facility replaced thefive-year Credit Agreement dated June 18, 2002 between MWI VeterinarySupply Co. and Bank of America, N.A.

 

The line-of-creditcontains certain financial covenants as well as other restrictive covenants. Thefacility allows for the issuance of up to $10,000 in letters of credit. Theletters of credit typically act as a guarantee of payment to certainthird-parties in accordance with specified terms and conditions. We had elevenletters of credit totaling $940 at December 31, 2007 and September 30,2007. There were no outstanding borrowings on these letters of credit at eitherDecember 31, 2007 or September 30, 2007.

 

**Long-TermDebt**—In January 2005, we issued a promissory note in theaggregate principal amount of $487 in partial consideration for the purchase ofsubstantially all the assets of Vetpo Distributors, Inc. The note bearsinterest at the prime rate (7.25% at December 31, 2007), payablequarterly. The principal of the note is payable in five equal annualinstallments, the first of which was due on January 1, 2006.  The balance on this promissory note was $292at December 31, 2007 and September 30, 2007.

 

9

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**NOTE 8****— STOCK OPTIONS**

 

We have two stock-basedaward plans, the 2002 Stock Option Plan and the Amended and Restated 2005Stock-Based Incentive Compensation Plan (the “2005 Plan”).  The 2005 Plan allows our Board of Directorsto grant common stock options, restricted stock, deferred units and other stock-basedawards to directors, executives and other key employees.  These plans have been developed to provideadditional incentives by allowing equity ownership in our company and, as aresult, encouraging participants to contribute to our success.  At December 31, 2007, 432,737 options topurchase common stock were outstanding (319,921 options vested and exercisable)with a weighted average exercise price of $3.21 and expiring through September 2015.  During the three months ended December 31,2007, we issued 4,000 shares of restricted stock under the 2005 Plan, whichvest annually for up to 5 years.  At December 31,2007, 1,544,644 shares were available to be issued under our stock-based awardplans.

 

We granted no commonstock options during the three months ended December 31, 2007 and2006.  During the three months ended December 31,2007 and 2006, we recognized $30 and $20 of compensation expense related torestricted stock grants, respectively.

 

**NOTE 9****—****INCOME TAXES**

 

In2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty intax positions.  FIN 48 requires thatmanagement evaluate its tax positions for all open tax years to determine ifthe position is more likely than not to be sustained upon examination by taxingauthorities having full knowledge of all relevant information.  We adopted the provisions of FIN 48 as of October 1,2007, the beginning of our 2008 fiscal year. As a result of the adoption of FIN 48, we reported a cumulative effectadjustment of $258 which reduced our retained earnings.

 

OnOctober 1, 2007, we had $449 of unrecognized tax benefits, of which $292would impact our effective rate, if recognized. Our policy for classifying interest and penalties associated withunrecognized tax benefits is to include such items in income tax expense.  As of the date of adoption, gross interestand penalties associated with unrecognized tax benefits were $122 and $38,respectively.

 

Wefile income tax returns in the U.S. federal jurisdiction and other variousstate and local jurisdictions.  A numberof years may elapse before an uncertain tax position is audited and finallyresolved.  While it is often difficult topredict the final outcome or the timing of resolution of any particularuncertain tax position, we believe that our liability for uncertain taxbenefits reflects the most probable outcome. We adjust the liability, as well as the related interest, in light ofchanging facts and circumstances. Settlement of any particular position would usually require the use of cash.  The resolution of a matter would berecognized as an adjustment to our income tax expense and our effective taxrate in the period of resolution.   During the next twelve months, we intend to enter into voluntarydisclosure agreements with certain state jurisdictions which would decrease theliability for uncertain tax benefits by approximately $304 as a result of thepayment of additional tax expected to be due. With few exceptions, we are no longer subject to income tax examinationfor years before 2003 in the U.S. and major state and local jurisdictions.

 

## **NOTE10 — COMPUTATION OF EARNINGS PER SHARE***(In thousands, except per sharedata)*

 
| ** **                                      | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **Basic**                                               | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                      |       | $                                                       | 4,700      |   | $ | 4,700 |   | $ | 4,604 |   | $ | 4,604 |   |
| Weighted average  common shares outstanding     |       | 12,046                                                  |       | 12,046 |   | 11,559 |   | 11,559 |   |
| Effect of  diluted securities                   |       |                                                    |       |   |   |   |   |   |   |
| Stock options  and restricted stock             |       |                                                    |       | 250 |   |   |   | 301 |   |
| Weighted average  diluted shares outstanding    |       |                                                    |       | 12,296 |   |   |   | 11,860 |   |
| Earnings per  share                             |       | $                                                       | 0.39       |   | $ | 0.38 |   | $ | 0.40 |   | $ | 0.39 |   |
| Anti-dilutive  shares excluded from calculation |       |                                                    |       | — |   |   |   | — |   |

 

10

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**NOTE 11****—****RELATED PARTIES**

 

MWI Veterinary SupplyCo., our wholly-owned subsidiary, holds a 50.0% membership interest in Feeders’Advantage. MWI Veterinary Supply Co. charged Feeders’ Advantage for certainoperating and administrative services in the amounts of $157 and $149 for thethree months ended December 31, 2007 and 2006, respectively.  Sales of products to Feeders’ Advantage were$11,117 and $9,559 for the three months ended December 31, 2007 and 2006,respectively.

 

MWI Veterinary Supply Co.provides Feeders’ Advantage with a line-of-credit to finance its day-to-dayoperations. This line-of-credit bears interest at the prime rate. The interestdue on the line-of-credit is calculated and charged to Feeders’ Advantage onthe last day of each month. Conversely, to the extent MWI Veterinary Supply Co.has a payable balance due to Feeders’ Advantage, the payable balance accruesinterest in favor of Feeders’ Advantage at the average federal funds rates ineffect for that month. As of December 31, 2007, MWI Veterinary Supply Co.had a payable balance with Feeders’ Advantage of $214.  As of September 30, 2007, MWI VeterinarySupply Co. had a receivable balance with Feeders’ Advantage of $336.

 

**NOTE 12 – STATEMENTS OF CASH FLOWS – SUPPLEMENTAL AND NONCASH DISCLOSURES**

 
| ** **                                             | ** ** | **Three months ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| *Supplemental  Disclosures*                            |       |                                                    |       |   |   |
| Cash paid for  interest                                |       | $                                                       | 27         |   | $ | 301 |   |
| Cash paid for  income taxes                            |       | 434                                                     |       | 7 |   |
| *Noncash  Activities*                                  |       |                                                    |       |   |   |
| Equipment  acquisitions financed with accounts payable |       | 26                                                      |       | 196 |   |
|                                                        |            |                                                         |            |  |  |  |  |

 

**NOTE 13****—****CONTINGENCIES AND COMMITMENTS**

 

## From time to time,in the normal course of business, we may become a party to legal proceedingsthat may have an adverse effect on our financial position, results ofoperations and cash flows. Management presently believes that the ultimateoutcome of these proceedings, including the proceedings described below, willnot have a material adverse effect on our financial position, cash flows orresults of operations.  However,litigation is subject to inherent uncertainties, and unfavorable outcomes couldoccur. An unfavorable outcome could include the payment of monetary damages or,in cases for which injunctive relief is sought, an injunction prohibiting usfrom selling one or more products or taking certain other actions.  Were an unfavorable outcome to occur, ourbusiness or results of operations could be materially harmed.

##  

*Putney Inc. v. Pfizer Inc. andMWI Veterinary Supply, Inc., United States District Court, D. Me. 2007*

 

Putney sells toveterinarians and distributors a generic, human-approved form of apharmaceutical sold by Pfizer.  MWI is aparty to a Distribution Agreement with Putney pursuant to which MWI purchasesPutney’s product for resale.  The term ofthe agreement expired on December 31, 2007.  Pfizer has contended that the sale andpromotion of Putney’s product is unlawful. Putney has sued Pfizer and MWI seeking a declaration that the sale andpromotion of Putney’s product is lawful. Putney also alleges, as against MWI, that MWI has disparaged Putney’sproduct, has breached the Distribution Agreement, and is obligated to indemnifyPutney. Based on that alleged breach Putney claims damages of lost profits inthe amount of $496 during the term of the Agreement. Pfizer has filed acounterclaim, against Putney, in which it makes no claims of any type against MWI.MWI has answered the complaint, and intends to contest vigorously anyallegation that it has breached any agreement, disparaged Putney’s product, oris otherwise liable to Putney in any way. On January 3, 2008 Putney filedan amended complaint adding a claim of promissory estoppel alleging that MWIhad agreed to be the only distributor of the Putney product with a nationaloutside sales force and as a result Putney did not pursue similar arrangementswith other distributors. MWI has denied that claim. Discovery in the case isongoing and it is unclear to what extent MWI will remain involved in oraffected by this dispute, so it is not reasonably possible to evaluate thelikely outcome.

 

11

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To theBoard of Directors and Stockholders ofMWI Veterinary Supply, Inc.Meridian, ID

 

Wehave reviewed the accompanying condensed consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries as of December 31, 2007, andthe related condensed consolidated statements of income and of cash flows forthe three-month periods ended December 31, 2007 and 2006. These interimfinancial statements are the responsibility of the Corporation’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 30,2007, and the related consolidated statements of income, comprehensive income,stockholders’ equity, and cash flows for the year then ended (not presentedherein); and in our report dated November 20, 2007, we expressed anunqualified opinion on those consolidated financial statements. In our opinion,the information set forth in the accompanying condensed consolidated balancesheet as of September 30, 2007 is fairly stated, in all material respects,in relation to the consolidated balance sheet from which it has been derived.

 

 
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
| Boise, Idaho                       |
| January 31, 2008              |

 

12

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**Item 2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*Alldollar amounts are presented in thousands, except for per share amounts.*

 

**Overview**

 

Weare a leading distributor of animal health products to veterinarians across theUnited States.  We distribute more than 11,000products sourced from over 450 vendors to approximately 16,000 veterinarypractices nationwide from thirteen strategically located distributioncenters.  Products we sell includepharmaceuticals, vaccines, parasiticides, diagnostics, capital equipment,supplies, veterinary pet food and nutritional products.  We market these products to veterinarians inboth the companion animal and production animal markets. Historically,approximately two-thirds of our total revenues have been generated from salesto the companion animal market and one-third from sales to the productionanimal market.  Our product mix was moreweighted to the production animal market in the quarter ended December 31,2007, compared to our historical mix. The shift in mix was primarily related to price increases by two of ourlargest vendors which were effective January 1, 2008, creating greaterdemand particularly for production animal products later in the quarter.  The increasing maturity of the productionanimal market results in lower margins on product sales relative to thecompanion animal market.  While theaverage order size for companion animal health products is often smaller thanproduction animal health products, companion animal health products typicallyhave higher margins.

 

*Common Stock Offerings*

 

On August 3,2005, we completed our initial public offering in which we sold an aggregate of4,983,334 shares (including the exercise of the underwriters’ over-allotmentoption) of our common stock at a price to the public of $17 per share.  We received net proceeds of $77,159 afterdeducting the underwriting discounts and offering expenses.  We used the net proceeds to redeem all of ourSeries A preferred stock for approximately $39,789 and to repayapproximately $37,370 of borrowings outstanding on the revolving creditfacility under our former credit agreement. In the fourth quarter of our fiscal year 2006, we issued 908,846 shares(including the shares issued upon the partial exercise of the underwriters’over-allotment option) of our common stock at a price to the public of $32.25per share.  We used the net proceeds of$27,341 received from this offering to pay down our borrowings on our formerrevolving credit facility.  In the thirdquarter of our fiscal year 2007, we issued 348,974 shares of our common stockat a price to the public of $35.00 per share. We used the net proceeds of $11,252 received from this offering to paydown our borrowings on our revolving credit facility and for general corporatepurposes.

 

*Sales*

 

Wesell products that we source from our vendors to our customers through either a“buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell”transaction, we purchase or take inventory of products from our vendors. When acustomer places an order, we pick, pack and ship products, and then invoice thecustomer for the order. We record sales from “buy/sell” transactions, whichaccount for the majority of our business, as revenue in conformity withaccounting principles generally accepted in the United States. In an agencyrelationship, we generally do not purchase and take inventory of products fromvendors. When we receive an order from a customer, we transmit the order to thevendor, who picks, packs and ships the order to our customer. In some cases,the vendor invoices and collects payment from the customer, while in othercases we invoice and collect payment from the customer on behalf of the vendor.We receive a commission payment for soliciting the order from the customer andfor providing other customer service activities. The aggregate revenue wereceive in agency transactions constitutes the “commissions” line item on ourstatement of income and is recorded in conformity with accounting principlesgenerally accepted in the United States. The vendor determines the method weuse to sell the products. Historically, vendors have occasionally switchedbetween the “buy/sell” and agency models for particular products in response tomarket conditions related to that particular product. A switch between modelscan impact our revenues, gross margin, gross margin percentage and operatingincome.

 

*Vendor Rebates*

 

We typically renegotiate vendor contractsannually.  These vendor contracts mayinclude terms defining rebates, commissions and exclusivity requirements.Vendor rebates based on sales are classified in our accompanying consolidatedstatements of income as a reduction to cost of product sales at the time thesales performance measures are achieved. 

 

13

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Purchase rebates are measured against inventorypurchases from the vendors and are a reduction of inventory until the productis sold.  When the inventory is sold,purchase rebates are recognized as a reduction to cost of product sales. Manyof our vendors’ rebate programs are based on a calendar year.

 

*Tri V Services Inc. Acquisition*

 

In October 2007, we acquired substantially all ofthe assets of Tri V Services, Inc. (“Tri V”) for approximately $5,111,consisting of $4,606 in cash (including direct acquisition costs ofapproximately $106) and 12,692 shares of restricted common stock valued at thetime of issuance at approximately $505. Based near Detroit, Michigan, Tri V was a distributor with an 11-yearhistory of providing animal health products to approximately 850 veterinarypractices, with a particular focus on emergency clinics and ophthalmologyspecialists.

 

*Securos, Inc. and International VeterinaryDistribution Network, Inc. Acquisition*

 

In June 2007, weacquired substantially all of the assets of Securos, Inc. andInternational Veterinary Distribution Network, Inc. (collectively “Securos”)for approximately $5,147, consisting of $4,661 in cash (including directacquisition costs of approximately $177) and 13,058 shares of restricted commonstock valued at the time of the issuance at approximately $486.  Additionalcontingent consideration will be paid to Securos shareholders if certaindefined financial targets are achieved in each year through 2011.  This is currently estimated to beapproximately $1.0 million. These additional payments will increase thepurchase price and goodwill at the time the financial targets areachieved.  Based in Charlton,Massachusetts, Securos is a provider of veterinary orthopedic products in theUnited States and select foreign countries and sources private label productsin the categories of veterinary surgical consumables and equipment and handheldinstruments.

 

For more information onour business, see our Annual Report on Form 10-K filed with the SEC on November 21,2007.

 

14

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**Results of Operations**

 

Thefollowing table summarizes our results of operations for the three months endedDecember 31, 2007 and 2006, in dollars and as a percentage of totalrevenues.

 
| ** **                                                  | ** ** | **Three Months Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007**                                                | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                                    |       |   |   |   |   |   |   |
| Product  sales                                              |       | $                                                       | 189,303    |   | 93.1 | % | $ | 149,787 |   | 93.0 | % |
| Product  sales to related party                             |       | 11,117                                                  |       | 5.5 | % | 9,559 |   | 5.9 | % |
| Commissions                                                 |       | 2,941                                                   |       | 1.4 | % | 1,699 |   | 1.1 | % |
| Total  revenues                                             |       | 203,361                                                 |       | 100.0 | % | 161,045 |   | 100.0 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Cost  of product sales                                      |       | 173,576                                                 |       | 85.4 | % | 135,296 |   | 84.0 | % |
| Gross  profit                                               |       | 29,785                                                  |       | 14.6 | % | 25,749 |   | 16.0 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses               |       | 21,303                                                  |       | 10.5 | % | 17,694 |   | 11.0 | % |
| Depreciation  and amortization                              |       | 747                                                     |       | 0.3 | % | 569 |   | 0.3 | % |
| Operating  income                                           |       | 7,735                                                   |       | 3.8 | % | 7,486 |   | 4.7 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Other  income (expense):                                    |       |                                                    |       |   |   |   |   |   |   |
| Interest  expense                                           |       | (51                                                     | )          | 0.0 | % | (269 | ) | -0.2 | % |
| Earnings  of equity method investees                        |       | 51                                                      |       | 0.0 | % | 45 |   | 0.0 | % |
| Other                                                       |       | 235                                                     |       | 0.1 | % | 90 |   | 0.1 | % |
| Total  other income (expense), net                          |       | 235                                                     |       | 0.1 | % | (134 | ) | -0.1 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Income  before taxes                                        |       | 7,970                                                   |       | 3.9 | % | 7,352 |   | 4.6 | % |
| Income  tax expense                                         |       | (3,270                                                  | )          | -1.6 | % | (2,748 | ) | -1.7 | % |
| Net  income                                                 |       | $                                                       | 4,700      |   | 2.3 | % | $ | 4,604 |   | 2.9 | % |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Earnings  per common share:                                 |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                       |       | $                                                       | 0.39       |   |   |   | $ | 0.40 |   |   |   |
| Diluted                                                     |       | $                                                       | 0.38       |   |   |   | $ | 0.39 |   |   |   |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Weighted  average common shares outstanding (in thousands): |       |                                                    |       |   |   |   |   |   |   |
| Basic                                                       |       | 12,046                                                  |       |   |   | 11,559 |   |   |   |
| Diluted                                                     |       | 12,296                                                  |       |   |   | 11,860 |   |   |   |
|                                                        |       |                                                    |       |   |   |   |   |   |   |
| Other  Data:                                                |       |                                                    |       |   |   |   |   |   |   |
| Product  sales from Internet as a percentage of sales       |       | 24                                                      | %          |   |   | 23 | % |   |   |
| Field  sales representatives (at end of period)             |       | 170                                                     |       |   |   | 155 |   |   |   |
| Telesales  representatives (at end of period)               |       | 128                                                     |       |   |   | 110 |   |   |   |
| Fill  rate (1)                                              |       | 98                                                      | %          |   |   | 98 | % |   |   |

 

----

| (1) |   | Defined  as, for any period, the dollar value of orders shipped the same day they were  placed from any distribution center expressed as a percentage of the total  dollar value of the orders placed by customers in the period. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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**Three Months Ended December 31, 2007 Compared to ThreeMonths Ended December 31, 2006**

 

*Total Revenues*.  Total revenues increased 26.3% to $203,361for the three months ended December 31, 2007 from $161,045 for the threemonths ended December 31, 2006. Revenue growth was partially influenced by price increases by two of ourlargest vendors which were effective January 1, 2008, creating greaterdemand particularly for production animal products later in the quarter.  In the prior year, these same two vendorsannounced their price increases effective February 1, 2007, which had theeffect of delaying sales until the quarter ended March 31, 2007.  Revenues attributable to new customersrepresented approximately 42% of the growth in total revenues during the threemonths ended December 31, 2007. Revenues attributable to existing customers represented approximately58% of the growth in total revenues during the three months ended December 31,2007.  For the purpose of calculatinggrowth rates of new and existing customer revenue, we have defined a newcustomer as a customer that did not purchase product from us in thecorresponding fiscal quarter of the prior year, with the remaining customerbase being considered an existing customer. Also contributing to revenue growth was the increase in commissions onour agency sales of 73.1% to $2,941 for the three months ended December 31,2007, from $1,699 for the same period of the prior fiscal year. The growth incommissions was partially due to incentives which were achieved in the quarterended December 31, 2007.

 

*Gross Profit*.  Gross profit increased by 15.7% to $29,785for the three months ended December 31, 2007 from $25,749 for the threemonths ended December 31, 2006.  Ourgross profit benefited from the increase in revenues discussed above.  Gross profit as a percentage of totalrevenues was 14.6% for the three months ended December 31, 2007 comparedto 16.0% for the same period in the prior year. The reduced gross marginpercentage was due to reduced rebates as a percentage of revenues and increasedsales of lower-margin production animal products.  Actual rebate dollars decreased approximately$767 for the three months ended December 31, 2007 as compared to the sameperiod in the prior fiscal year. Rebates were approximately $1.0 million lessthan anticipated due to a recent disagreement with a key vendor over the amountof rebate dollars that were expected during the quarter under their program.

 

*Selling, General and Administrative (“SG&A”)*.  SG&A expenses increased 20.4% to $21,303for the three months ended December 31, 2007 from $17,694 for the threemonths ended December 31, 2006. SG&A expenses as a percentage of revenues decreased to 10.5% for thethree months ended December 31, 2007 from 11.0% for the three months endedDecember 31, 2006 as a result of our 26% growth in revenues. The dollarincrease in SG&A expenses was primarily due to increased compensation costsas a result of additional headcount of 89 team members, including 33 new fieldsales and telesales representatives.  Theincrease in total headcount also includes 24 team members added as a result ofthe Tri V acquisition in October 2007 and the Securos acquisition in June 2007.  Employee benefits increased as a result ofthe growth in headcount, as well as higher health insurance costs due to growthin the volume and magnitude of individual claims.  Also contributing to the growth in SG&Aexpenses were increased legal and professional fees, increased occupancy andlocation costs due to increased revenues and the expansion of a number ofdistribution centers, including the facility in Edwardsville, Kansas whichopened in October 2007 and higher credit card fees as a result ofincreased revenues.

 

*Depreciation and Amortization. *Depreciationand amortization expense increased 31.3% to $750 for the three months ended December 31,2007 from $571 for the three months ended December 31, 2006.  This increase was primarily the result of anumber of capital expenditures, primarily from new or expanded distributioncenters.  Since December 31, 2006,we added to or expanded our distribution centers in Harrisburg, Pennsylvania;Atlanta, Georgia; Clear Lake, Wisconsin; and Nampa, Idaho as well asestablishing the distribution center in Edwardsville, Kansas.  We have also made improvements to ourinformation technology infrastructure.

 

*Other Income (Expense)*.  Other income (expense) decreased 275.4% to$235 in income for the three months ended December 31, 2007 from $134 inexpense for the three months ended December 31, 2006. This decrease inother expenses was due to a decline in interest expense of $218 to $51 for thethree months ended December 31, 2007, compared to $269 for the threemonths ended December 31, 2006. This decrease was a result of the lower average loan balance on thefacility.  We used the proceeds from ouroffering of common stock the third quarter of our fiscal year 2007 to pay downthe loan balance.

 

*Income Tax Expense*.  Our effective tax rate for the three monthsended December 31, 2007 and 2006 was 41.0% and 37.4%, respectively.   The change in the effective tax rate is aresult of an increase in our estimated state tax rate, which was revised as aresult of our FIN 48 analysis.  Weadopted FIN 48 effective October 1, 2007.

 

16

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**Critical Accounting Policies**

 

Thepreparation of financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and related disclosure of contingent assets and liabilities.  The accompanying condensed consolidatedfinancial statements are prepared using the same critical accounting policiesdiscussed in our Annual Report on Form 10-K filed with the SEC on November 21,2007.

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of liquidity are cash flow generated from operations andborrowings on the revolving credit facility under the credit agreement. We usecapital primarily to fund day-to-day operations and to maintain sufficientinventory levels in order to promptly fulfill customer orders and to expand ouroperations and sales.  We believe ourcapital resources will be sufficient to meet our anticipated cash needs for atleast the next twelve months.

 

MWI Veterinary Supply Co.,(our wholly-owned subsidiary) has a line-of-credit under a revolving creditfacility with two lenders.  The facilityallows for borrowings in the aggregate of $70,000, with the right to request anincrease in the commitment of the lenders to $100,000.  The facility has a maturity date of December 1,2011 and a variable interest rate equal to the Daily LIBOR Floating Rate or theLIBOR 1-month fixed rate (at our option) plus a margin ranging from 0.7% to1.25%.  The lenders also receive anunused line fee and letter of credit fee equal to 0.125% of the unused amountof the facility. Our outstanding balance on the facility at December 31,2007 was $244 and the interest rate on the facility was 5.52% as of thisdate.  The line-of-credit containscertain financial covenants as well as other restrictive covenants.

 

The facility allows forthe issuance of up to $10,000 in letters of credit. The letters of credittypically act as a guarantee of payment to certain third parties in accordancewith specified terms and conditions. We had eleven letters of credit totaling$940 at December 31, 2007 and September 30, 2007. There were nooutstanding borrowings on these letters of credit at either December 31,2007 or September 30, 2007.

 

*OperatingActivities*.  For the three months ended December 31,2007, cash used in operations was $3,851 and was primarily attributable to netincome of $4,700, an increase of receivables of $5,177 due to higher revenuegrowth, an increase in inventories of $19,915 due to inventory planning and thetiming of manufacturer price increases and an increase in accounts payable of$14,140 as a result of increased inventory purchases.  Due to the growth in revenues in the quarteras a result of price increases from two of our largest vendors, cash was usedto accommodate delayed billing on our production animal sales and to fundinventory purchases to meet the demand during the quarter.

 

For the three monthsended December 31, 2006, cash provided by operations was $9,598 and wasprimarily attributable to net income of $4,604, a decrease in receivables of$9,744 from the prior year-end and an increase in accounts payable of $6,844,the combined effects of which were partially offset by an increase ininventories of $13,546.  The increase ininventories was directly tied to inventory planning and the timing ofmanufacturer price increases.  Thedecrease in receivables was the result of collection of customer accounts thatwere offered extended payment terms.  Theincrease in accounts payable was a result of timing of inventory purchases.

 

*InvestingActivities.*  For the three months ended December 31,2007, net cash used in investing activities was $5,092 and was primarily due tothe acquisition of Tri V for $4,606 coupled with capital expenditures of $597,primarily related to distribution center infrastructure and technology.

 

For the three monthsended December 31, 2006, net cash used in investing activities was $947and was primarily due to the purchase of property and equipment related to therelocation of our existing distribution center to a larger distribution centerin Atlanta, Georgia.

 

*Financing Activities.*  For the three months ended December 31, 2007, netcash provided by financing activities was $406, which was primarily due to theuse of $244 on our revolving credit facility and tax benefit of stock optionexercises of $112. Our revolving credit facility is used to finance our workingcapital requirements and fluctuates based on timing of payables and collectionof receivables.

 

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For the three monthsended December 31, 2006, net cash used in financing activities was $8,651,and was primarily attributable to payments on our former revolving creditfacility.

 

**Contractual Obligations and Guarantees**

 

For information on our contractualobligations and guarantees, see our Annual Report on Form 10-K filed on November 21,2007 with the SEC. During the three months ended December 31, 2007 therewe no significant changes to the contractual obligations reported in our Form 10-Kon November 21, 2007, except as follows:

 

·              Upon adoption of FIN 48 on October 1,2007, the total liability for unrecognized tax benefits was $449.  During the first quarter ended December 31,2007, this amount did not change significantly.

 

·              InDecember 2008, we leased approximately 3,000 square feet of office spacelocated in Rochester Hills, Michigan with an average annual lease of $42 peryear and expiring in 2013.

 

**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 credit facility is based on variable interest rates andis therefore affected by changes in market interest rates. If the interest rateon the variable rate indebtedness rose 55 basis points (a 10% change from theinterest rate as of December 31, 2007), assuming no change in theoutstanding balance on the facility ($244 as of December 31, 2007), theannualized income before taxes and cash flows from operating activities woulddecline by approximately $1.  If theinterest rate on the variable rate indebtedness decreased 55 basis points (a10% change from the interest rate as of December 31, 2007), assuming nochange in the outstanding balance on the facility, the annualized income beforetaxes and cash flows from operating activities would increase by approximately$1.

 

**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) ofthe Securities Exchange Act of 1934) as of December 31, 2007.  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 as appropriate to allow timely decisions regarding required disclosure,are effective to provide reasonable assurance that information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified by the SEC’s rules and forms.

 

There were no changes inthe Company’s internal control over financial reporting that occurred duringthe Company’s most recently completed fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**CautionaryStatement for Purposes of “Safe Harbor Provisions” of the Private SecuritiesLitigation Reform Act of 1995**

 

*This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of the federalsecurities laws. Statements that are not historical facts, including statementsabout our 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 our expectedbusiness outlook, anticipated financial and operating results, our businessstrategy and means to implement our strategy, our objectives, the amount andtiming of capital expenditures, the amount and timing of interest expense, thelikelihood of our success in expanding our business, financing plans, budgets,working capital needs and sources of liquidity.*

 

*Forward-looking statements are only predictions and are notguarantees of our performance. These statements are based on our management’sbeliefs and assumptions, which in turn are based on currently availableinformation. Important assumptions relating to the forward-looking statementsinclude, among others assumptions regarding demand for our products, theexpansion of product offerings geographically or through new applications, thetiming and cost of planned capital expenditures, competitive conditions andgeneral economic conditions. These assumptions could prove inaccurate.Forward-looking statements also involve known and unknown risks anduncertainties, which could cause actual results that differ materially fromthose contained in any forward-looking statement. Many of these factors arebeyond our ability to control or predict. Such factors include, but are notlimited to, the following:*

 

·                  *vendor rebates based upon attaining certain growth goals;*

 

·                  *changes in or availability of vendor rebate programs;*

 

·                  *changes in the way vendors introduce products to market;*

 

·                  *exclusivity requirements with certain vendors that mayprohibit us from distributing competing products manufactured by other vendors;*

 

·                  *the impact of general economic trends on our business;*

 

·                  *the recall of a significant product by one of our vendors;*

 

·                  *extended shortage or backlog of a significant product by oneof our vendors;*

 

·                  *seasonality;*

 

·                  *the timing and effectiveness of marketing programs offeredby our vendors;*

 

·                  *the timing of the introduction of new products and servicesby our vendors; and*

 

·                  *competition.*

 

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

 

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

 

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## **Item1.  Legal Proceedings**

##  

## From time to time, in thenormal course of business, we may become a party to legal proceedings that mayhave an adverse effect on our financial position, results of operations andcash flows. Management presently believes that the ultimate outcome of theseproceedings, including the proceedings described below, will not have amaterial adverse effect on our financial position, cash flows or overall trendsin results of operations.  However,litigation is subject to inherent uncertainties, and unfavorable outcomes couldoccur. An unfavorable outcome could include the payment of monetary damages or,in cases for which injunctive relief is sought, an injunction prohibiting usfrom selling one or more products or taking certain other actions.  Were an unfavorable outcome to occur, ourbusiness or results of operations could be materially harmed.

##  

*Putney Inc. v. Pfizer Inc. andMWI Veterinary Supply, Inc., United States District Court, D. Me. 2007*

 

Putney sells toveterinarians and distributors a generic, human-approved form of apharmaceutical sold by Pfizer.  MWI is aparty to a Distribution Agreement with Putney pursuant to which MWI purchasesPutney’s product for resale.  The term ofthe agreement expired on December 31, 2007.  Pfizer has contended that the sale andpromotion of Putney’s product is unlawful. Putney has sued Pfizer and MWI seeking a declaration that the sale andpromotion of Putney’s product is lawful. Putney also alleges, as against MWI, that MWI has disparaged Putney’sproduct, has breached the Distribution Agreement, and is obligated to indemnifyPutney. Based on that alleged breach Putney claims damages of lost profits inthe amount of $496 during the term of the Agreement. Pfizer has filed acounterclaim, against Putney, in which it makes no claims of any type againstMWI. MWI has answered the complaint, and intends to contest vigorously anyallegation that it has breached any agreement, disparaged Putney’s product, oris otherwise liable to Putney in any way. On January 3, 2008 Putney filedan amended complaint adding a claim of promissory estoppel alleging that MWIhad agreed to be the only distributor of the Putney product with a nationaloutside sales force and as a result Putney did not pursue similar arrangementswith other distributors. MWI has denied that claim. Discovery in the case is ongoingand it is unclear to what extent MWI will remain involved in or affected bythis dispute, so it is not reasonably possible to evaluate the likely outcome.

 

## **Item1A.  Risk Factors**

##  

**There have been no materialchanges from our risk factors as previously reported in our Annual Report on Form 10-Kfor the year ended September 30, 2007*.***

** **

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

##  

## The table below providesinformation concerning our repurchase of shares of our common stock during thequarter ended December 31, 2007.

##  

**IssuerPurchases of Equity Securities**

 
| **Period**                                       | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total Number of  Shares   Purchased  as Part of  Publicly**

**Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Shares that May Yet  Be Purchased Under   the Plans or Programs** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October 1,  2007 to October 31, 2007   |       | 410                                          | (1)        | $                                        | 40.28      |                                                                                                                          | —     |                                                                                                                                                                     | —     |   |
| November 1,  2007 to November 30, 2007 |       | —                                       |       | —                                   |       | —                                                                                                                        |       | —                                                                                                                                                                   |       |
| December 1,  2007 to December 31, 2007 |       | —                                       |       | —                                   |       | —                                                                                                                        |       | —                                                                                                                                                                   |       |
| Total                                            |       | 410                                          |       | $                                        | 40.28      |                                                                                                                          | —     |                                                                                                                                                                     | —     |   |

 

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| (1) |   | These shares were  withheld upon the vesting of employee restricted stock grants in connection  with payment of required withholding taxes. |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

 

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##  

## On October 5, 2007, weissued an aggregate of 12,692 shares of restricted common stock to Tri VServices, Inc. as part of the consideration for the purchase ofsubstantially all the assets of Tri V Services, Inc.  The securities described in this paragraphwere issued in reliance upon the exemption from the registration requirementsof the Securities Act, as set forth in Section 4(2) under theSecurities Act and Regulation D promulgated thereunder relative to sales by anissuer not involving any public offering.

##  

## **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

 

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

 
|                             | MWI Veterinary  Supply, Inc.                                                 |   |
|-----------------------------|-----------------------------------------------------------------------------------|--------|
|                        | (Registrant)                                                                      |   |
|                        |                                                                              |
|                        |                                                                              |
| Date: February 1, 2008 | /s/ Mary Patricia B. Thompson                                                     |   |
|                        | Mary Patricia B. Thompson                                                         |   |
| * *                    | *Senior  Vice President of Finance and   Administration, Chief Financial Officer* |

 

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