| **UNITED STATES**                      |
|----------------------------------------|
| **SECURITIES AND EXCHANGE COMMISSION** |
| **WASHINGTON, DC 20549**               |

 

| **FORM 10-Q** |
|---------------|

 

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

 

| For the quarterly period ended January 31, 2008 |
|-------------------------------------------------|

 

| or |
|----|

 

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

 

| For the transition period from __________ to ____________. |
|------------------------------------------------------------|

 

| Commission file number: 000-26326 |
|-----------------------------------|

 

| **PROFESSIONAL VETERINARY PRODUCTS, LTD.**             |
|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |

 

| Nebraska                        | 37-1119387          |
|---------------------------------|---------------------|
| (State or other jurisdiction of | (IRS Employer       |
| incorporation or organization)  | Identification No.) |

 

| 10077 South 134th Street                                                        |
|---------------------------------------------------------------------------------|
| Omaha, Nebraska 68138                                                           |
| (402) 331-4440                                                                  |
| (Address and telephone number of registrant’s principal executive offices) |

 

|  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed

by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12

months (or for such shorter 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

x

No

o

 

 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated

filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” 

”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

o

Accelerated Filer

o

Non-accelerated Filer

x

Smaller reporting company

o

 

 

 

 

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 

12b-2 of the Exchange Act).

Yes

o

No

x

 
Indicate the number of shares outstanding of each of the issuer’s classes of common

stock, as of the latest practicable date (February 29, 2008).

Common Stock, $1.00 par value, 2,041

 

 

 

 

PROFESSIONAL VETERINARY PRODUCTS, LTD.

INDEX TO 10-Q FOR THE QUARTERLY

PERIOD ENDED JANUARY 31, 2008

 

 

 

**PART I FINANCIAL INFORMATION**

**1**

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

2

 

Consolidated Balance Sheets as of January 31, 2008 (unaudited)

 

 

 

and July 31, 2007

 

2

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for

 

 

 

the three and six month periods ended January 31, 2008 and 2007 (unaudited)

 

3

 

 

 

 

 

Consolidated Statements of Cash Flows for the six month periods

 

 

 

ended January 31, 2008 and 2007 (unaudited)

 

4

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

5

 

 

 

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

 

 

AND RESULTS OF OPERATIONS

12

 

 

 

 

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

26

 

 

 

 

ITEM 4: CONTROLS AND PROCEDURES

26

 

 

 

**PART II OTHER INFORMATION**

**27**

 

 

 

 

ITEM 1: LEGAL PROCEEDINGS

27

 

 

 

 

ITEM 1A: RISK FACTORS

27

 

 

 

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

27

 

 

 

 

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

28

 

 

 

 

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

29

 

 

 

 

ITEM 5: OTHER INFORMATION

29

 

 

 

 

ITEM 6: EXHIBITS

29

 

 

 

 

SIGNATURES

31

 

 

 

1

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Consolidated Balance Sheets

As of January 31, 2008 (unaudited) and July 31, 2007

(in thousands, except share data)

 

**ITEM 1:**  

**FINANCIAL STATEMENTS**

 

 

 

**January 31,**

 

 

**July 31,**

 

 

 

**2008**

 

 

**2007**

 

**ASSETS**

 

 

 

 

 

 

**CURRENT ASSETS**

 

 

 

 

 

 

Cash

$

2,688

 

$

1,111

 

Accounts receivable, less allowance for doubtful

 

 

 

 

 

 

accounts $561 and $515, respectively

 

30,880

 

 

24,754

 

Accounts receivable, related parties

 

3,760

 

 

3,876

 

Inventory, less allowance for obsolete inventory $160 and

 

 

 

 

 

 

$127, respectively

 

47,797

 

 

43,084

 

Deferred tax asset

 

685

 

 

653

 

Other current assets

 

1,141

 

 

555

 

Total current assets

 

86,951

 

 

74,033

 

**NET PROPERTY AND EQUIPMENT**

 

10,323

 

 

10,172

 

**OTHER ASSETS**

 

 

 

 

 

 

Intangible assets, less accumulated

 

 

 

 

 

 

amortization, $5 and $24, respectively

 

35

 

 

37

 

Investment in unconsolidated affiliates

 

2,025

 

 

2,092

 

Cash value of life insurance

 

2,344

 

 

1,886

 

Deferred tax asset

 

152

 

 

22

 

Other assets

 

1

 

 

2

 

Total other assets

 

4,557

 

 

4,039

 

**TOTAL ASSETS**

$

101,831

 

$

88,244

 

 

 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

 

 

 

 

 

 

**CURRENT LIABILITIES**

 

 

 

 

 

 

Note payable, bank

$

12,672

 

$

11,946

 

Current portion of long-term debt and capital lease obligation

 

376

 

 

400

 

Accounts payable

 

51,788

 

 

40,549

 

Accounts payable, related parties

 

1,714

 

 

1,559

 

Other current liabilities

 

4,869

 

 

4,796

 

Total current liabilities

 

71,419

 

 

59,250

 

**LONG-TERM LIABILITIES**

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

 

less current portion

 

3,954

 

 

4,133

 

Accrued retirement benefits

 

2,779

 

 

2,628

 

Total long-term liabilities

 

6,733

 

 

6,761

 

**TOTAL LIABILITIES**

 

78,152

 

 

66,011

 

 

 

 

 

 

 

 

**COMMITMENTS AND CONTINGENT LIABILITIES – SEE NOTE 9**

 

 

 

 

 

 

 

**STOCKHOLDERS’ EQUITY**

 

 

 

 

 

 

Common stock, $1 par value; authorized 30,000 shares; issued

 

 

 

 

 

 

and outstanding, 2,045 shares and 2,068, respectively

 

2

 

 

2

 

Paid-in capital

 

6,068

 

 

6,112

 

Retained earnings

 

17,984

 

 

16,507

 

Accumulated other comprehensive loss

 

(375

)

 

(388

)

Total stockholders’ equity

 

23,679

 

 

22,233

 

**TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**

$

101,831

 

$

88,244

 

 

 

See notes to the consolidated financial statements.

2

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Consolidated Statements of Income and Comprehensive Income

Three and Six Month Periods Ended January 31, 2008 and 2007

(unaudited)

(in thousands, except share data)

 

 

 

**Three Months Ended**

**Six Months Ended**

 

 

**January 31,**

 

 

**January 31,**

 

**January 31,**

 

 

**January 31,**

 

 

 

**2008**

 

 

**2007**

 

**2008**

 

 

**2007**

 

 

 

 

 

 

 

 

 

 

 

 

 

**NET SALES AND OTHER REVENUE**

$

91,016

 

$

87,478

$

180,617

 

$

177,294

 

 

 

 

 

 

 

 

 

 

 

 

 

**COST OF SALES**

 

78,121

 

 

76,681

 

158,158

 

 

156,449

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

12,895

 

 

10,797

 

22,459

 

 

20,845

 

 

 

 

 

 

 

 

 

 

 

 

 

**OPERATING GENERAL AND**

 

 

 

 

 

 

 

 

 

 

 

**ADMINISTRATIVE EXPENSES**

 

10,191

 

 

9,497

 

19,521

 

 

18,553

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

2,704

 

 

1,300

 

2,938

 

 

2,292

 

 

 

 

 

 

 

 

 

 

 

 

 

**OTHER INCOME (EXPENSE)**

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

92

 

 

49

 

161

 

 

113

 

Interest expense

 

(379

)

 

(428

)

(774

)

 

(814

)

Equity in earnings of unconsolidated affiliate

 

-

 

 

-

 

(36

)

 

-

 

Other expense – net

 

(287

)

 

(379

)

(649

)

 

(701

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

2,417

 

 

921

 

2,289

 

 

1,591

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

906

 

 

453

 

812

 

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

**NET INCOME**

$

1,511

 

$

468

$

1,477

 

$

887

 

 

 

 

 

 

 

 

 

 

 

 

 

**EARNINGS PER COMMON SHARE**

$

737.29

 

$

229.79

$

719.29

 

$

435.03

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

outstanding

 

2,049

 

 

2,036

 

2,053

 

 

2,039

 

 

 

 

 

 

 

 

 

 

 

 

 

**COMPREHENSIVE INCOME**

 

 

 

 

 

 

 

 

 

 

 

Net income

$

1,511

 

$

468

$

1,477

 

$

887

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Adjustment for net periodic pension

 

 

 

 

 

 

 

 

 

 

 

benefit cost, net of tax

 

6

 

 

-

 

12

 

 

-

 

Total comprehensive income

$

1,517

 

$

468

$

1,489

 

$

887

 

 

 

 

 

 

 

 

 

 

 

 

 

**SUPPLEMENTAL INFORMATION**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other revenue – related parties

$

9,222

 

$

10,039

$

19,512

 

$

20,367

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases – related parties

$

3,777

 

$

3,511

$

7,120

 

$

7,052

 

 

 

See notes to the consolidated financial statements.

3

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

Six Month Periods Ended January 31, 2008 and 2007

(unaudited)

(in thousands, except share data)

 

 

 

 

**January 31,**

 

 

**January 31,**

 

 

 

**2008**

 

 

**2007**

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

 

 

 

 

Net income

$

1,477

 

$

887

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

814

 

 

702

 

Retirement benefits

 

164

 

 

172

 

Cash value of life insurance

 

(459

)

 

(182

)

Deferred income tax

 

(162

)

 

(236

)

Allowance for doubtful accounts

 

47

 

 

38

 

Allowance for obsolete inventory

 

33

 

 

30

 

(Earnings) loss from affiliates

 

36

 

 

-

 

(Increase) decrease in:

 

 

 

 

 

 

Receivables

 

(6,055

)

 

(10,603

)

Inventory

 

(4,745

)

 

(18,532

)

Other current assets

 

(586

)

 

961

 

Intangible assets

 

-

 

 

(36

)

Other assets

 

-

 

 

(1

)

Increase (decrease) in:

 

 

 

 

 

 

Accounts payable

 

11,394

 

 

6,762

 

Other liabilities

 

74

 

 

659

 

Total adjustments

 

555

 

 

(20,266

)

 

 

 

 

 

 

 

Net cash provided (consumed) by operating activities

 

2,032

 

 

(19,379

)

 

 

 

 

 

 

 

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

 

 

 

Purchase of property and equipment

 

(964

)

 

(529

)

Purchase of investments

 

(9

)

 

(16

)

Sale of investments

 

40

 

 

-

 

Net cash consumed by investing activities

 

(933

)

 

(545

)

 

 

 

 

 

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

 

 

 

Net short-term borrowings (repayment)

 

725

 

 

19,630

 

Payments on long-term debt and capital lease obligation

 

(203

)

 

(5,048

)

Proceeds from long-term debt

 

-

 

 

4,666

 

Net payments from issuance (redemption) of common stock

 

(44

)

 

(19

)

Net cash provided by financing activities

 

478

 

 

19,229

 

Net increase (decrease) in cash

 

1,577

 

 

(695

)

Cash at beginning of year

 

1,111

 

 

2,521

 

Cash at end of period

$

2,688

 

$

1,826

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

$

823

 

$

792

 

Income taxes paid

$

896

 

$

494

 

 

 

See notes to the consolidated financial statements.

4

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 1 – BASIS OF PRESENTATION:**

 

The accompanying consolidated financial statements of Professional Veterinary Products, Ltd., and its wholly-owned subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the SEC). Accordingly, these consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

The information contained in the financial statements is unaudited. The statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All significant intercompany accounts and transactions have been eliminated.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The consolidated balance sheet of the Company as of July 31, 2008 has been derived from the audited consolidated balance sheet of the Company as of that date. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2007 filed with the SEC. The Company follows the same accounting policies in preparation of interim financial statements. These policies are presented in Note 2 to the Consolidated Financial Statements included on Form 10-K referred to above.

 

The results of operations and cash flows for the six months ended January 31, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2008 or any other period. Certain amounts from prior periods have been reclassified to conform to the current period’s presentation.

**NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS:**

 

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes,*which is an interpretation of Statement of Financial Accounting Standard (SFAS) No. 109, *Accounting for Income Taxes,*as of August 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in companies’ financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. As a result, the Company applies a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The adoption of FIN 48 had noeffect on the Company’s financial position, cash flows or results of operations. See Note 7 Income Taxes for additional details.

 

In December 2007, FASB issued SFAS No. 141®, *Business Combinations – an amendment of FASB Statement No. 141.*  This statement improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  This statement establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.  This statement also establishes principles and requirements for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase.  Lastly, this statement establishes principles and requirements for how the acquirer determineswhat information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The adoption of this statement is not expected to have a material effect on the Company’s financial position, cash flows or results of operations.

 

5

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (continued):**

 

In December 2007, FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin (ARB) No. 51*.  This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The adoption of this statement is not expected to have a material effect on the Company’s financial position, cash flows or results of operations.

 

**NOTE 3 – PROPERTY AND EQUIPMENT:**

 

Major classes of property and equipment consists of the following:

 

 

 

January 31,

 

July 31,

 

 

2008

 

2007

Land

$

1,762

$

1,762

Buildings

 

5,178

 

5,114

Leasehold improvements

 

636

 

636

Equipment

 

10,116

 

9,624

 

 

17,692

 

17,136

Less – Accumulated depreciation

 

7,913

 

7,100

 

 

9,779

 

10,036

Construction in progress

 

544

 

136

Net property, plant, and equipment

$

10,323

$

10,172

 

**NOTE 4 – LINE OF CREDIT:**

 

The Company has a revolving line of credit that provides for borrowings up to $40,000 with First National Bank (FNB) and is scheduled to expire in December 2009. The short-term borrowing amounts outstanding under this credit facility were $12,672 and $11,946 at January 31, 2008 and July 31, 2007, respectively. Under the current credit agreement, interest is payable at 1.25% or 1.50% over the London InterBank Offered Rate (LIBOR), depending on the Company’s leverage ratio. The weighted average interest rates of borrowing outstanding under the revolving credit agreements were 6.29% and 6.75% at January 31, 2008 and July 31, 2007, respectively. The average dollar amounts of the borrowing were $18,338 and $21,373 at January 31, 2008 and July 31, 2007, respectively. The line of credit is secured by substantially all of the Company’s assets.

 

The debt and credit agreements contain certain covenants related to financial ratios as well as restricting the Company from paying dividends. The Company was in compliance with all covenants under the borrowing agreements at January 31, 2008 and July 31, 2007. 

 

**NOTE 5 – EARNINGS PER SHARE:**

 

SFAS No. 128, *Earnings per Share*promulgates accounting standards for the computation and manner of presentation of the Company’s earnings per share data. Under SFAS No. 128, the Company is required to present basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. There are no securities that are convertible to common stock that would cause further dilution. The weighted average number of common shares outstanding was 2,049 and 2,036 for the three month period ending January 31, 2008 and 2007, respectively. Theweighted average number of 

 

6

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 5 – EARNINGS PER SHARE (continued):**

 

common shares outstanding for the six month period ending January 31, 2008 and 2007 was 2,053 and 2,039, respectively.

 

**NOTE 6 – COMMON STOCK:**

 

The Company is authorized to issue 30,000 shares of common stock with a par value of $1. Issued and outstanding shares amounted to 2,045 at January 31, 2008 and 2,068 at July 31, 2007. Holders of common stock are entitled to a) one vote for each share held on matters submitted to a vote of stockholders, b) a ratable share of dividends declared and c) in the event of liquidation or dissolution, a ratable share of monies after liabilities. Shareholders are not permitted to dispose of their stock except by a sale back to the Company.

 

There were 0 and 13 Common Shares subscribed but unissued as of January 31, 2008 and July 31, 2007, respectively. The amounts receivable on these shares reduced paid-in capital by $0 and $25 at January 31, 2008 and July 31, 2007, respectively. Accounts receivable arising from common stock are presented as a deduction from paid-in capital to the extent such receivables were not paid in cash prior to the date of the report. No finance charges have been generated on any existing payment plan for any common share.

 

**NOTE 7 – INCOME TAXES:**

 

On August 1, 2007, the Company adopted FIN 48, *Accounting for Uncertainty in Income Taxes,*which is an interpretation of SFAS No. 109, *Accounting for Income Taxes*. The adoption did not effect the Company’s financial position, cash flows or results of operations. The Company believes that its current tax positions have a greater than 50% likelihood of being sustained upon examination by the taxing authorities.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of a resolution of any particular uncertain tax position, we believe that our accrual for income taxes reflects the most probable outcome. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for fiscal years prior to July 31, 2005. The Company was examined by the IRS for fiscal year July 31, 2004, which resulted in no change to the federal tax return. The IRS requested an examination for fiscal year July 31, 2005, however, upon consideration of the facts in the prior examination, the examination was cancelled.

 

The Company’s policy is to classify interest expense and any penalties related to income tax uncertainties as a component of income tax expense. There was no interest expense, net of tax benefits, or penalty relating to tax uncertainties recognized in the Consolidated Statements of Income and Comprehensive Income for the three and six months ended January 31, 2008. There were no accrued interest and penalties related to income tax uncertainties reported on the Consolidated Balance Sheet at January 31, 2008.

 

**NOTE 8 – POST RETIREMENT BENEFITS:**

 

For the six months ended January 31, 2008 and 2007, benefits accrued and expensed were $172 and $172, respectively. The plan is an unfunded supplemental retirement plan and is not subject to the minimum funding requirements of the Employee Retirement Income Security Act (ERISA). While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values of $2,229 and $1,772 at January 31, 2008 and July 31, 2007, respectively.

 

7

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 8 – POST RETIREMENT BENEFITS (continued):**

 

Net periodic benefit costs for the Company’s SERP include the following components:

 

 

 

Three Months Ended

Six Months Ended

 

 

January 31,

January 31,

 

 

2008

 

2007

 

2008

 

2007

 

Service cost

$

35

$

36

$

69

$

72

 

Interest cost

 

41

 

38

 

82

 

75

 

Amortization of prior losses

 

1

 

3

 

3

 

6

 

Amortization of unrecognized prior service cost

 

9

 

9

 

18

 

19

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

86

$

86

$

172

$

172

 

 

**NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES:**

 

***Stock Redemption*****–**The Bylaws grant the Company discretion to repurchase or not to repurchase shares of common stock at the time of the shareholder’s request for redemption. The Company may, but is not obligated to, repurchase such shares. See Note 6 for additional information.

 

***Major Customer, Major Suppliers and Credit Concentrations*****–**Other financial instruments, which potentially subject the Company to concentrations of credit risk, are trade accounts receivable and trade payables. One customer comprised a significant individual receivable consisting of 8.9% and 15.0% of the Company’s receivables at January 31, 2008 and July 31, 2007, respectively. Two vendors comprised 43.1% and 6.7% of all purchases at January 31, 2008. Two vendors comprised 41.5% and 6.7% of all purchases at July 31, 2007.

 

***Agreements*****–**On November 7, 2005, the Company executed a lease agreement with Independent Veterinary Group LLC (IVG). Pursuant to the lease agreement, the Company leased certain premises located in Lexington, Kentucky for a term commencing November 1, 2005 and ending July 31, 2007. The Company used the premises for storing and warehousing animal health products.

 

The Company executed a loan agreement dated November 14, 2006 and related loan documents with First National Bank of Omaha (FNB), a national banking association. The obligations of the Company and its subsidiaries under the loan agreement and loan documents commenced November 16, 2006, and are joint and several.

 

Pursuant to the terms of the loan documents, FNB may loan the Company and its subsidiaries up to $44,666, which includes a $40,000 revolving loan facility and a $4,666 term loan facility. The proceeds of such loan facilities were used to repay existing indebtedness of the Company and provide working capital support. The loan proceeds from the term note were wired to U.S. Bank, N.A., the Company’s prior lender, on November 16, 2006, to repay the Company’s obligations under the U.S. Bank loan agreement.

 

The loan agreement imposes certain financial covenants, and the Company shall not, without the consent of FNB, permit its minimum tangible net worth to be less than $17,000 or its cash flow leverage ratio to be equal to or greater than 3.50 to 1.00. The loans may be accelerated upon default. Event of default include, among other things, the Company’s failure (i) to pay amounts due when due and (ii) to perform any material condition or to comply with any material promise or covenant of the loan agreement or any of the loan documents. The revolving note and term note are secured by substantially all of the assets of the Company, including the Company’s headquarters in Omaha. The Company is also currently restricted from paying dividends by these credit facilities.

 

8

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES (continued):**

 

The term note is amortized over a ten year period with a final maturity date of December 1, 2016. The interest rate is fixed at 7.35% per annum for the term of the note. Upon an event of default, the term note shall bear interest at LIBOR as determined by FNB plus 7.50% per annum. This term note may not be prepaid without obtaining the consent of FNB and payment of the prepayment fee as calculated therein. Payments with respect to the term note shall be as follows:  (i) interest only in advance at the rate of $1 per day shall be due and payable for the period beginning November 16, 2006 and ending on November 30, 2006 and (ii) one hundred nineteen (119) installments of principal and interest in the amount of $55 each shall be payable commencing on January 1, 2007 and continuing on the first day of each month until and including November 1, 2016. On December 1, 2016, all unpaid principal andinterest thereon shall be due and payable.

 

FNB shall provide advances to the Company from the revolving note in the maximum aggregate amount of $40,000, which advances will be used as needed by the Company for working capital, through the termination date of December 1, 2009. Interest shall be paid at a variable rate, reset daily, equal to LIBOR as determined by FNB plus 1.25% percent based on the Company’s leverage ratio. Upon an event of default, the revolving note shall bear interest at LIBOR as determined by FNB plus 7.50% per annum.

 

On January 3, 2007, the Company entered into Amendment No. 3 to lease agreement with Kinsley Equities II Limited Partnership relating to its York, Pennsylvania property. The agreement extended the lease term from July 31, 2007 to July 31, 2010.

 

On May 18, 2007, the Company’s Audit Committee recommended to the Board of Directors the dismissal of Quick & McFarlin upon its completion of the audit and the filing of the Form 10-K for the fiscal year ending July 31, 2007 and the retention of BKD, LLP (BKD) as the Company’s independent accountant for the fiscal year ending July 31, 2008. The Board of Directors approved the Audit Committee’s recommendations, subject to acceptance by BKD of the engagement. Quick & McFarlin audited the Company’s financial statements for each of the six fiscal years in the period ended July 31, 2007. On July 27, 2007, BKD and the Company executed the engagement letter to formally retain BKD as the Company’s independent accountant to audit its financial statements for the year ending July 31, 2008.

 

On August 9, 2007, the Company and SERVCO agreed to a temporary extension with a minor revision to the agreement to logistics and other operational services. The Company and SERVCO agreed to extend the agreement through June 30, 2008 pending final changes.

 

On September 17, 2007, the Company entered into Amendment No. 1 to the Loan Agreement dated November 14, 2006 with FNB. Hill’s Pet Nutrition Sales, Inc. (Hill’s) requested that the limitation on purchase money security interest liens under the Loan Agreement be amended to grant Hill’s a purchase money security interest in all products that the Company acquires from Hill’s including but not limited to Hill’s Prescription Diet and Hill’s Science Diet, together with all proceeds from the sale of such branded products.

 

9

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 10 – SEGMENT INFORMATION:**

 

The Company has three reportable segments:  Wholesale Distribution, Logistics Services and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of animal health products. This segment distributes products primarily to licensed veterinarians or business entities comprised of licensed veterinarians. The Logistics Services segment provides logistics and distribution service operations for vendors of animal health products and business to business type transactions. The Logistics Services segment distributes products primarily to other animal health companies. The Direct Customer Services segment acts as a supplier of animal health products to the producer or consumer. Animal health products are shipped to locations closer to the final destination. The segment’s trucking operations transport the products directly to the producer or consumer.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies as detailed in the Company’s consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended July 31, 2007, filed with the SEC. The Company evaluates performance based on profit or loss from operations before income taxes. The Company’s reportable segments are strategic business units that serve different types of customers in the animal health industry. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

Since the Company’s reportable segments all provide essentially the same products and services, the Company believes it would be impracticable to report the revenue from external customers for each product and service or each group of similar products and services in accordance with paragraph 37 of SFAS No. 131, *Disclosures About Segments of an Enterprise and Related Information.*

 

10

 

**PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

January 31, 2008 (unaudited)

(in thousands, except share data)

 

**NOTE 10 – SEGMENT INFORMATION (continued):**

 

The following table summarizes the Company’s operations by business segment:

 

 

 

 

 

 

 

 

Direct

 

 

 

 

 

 

 

Wholesale

 

Logistics

 

 

Customer

 

 

 

 

Consolidated

 

 

Distribution

 

Services

 

 

Services

 

Eliminations

 

 

Total

Three months ended 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other revenue

$

90,981

$

878

 

$

19,915

$

(20,758

)

$

91,016

Cost of sales

 

80,008

 

937

 

 

17,232

 

(20,056

)

 

78,121

Operating, general and 

 

 

 

 

 

 

 

 

 

 

 

 

administrative expenses

 

8,265

 

-

 

 

1,926

 

-

 

 

10,191

Operating income

 

2,710

 

(59

)

 

756

 

(703

)

 

2,704

Income before taxes

$

2,417

$

(59

)

$

762

$

(703

)

$

2,417

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other revenue

$

86,107

$

64

 

$

18,835

$

(17,528

)

$

87,478

Cost of sales

 

77,114

 

54

 

 

16,705

 

(17,192

)

 

76,681

Operating, general and

 

 

 

 

 

 

 

 

 

 

 

 

administrative expenses

 

7,702

 

-

 

 

1,795

 

-

 

 

9,497

Operating income

 

1,290

 

10

 

 

336

 

(336

)

 

1,300

Income before taxes

$

921

$

10

 

$

326

$

(336

)

$

921

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other revenue

$

180,957

$

1,264

 

$

36,732

$

(38,336

)

$

180,617

Cost of sales

 

162,257

 

1,338

 

 

31,964

 

(37,401

)

 

158,158

Operating, general and 

 

 

 

 

 

 

 

 

 

 

 

 

administrative expenses

 

15,766

 

-

 

 

3,755

 

-

 

 

19,521

Operating income

 

2,935

 

(74

)

 

1,012

 

(935

)

 

2,938

Income before taxes

$

2,289

$

(74

)

$

1,009

$

(935

)

$

2,289

Business segment assets

$

100,863

$

320

 

$

14,550

$

(13,902

)

$

101,831

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and other revenue

$

175,702

$

140

 

$

34,231

$

(32,779

)

$

177,294

Cost of sales

 

158,383

 

116

 

 

30,211

 

(32,261

)

 

156,449

Operating, general and

 

 

 

 

 

 

 

 

 

 

 

 

administrative expenses

 

15,042

 

-

 

 

3,511

 

-

 

 

18,553

Operating income

 

2,277

 

24

 

 

509

 

(518

)

 

2,292

Income before taxes

$

1,591

$

24

 

$

494

$

(518

)

$

1,591

Business segment assets

$

102,706

$

369

 

$

13,609

$

(12,789

)

$

103,895

 

 

11

 

**ITEM 2:**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**

**RESULTS OF OPERATIONS**

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes that are included in this quarterly report.

 

***Forward-Looking Statements***

 

*This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements are contained principally in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:*

 

 

**•**

*the current economic environment affecting the Company and the markets it serves;*

 

**•**

*sources of revenues and anticipated revenues, including the contribution from the growth of new products and markets;*

 

**•**

*estimates regarding the Company’s capital requirements and its need for additional financing;*

 

**•**

*the Company’s ability to attract and retain customers and the market acceptance of its products;*

 

**•**

*our ability to establish relationships with suppliers of products; and*

 

**•**

*plans for future products and services and for enhancements of existing products and services.*

 

*In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these statements. Also, these statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or revise these forward-looking statements.*

 

*These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ materially from those in forward-looking statements: decreased demand for our products or services; loss of one or more of our major customers; surplus inventories; loss of one or more of our major vendors; recessionary economic cycles; strikes, work slow downs, or work stoppages at our vendors’ facilities; increases in interest rates; and increases in the prices paid for products. Readers should review and consider these factors along with the various disclosures wemake in public filings with the Securities and Exchange Commission.*

 

***Overview***

 

Professional Veterinary Products, Ltd. provides distribution services of animal health products through three business segments, Wholesale Distribution, Logistics Services, and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of animal health products. The Logistics Services segment provides logistics and distribution service operations for vendors of animal health products and business to business type transactions. The Direct Customer Services segment is a supplier of animal health products to the producer or consumer.

 

We generate most of our net sales and other revenue by providing pharmaceuticals, vaccines, supplies, equipment and other animal health related items to our customers through our wholesale distribution segment. The main factor that impacts our net sales and other revenue is the Company’s ability to offer a broad product line combined with our excellent and knowledgeable customer service. We also derived approximately 17% of our sales and other revenue from our direct customer services segment for the six month period ending January 31, 2008.

 

12

 

 

During the quarter ended January 31, 2008, the Company’s net sales and other revenues increased by $3.5 million and gross profit increased $2.1 million or 19.43% compared to the prior period. The gross profit increase was primarily due to the increase in margin and vendor sales and purchase incentives of $2.8 million, an increase in agency commission of $.2 million, an increase in reimbursement of free goods of $.4 million, and a decrease in the shareholder rebate of $.8 million. This increase was offset primarily due to an increase in freight expense of $2.1 million. Shareholder rebates are calculated in the discretion of management and are based on the margin from eligible purchases by the shareholder during the period. If accrued, rebates are made on a pro rata basis to each shareholder based on the aggregate margin from all shareholders during the period and are netted againstsales and accounts receivable. For the quarter, net income increased by $1.0 million to $1.5 million compared to $.5 million in the prior comparative period. The net income increase was primarily due to an increase in gross profit of $2.1 million as a result of a $1.5 million rebate earned from a major vendor. Partially offsetting this increase was an increase in operations and maintenance expense of $.7 million and an increase in income tax expense of $.4 million. In the discretion of management, the Company did not accrue any shareholder performance rebate for the three month period ended January 31, 2008. In the prior comparative period, the Company accrued $.8 million. Despite the Company’s positive performance, management determined that it is in the Company’s best interest to retain net income for on-going business needs, rather than shareholder rebates.

 

Vendor sales and purchase incentives range from one-time opportunities to programs that last a month, a quarter, a trimester, or an entire year. Vendor sales and purchase incentives are recorded as a reduction of cost of sales. Incentives are recognized when goals are achieved or when they are estimated and are likely to be achieved.

 

Looking forward, we believe that pricing competition, costs of goods from manufacturers and labor expenses will continue to be the most pressing issues facing the industry and us in the foreseeable future and will continue to impact our profitability.

 

***Current Assets***

 

During the six month period ending January 31, 2008, the Company’s current assets increased $12.9 million primarily due to increased accounts receivable of $6.0 million and an increase in inventory of $4.7 million, which resulted from fewer cash receipts from customers and an increase in product purchased from vendors.

 

***Current Liabilities***

 

During the six month period ending January 31, 2008, the Company’s current liabilities increased $12.2 million primarily due to an increase in notes payable of $.7 million and an increase in accounts payable of $11.4 million. The accounts payable increase reflects higher quarter end inventory levels as compared to the end of the previous fiscal year end.

 

***Results of Operations***

 

The following discussion is based on the historical results of operations for the three month and six month periods ended January 31, 2008 and 2007.

 

13

 

***Summary Consolidated Results of Operations Table For Three Months Ended January 31, 2008***

 

 

**Three Months Ended**

 
 

**January 31,**

 
 

**(in thousand**s)

 
 

**2008**

**2007**

Net sales and other revenue

$

91,016

 

$

87,478

 

Cost of sales

 

78,121

 

 

76,681

 

Gross profit

 

12,895

 

 

10,797

 

Operating, general and administrative expenses

 

10,191

 

 

9,497

 

Operating income

 

2,704

 

 

1,300

 

Interest expense, net

 

(287

)

 

(379

)

Income before taxes

 

2,417

 

 

921

 

Income tax expense

 

906

 

 

453

 

Net income

$

1,511

 

$

468

 

 

 

 

 

 

 

 

 

***Three months ended January 31, 2008 as compared to three months ended January 31, 2007***

 

Net sales and other revenue for the three month period ending January 31, 2008 increased $3.5 million to $91.0 million compared to $87.5 million for the same period the previous year. The increase in net sales and other revenue resulted primarily due to an increase in sales to existing customers of $1.7 million, an increase in sales to new customers of $.7 million, an increase in agency commission of $.3 million and a decrease in shareholder rebate of $.8 million. For the purpose of calculating revenue growth rates of new and existing customers, the Company has defined a new customer as a customer that did not purchase product from the Company in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered an existing customer. Revenues from new customers for each fiscal quarter are summed to arrive at the year-to-date revenue for new customers.The Company’s shareholder rebate decreased $.8 million, compared to the prior period, which is netted against sales and accounts receivable on the Company’s financial statements. Such rebates are calculated in the discretion of management and are based on the margin from eligible purchases by the shareholder during the period. If accrued, such rebates are made on a pro rata basis to each shareholder based on the aggregate of all shareholders during the period.

 

Cost of sales for the three month period ending January 31, 2008 increased $1.4 million to $78.1 million compared to $76.7 million for the same period the previous year. This increase is primarily attributable to an increase in cost of goods sold of $4.2 million. Partially offsetting this increase was an increase in margin and vendor sales and purchase incentives of $2.8 million. Cost of sales includes the Company’s inventory product cost and freight costs less vendor purchase and sales incentives.

 

Gross profit for the three month period ending January 31, 2008 increased $2.1 million to $12.9 million compared to $10.8 million for the same period the previous year. This increase is primarily attributable to the increase in margin of $.5 million and an increase in vendor sales and purchase incentives earned of $2.3 million. Gross profit as a percentage of net sales and other revenue was 14.2% compared to 12.3% for the same period the previous year.

 

Operating, general and administrative expenses for the three month period ending January 31, 2008 increased $.7 million to $10.2 million compared to $9.5 million for the same period the previous year. The increase in operating, general and administrative expenses resulted primarily from an increase in payroll, payroll taxes and employee benefits of $.3 million, an increase in professional services of $.2 million, an increase in credit card fees of $.1 million, and an increase in mileage costs of $.1 million. These expenses as a percentage of net sales and other revenue were 11.2% compared to 10.9% for the same period the previous year.

 

Operating income for the three month period ending January 31, 2008 increased $1.4 million to $2.7 million compared to $1.3 million for the same period the previous year. This increase is primarily attributable to the 

 

14

 

increase in gross profit margin of $2.1 million. Partially offsetting this increase was an increase in operating, general and administrative expenses of $.7 million.

 

The Company’s net interest (expense) was $(287) thousand for the three month period ending January 31, 2008, compared to $(379) thousand for the same period the previous year. Interest expense decreased by $49 thousand to $379 thousand for the three month period ending January 31, 2008, from $428 thousand for the same period in the previous year while interest income increased to $92 thousand compared to $49 thousand in the prior period. The decrease in the Company’s net interest (expense) resulted primarily from an increase in interest income and a decrease in interest expense of $49 thousand on outstanding debt. The increase in interest income resulted from an increase in the finance charges on past due accounts receivable of $43 thousand.

 

Net income increased by $1.0 million to $1.5 compared to $.5 million for the same period the previous year. The net income increase was primarily due to an increase in gross profit of $2.1 million. Partially offsetting this increase was an increase in operating, general and administrative expenses of $.7 million and an increase in income tax expense of $.4 million.

 

***Operating Segments – Three months ended January 31, 2008 as compared to three months ended January 31, 2007***

 

The Company has three reportable segments: Wholesale Distribution, Logistics Services, and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of animal health products to veterinarians. This segment distributes products primarily to Company shareholders, who are licensed veterinarians or business entities comprised of licensed veterinarians.

 

The Logistics Services segment provides animal health products to other animal health wholesalers. The Logistic Services segment serves business-to-business type transactions.

 

The Direct Customer Services segment is a supplier of animal health products to the producer or consumer. Animal health products are shipped to locations closer to the final destination. The segment’s trucking operations transport the products directly to the producer or consumer.

 

The Company’s reportable segments are strategic business units that serve different types of customers in the animal health industry. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the Company’s management, who decides how to allocate resources and assesses performance. For additional quantitative segment information, see Note 10 of the Company’s Consolidated Financial Statements at January 31, 2008.

 

***Wholesale Distribution***

 

Net sales and other revenue for the three month period ending January 31, 2008 increased by 5.7% or $4.9 million. Net sales and other revenue for the three month period ending January 31, 2008 totaled $91.0 million compared to $86.1 million for the same three month period in the prior fiscal year. The increase in net sales and other revenue resulted primarily from an increase in sales to existing customers of $3.4 million, an increase in earnings in consolidated affiliates of $.4 million, an increase in agency commission of $.2 million, an increase in sales to new customers of $.1 million, and a decrease in the shareholder rebate of $.8 million. The Company’s shareholder rebate decreased $.8 million, compared to the prior period, which is netted against sales and accounts receivable on the Company’s financial statements.

 

Cost of sales for the three month period ending January 31, 2008 increased $2.9 million to $80.0 million compared to $77.1 million for the same period the previous year. This increase is primarily attributable to an increase in cost of goods sold of $6.0 million.  Partially offsetting this increase was an increase in margin and vendor sales and purchase incentives of $3.1 million.

 

Gross profit increased by $2.0 million to $10.9 million from $8.9 million for the same three month period in the prior fiscal year. This increase is primarily attributable to the increase in vendor sales and purchase incentives 

 

15

 

earned of $2.4 million. Gross profit as a percentage of total revenue was 12.1% for the three month period ending January 31, 2008 compared to 10.4% for the same three month period in the previous year.

 

Operating, general and administrative expenses increased by $.6 million to $8.3 million for three month period ending January 31, 2008 compared to $7.7 million for the previous year. This increase in operating, general and administrative expenses resulted primarily from an increase in payroll, payroll taxes, and employee benefits of $.4 million and an increase in professional services of $.2 million. Such operating, general and administrative expenses as a percentage of total revenue for the three month period ending January 31, 2008 was 9.1% compared to 8.9% for the three month period ended January 31, 2007.

 

Operating income increased by $1.4 million to $2.7 million for the three month period ending January 31, 2008 compared to $1.3 million for the previous year. This increase is primarily attributable to the increase in gross profit of $2.0 million.  Partially offsetting this increase was an increase in operating expenses of $.6 million.

 

***Logistics Services***

 

Net sales and other revenue for the three month period ending January 31, 2008 increased by $.8 million. Net sales and other revenue for the three month period ending January 31, 2008 totaled $.9 million compared to $.1 million for the same period in the previous fiscal year. This increase is primarily attributable to the increased sales to other animal health wholesalers. 

 

Cost of sales for the three month period ending January 31, 2008 increased $.8 million to $.9 million compared to $.1 million from the same period the previous year. This increase is primarily attributable to increased cost of goods sold of $.8 million. The cost of goods sold includes the Company’s inventory product cost. During the period, the Company had excess inventory items that had an expiration date. Expired inventory has little or no value. By selling these items below cost, the Company was able to recover most of the cost of the inventory.

 

Gross profit decreased by $69 thousand to $(59) thousand during the three month period ending January 31, 2008 compared to $10 thousand for the same period during the previous fiscal year. Gross profit as a percentage of total revenue was (6.7)% for the three month period ending January 31, 2008 compared to 15.6% for the three month period ended January 31, 2007.

 

Operating, general and administrative expenses are nominal for this segment and for the three month periods ended January 31, 2008 and 2007.

 

Operating income decreased by $69 thousand to $(59) thousand for the three month period ending January 31, 2008 compared to $10 thousand for the same period the previous year. This decrease is primarily attributable to the decrease in gross profit.

 

***Direct Customer Services***

 

Net sales and other revenue for the three month period ending January 31, 2008 increased by 5.7% or $1.1 million. Net sales and other revenue for the three month period ending January 31, 2008 totaled $19.9 million compared to $18.8 million for the same period the previous year. The increase in net sales and other revenue resulted primarily from an increase in sales to new customers of $.6 million and an increase in sales to existing customers of $.5 million.

 

Cost of sales for the three month period ending January 31, 2008 increased by $.5 million to $17.2 million compared to $16.7 million for the same period the previous year. This increase is primarily attributable to the increase of cost of goods sold of $.3 million and a decrease in margin and vendor sales and purchase incentives earned of $.2 million.  Cost of sales includes the Company’s inventory product cost and freight costs less vendor purchase and sales incentives.

 

Gross profit increased by $.6 million to $2.7 million in the three month period ending January 31, 2008 compared to $2.1 million for the same period the previous fiscal year.  This increase was primarily attributable due to the increase in sales to new customers of $.6 million.  Gross profit as a percentage of total revenue was 13.5% for 

 

16

 

the three month period ending January 31, 2008 compared to 11.3% for the three month period ending January 31, 2007.

 

Operating, general and administrative expenses increased by $.1 million to $1.9 million for three month period ending January 31, 2008 compared to $1.8 million for the previous year. The increase in operating, general and administrative expenses resulted primarily from an increase in employee transportation expenses of $.1 million. Such operating, general and administrative expenses as a percentage of total revenue for the three month period ending January 31, 2008 were 9.7% and compared to 9.5% during the same three month period ending January 31, 2007.

 

Operating income increased by $.4 million to $.7 million for the three month period ending January 31, 2008 compared to an operating income of $.3 million for the same period in the previous year.  This increase is primarily attributable to an increase in gross profit of $.6 million.  Partially offsetting this increase was an increase in operating expenses of $.1 million.

 

17

 

***Summary Consolidated Results of Operations Table for six months ended January 31, 2008***

 

 

**Six Months Ended**

 
 

**January 31,**

 
 

**(in thousand**s)

 
 

**2008**

**2007**

Net sales and other revenue

$

180,617

 

$

177,294

 

Cost of sales

 

158,158

 

 

156,449

 

Gross profit

 

22,459

 

 

20,845

 

Operating, general and administrative expenses

 

19,521

 

 

18,553

 

Operating income

 

2,938

 

 

2,292

 

Other income (expense), net

 

(649

)

 

(701

)

Income before taxes

 

2,289

 

 

1,591

 

Income tax expense

 

812

 

 

704

 

Net income

$

1,477

 

$

887

 

 

 

 

 

 

 

 

 

***Six months ended January 31, 2008 as compared to six months ended January 31, 2007***

 

Net sales and other revenue for the six month period ending January 31, 2008 increased $3.3 million to $180.6 million compared to $177.3 million for the same period the previous year. The increase in net sales and other revenue resulted primarily due to an increase in sales to new customers of $2.7 million, an increase in agency commission of $.5 million, and a decrease in the shareholder rebate of $1.5 million. Partially offsetting this increase was a decrease in sales to existing customers of $1.4 million which primarily resulted from a 2007 vendor contract change. This change moved previously invoiced sales to a commission-based agency relationship. Under an agency relationship, when the Company receives orders for products from a customer, the Company transmits the order to the vendor, who then picks, packs, ships, invoices and collects for the products ordered. The Company’sshareholder rebate decreased $1.5 million, compared to the prior period, which is netted against sales and accounts receivable on the Company’s financial statements.

 

Cost of sales for the six month period ending January 31, 2008 increased $1.7 million to $158.2 million compared to $156.5 million for the same period the previous year. This increase is primarily attributable to increased cost of goods sold of $4.0 million. Partially offsetting this increase was an increase in vendor sales and purchase incentives earned of $2.3 million. The cost of goods sold includes the Company’s inventory product cost and freight costs less vendor purchase and sales incentives. Sales performance incentives are recorded based on the terms of the contracts or programs with each vendor. Sales performance incentives are classified in the accompanying consolidated statements of income as a reduction to cost of goods sold at the time of the sales performance measures are achieved.

 

Gross profit for the six month period ending January 31, 2008 increased $1.6 million to $22.4 million compared to $20.8 million for the same period the previous year. This increase is primarily attributable to the increase in vendor sales and purchase incentives earned by the Company of $2.3 million. This increase was offset primarily due to a decrease in sales margin of $.5 million. Gross profit as a percentage of net sales and other revenue was 12.4% compared to 11.8% for the same period the previous year.

 

Operating, general and administrative expenses for the six month period ending January 31, 2008 increased $1.0 million to $19.5 million compared to $18.5 million for the same period the previous year. The increase in operating, general and administrative expenses resulted primarily from an increase in employee training of $.9 million and an increase in payroll, payroll taxes, and employee benefits of $.1 million These expenses as a percentage of net sales and other revenue were 10.8% compared to 10.5% for the same period the previous year.

 

Operating income for the six month period ending January 31, 2008 increased $.6 million to $2.9 million compared to $2.3 million for the same period the previous year. This increase is primarily attributable to the increase 

 

18

 

in gross profit margin of $1.6 million. Partially offsetting this increase was an increase in operating, general and administrative expenses of $1.0 million.

 

The Company’s other income (expense) was $(649) thousand for the six month period ending January 31, 2008, compared to $(701) thousand for the same period the previous year. Interest expense decreased to $774 thousand for the six month period ending January 31, 2008, from $814 thousand for the same period in the previous year while interest income increased to $161 thousand compared to $113 thousand in the prior period. The decrease in the Company’s other income (expense) resulted primarily from an increase in interest income and a decrease in interest expense of $40 thousand due principally on outstanding debt and a decrease in equity earnings of unconsolidated affiliates of $36 thousand. The increase in interest income resulted from an increase in the finance charges on past due accounts receivable of $48 thousand.

 

Net income increased by $.6 million to $1.4 million compared to $.8 million for the same period the previous year. The net income increase was primarily due to an increase in operating income of $.6 million and a decrease in other income (expense) of $.1 million. Partially offsetting this increase was an increase in income tax expense of $.1 million.

 

***Operating Segments –Six months ended January 31, 2008 compared to six months ended January 31, 2007***

 

***Wholesale Distribution***

 

Net sales and other revenue for the six month period ending January 31, 2008 increased by 3.0% or $5.3 million. Net sales and other revenue for the six month period ending January 31, 2008 totaled $181.0 million compared to $175.7 million for the same six month period in the prior fiscal year. The increase in net sales and other revenue resulted primarily because of an increase in sales to existing customers of $1.5 million, an increase in sales to new customers of $1.4 million, an increase in agency commission of $.5 million, an increase in earnings of unconsolidated affiliates of $.4 million and a decrease in the shareholder rebate of $1.5 million. The Company’s shareholder rebate decreased $1.5 million, compared to the prior period, which is netted against sales and accounts receivable on the Company’s financial statements.

 

Cost of sales for the six month period ending January 31, 2008 increased $3.9 million to $162.3 million compared to $158.4 million for the same period the previous year. This increase is primarily attributable to increased cost of goods sold of $3.1 million, an increase in freight expense of $2.6 million, and a decrease in sales margin of $.5 million. Partially offsetting this increase was an increase in vendor sales and purchase incentives earned by the Company of $2.3 million. The cost of goods sold includes the Company’s inventory product cost and freight costs less vendor purchase and sales incentives.

 

Gross profit increased by $1.4 million to $18.7 million compared to $17.3 million for the same six month period in the prior fiscal year. This increase is primarily attributable to the increase of vendor sales and purchase incentives earned by the Company of $2.3 million. This increase was offset primarily due to a decrease in sales margin of $.5 million. Gross profit as a percentage of total revenue was 10.3% for the six month period ending January 31, 2008 compared to 9.9% for the same six month period in the previous year.

 

Operating, general and administrative expenses increased by $.7 million to $15.7 million for six month period ending January 31, 2008 compared to $15.0 million for the previous year. This increase in operating, general and administrative expenses resulted primarily from increases in professional services of $.2 million, communications expense of $.1 million, computer supply expense of $.1 million, employee education of $.1 million, depreciation expense of $.1 million, and employment expenses of $.1 million. Such operating, general and administrative expenses as a percentage of total revenue for the six month period ending January 31, 2008 was 8.7% compared to 8.6% for the six month period ended January 31, 2007.

 

Operating income increased by $.6 million to $2.9 million for the six month period ending January 31, 2008 compared to $2.3 million for the previous year. This increase is primarily attributable to the increase in gross profit margin of $1.4 million. Partially offsetting this increase was an increase in operating, general and administrative expenses of $.7 million.

 

19

 

***Logistics Services***

 

Net sales and other revenue for the six month period ending January 31, 2008 increased by $1.1 million. Net sales and other revenue for the six month period ending January 31, 2008 totaled $1.2 million compared to $.1 million for the same period in the previous fiscal year. This increase is primarily attributable to increased sales to other animal health wholesalers.

 

Cost of sales for the six month period ending January 31, 2008 increased $1.2 million to $1.3 million compared to $.1 million from the same period the previous year. This increase is primarily attributable to increased cost of goods sold of $1.2 million. The cost of goods sold includes the Company’s inventory product cost. During the period, the Company had excess inventory items that had an expiration date. Expired inventory has little or no value. By selling these inventory items below cost, the Company was able to recover most of the cost of the inventory.

 

Gross profit decreased by $98 thousand to $(74) thousand during the six month period ending January 31, 2008 compared to $24 thousand for the same period during the previous fiscal year. Gross profit as a percentage of total revenue was (5.9)% for the six month period ending January 31, 2008 compared to 17.1% for the six month period ended January 31, 2007.

 

Operating, general and administrative expenses are nominal for this segment and for the six month periods ended January 31, 2008 and 2007.

 

Operating income decreased by $98 thousand to $(74) thousand for the six month period ending January 31, 2008 compared to $24 thousand for the same period the previous year. This decrease is primarily attributable to the decrease in gross profit.

 

***Direct Customer Services***

 

Net sales and other revenue for the six month period ending January 31, 2008 increased by 7.3% or $2.5 million. Net sales and other revenue for the six month period ending January 31, 2008 totaled $36.7 million compared to $34.2 million for the same period the previous year. The increase in net sales and other revenue resulted primarily from an increase in sales to new customers of $1.3 million and an increase to existing customers of $1.2 million.

 

Cost of sales for the six month period ending January 31, 2008 increased by $1.8 million to $32.0 million compared to $30.2 million for the same period the previous year. This increase is primarily attributable to the increase of cost of goods sold of $1.8 million. The cost of goods sold includes the Company’s inventory product cost and freight costs less vendor purchase and sales incentives.

 

Gross profit increased by $.7 million to $4.7 million in the six month period ending January 31, 2008 compared to $4.0 million for the same period the previous fiscal year. This increase was primarily attributable due to the increase in sales margin on the purchase of animal health products of $.7 million. Gross profit as a percentage of total revenue was 13.0% for the six month period ending January 31, 2008 compared to 11.7% for the six month period ended January 31, 2007.

 

Operating, general and administrative expenses increased by $.2 million to $3.7 million for six month period ending January 31, 2008 compared to $3.5 million for the previous year. The increase in operating, general and administrative expenses resulted primarily from an increase in payroll, payroll taxes, and employee benefits of $.2 million. Such operating, general and administrative expenses as a percentage of total revenue for the six month period ending January 31, 2008 were 10.2% and compared to 10.2% during the same six month period ending January 31, 2007.

 

Operating income increased by $.5 million to $1.0 million for the six month period ending January 31, 2008 compared to an operating income of $.5 million for the same period in the previous year.  This increase is primarily attributable to an increase in gross profit of $.7 million.  Partially offsetting this increase was an increase in operating expenses of $.2 million.

 

20

 

 

***Seasonality in Operating Results***

 

The Company’s quarterly sales and operating results have varied in the past. Historically, the Company’s sales are seasonal with peak sales in the spring and fall. The cyclical nature is directly tied to the significant amount of business the Company does in the livestock sector. Product use cycles are directly related to certain medical procedures performed by veterinarians on livestock during the spring and fall.

 

The Company is selling more companion animal related products. These products tend to have a different seasonal nature which minimally overlaps the livestock business cycles. The net result is a reduction of the cyclical seasonal nature of the business. Minimizing the cyclical nature of the Company’s business has allowed for more efficient utilization of all resources.

 

***Liquidity and Capital Resources***

 

The Company expends capital primarily to fund day-to-day operations and expand those operations to accommodate sales growth. It is necessary for the Company to expend necessary funds to maintain significant inventory levels in order to fulfill its commitment to its customers. Historically, the Company has financed its cash requirements primarily from short term bank borrowings and cash from operations. At the end of the six month period ended January 31, 2008, there were no additional material commitments for capital expenditures other than those described below.

 

The Company also has expended funds in the lease and purchase of its facilities. On March 15, 2002, the Company signed a lease agreement with Kinsley Equities II Limited Partnership for 70,000 square feet of warehouse space in York, Pennsylvania for an initial term of five years. The Company uses this facility to ship products to its customers in that geographical area of the United States. In June 2003, the Company exercised an option to lease an additional 17,500 square feet of space in the York facility for a total of 87,500 square feet of leased space in York, Pennsylvania. In January 2007, the Company entered into Amendment No. 3 to the lease agreement with Kinsley Equities II Limited Partnership. The amendment extended the lease term from July 31, 2007 to July 31, 2010. The payment for this lease is $29,895.83 per month.

 

In May 2003, the Company amended and restated its Revolving Credit Agreement with U.S. Bank and established a revolving line of credit facility and a term loan facility. The Company’s subsidiaries also were named as borrowers and were jointly and severally liable for the U.S. Bank obligations. The Term Promissory Note in the amount of $4 million accrued interest at a fixed rate of 5.77% per annum and was payable in 59 monthly installments of principal and interest through May 1, 2008. On June 1, 2008, all unpaid principal and interest would have been due. On December 28, 2004, the Company, its subsidiaries and U.S. Bank entered into a Second Amendment to the Amended and Restated Loan Agreement whereby U.S. Bank increased Company’s revolving line of credit to $40 million, which was evidenced by a Revolving Promissory Note. The Revolving Promissory Note was scheduled to mature onJanuary 1, 2008, and accrued interest at a variable rate, subject to change each fiscal quarter, equal to LIBOR plus a percentage based on the Company’s leverage ratio.

 

Both the Term Promissory Note and the Revolving Promissory Note were secured by a first and second mortgage held by U.S. Bank on the Company’s Omaha facility as well as a security interest in substantially all of the Company’s assets. On November 16, 2006, after executing new loan documents with First National Bank of Omaha (as described below), the Company repaid all of its obligations in the amount of $22,275,901 under the U.S. Bank loan documents, which amount included a prepayment penalty of $112,448 of which $25,000 was reimbursed by FNB.

 

In April 2005, the Company signed a lease agreement with U.S. Bancorp Equipment Finance for voice picking equipment to be used in the Omaha, Nebraska and York, Pennsylvania facilities. The initial amount of the lease is in the amount of $207,996, with interest at 6.19% and monthly payments of $6,346 through April 2008.

 

Effective October 1, 2005, the Company entered into an agreement to lease approximately 15,625 square feet in Hereford, Texas. The lease has an initial term of five years, ending on September 30, 2010. The Company also has the option to renew the initial term of the lease for two successive three year periods by providing the 

 

21

 

landlord notice of its election to renew thirty days prior to the commencement of such renewal term. The Company uses the premises for storing and warehousing veterinary products.

 

In November 2006, the Company and its subsidiaries executed a Loan Agreement and related loan documents (collectively “Loan Documents”) with FNB, which replaced the Loan Agreement with U.S. Bank. The obligations of the Company and its subsidiaries under the Loan Documents commenced November 16, 2006, and are joint and several. Pursuant to the terms of the Loan Documents, FNB may loan to the Company and its subsidiaries up to $44.7 million, which includes a $40 million revolving loan facility and a $4.7 million term loan facility. The proceeds of such loan facilities were used to repay existing indebtedness of the Company owed to U.S. Bank and provide working capital support.

 

The Term Note is amortized over a ten year period with a final maturity date of December 1, 2016. The interest rate is fixed at 7.35% per annum for the term of the note. Upon an event of default, the Term Note shall bear interest at LIBOR as determined by FNB plus 7.50% per annum. This Term Note may not be prepaid without obtaining the consent of FNB and payment of the prepayment fee as calculated therein. Payments with respect to the Term Note shall be as follows:  (i) interest only in advance at the rate of $953 per day shall be due and payable for the period beginning on November 16, 2006 and ending on November 30, 2006 and (ii) one hundred nineteen (119) installments of principal and interest in the amount of $55,282 each shall be payable commencing on January 1, 2007 and continuing on the first day of each month until and including November 1, 2016. On December 1, 2016, all unpaidprincipal and interest thereon shall be due and payable. As of January 31, 2008 and July 31, 2007, the Company had $4,311,535 and $4,477,542 outstanding on the Term Note, respectively.

 

FNB shall provide advances to the Company from the Revolving Note in the maximum aggregate amount of $40 million, which advances will be used as needed by the Company for working capital, through the termination date of December 1, 2009. Interest shall be paid at a variable rate, reset daily, equal to LIBOR as determined by FNB plus (i) 1.25% per annum when the leverage ratio is less than or equal to 3.00 to 1.00 or (ii) 1.50% per annum when the leverage ratio is more than 3.00 to 1.00. Upon the event of default, the Revolving Note shall bear interest at LIBOR as determined by FNB plus 7.50% per annum. As of January 31, 2008, the variable interest rate at which the Revolving Note accrued interest was 4.52%, and the Company had approximately $12.7 million outstanding thereunder.

 

The Loan Agreement imposes certain financial covenants, and the Company shall not, without the consent of FNB permit its minimum tangible net worth to be less than $17 million or its leverage ratio to be equal to or greater than 3.50 to 1.00. The loans may be accelerated upon default. Event of default provisions include, among other things, the Company’s failure (i) to pay amounts when due and (ii) to perform any material condition or to comply with any material promise or covenant of the Loan Documents. The Revolving Note and Term Note are secured by substantially all of the assets of the Company and its subsidiaries, including the Company’s headquarters in Omaha. We also currently are restricted from paying dividends by these credit facilities.

 

On August 9, 2007, the Company and SERVCO agreed to a temporary extension with a minor revision to the agreement to logistics and other operational services. The Company and SERVCO agreed to extend the agreement through June 30, 2008 pending final changes.

 

On September 17, 2007, the Company entered into Amendment No. 1 to the loan agreement with FNB to permit the limitation on purchase money security liens. See Note 9 to the Consolidated Financial Statements.

 

Under its Bylaws, the Company may, in its discretion, decide to repurchase shares of common stock upon request for redemption by a shareholder.

 

***Operating Activities.***Net cash provided in operating activities of $2.0 million for six months ending January 31, 2008 was primarily attributable to net income of $1.5 million and an increase in accounts payable of $11.4 million, which was partially offset by an increase in accounts receivable of $6.1 million and an increase of $4.7 million in inventories. Net cash consumed in operating activities of $19.4 million for the six months ending January 31, 2007, was primarily attributable to an increase of $10.6 million in accounts receivable and an increase of $18.5 million in inventories, which was partially offset by an increase in accounts payable of $6.8 million.

 

22

 

***Investing Activities.***Net cash consumed by investing activities of $.9 million for the six months ending January 31, 2008 was primarily attributable to investments in equipment and furniture, including the purchase of office, warehouse and computer equipment. Net cash consumed by investing activities of $.5 million for the six months ending January 31, 2007 was primarily attributable to investments in equipment and furniture, including the purchase of office, warehouse and computer equipment.

 

***Financing Activities.***Net cash provided by financing activities of $.5 million for period ending January 31, 2008 was primarily attributable to net loan proceeds. The loan proceeds were on the Company’s revolving line of credit. Net cash provided by financing activities of $19.2 million for the period ending January 31, 2007 was primarily attributable to net loan proceeds. The loan proceeds were primarily on the Company’s revolving line of credit.

 

***Off-Balance Sheet Arrangements***

 

At January 31, 2008, the Company did not have any off-balance sheet arrangements.

 

***Critical Accounting Policies***

 

The SEC issued disclosure guidance for “critical accounting policies.”  The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

 

The Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2007 filed with the SEC. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. Following are some of the Company’s critical accounting policies impacted by judgments, assumptions and estimates.

 

***Use of Estimates***

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

 

***Revenue Recognition***

 

The Company derives its revenue primarily from the sale of products, consignment sales and agency agreements. Revenues are recognized as product is received by the customer and related services are performed in accordance with all applicable revenue recognition criteria. For these transactions, the Company applies the provisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.”    The revenue from the “buy/sell” and consignment transactions are recorded at gross. Agency sales are transactions presented on a net basis. The Company recognizes revenue when there is pervasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the contractual obligations are met, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.

 

***Inventories***

 

23

 

Inventories consist substantially of finished goods held for resale and are valued at the lower of cost or market, not in excess of net realizable value. Cost is determined primarily by the weighted average cost method.

 

***Major Customer, Major Suppliers and Credit Considerations***

 

Other financial instruments, which potentially subject the Company to concentrations of credit risk, are trade accounts receivable and trade payables. One customer comprised a significant individual receivable consisting of 8.9% and 15.0% of the Company’s receivables at January 31, 2008 and July 31, 2007, respectively. Two vendors comprised 43.1% and 6.7% of all purchases at January 31, 2008. Two vendors comprised 41.5% and 6.7% of all purchases at July 31, 2007.

 

***Income Taxes***

 

The Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carry-forwards that result from events that have been recognized either in the financial statements or the income tax returns, but not both. The Company expects an effective tax rate of approximately 38% to 39%. The effective rate for the six month period ending January 31, 2008 was 35% compared to 44% for the same six month period in the prior fiscal year. Through the fiscal year ending January 31, 2008, the effective rate was about 3% less than expected as a result of the recognition of the one time Federal Telephone Excise Tax Credit of $17 thousand and the recognition of over estimated state tax expense of $20 thousand. The Company uses an effective rate of 5% to calculate estimatedstate tax expense on a quarterly basis. Actual state tax expenses were realized on the Company’s state tax returns at an effective rate of 4.5% resulting in the $20 thousand over estimation which was recognized as an income tax benefit in the quarter ended October 31, 2007 at the time the actual information was available. Through the six month period ending January 31, 2007, the effective tax rate was about 6% higher than expected primarily due to the underestimation of the impact of the cost segregation study on the 263(a) uniform capitalization computation.  The cost segregation study was completed in September 2006 and the Internal Revenue Service Form 3115 was filed with the July 31, 2006 tax return in October 2006.  The net effect on the income tax provision realized was recognized in the quarter ended January 31, 2007 and amounted to a $96 thousand or 6% increase in the effective tax rate. The measurement of current and deferred income tax liabilities and assets is based onprovisions of enacted laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. See Note 7 Income Taxes for additional details.

 

***Other Intangible Assets***

 

Annually, the Company subjects other identifiable intangible assets with indefinite lives to an impairment test, in accordance with accounting procedures generally accepted in the United States. Other intangible assets continue to be amortized over their useful lives.

 

Other identifiable intangible assets consist of the Company trademark and loan origination fees. Trademarks have an indefinite life and therefore are not amortized. Loan origination fees constitute the Company’s identifiable intangible asset subject to amortization. Amortization of the loan origination fees is computed on a straight-line basis over the term of the related note. Amortization expense is included in operating, general, and administrative expenses on the Consolidated Statements of Income and Comprehensive Income.

 

***Pension Accounting***

 

24

 

On January 1, 2003, the Company adopted a Supplemental Executive Retirement Plan (SERP). The SERP is a nonqualified defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees’ years of service and compensation. As of July 31, 2007, the Company adopted the provisions of SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans* and in accordance therewith reflected the underfunded status of the plan in its balance sheet at such date. The Company adjusted the liability to reflect the current funded status of the plan. The gains or losses that arise during the period but are not recognized as components of net periodic benefit cost is recognized as a component of other comprehensive income. The adoptionof SFAS No. 158 resulted in the recognition of $646 of unrecognized actuarial losses which arose during the period ended July 31, 2007 and a corresponding increase in the defined pension plan liability at July 31, 2007. Such unrecognized losses, net of deferred taxes of $258, were debited to other comprehensive income. The adoption of SFAS No. 158 had no effect on the Company’s consolidated statement of income for the period ended July 31, 2007.

 

For the six months ended January 31, 2008 and 2007, benefits accrued and expensed were $172 and $172, respectively. The plan is an unfunded supplemental retirement plan and is not subject to the minimum funding requirements of the Employee Retirement Income Security Act (ERISA). While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values of $2,229 and $1,772 at January 31, 2008 and July 31, 2007, respectively.

 

***Recent Accounting Changes***

 

The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes,*which is an interpretation of Statement of Financial Accounting Standard (SFAS) No. 109, *Accounting for Income Taxes,*as of August 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in companies’ financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. As a result, the Company applies a more-likely-than-not recognition threshold for all tax uncertainties. FIN 48 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The adoption of FIN 48 hadno effect on the Company’s financial position, cash flows or results of operations. See Note 7 Income Taxes for additional details.

 

In December 2007, FASB issued SFAS No. 141(R), *Business Combinations – an amendment of FASB Statement No. 141.*  This statement improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  This statement establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.  This statement also establishes principles and requirements for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase.  Lastly, this statement establishes principles and requirements for how the acquirer determineswhat information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The adoption of this statement is not expected to have a material effect on the Company’s financial position, cash flows or results of operations.

 

In December 2007, FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin (ARB) No. 51.*  This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this statement is not expected to have a material effect on the Company’s financial position, cash flows or results of operations.

 

25

 

 

**ITEM 3:**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company is exposedto market risks primarily from changes in interest rates. The Company does not engage in financial transactions for trading or speculative purposes.

 

From May 12, 2003 through November 16, 2006, the Company had a lending relationship with U.S. Bank, N.A. pursuant to an Amended and Restated Loan Agreement. On November 14, 2006, the Company and its subsidiaries executed a new Loan Agreement with First National Bank of Omaha and the loan proceeds from the revolving line of credit were wired to U.S. Bank, N.A., the Company’s prior lender to repay the Company’s obligations under the U.S. Bank loan agreement.

 

Under U.S. Bank loan agreement, the Company and its subsidiaries executed a Term Promissory Note in the amount of $4,000,000, which accrued interest at a fixed rate of 5.77% per annum and was payable in 59 installments of principal and interest in the amount of $76,904, and a Revolving Promissory Note in the amount of $40,000,000. Under the revolving line of credit, the actual principal amount outstanding varied as the Company borrowed and repaid its obligations throughout the term of the loan. Interest was payable at a variable rate, subject to change each fiscal quarter, equal to the London InterBank Offered Rate (LIBOR), plus a percentage based on the Company’s leverage ratio.

 

The Company executed a Loan Agreement dated November 14, 2006 and related loan documents with First National Bank of Omaha, a national banking association (FNB). The obligations under the Loan Agreement and Loan Documents commenced November 16, 2006, and are joint and several.

 

Under the FNB Loan Agreement, the Company and its subsidiaries executed a Term Note in the amount of $4,666,000 which accrues interest at a fixed rate of 7.35% per annum and is scheduled to mature December 1, 2016. The Term Note is payable in 119 monthly installments of principal and interest in the amount of $55,282 through November 1, 2016. As of January 31, 2008, the Company had $4,311,535 outstanding on the Term Note.

 

The Company and its subsidiaries also executed a Revolving Note in the maximum aggregate amount of $40,000,000 and evidenced by a Revolving Note dated November 14, 2006. Advances will be used as needed by the Company for working capital, through the termination date of December 1, 2009. Interest shall be paid at a variable rate, reset daily, equal to LIBOR as determined by FNB plus (i) 1.25% per annum when the leverage ratio is less than or equal to 3.00 to 1.00 or (ii) 1.50% per annum when the leverage ratio is more than 3.00 to 1.00. Upon an event of default, the Revolving Note shall bear interest at LIBOR as determined by FNB plus 7.50% per annum. FNB advanced funds under the Revolving Note on November 16, 2006, which were wired to U.S. Bank, to repay the Company’s obligations under the U.S. Bank Loan Agreement. As of January 31, 2008, the variable rate at which the Revolving Noteaccrued interest was 4.52% and the Company had approximately $12.7 million outstanding thereunder.

 

The interest payable on the Company’s revolving line of credit is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates on variable rate debt increased by .45 percentage points (a 10% change from the interest rate as of January 31, 2008), assuming no change in the Company’s outstanding balance under the line of credit (approximately $12.7 million as of January 31, 2008), the Company’s annualized income before taxes and cash flows from operating activities would decline by approximately $57 thousand.

 

**ITEM 4:**

**CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e)) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring 

 

26

 

that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to Company management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding disclosures, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated its disclosure controls and procedures, did not identify any material weaknesses, and believes that its disclosure controls and procedures were effective at January 31, 2008.

 

The Company intends to continue to monitor its disclosure controls and procedures, and if further improvements or enhancements are identified, the Company will take steps to implement such improvements or enhancements. It should be noted that the design of any system of controls is based upon certain assumptions about the likelihood of future events, and there can be no assurance that such design will succeed in achieving its stated objective under all potential future conditions, regardless of how remote. However, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer believe the Company’s disclosure controls and procedures provide reasonable assurance that the disclosure controls and procedures are effective.

 

**Changes in Internal Controls**

 

During the quarter ended January 31, 2008, there were no significant changes in our internal control over financial reporting that have materially affected or that are reasonably likely to affect the Company’s internal control over financial reporting, the Company took no corrective actions regarding our internal controls, and the Company is not aware of any other factors that could significantly affect these controls.

 

**Limitations on the Effectiveness of Controls**

 

The Company has confidence in its internal controls and procedures. Nevertheless, the Company’s management (including the Chief Executive Officer and Chief Financial Officer) believes that a control system, no matter how well designed and operated can provide only reasonable assurance and cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitation in all internal control systems, no evaluation of controls can provide absolute assurance that all control issuers and instances offraud, if any, within the Company have been detected.

 

**PART II**

**OTHER INFORMATION**

 

**ITEM 1:**

**LEGAL PROCEEDINGS**

 

The Company is not currently a party to any material pending legal proceedings and has not been informed of any claims that could have a material adverse effect on its financial position or results of operations.

 

**ITEM 1A:**

**RISK FACTORS**

 

There have been no material changes to the risk factors as previously disclosed in the Company’s Form 10-K for the year ended July 31, 2007.

 

**ITEM 2:**

**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(a)        The Company has not sold any common stock which was not registered under the Securities Act of 1933, as amended within the past three years prior to January 31, 2008.

 

 

(b)

Not applicable.

 

 

27

 

(c)        There is no established public trading market for the Company’s common stock. Ownership of the Company’s stock is limited to licensed, practicing veterinarians or any lawful form of business entity established to deliver veterinary services and/or products in which all medical decisions are made by licensed veterinarians (such as a partnership or corporation). Each veterinarian shareholder is limited to ownership of one share of stock, which is purchased at the fixed price of $3,000. The share of stock may not be sold, assigned, or otherwise transferred, except back to the Company at the same $3,000 price. On February 29, 2008, there were 2,041 record holders of the Company’s common stock.

Shareholders have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock other than optional redemption by the Company set forth in the Articles of Incorporation and Bylaws. The Company does not have any preferred stock authorized and has not issued any stock options, stock option plans, warrants, or other outstanding rights or entitlements to common stock.

The Company has never declared or paid any cash dividends on the common stock. The Company intends to retain any future earnings for funding growth of the Company’s business and therefore does not currently anticipate paying cash dividends in the foreseeable future. The Company has not sold any common stock which was not registered under the Securities Act of 1933, as amended within the past three fiscal years ended July 31, 2007.

Under its Articles of Incorporation, the Company may repurchase shares of any shareholder who is no longer a veterinarian or veterinary clinic or owes money to the Company and fails to make required payments. The Company may, but is not obligated to repurchase the stock. The redemption amount is the original purchase price of the stock paid by the shareholder. There is no expiration date for repurchase. Since the Company’s inception, each shareholder has been entitled to request that his, her, or its share be redeemed in accordance with the Articles of Incorporation and Bylaws.

 

During the quarter ended January 31, 2008, the Company repurchased thirteen (13) shares of its common stock as set forth in the following table:

 

**Purchases of Equity Securities by the Company and Affiliated Purchasers:**(1)

 

Period

Total Number of Shares Purchased

 

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs(1)

November 1 – November 30, 2007

4

$

3,000

-

2,052

December 1 – December 31, 2007

5

$

3,000

-

2,049

January 1 – January 31, 2008

4

$

3,000

-

2,045

Total:

13

$

3,000

-

2,045

 

(1)        The maximum number of shares that may be purchased by the Company varies from time to time due to the addition of new shareholders and on-going redemption of shares.

 

**ITEM 3:**

**DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

28

 

**ITEM 4:**        **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Annual Meeting of Shareholders of the Company was held on February 1, 2008, for the purposes of electing three Class II directors to serve until the annual meeting held in or after December 2010. Proxies for the meeting were solicited pursuant to Section 14(a) of the Exchange Act, and there was no solicitation in opposition to management’s nominees. Each of management’s nominees for director as listed in the Proxy Statement was elected.

 

 

The voting tabulation on the election of directors was as follows:

 

**Director**

**Shares Voted**

**“FOR”**

**Shares Voted “WITHHOLD”**

Donald R. Fogle, D.V.M.

1182

29

Scott A. Shuey, D.V.M.

1182

29

Vicky Wilkey, D.V.M.

 

1174

37

 

The Company has historically held the annual meeting of shareholders in the month of December. In 2008, the Company held its Annual Meeting in February. Accordingly, Class I directors serve until the annual meeting of shareholders held in or after December 2009 and include Eileen Sam Holly Morris, D.V.M., and Thomas E. Wakefield, D.V.M. Class III directors serve until the next annual meeting and include G.W. Buckaloo, Jr., D.V.M., Donald R. Fogle, D.V.M., Tom Latta, D.V.M., and William Swartz, D.V.M. The Board also has a non-shareholder member, A. Donald Janezic, Jr., who serves until the next annual meeting.

 

**ITEM 5:**

**OTHER INFORMATION**

 

 

The following disclosure is provided pursuant to item 8.01 of Form 8-K:

 

The Company’s Board of Directors recently has met to discuss the exploration of several alternatives for the Company, including the possible merger or sale of some or all of the assets of the Company and its subsidiaries.

 

There can be no assurances that the Company will successfully complete any merger or sale with any other company.  The Company does not intend to disclose developments regarding the Board discussions except as otherwise required by law.

 

**ITEM 6:**

**EXHIBITS**

 

**Exhibit No.**

**Description**

3.1

Second Amended and Restated Articles of Incorporation of Professional Veterinary Products, Ltd. (1)

3.2

Second Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (2)

3.3

Amendment to Second Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (3)

4.1

Certificate of Professional Veterinary Products, Ltd. (4)

4.2

Second Amended and Restated Articles of Incorporation of Professional Veterinary Products, Ltd. (1)

4.3

Second Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (2)

4.4

Amendment to Second Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (3)

31.1(A)

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Company’s CEO (#)

31.1(B)

Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Company’s CFO (#)

32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s CEO and CFO (#)

 

(#)

Filed herewith.

 

 

29

 

 

The following footnotes indicate a document previously filed as an exhibit to and incorporated by reference from the following:

 

(1)

Form 10-Q Quarterly Report for the period ended January 31, 2005 filed March 17, 2005.

(2)

Form 8-K Current Report dated March 7, 2005 and filed March 11, 2005.

(3)

Form 8-K Current Report dated May 26, 2006 and filed June 2, 2006.

(4)

Form S-1 Registration Statement No. 333-86629 filed on September 7, 1999.

 

 

30

 

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:    March 11, 2008

 

PROFESSIONAL VETERINARY PRODUCTS, LTD.

 

By:

/s/ Dr. Lionel L. Reilly

 

Dr. Lionel L. Reilly, President and CEO

 

 

By:

/s/ Neal B. Soderquist

 

Neal B. Soderquist, Vice President and CFO

 

 

 

31

 

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