**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C.  20549**

 

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**FORM10-Q**

 

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| **Quarterly  Report Pursuant to Section 13 or 15(d)**     |
|-----------------------------------------------------------|
| **of the  Securities Exchange Act of 1934**               |
| **For the Quarter Ended: December 31, 2005**              | ** ** | **Commission  File Number: 000-51468** |
|                                                      |   |   |
| **MWI VETERINARY SUPPLY, INC.**                           |
| (Exact name of Registrant as specified in its Charter)    |
|                                                      |   |   |   |   |
|                                                      | **Delaware** |   | **02-0620757** |   |
|                                                      | (State or other jurisdiction) |   | (I.R.S. Employer Identification Number) |   |
|                                                      |   |   |   |   |
|                                                      | **651 S. Stratford Drive, Suite 100  Meridian, ID** |   | **83642** |   |
|                                                      | (Address of principal executive offices) |   | (Zip Code) |   |
|                                                      |   |   |
| **(800) 824-3703**                                        |
| (Registrant’s telephone number, including area code) |
|                                                           |  |  |  |  |  |  |  |  |

 

Indicate bycheck mark if the Registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act. Yes  o    No  ý

 

Indicate by check mark whether the Registrant(1) has filed 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) has been subject to such filing requirements for the past 90 days.Yes  ý    No  o

 

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

 

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

 

The number of shares of the registrant’scommon stock, $0.01 par value, outstanding at January 31, 2006 was 10,583,303.

 

 

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**MWI VETERINARY SUPPLY, INC.**

**INDEX**

 
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                        | ** ** | ** ** | ** ** |
|---------------|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|          |                                                                                                             |       |       |       |
| **Item 1.**   | **Financial Statements (Unaudited)**                                                                             |       |       |       |
|          | Condensed Consolidated Statements of Income  for the three-months ended December 31, 2005 and 2004               |       |       |
|          |                                                                                                             |       |       |       |
|          | Condensed Consolidated Statements of  Comprehensive Income for the three-months ended December 31, 2005 and 2004 |       |       |
|          |                                                                                                             |       |       |       |
|          | Condensed Consolidated Balance Sheets as of  December 31, 2005 and September 30, 2005                            |       |       |
|          |                                                                                                             |       |       |       |
|          | Condensed Consolidated Statements of Cash  Flows for the three-months ended December 31, 2005 and 2004           |       |       |
|          |                                                                                                             |       |       |       |
|          | Notes to Condensed Consolidated Financial  Statements                                                            |       |       |
|          |                                                                                                             |       |       |       |
|          | Report of Independent Registered Public  Accounting Firm                                                         |       |       |
|          |                                                                                                             |       |       |       |
| **Item  1A.** | **Risk  Factors**                                                                                                | ** ** | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 2.**   | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations**                  |       |       |
|          |                                                                                                             |       |       |       |
| **Item 3.**   | **Quantitative and Qualitative Disclosures About Market Risk**                                                   |       |       |
|          |                                                                                                             |       |       |       |
| **Item 4.**   | **Controls and Procedures**                                                                                      |       |       |       |
|          |                                                                                                             |       |       |       |
| **PART II**   | **OTHER INFORMATION**                                                                                            |       |       |       |
|          |                                                                                                             |       |       |       |
| ** **    | **Cautionary Statement**                                                                                         | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 1.**   | **Legal Proceedings**                                                                                            |       |       |       |
|          |                                                                                                             |       |       |       |
| **Item 2.**   | **Unregistered Sales of Equity Securities and Use of Proceeds**                                                  | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 3.**   | **Defaults Upon Senior Securities**                                                                              | ** ** | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 4.**   | **Submission of Matters to a Vote of Security Holders**                                                          | ** ** | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 5.**   | **Other Information**                                                                                            | ** ** | ** ** | ** ** |
|          |                                                                                                             |       |       |       |
| **Item 6.**   | **Exhibits**                                                                                                     | ** ** | ** ** | ** ** |
|               |                                                                                                                  |            |            |            |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 
| ** **                                    | ** ** | **Three-months ended December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Revenues:                                     |       |                                |       |   |   |
| Product sales                                 |       | $                                   | 127,048    |   | $ | 101,260 |   |
| Product sales to related party                |       | 9,355                               |       | 6,805 |   |
| Commissions                                   |       | 1,413                               |       | 929 |   |
| Total revenues                                |       | 137,816                             |       | 108,994 |   |
|                                          |       |                                |       |   |   |
| Cost of product sales                         |       | 115,064                             |       | 92,370 |   |
| Gross profit                                  |       | 22,752                              |       | 16,624 |   |
|                                          |       |                                |       |   |   |
| Selling, general and administrative  expenses |       | 14,553                              |       | 11,016 |   |
| Depreciation and amortization                 |       | 442                                 |       | 340 |   |
| Operating income                              |       | 7,757                               |       | 5,268 |   |
|                                          |       |                                |       |   |   |
| Other income (expense):                       |       |                                |       |   |   |
| Interest expense                              |       | (555                                | )          | (1,769 | ) |
| Earnings of equity method investees           |       | 45                                  |       | 32 |   |
| Other                                         |       | 90                                  |       | 67 |   |
| Total other expense                           |       | (420                                | )          | (1,670 | ) |
|                                          |       |                                |       |   |   |
| Income before taxes                           |       | 7,337                               |       | 3,598 |   |
| Income tax expense                            |       | (2,898                              | )          | (1,942 | ) |
|                                          |       |                                |       |   |   |
| Net income                                    |       | $                                   | 4,439      |   | $ | 1,656 |   |
|                                          |       |                                |       |   |   |
| Earnings per share:                           |       |                                |       |   |   |
| Basic                                         |       | $                                   | 0.42       |   | $ | 0.33 |   |
| Diluted                                       |       | $                                   | 0.41       |   | $ | 0.28 |   |
|                                          |       |                                |       |   |   |
| Weighted average common shares outstanding:   |       |                                |       |   |   |
| Basic                                         |       | 10,578                              |       | 5,062 |   |
| Diluted                                       |       | 10,864                              |       | 5,882 |   |
|                                          |       |                                |       |   |   |

 

See Notes to CondensedConsolidated Financial Statements

 

3

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**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(in thousands)(unaudited)**

 

 
| ** **                                                   | ** ** | **Three-months ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Net income                                                   |       | $                                   | 4,439      |   | $ | 1,656 |   |
| Other comprehensive income:                                  |       |                                |       |   |   |
| Interest rate swap: Change in fair value,  net of tax of $15 |       | —                              |       | 23 |   |
| Total comprehensive income                                   |       | $                                   | 4,439      |   | $ | 1,679 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

4

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**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                       | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                                                       | ** ** | ** **             | ** ** |
| **Assets**                                                                                                       |       |                   |       |                    |       |
|                                                                                                             |       |                   |       |                    |       |
| Current Assets:                                                                                                  |       |                   |       |                    |       |
| Cash                                                                                                             |       | $                      | 30         |                    | $          | 31 |   |
| Receivables, net                                                                                                 |       | 76,820                 |       | 77,099                  |       |
| Inventories                                                                                                      |       | 71,957                 |       | 68,786                  |       |
| Prepaid expenses and other current assets                                                                        |       | 1,918                  |       | 2,011                   |       |
| Assets held for sale                                                                                             |       | 1,422                  |       | —                  |       |
| Deferred income taxes                                                                                            |       | 549                    |       | 482                     |       |
| Total current assets                                                                                             |       | 152,696                |       | 148,409                 |       |
|                                                                                                             |       |                   |       |                    |       |
| Property and equipment, net                                                                                      |       | 5,899                  |       | 6,919                   |       |
| Goodwill                                                                                                         |       | 29,739                 |       | 29,739                  |       |
| Intangibles, net                                                                                                 |       | 1,597                  |       | 1,644                   |       |
| Other assets, net                                                                                                |       | 1,547                  |       | 1,533                   |       |
|                                                                                                             |       |                   |       |                    |       |
| Total assets                                                                                                     |       | $                      | 191,478    |                    | $          | 188,244 |   |
|                                                                                                             |       |                   |       |                    |       |
| **Liabilities And Stockholders’ Equity**                                                                    |       |                   |       |                    |       |
|                                                                                                             |       |                   |       |                    |       |
| Current Liabilities:                                                                                             |       |                   |       |                    |       |
| Line-of-credit                                                                                                   |       | $                      | 27,283     |                    | $          | 24,690 |   |
| Accounts payable                                                                                                 |       | 63,922                 |       | 69,382                  |       |
| Accrued expenses                                                                                                 |       | 7,959                  |       | 6,341                   |       |
| Current maturities of long-term debt                                                                             |       | 97                     |       | 97                      |       |
| Total current liabilities                                                                                        |       | 99,261                 |       | 100,510                 |       |
|                                                                                                             |       |                   |       |                    |       |
| Deferred income taxes                                                                                            |       | 641                    |       | 650                     |       |
|                                                                                                             |       |                   |       |                    |       |
| Long-term debt                                                                                                   |       | 292                    |       | 390                     |       |
|                                                                                                             |       |                   |       |                    |       |
| Commitments and contingencies                                                                                    |       |                   |       |                    |       |
|                                                                                                             |       |                   |       |                    |       |
| Stockholders’ Equity                                                                                        |       |                   |       |                    |       |
| Common stock $0.01 par value, 20,000  authorized; 10,583 and  10,576 shares issued and outstanding, respectively |       | 106                    |       | 106                     |       |
| Additional paid in capital                                                                                       |       | 78,547                 |       | 78,396                  |       |
| Retained earnings                                                                                                |       | 12,631                 |       | 8,192                   |       |
| Total stockholders’ equity                                                                                  |       | 91,284                 |       | 86,694                  |       |
| Total liabilities and stockholders’ equity                                                                  |       | $                      | 191,478    |                    | $          | 188,244 |   |

 

See Notes to CondensedConsolidated Financial Statements

 

5

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**MWI VETERINARY SUPPLY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

** **
| ** **                                                                                    | ** ** | **Three-months ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                    | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| **Cash Flows From Operating Activities:**                                                     |       |                                |       |   |   |
| Net income                                                                                    |       | $                                   | 4,439      |   | $ | 1,656 |   |
| Adjustments to reconcile net income to net  cash (used in)/provided  by operating activities: |       |                                |       |   |   |
| Depreciation and amortization                                                                 |       | 445                                 |       | 340 |   |
| Amortization of debt issuance costs                                                           |       | 35                                  |       | 35 |   |
| Deferred income taxes                                                                         |       | (76                                 | )          | 40 |   |
| Earnings of equity method investees                                                           |       | (45                                 | )          | (32 | ) |
| Distribution from equity method investees                                                     |       | —                              |       | — |   |
| Gain on disposal of property and equipment                                                    |       | —                              |       | (2 | ) |
| Accretion of redeemable preferred stock                                                       |       | —                              |       | 1,134 |   |
| Other                                                                                         |       | (10                                 | )          | — |   |
| Changes in operating assets and liabilities  (net of                                          |       |                                |       |   |   |
| effects of acquisitions):                                                                     |       |                                |       |   |   |
| Receivables                                                                                   |       | 279                                 |       | 2,463 |   |
| Inventories                                                                                   |       | (3,171                              | )          | (1,477 | ) |
| Prepaid expenses and other current assets                                                     |       | 93                                  |       | 119 |   |
| Accounts payable                                                                              |       | (5,078                              | )          | 1,954 |   |
| Accrued expenses                                                                              |       | 1,618                               |       | 494 |   |
| Net cash (used in)/provided by operating  activities                                          |       | (1,471                              | )          | 6,724 |   |
|                                                                                          |       |                                |       |   |   |
| **Cash Flows From Investing Activities:**                                                     |       |                                |       |   |   |
| Purchases of property and equipment                                                           |       | (1,182                              | )          | (756 | ) |
| Business acquisitions                                                                         |       | —                              |       | (412 | ) |
| Sale of property and equipment                                                                |       | —                              |       | 2 |   |
| Other                                                                                         |       | 5                                   |       | — |   |
| Net cash used in investing activities                                                         |       | (1,177                              | )          | (1,166 | ) |
|                                                                                          |       |                                |       |   |   |
| **Cash Flows From Financing Activities:**                                                     |       |                                |       |   |   |
| Net borrowings (payments) on line-of-credit                                                   |       | 2,593                               |       | (5,971 | ) |
| Proceeds from stock options                                                                   |       | 137                                 |       | — |   |
| Tax benefit of common stock options                                                           |       | 14                                  |       | — |   |
| Proceeds from issuance of debt                                                                |       | —                              |       | 485 |   |
| Payment on debt                                                                               |       | (97                                 | )          | (72 | ) |
| Net cash provided by/(used in) financing  activities                                          |       | 2,647                               |       | (5,558 | ) |
|                                                                                          |       |                                |       |   |   |
| **Decrease in Cash**                                                                          |       | (1                                  | )          | — |   |
|                                                                                          |       |                                |       |   |   |
| Cash at Beginning of Period                                                                   |       | 31                                  |       | 28 |   |
|                                                                                          |       |                                |       |   |   |
| Cash at End of Period                                                                         |       | $                                   | 30         |   | $ | 28 |   |
|                                                                                          |       |                                |       |   |   |
| *Supplemental Disclosures:*                                                                   |       |                                |       |   |   |
| Cash paid for interest                                                                        |       | $                                   | 485        |   | $ | 575 |   |
| Cash paid for income tax                                                                      |       | 341                                 |       | 44 |   |
|                                                                                          |       |                                |       |   |   |

See Notes to CondensedConsolidated Financial Statements

 

6

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**MWI VETERINARY SUPPLY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(dollars and shares in thousands, except per share data)**

**(unaudited)**

 

## **NOTE 1 – GENERAL**

 

**Basis of Presentation**

 

The accompanying unauditedcondensed consolidated financial statements include the results of operations,statement of comprehensive income, financial position and cash flows of MWIVeterinary Supply, Inc., formerly named MWI Holdings, Inc., and itswholly-owned subsidiaries (“the Company”). All material intercompany balances have been eliminated.

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements include all adjustments necessary to present fairly, in all materialrespects, the results of the Company for the periods presented. These condensedconsolidated financial statements have been prepared by the Company pursuant tothe rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and accompanying notesincluded in the Company’s 2005 Annual Report on Form 10-K filed with theSecurities Exchange Commission on December 1, 2005.  The results of operations for thethree-months ended December 31, 2005 are not necessarily indicative of resultsto be expected for the entire fiscal year.

 

The Company’s unauditedCondensed Consolidated Balance Sheet as of September 30, 2005 has been derivedfrom the audited Consolidated Balance Sheet as of that date.

** **

**Use of Estimates**

 

The preparation of theCompany’s consolidated financial statements, in conformity with accountingprinciples generally accepted in the United States, requires management to makeestimates and assumptions. Some of these estimates require difficult,subjective or complex judgments about matters that are inherently uncertain.  As a result, actual results could differ fromthese estimates.  These estimates andassumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.

** **

**Revenue Recognition**

 

MWI sells products that itsources from vendors to its customers through either a “buy/sell” transactionor an agency relationship with its vendors. In a “buy/sell” transaction, MWIpurchases or takes inventory of products from the vendor. When a customerplaces an order with MWI, the Company picks, packs, ships and invoices thecustomer for the order. MWI recognizes revenue from “buy/sell” transactions asproduct sales when the product is delivered to the customer. The Companyaccepts product returns from its customers. The Company estimates returns basedon historical experience and recognizes these estimated returns as a reductionof product sales. Product returns have not been significant to the Company’sfinancial statements. In an agency relationship, MWI does not purchase and takeinventory of products from its vendors. MWI receives an order from a customer,then transmits the order to the vendor, who picks, packs and ships the order tothe customer. In some cases, the vendor invoices and collects payment from thecustomer, while in other cases MWI invoices and collects payment from thecustomer on behalf of the vendor. MWI receives a commission payment for solicitingthe order from the customer and for providing other customer serviceactivities. Commissions are recognized when the services upon which thecommissions are based are complete. Gross billings from agency contracts were$26,869 and $18,466 for the three-months ended December 31, 2005 and 2004,respectively, and generated commission revenue of $1,413 and $929,respectively.

 

## **NOTE 2 – EFFECT OF RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, *InventoryCosts, an Amendment of ARB No. 43, Chapter 4* (“SFAS 151”). SFAS 151clarifies that inventory costs that are “abnormal” are required to be chargedto expense as incurred as opposed to being capitalized into inventory as aproduct cost. SFAS 151 provides examples of “abnormal” costs that include costsof idle facilities, excess freight and handling costs, and wasted material(spoilage). SFAS 151 was effective for the Company’s fiscal year beginningOctober 1, 2005 and did not have a material effect on the Company’sconsolidated financial statements.

 

In December 2004, the FASBissued SFAS No. 123 (Revised), *Share-BasedPayment* (“SFAS 123 R”). SFAS 123 R replaces SFAS No.123, *Accounting for Stock-based Compensation* (“SFAS123”), as amended by SFAS No. 148, *Accountingfor Stock*

 

7

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*Based Compensation–Transition and Disclosure* and supersedes Accounting PrinciplesBoard Opinion (“APB”) No. 25, *Accountingfor Stock Issued to Employees*.Adoption of SFAS 123 R requires the Company to record non-cash expense for theCompany’s stock compensation plans using the fair value method. SFAS 123 R waseffective for the Company on October 1, 2005 and the adoption of SFAS 123 R didnot have a material effect on the Company’s consolidated financial statements.

 

In December 2004, the FASBissued SFAS No. 153, *Exchanges ofNonmonetary Assets–An Amendment of APB Opinion No. 29*(“SFAS 153”),which eliminates the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. The Company adopted SFAS 153 asof October 1, 2005 and the adoption did not have a material effect on theCompany’s consolidated financial statements.

 

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes and ErrorCorrections* (“SFAS 154”). SFAS 154 replaces FASB Statement No. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and replaces ABP No. 20, *Accounting Changes*. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005 and will be effective for the Company for its fiscal year beginningOctober 1, 2006. The adoption of SFAS 154 is not expected to have a materialeffect on the Company’s consolidated financial statements.

 

In September 2005, theEmerging Issues Task Force issued EITF No. 04-13, *Accounting for Purchases and Sales of Inventory with the SameCounterparty* (“EITF 04-13”). EITF 04-13 requires that purchases andsales of inventory with the same counterparty be accounted for as a nonmonetarytransaction within the scope of APB No. 29, *Accountingfor Nonmonetary Transactions*. EITF 04-13 is effective for newarrangements entered into, or modifications or renewals of existingarrangements, beginning in the first interim or annual reporting periodbeginning after March 15, 2006. The adoption of EITF 04-13 is not expected tohave a material effect on the Company’s consolidated financial statements.

 

**NOTE 3**–**RECEIVABLES**

 
| ** **                      | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| Trade                           |       | $                      | 66,719     |                    | $          | 69,969 |   |
| Vendor rebates and programs     |       | 11,217                 |       | 6,882                   |       |
| Related party                   |       | 12                     |       | 1,429                   |       |
|                            |       | 77,948                 |       | 78,280                  |       |
| Allowance for doubtful accounts |       | (1,128                 | )          | (1,181                  | )          |
|                            |       | $                      | 76,820     |                    | $          | 77,099 |   |

 

Approximately 9% and 10% ofthe Company’s product sales resulted from transactions with a single customerduring the three-months ended December 31, 2005 and 2004, respectively. Approximately10% and 7% of the Company’s trade receivables resulted from transactions withthis single customer as of December 31, 2005 and September 30, 2005,respectively.

 

Approximately 7% and 6% ofthe Company’s product sales resulted from transactions with Feeders’ AdvantageLLC, a related party, during the three-months ended December 31, 2005 and 2004,respectively.

** **

**NOTE 4**–**PROPERTY AND EQUIPMENT**

** **
| ** **                                | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| Land                                      |       | $                      | —     |                    | $          | 169 |   |
| Buildings and leasehold improvements      |       | 1,175                  |       | 2,293                   |       |
| Machinery, furniture and equipment        |       | 8,814                  |       | 8,140                   |       |
| Computer equipment                        |       | 2,823                  |       | 2,759                   |       |
| Construction in progress                  |       | 93                     |       | 630                     |       |
|                                      |       | 12,905                 |       | 13,991                  |       |
|                                      |       |                   |       |                    |       |
| Accumulated depreciation and amortization |       | (7,006                 | )          | (7,072                  | )          |
|                                      |       | $                      | 5,899      |                    | $          | 6,919 |   |

 

The Company recordeddepreciation expense of $398 and $340 for the three-months ended December 31,2005 and 2004, respectively.

 

8

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During the three-monthsended December 31, 2005 the Company relocated from its existing, owneddistribution center to a new larger leased facility located in Denver, Coloradoand entered into an agreement to sell the owned distribution center. The saleof the distribution center is expected to close during the three-months endedMarch 31, 2006.  The Company evaluatedthe assets to be sold under SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets,* and determinedthat there was no impairment at December 31, 2005. The Company has classifiedthe $1,422 of net book value to be sold as “Assets held for sale” in itsCondensed Consolidated Balance Sheet at December 31, 2005.

** **

**NOTE 5**–**INTANGIBLES**

** **
| ** **

** **   | ** ** | **Useful Life** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** |
|--------------------------|------------|-----------------|------------|------------------------|------------|-------------------------|------------|
| Amortizing:              |       |            |       |                   |       |                    |       |
| Customer lists           |       | 10 years        |       | $                      | 1,589      |                    | $          | 1,589 |   |
| Covenants not to compete |       | 5 years         |       | 112                    |       | 112                     |       |
| Other                    |       | 5 years         |       | 36                     |       | 36                      |       |
|                     |       |            |       | 1,737                  |       | 1,737                   |       |
|                     |       |            |       |                   |       |                    |       |
| Accumulated amortization |       |            |       | (192                   | )          | (145                    | )          |
|                     |       |            |       | 1,545                  |       | 1,592                   |       |
| Non-Amortizing:          |       |            |       |                   |       |                    |       |
| Trade names              |       |            |       | 52                     |       | 52                      |       |
|                     |       |            |       |                   |       |                    |       |
|                     |       |            |       | $                      | 1,597      |                    | $          | 1,644 |   |

 

Projected amortizationexpense for existing intangible assets is $189 for each of the fiscal yearsending 2006, 2007, 2008, and 2009 and $166 for the fiscal year ending 2010.

** **

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

** **

**Line-of-Credit**–The Company has a line-of-credit agreement with two lenders for acredit facility that allows for borrowings up to $70,000. The line-of-credit issecured by a security interest in substantially all of the Company’s assets andterminates on June 18, 2007. Interest is due monthly at the following rates: 1)LIBOR plus a margin (5.85% at December 31, 2005); or 2) the prime rate (7.25%at December 31, 2005). The lenders also receive an unused line fee and letterof credit fee equal to 0.375% of the unused amount of the revolving creditfacility. The Company’s outstanding balance on this facility at December 31,2005 was $27,283. The line-of-credit contains certain restrictive financialcovenants as well as restrictions on dividend payments and future debtborrowings. The credit agreement allows the Company to issue up to $10,000 inletters of credit. The letters of credit typically act as guarantee of paymentto certain third parties in accordance with specified terms and conditions. TheCompany had four letters of credit totaling $400 at December 31, 2005. Therewere no outstanding borrowings on these letters of credit at December 31, 2005.

** **

**Long-Term Debt**—On January 3, 2005, the Company issued an unsecured non-negotiablepromissory note in the aggregate principal amount of $487 in partialconsideration for the purchase of substantially all the assets of VetpoDistributors, Inc. The note bears interest at the prime rate (7.25% at December31, 2005), payable quarterly. The principal of the note is payable in fiveequal annual installments and matures on January 1, 2010.  The balance on this promissory note was $389at December 31, 2005.

** **

**NOTE 7**–**STOCK OPTIONS**

 

The Company has twostock-based award plans, the 2002 Stock Option Plan and the 2005 Stock-BasedAward and Incentive Compensation Plan (the “2005 Plan”).  The 2005 Plan allows the Company’s Board ofDirectors to grant common stock options, restricted stock, deferred units andother stock-based awards to directors, executives and other key employees.  These plans have been developed to provideadditional incentives by allowing equity ownership in the Company and, as aresult, encouraging them to contribute to its success.  At December 31, 2005, the Company had 567,563options to purchase common stock outstanding (374,163 vested and exercisable)with a weighted average exercise price of $4.05 and expiring through September2015.  At December 31, 2005, the Companyhad 1,698,932 stock-based awards available to be issued under its stock-basedaward plans.

 

Effective October 1, 2005,the Company adopted the provisions of SFAS No. 123 R for its share-basedcompensation plans. The Company previously accounted for these plans under therecognition and measurement principals of APB No. 25 and

 

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related interpretations anddisclosure requirements established by SFAS 123, as amended by SFASNo. 148*.*Under APB No. 25,no compensation expense was recorded in earnings for the Company’s stock-basedawards granted under the Company’s stock-based award plans. The pro formaeffects on net income and earnings per share for stock-based awards wereinstead disclosed in a footnote to the financial statements. Under SFAS 123 R,all share-based compensation is measured at the grant date, based on the fairvalue of the award, and is recognized as an expense in earnings over therequisite service period.

 

The Company adopted SFAS 123R using the modified prospective method. Under this transition method,compensation expense includes the expense for all share-based awards grantedprior to, but not yet vested as of October 1, 2005 excluding those optionsinitially valued using the minimum value method.  At October 1, 2005, all of the Company’soptions to purchase common stock were either vested and exercisable or wereinitially valued using the minimum value method. Therefore, the Companyrecognized no compensation expense for stock-based awards in the first quarterof fiscal 2006. In the first quarter of fiscal 2005, compensation expense thatwould have been recorded had the Company adopted the fair value method (all ofwhich would have been determined using the minimum value method) was notsignificant.

 

**NOTE 8**–**INCOME TAXES**

 

TheCompany’s effective tax rate for the three-months ended December 31, 2005 and2004 was 39.5% and 54.0%, respectively. The decrease in the effective rate in the three-months ended December31, 2005 as compared to the same quarter in the prior year was primarily aresult of the elimination of the non-deductible accretion of dividends,recorded as interest expense, on the Series A preferred stock that was redeemedin August 2005.

## ** **

## **NOTE 9 – COMPUTATION OF EARNINGS PER SHARE**

 
| ** **

** **                          | ** ** | **Three-months ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** |
|                                            |       | **Basic**              | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
|                                            |       |                   |       |   |   |   |   |   |   |
| Net income                                      |       | $                      | 4,439      |   | $ | 4,439 |   | $ | 1,656 |   | $ | 1,656 |   |
|                                            |       |                   |       |   |   |   |   |   |   |
| Weighted average common shares outstanding      |       | 10,578                 |       | 10,578 |   | 5,062 |   | 5,062 |   |
| Effect of dilutive securities:                  |       |                   |       |   |   |   |   |   |   |
| Stock options                                   |       |                   |       | 286 |   |   |   | 321 |   |
| Contingent stock                                |       |                   |       | — |   |   |   | 499 |   |
| Weighted average shares outstanding             |       |                   |       | 10,864 |   |   |   | 5,882 |   |
|                                            |       |                   |       |   |   |   |   |   |   |
| Earnings per share                              |       | $                      | 0.42       |   | $ | 0.41 |   | $ | 0.33 |   | $ | 0.28 |   |
|                                            |       |                   |       |   |   |   |   |   |   |
| Anti-dilutive shares excluded from  calculation |       |                   |       | 10 |   |   |   | — |   |

## ** **

**NOTE 10**–**RELATED PARTIES**

 

MWI Veterinary Supply Co. (“MWICo.”), a subsidiary of the Company, holds a 50.0% membership interest inFeeders’ Advantage, L.L.C (“Feeders’ Advantage”). MWI Co. charged Feeders’Advantage for certain operating and administrative services of $153 and $105for the three-months ended December 31, 2005 and 2004, respectively.  Sales of products to Feeders’ Advantage were$9,353 and $6,805 for the three-months ended December 31, 2005 and 2004,respectively

 

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

 

The Company had a managementand consulting services agreement with Bruckmann, Rosser, Sherrill & Co.LLC (“BRS LLC”) and Agri Beef Co., both related parties, which was terminatedin August 2005. For the three-months ended December 31, 2004 the Companyexpensed $140 in management and other service fees under the agreement with BRSLLC and Agri Beef Co.

 

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**NOTE 11**–**CONTINGENCIES AND COMMITMENTS**

 

From time to time, in thenormal course of business, the Company may become a party to legal proceedingsthat may have an adverse effect on the Company’s financial position, results ofoperations and cash flows.  At December31, 2005 the Company was not a party to any material pending legal proceedingsand was not aware of any claims that could have a material adverse effect onthe Company’s financial position, results of operations, or cash flows.

 

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

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

Meridian,Idaho

 

Wehave reviewed the accompanying condensed consolidated balance sheet of MWIVeterinary Supply, Inc. and subsidiaries (the “Company”) as of December 31,2005 and the related condensed consolidated statements of income, comprehensiveincome, and cash flows for the three-month periods ended December 31, 2005 and2004. These interim financial statements are the responsibility of the Company’smanagement.

 

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

 

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

 

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

 
| /s/  DELOITTE & TOUCHE LLP |   |
|--------------------------------|--------|
| Boise,  Idaho                  |
| January  31, 2006              |

 

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**Item1A.  Risk Factors.**

* *

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

 

***Our operating results may fluctuate due to factors outside ofmanagement’s control.***

 

Ourfuture revenues and results of operations may significantly fluctuate due to acombination of factors, many of which are outside of management’s control. Themost notable of these factors include:

 

•                  vendor rebates based upon attaining certaingrowth goals;

•                  changes in the way vendors introduce productsto market;

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

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

•                  seasonality;

•                  the impact of general economic trends on ourbusiness;

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

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

•                  competition.

 

Thesefactors could adversely impact our results of operations and financialcondition. We may be unable to reduce operating expenses quickly enough tooffset any unexpected shortfall in revenues or gross profit. If we have ashortfall in revenues or gross profit without a corresponding reduction toexpenses, operating results may suffer. Our operating results for anyparticular fiscal year or quarter may not be indicative of future operatingresults. You should not rely on year-to-year or quarter-to-quarter comparisonsof results of operations as an indication of our future performance.

 

***An adverse change in vendor rebates could negatively affect ourbusiness.***

 

Theterms on which we purchase or sell products from many vendors of animal healthproducts entitle us to receive a rebate based on the attainment of certaingrowth goals. If market conditions deteriorate, vendors may adversely changethe terms of some or all of these rebate programs. Because the amount ofrebates we earn is directly related to the attainment of pre-determined salesgrowth goals, and because the nature of the rebate programs and the amount ofrebates available are determined by the vendors, there can be no assurance asto the amount of rebates that we will earn in any given year. Historically, wehave been successful in achieving most rebate growth goals and have notexperienced any material adverse impact on our results of operations andfinancial condition due to a change in a rebate program. Changes to any rebateprogram initiated by our vendors may have a material effect on our gross profitand our operating results in any given quarter or year. Vendors may reduce theamount of rebates offered under their programs, or increase the growth goals orother conditions we must meet to earn rebates to levels that we cannot achieve.

 

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

 

***Our quarterly operating resultsmay fluctuate significantly.***

 

Ourquarterly revenues and operating results have varied significantly in the past,and may continue to do so in the future. While we accrue rebates from vendorsas they are earned, our rebates have historically been highest during thequarter ended December 31, since most of our vendors’ rebate programs aredesigned to include targets to be achieved during the calendar year.Historically, our revenues have been seasonal, with peak sales in the springand fall months. The seasonal nature of our business is directly tied to thebuying patterns of veterinarians for production animal health products used forcertain medical procedures performed on production animals during the springand fall months. These buying patterns can also be affected by vendors’ anddistributors’ marketing programs launched during the summer months,particularly in June, which can cause veterinarians to purchase productionanimal health products earlier than those products are used. This kind of earlypurchasing may reduce our sales in the months these purchases would haveotherwise been made. While companion animal products tend to have a differentproduct use cycle than production animal health products, and approximatelytwo-thirds of our revenues have been generated from the sale of companionanimal products, we cannot assure you that our revenues and operating resultswill not continue to fluctuate on a quarter-to-quarter basis.

 

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***Our market is highly competitive. Failure to compete successfully couldhave a material adverse effect on our business, financial condition and resultsof operations.***

 

Themarket for veterinary distribution services is highly competitive, continuallyevolving and subject to technological change. We compete with numerous vendorsand distributors based on customer relationships, service and delivery, productselection, price and e-business capabilities. Some of our competitors may havemore customers, stronger brand recognition or greater financial and otherresources than we do. Most of our products are available from several sources,including other distributors and vendors, and our customers typically haverelationships with several distributors and vendors. Many of our competitorshave comparable product lines, technical expertise or distribution strategiesthat directly compete with us. Our competitors could obtain exclusive rights todistribute certain products, eliminating our ability to distribute thoseproducts. Additionally, some of our vendors may decide to compete with usdirectly by selling their products directly to our customers. If we do notcompete successfully against these organizations, it could have a material andadverse effect on our business, financial condition and results of operations.

 

Wehave many competitors including:

 

•                  Butler Animal Health Supply;

•                  Lextron Animal Health, Inc.;

•                  Professional Veterinary Products, Ltd.;

•                  Vet Pharm, Inc.;

•                  Walco International, Inc.;

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

•                  other national, regional, local and specialtydistributors.

 

Consolidationin the veterinary distribution business could result in existing competitorsincreasing their market share, which could give them greater pricing power,decrease our revenues and profitability, and increase the competition forcustomers. Any of these developments could result in increased marketingexpenses and have a material adverse effect on our business, financialcondition and results of operations. The entry of new distributors in theindustry could also have a material adverse effect on our ability to compete.These and other competitive factors could materially and adversely affect ourbusiness, financial condition and results of operations.

 

Consolidationof the many small, privately-held veterinary practices would result in anincreasing number of larger veterinary practices, which could have increasedpurchasing leverage and the ability to negotiate lower product costs. Thiscould reduce our operating margins and negatively impact our revenues andprofitability.

 

***Our business, financial condition and results of operations depend uponmaintaining our relationships with vendors.***

 

AtDecember 31, 2005 we distributed more than 10,000 products sourced from morethan 400 vendors to over 14,800 veterinary practices. We currently do notmanufacture any of our products and are dependent on these vendors for oursupply of products. Our top three vendors, Fort Dodge, Pfizer and Vedco,supplied products that accounted for approximately 48% of our revenues for ourquarter ended December 31, 2005. Our ten largest vendors supplied products thataccounted for approximately 74% of our revenues for our quarter ended December31, 2005.

 

Ourability to sustain our gross profits has been, and will continue to be,dependent in part upon our ability to obtain favorable terms and access to newand existing products from our vendors. These terms may be subject to changesfrom time to time by vendors, such as changing from a “buy/sell” to an agencyrelationship, or from an agency to a “buy/sell” relationship. In a “buy/sell”transaction, we purchase or take inventory of products from our vendors. Underan agency relationship, when we receive orders for products from a customer, wetransmit the order to the vendor who then picks, packs and ships the products.Any changes from “buy/sell” to agency or from agency to “buy/sell” couldadversely affect our revenues and operating income. The loss of one or more ofour large vendors, a material reduction in their supply of products to us ormaterial changes in the terms we obtain from them could have a material adverseeffect on our business, financial condition and results of operations. Some ofour current and future vendors may decide to compete with us in the future bypursuing or increasing their efforts in direct marketing and sales of theirproducts. These vendors could sell their products at lower prices and maintaina higher gross margin on their product sales than we can. In this event,veterinarians or animal owners may elect to purchase animal health productsdirectly from these vendors. Increased competition from any vendor of animalhealth products could significantly reduce our market share and adverselyimpact our financial results.

 

Inaddition, we may not be able to establish relationships with key vendors in theanimal health industry if we have established relationships with competitors ofthese key vendors. We have written agreements with approximately 30 of ourvendors,

 

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includingFort Dodge and Pfizer. Some of our agreements with vendors are for one-yearperiods. Upon expiration, we may not be able to renew our existing agreementson favorable terms, or at all. If we lose the right to distribute productsunder such agreements, we may lose access to certain products and lose acompetitive advantage. Potential competitors could sell products from vendorsthat we fail to continue with and erode our market share.

 

***We rely substantially on third-party vendors, and the loss of productsor delays in product availability from one or more third-party vendors couldsubstantially harm our business.***

 

Wemust contract for the supply of current and future products of appropriatequantity, quality and cost. These products must be available on a timely basisand be in compliance with any regulatory requirements. Failure to do so couldsubstantially harm our business.

 

Weoften purchase products from our vendors under agreements that typically have aterm of one year and can be terminated on a periodic basis. There can be noassurance, however, that our vendors will be able to meet their obligationsunder these agreements or that we will be able to compel them to do so. Risksof relying on vendors include:

 

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

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

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

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

•                  Some of our third party vendors are subjectto ongoing periodic unannounced inspection by regulatory authorities, includingthe Food and Drug Administration (“FDA”), the US Department of Agriculture (“USDA”),the Environmental Protection Agency (“EPA”), the Drug Enforcement Agency (“DEA”)and other federal and state agencies for compliance with strictly enforcedregulations. We do not have control over our vendors’ compliance with theseregulations and standards. Violations could potentially lead to interruptionsin supply that could lead to lost sales to competitive products that are morereadily available.

 

Potentialproblems with vendors such as those discussed above could substantiallydecrease sales of our products, lead to higher costs and damage our reputationwith our customers.

 

***We rely upon third parties to ship products to our customers andinterruptions in their operations could harm our business, financial conditionand results of operations.***

 

Weuse United Parcel Service, Inc., or UPS, as our primary delivery service forour air and ground shipments of products to our customers. If there were anysignificant service interruptions, there can be no assurance that we couldengage alternative service providers to deliver these products in either atimely or cost-efficient manner, particularly in rural areas where many of ourcustomers are located. Any labor disputes, slowdowns, transportationdisruptions or other adverse conditions in the transportation industryexperienced by UPS could impair or disrupt our ability to deliver our productsto our customers on a timely basis, and could have a material adverse effectupon our customer relationships, business, financial condition and results ofoperations. For example, during the strike by members of the InternationalBrotherhood of Teamsters against UPS in August 1997, many of our salesrepresentatives, some traveling hundreds of miles, were required to makedeliveries to customers for which no alternative delivery service provider wasavailable on a timely basis. In addition, rising fuel costs may result incontinued increases in shipping costs charged by UPS, or other delivery serviceproviders, and could have an adverse effect on our financial condition andresults of operations.

 

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***The loss of one or more significant customers could adversely affectour profitability.***

 

Banfield— The Pet Hospital (“Banfield”) and Feeders’ Advantage, a related party, ourtwo largest customers, accounted for approximately 10% and 6% of our productsales for our fiscal year ended September 30, 2005, respectively, and 9% and 7%for the three-months ended December 31, 2005, respectively. Our ten largestcustomers, excluding Banfield and Feeders’ Advantage, accounted forapproximately 6% of our product sales for our fiscal year ended September 30,2005 and 7% for the three-months ended December 31, 2005. Our business andresults of operations could be adversely affected if the business of thesecustomers was lost. We cannot guarantee that we will maintain or improve ourrelationships with these customers or that we will continue to supply thesecustomers at current levels. Banfield, Feeders’ Advantage and other customersmay seek to purchase some of the products that we currently sell directly fromthe vendors or from one or more of our competitors. Furthermore, our customersare not required to purchase any minimum amount of products from us. The lossof Banfield or Feeders’ Advantage or a deterioration in our relations witheither of them could significantly affect our financial condition and resultsof operations. Additionally, a deterioration in the financial condition of oneor more of our customers could have a material adverse effect on our results ofoperations.

 

***Failure to effectively manage growth could impair our business.***

 

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

 

Itmay be difficult to manage such rapid growth in the future, and our futuresuccess depends on our ability to implement and/or maintain:

•                  sales and marketing programs;

•                  customer service levels;

•                  current and new product and service lines andvendor relationships;

•                  technological support which equals or exceedsour competitors;

•                  recruitment and training of new personnel;and

•                  operational and financial control systems.

 

Ourability to successfully offer products and services and implement our businessplan in a rapidly evolving market requires an effective planning and managementprocess. We expect that we will need to continue to improve our financial andmanagerial controls and reporting systems and procedures and to expand thetraining of our work force. While we believe our current systems havesufficient capacity to meet our projected needs, we may need to increase thecapacity of our current systems to meet additional or unforeseen demands.

 

If weare not able to manage our rapid growth, there is a risk our customer servicequality could deteriorate which may in turn lead to decreased sales orprofitability. Also, the cost of our operations could increase faster thangrowth in our revenues, negatively impacting our profitability.

 

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

 

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

 

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

 

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

 

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

 

•                  impairments of goodwill and other intangibleassets; and

 

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

 

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If weare unable to successfully integrate the operations of an acquired businessinto our operations, we could be required to undertake unanticipated changes.These changes could have a material adverse effect on our business.

 

***Increases in over-the-counter sales of animal health products couldadversely affect our business.***

 

Werely, and will continue to rely, on animal owners who purchase their animalhealth products directly from veterinarians, which we refer to as the ethicalchannel. There can be no assurance that animal owners will continue to use theethical channel with the same frequency as they have in the past, and will notincreasingly purchase animal health products from sources other thanveterinarians, such as the Internet and other over-the-counter channels.Increased competition from any distributor of animal health products making useof an over-the-counter channel could significantly reduce our market share andadversely impact our financial results.

 

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

 

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

 

Westrive to maintain compliance with these laws and regulations. For example, wehave hired a Manager of Regulatory Compliance and we have engaged an outsideconsultant to assist us in meeting and complying with the various statelicensure requirements to which we are subject. If we are unable to maintain orachieve compliance with these laws and regulations, we could be subject tosubstantial fines or other restrictions on our ability to provide competitivedistribution services, which could have an adverse impact on our financialcondition.

 

Wecannot assure you that existing laws and regulations will not be revised orthat new, more restrictive laws will not be adopted or become applicable to usor the products that we distribute or dispense. We cannot assure you that thevendors of products that may become subject to more stringent laws will not tryto recover any or all increased costs of compliance from us by increasing theprices at which we purchase products from them, or, that we will be able torecover any such increased prices from our customers. We also cannot assure youthat our business and financial condition will not be materially and adverselyaffected by future changes in applicable laws and regulations.

 

***Loss of key management or sales representatives could harm ourbusiness.***

 

Ourfuture success depends to a significant extent on the skills, experience andefforts of management, including our President and Chief Executive Officer, Mr.James F. Cleary, Jr. While we have not experienced problems in the pastattracting and maintaining members of our management team, the loss of any orall of these individuals could adversely impact our business. We do not carrykey-man life insurance on any member of management. In addition we do not haveemployment agreements with our key members of the senior management team. Wemust continue to develop and retain a core group of individuals if we are torealize our goal of continued expansion and growth. We cannot assure you thatwe will be able to do so in the future. Also, due to the specialized nature ofour products and services, generally only highly qualified and trained salesrepresentatives have the necessary skills to market our products and provideour services. These individuals develop relationships with our customers thatcould be damaged if these employees are not retained. We face intensecompetition for the hiring of these professionals. Any failure on our part tohire, train and retain a sufficient number of qualified professionals woulddamage our business. We do not generally enter into agreements that containnon-competition provisions with any of our employees, other than with membersof our senior management team.

 

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***Failure of, or security problems with, our information systems coulddamage our business.***

 

Ourinformation systems are dependent on third party software, globalcommunications providers, telephone systems and other aspects of technology andInternet infrastructure that are susceptible to failure. Though we haveimplemented security measures and some redundant systems, our customer satisfactionand our business could be harmed if we or our vendors experience any systemdelays, failures, loss of data, power outages, computer viruses, break-ins orsimilar disruptions. We currently process all customer transactions and data atour facilities in Meridian, Idaho. Although we have safeguards for emergencies,including, without limitation, sophisticated back-up systems, the occurrence ofa major catastrophic event or other system failure at any of our distributionfacilities could interrupt data processing or result in the loss of storeddata. This may result in the loss of customers or a reduction in demand for ourservices. Only some of our systems are fully redundant and although we do carrybusiness interruption insurance, it may not be sufficient to compensate us forlosses that may occur as a result of system failures. If a disruption occurs,our profitability and results of operations may suffer.

 

***The outbreak of an infectious disease within either the productionanimal or companion animal population could have a significant adverse effecton our business and our results of operations.***

 

Anoutbreak of disease affecting animals, such as foot-and-mouth disease, avianinfluenza and bovine spongiform encephalopathy, commonly referred to as “madcow disease,” could result in the widespread destruction of affected animalsand consequently result in a reduction in demand for animal health products. Inaddition, outbreaks of these or other diseases or concerns of such diseasescould create adverse publicity that may have a material adverse effect onconsumer demand for meat, dairy and poultry products, and, as a result, on ourcustomers’ demand for the products we distribute. The outbreak of a diseaseamong the companion animal population which could cause a reduction in thedemand for companion animals could also adversely affect our business. Althoughwe have not been adversely impacted by the outbreak of a disease in the past,there can be no assurance that a future outbreak of an infectious disease will nothave an adverse effect on our business.

 

***We may be subject to product liability and other claims in the ordinarycourse of business.***

 

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

 

***A prolonged economic downturn could materially adversely affect ourbusiness.***

 

Ourbusiness may be materially adversely affected by prolonged, negative trends inthe general economy that could reduce consumer discretionary spending on animalhealth products. Our business ultimately depends on the ability and willingnessof animal owners to pay for our products. This dependence could make us morevulnerable to any reduction in consumer confidence or disposable income thancompanies in other industries that are less reliant on consumer spending, suchas the human health care industry, in which a large portion of payments aremade by insurance programs.

 

***We may not be able to raise needed capital in the future on favorableterms or at all.***

 

Weexpect that our existing sources of cash, together with any funds generatedfrom operations, will be sufficient to meet our anticipated capital needs forat least the next twelve months. However, we may require additional capital tofinance our growth strategies or other activities in the future. Our capitalrequirements will depend on many factors, including the costs associated withour growth and expansion. Additional financing may not be available when neededand, if such financing is available, it may not be available on terms favorableto us. Our failure to raise capital when needed could have an adverse effect onour business, financial condition and results of operations.

 

***Our variable rate indebtedness subjects us to interest rate risk, whichcould cause our debt service obligations to increase significantly.***

 

Certainof our borrowings, primarily borrowings on the revolving credit facility underour amended credit agreement, are at variable rates of interest and expose usto interest rate risk based on market rates. In the last year there has been ageneral increase in borrowing rates in the United States. If interest ratescontinue to increase, our debt service obligations on our variable rateindebtedness would increase even though the amount borrowed remained the same,and our net income and cash available for servicing our indebtedness woulddecrease. Our variable rate debt as of December 31, 2005 was approximately$27.7 million (comprised of $27.3 million credit facility and $389,232promissory note).  Our interest expensefor fiscal year 2005 was $2.5 million (excluding $4.1 million of accretion ofour Series A preferred stock dividends) and was $555,445 for the three-monthsended December 31, 2005.

 

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**MWI VETERINARY SUPPLY, INC.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**(dollars in thousands, except per share data)**

 

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

 

**Overview**

 

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

 

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

 

19

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**Results of Operations**

 

Thefollowing table summarizes the Company’s results of operations for thethree-months ended December 31, 2005 and 2004 in dollars and as a percentage oftotal revenues.

 
| ** **                                                      | ** ** | **Three-Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Revenues:                                                       |       |                                |       |   |   |   |   |   |   |
| Product sales                                                   |       | $                                   | 127,048    |   | 92.2 | % | $ | 101,260 |   | 92.9 | % |
| Product sales to related party                                  |       | 9,355                               |       | 6.8 |   | 6,805 |   | 6.2 |   |
| Commissions                                                     |       | 1,413                               |       | 1.0 |   | 929 |   | 0.9 |   |
| Total revenues                                                  |       | 137,816                             |       | 100.0 |   | 108,994 |   | 100.0 |   |
|                                                            |       |                                |       |   |   |   |   |   |   |
| Cost of product sales                                           |       | 115,064                             |       | 83.5 |   | 92,370 |   | 84.7 |   |
| Gross profit                                                    |       | 22,752                              |       | 16.5 |   | 16,624 |   | 15.3 |   |
| Selling, general and administrative  expenses                   |       | 14,553                              |       | 10.6 |   | 11,016 |   | 10.1 |   |
| Depreciation and amortization                                   |       | 442                                 |       | 0.3 |   | 340 |   | 0.4 |   |
| Operating income                                                |       | 7,757                               |       | 5.6 |   | 5,268 |   | 4.8 |   |
| Other income (expense):                                         |       |                                |       |   |   |   |   |   |   |
| Interest expense (1)                                            |       | (555                                | )          | (0.4 | ) | (1,769 | ) | (1.6 | ) |
| Earnings of equity method investees                             |       | 45                                  |       | - |   | 32 |   | - |   |
| Other                                                           |       | 90                                  |       | 0.1 |   | 67 |   | 0.1 |   |
| Total other expense                                             |       | (420                                | )          | (0.3 | ) | (1,670 | ) | (1.5 | ) |
| Income before taxes                                             |       | 7,337                               |       | 5.3 |   | 3,598 |   | 3.3 |   |
| Income tax expense                                              |       | (2,898                              | )          | (2.1 | ) | (1,942 | ) | (1.8 | ) |
|                                                            |       |                                |       |   |   |   |   |   |   |
| Net income                                                      |       | $                                   | 4,439      |   | 3.2 | % | $ | 1,656 |   | 1.5 | % |
|                                                            |       |                                |       |   |   |   |   |   |   |
| Earnings Per Share:                                             |       |                                |       |   |   |   |   |   |   |
| Basic                                                           |       | $                                   | 0.42       |   |   |   | $ | 0.33 |   |   |   |
| Dilutive                                                        |       | $                                   | 0.41       |   |   |   | $ | 0.28 |   |   |   |
|                                                            |       |                                |       |   |   |   |   |   |   |
| Shares used in earnings per share  calculation (in ‘000s): |       |                                |       |   |   |   |   |   |   |
| Basic                                                           |       | 10,578                              |       |   |   | 5,062 |   |   |   |
| Dilutive                                                        |       | 10,864                              |       |   |   | 5,882 |   |   |   |
|                                                            |       |                                |       |   |   |   |   |   |   |
| **Other Data:**                                                 |       |                                |       |   |   |   |   |   |   |
| Product sales from Internet  as a percentage of sales           |       |                                |       |   |   |   |   |   |   |
|                                                            | 23         | %                                   |       |   | 21 | % |   |   |
| Field sales representatives  (at end of period)                 |       |                                |       |   |   |   |   |   |   |
|                                                            | 132        |                                |       |   | 114 |   |   |   |
| Telesales representatives  (at end of period)                   |       |                                |       |   |   |   |   |   |   |
|                                                            | 95         |                                |       |   | 79 |   |   |   |
| Fill rate (2)                                                   |       | 98                                  | %          |   |   | 98 | % |   |   |

 

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| (1) | The  three-months ended December 31, 2004 includes $1,134 accretion of our  Series A preferred stock dividends, which was non-deductible for income  tax purposes, as a component of interest expense. The Company redeemed all  the Series A preferred stock and accrued dividends in August 2005. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | 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, 2005 Compared to Three-monthsEnded December 31, 2004**

* *

*Total Revenues*. Total revenues increased 26.4% to $137,816 for the three-months endedDecember 31, 2005 from $108,994 for the three-months ended December 31,2004.  This increase was attributable toan increase in product sales volumes of a wide variety of products to bothexisting and new customers. The amount of the increase in product salesattributable to customers obtained subsequent to the end of the priorcomparative period was approximately $12,532 with the remaining increase attributableto existing customers. Included in the $12,532 are revenues from customersacquired as part of the Vetpo Distributors, Inc. acquisition that was completedin January 2005.  Revenues improved inthe three-months ended December 31,2005 as compared to the corresponding periodin the prior year as a result of the addition of non-steroidalanti-inflammatory drugs for dogs, the addition of new cattle antibiotics andthe conversion to a buy/sell arrangement for an equine West Nile Virus vaccinethat was a commission-based agency relationship in the comparative period inthe prior year.

 

*Gross Profit*. Gross profit increased by 36.9% to $22,752 for the three-months endedDecember 31, 2005 from $16,624 for the three-months ended December 31,2004.  The increase in gross profit is aresult of increased total revenues as discussed above and increased vendorrebates. Vendor rebates contributed to the gross profit dollar improvement by$2,837 for the three-months ended December 31, 2005 as compared to three-monthsended December 31, 2004.  Vendor rebates have historically been highest duringthe Company’s first fiscal quarter ended December 31, since certain significantvendor rebate programs are designed to include annual targets to be achievedbased on the calendar year.  The growthin vendor rebates during the three-months ended December 31, 2005 as comparedto the three-months ended December 31, 2004 was attributable to the Company’scalendar year sales growth with key vendors and the addition of new programs relatedto new product offerings.  Grossprofit as a percentage of total revenues was 16.5% for the three-months endedDecember 31, 2005, compared to 15.3% for the same period in the prioryear.  The increase in the Company’sgross profit as a percentage of total revenues was primarily due to an increasein vendor rebates and an increase in commission revenue on agency productssold. Partially offsetting these improvements were increases in freight costsas a result of higher fuel and transportation costs.

 

*Selling, General and Administrative (“SG&A”)*.  SG&A increased 32.1% to $14,553 for thethree-months ended December 31, 2005 from $11,016 for the three-months endedDecember 31, 2004.  The dollar increasewas primarily due to increased compensation costs, outside fees and services,location and travel and occupancy costs. Compensation costs increased as a result of additional headcount of 113associates, primarily related to the acquisition of Vetpo and an increase inthe Company’s distribution centers.  Compensationcosts also increased as a result of increased sales commissions that aredirectly correlated with the sales growth. The increase in outside fees and services were primarily due to theCompany’s use of temporary workforce to support its sales growth and demands inits distribution centers, increased professional services fees related tooperating as a public company and increased credit card and other bankfees.  Increases in location and travelcost are due to increased headcount and costs to support the Company’s salesgrowth.  Increases in occupancy costs aredue primarily to the distribution center acquired in the Vetpo acquisition andthe relocation of the Company’s distribution centers in Nampa, Idaho andDenver, Colorado from owned properties to leased properties.

 

*Depreciation and Amortization. *Depreciation and amortization expenseincreased 30.0% to $442 for the three-months ended December 31, 2005 from $340for the three-months ended December 31, 2004. This increase was due primarily to amortization of intangible assetsacquired with the purchase of Vetpo.  Inaddition, depreciation expense increased as a result of the facility acquiredwith Vetpo and capital expenditures for delivery trucks used at the Company’swarehouse facilities to support its sales growth.  The Company expects that depreciation andamortization expense related to leasehold improvements will increase as aresult of the relocation of the Company’s Denver, Colorado distribution centerfrom an approximately 24,000 square foot facility to an approximately 58,000square foot facility in December 2005, and as a result of the Company’s plannedaddition of a distribution center located in Orlando, Florida.

 

*Other Expenses*. Other expenses decreased 74.9% to $420 for the three-months endedDecember 31, 2005 from $1,670 for the three-months ended December 31, 2004. Thedecrease in other expenses was primarily due to a reduction in interest expenseof $1,214 in the three-months ended December 31, 2005 as compared to the same periodin the prior year. Included in interest expense for the three-months endedDecember 31, 2004 is accretion of dividends on the Series A preferred stock of$1,134. The Series A preferred stock was redeemed in August 2005.

 

*Income Tax Expense*.  The Company’s effective tax rate was 39.5%and 54.0% for the three-months ended December 31, 2005 and 2004, respectively.The decrease in the effective rate in the quarter ended December 31, 2005 ascompared to the same quarter in the prior year was primarily a result of theelimination of the non-deductible accretion of dividends on the Series Apreferred stock that were redeemed in August 2005.

 

21

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**CriticalAccounting Policies**

 

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

 

**Liquidityand Capital Resources**

 

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

 

The Company has aline-of-credit agreement with two lenders for a credit facility that allows forborrowings up to $70,000. The line-of-credit is secured by a security interestin substantially all of the Company’s assets and terminates on June 18, 2007.Interest is due monthly at the following rates: 1) the London Interbank OfferedRate (LIBOR) plus a margin (5.85% at December 31, 2005); or 2) the prime rate(7.25% at December 31, 2005). The lenders also receive an unused line fee andletter of credit fee equal to 0.375% of the unused amount of the revolvingcredit facility.  The Company’soutstanding balance on this facility at December 31, 2005 was $27,283 of which$16,000 carried an interest rate at LIBOR and $11,283 carried an interest rateat the prime rate.  The line-of-creditcontains certain restrictive financial covenants as well as restrictions ondividend payments and future debt borrowings.

 

From time to time theCompany issues letters of credit to act as guarantee of payment to specifiedthird parties. At December 31, 2005, the Company had four letters of credittotaling $400 and at September 30, 2005 the Company had three letters of credittotaling $300.  There were no outstandingborrowings on these letters of credit at December 31, 2005 or September 30,2005.

* *

*Operating Activities*.  For the three-months ended December 31, 2005,cash used in operations was $1,471, and was primarily attributable to adecrease in accounts payable of $5,078 and an increase in inventories of$3,171. The decrease in accounts payable was primarily due to timing ofinventory purchases and associated payments. Increases in inventories are primarily attributable to purchases made inadvance of vendor price increases.  Forthe three-months ended December 31, 2004 net cash provided by operatingactivities was $6,724, and was primarily attributable to a decrease in accountsreceivable of $2,463 and an increase of $1,954 in accounts payable, partiallyoffset by an increase in inventories of $1,477. The decrease in accountsreceivable was a result of the collection of customer accounts that wereoffered extended payment terms and the increase in accounts payable was due totiming of inventory purchases.

* *

*Investing Activities.*  For the three-months ended December 31, 2005,net cash used in investing activities was $1,177 compared to net cash used byinvesting activities of $1,166 for the three-months ended December 31,2004.  Net cash used by investingactivities for the three-months ended December 31, 2005 was primarily due tocapital expenditures of $1,182 related to relocating the Company’s existingdistribution center to a new larger distribution center in Denver,Colorado.  Net cash used in investingactivities for the three-months ended December 31, 2004 was primarilyattributable to capital expenditures and the acquisition of Memorial Pet Care,Inc.

* *

*FinancingActivities.*  For the three-months ended December31, 2005, net cash provided in financing activities was $2,647, and wasprimarily attributable to borrowings made on the Company’s revolving creditfacility.  For the three-months endedDecember 31, 2004, net cash used by financing activities was $5,558, which wasa result of payments on the Company’s revolving credit facility.  The Company’s revolving credit facility isused to finance the Company working capital requirements and fluctuates basedon timing of payables and collection of receivables.

 

**ContractualObligations and Guarantees**

 

For information on contractual obligations andguarantees, see the Company’s 2005 Annual Report on Form 10-K. During thethree-months ended December 31, 2005 the Company entered into a lease agreementfor an approximate 29,000 square foot distribution center located in Orlando,Florida.  The Company’s average annuallease expense is $183 per year and the lease expires in 2013.

 

22

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**Item 3.  Quantitative andQualitative Disclosures About Market Risk**

 

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

 

Theinterest payable on the revolving credit facility under the amended creditagreement is based on variable interest rates and is therefore affected bychanges in market interest rates. If the weighted average interest rate on thevariable rate indebtedness rose 64 basis points (a 10.0% change from thecalculated weighted average interest rate as of December 31, 2005), assuming nochange in the outstanding balance on the revolving credit facility under theamended credit agreement ($27,283 as of December 31, 2005), the annualizedincome before taxes and cash flows from operating activities would decline byapproximately $176. If the weighted average interest rate on the variable rateindebtedness decreased 64 basis points (a 10.0% change from the calculatedweighted average interest rate as of December 31, 2005), assuming no change inthe outstanding balance on the revolving credit facility under the amendedcredit agreement, the annualized income before taxes and cash flows fromoperating activities would increase by approximately $176.

 

**Item 4.  Controls and Procedures**

 

Managementof the Company, including the Chief Executive Officer and the Chief FinancialOfficer of the Company, have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934) as of December 31, 2005.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified by theSecurities and Exchange Commission’s rules and forms.

 

There were no changes in theCompany’s internal control over financial reporting that occurred during theCompany’s most recently completed fiscal quarter that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Cautionary Statement for Purposesof “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of1995**

* *

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

 

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

 

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

## ** **

## **Item 1.  Legal Proceedings**

## ** **

## **TheCompany is not currently a party to any material pending legal proceedings andis not aware of any claims that could have a materially adverse effect on theCompany’s financial position, results of operations, or cash flows.**

## ** **

## **Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

## **Item 3.  Defaults Upon Senior Securities**

 

None.

## ** **

## **Item 4.  Submission of Matters to aVote of Security Holders**

 

None.

 

## **Item 5.  Other Information**

 

None.

** **

**Item 6.  Exhibits**

 
| 15     |   | Letter re:  Unaudited Interim Financial Statements.                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                     |
| 31.1   |   | Certification  of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                          |
|   |   |                                                                                                                     |
| 31.2   |   | Certification  of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                          |
|   |   |                                                                                                                     |
| 32     |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

24

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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 6, 2006 | /S/ Mary  Patricia B. Thompson                           |   |
|                    | Mary  Patricia B. Thompson                               |   |
|                    | *Vice President, Secretary and  Chief Financial Officer* |   |

 

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