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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  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 October 31, 2004 or  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For
the transition period
fromto. Commission file number: 000-26326 PROFESSIONAL VETERINARY PRODUCTS, LTD.  Nebraska
(State or other jurisdiction of
incorporation or organization)
    
    37-1119387
(IRS Employer
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 proceeding 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 an accelerated filer (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 (November 30, 2004). Common Stock, $1.00 par value, 1,955




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PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED OCTOBER 31, 2004 PAGEPART I FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSIndependent Accountants Report
    
    
    1Consolidated Balance Sheets as of October 31, 2004 (unaudited)
and July 31, 2004
    
    
    2Consolidated Statements of Income for the three month periods ended
October 31, 2004 and 2003 (unaudited)
    
    
    3Consolidated Statements of Cash Flow for the three months ended
October 31, 2004 and 2003 (unaudited)
    
    
    4Notes to Condensed, Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    25ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    26PART II OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    26ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    26ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
    
    
    27ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    27ITEM 5.
    
    OTHER INFORMATION
    
    
    27ITEM 6.
    
    EXHIBITS
    
    
    27SIGNATURES
    
    
    
    
    28302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of CEO and CFO




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ITEM 1: FINANCIAL STATEMENTS To the Board of Directors and Stockholders
Professional Veterinary Products, Ltd.
Omaha, NE 
 INDEPENDENT ACCOUNTANTS REPORT We have reviewed the accompanying consolidated balance sheet of
Professional Veterinary Products, Ltd. (a Nebraska Corporation) and
subsidiaries as of October 31, 2004, and the related statements of consolidated
income for the three month periods ended October 31, 2004 and 2003 and the
consolidated statements of cash flows for the three month periods ended October
31, 2004 and 2003. We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Professional Veterinary Products, Ltd. A review of interim financial information consists principally of
inquiries of Company personnel and analytical procedures applied to financial
data. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles. The July 31, 2004 balance sheet included in these financial statements was
audited by us. Our audit report dated October 7, 2004 expressed an unqualified
opinion on that balance sheet. /s/ Quick & McFarlin, P.C. Quick & McFarlin, P.C.
Omaha, Nebraska
December 6, 2004 1




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
    October 31,
    
    July 31,2004
    
    2004ASSETSCURRENT ASSETSCash
    
    $
    2,249
    
    
    $
    2,545Accounts receivable, net of allowance for doubtful
accounts $996 and $821, respectively
    
    
    34,512
    
    
    
    22,117Accounts receivable, related party
    
    
    4,557
    
    
    
    3,248Inventory, less allowance for obsolete inventory $152 and $129, respectively
    
    
    48,282
    
    
    
    40,682Deferred tax asset
    
    
    1,082
    
    
    
    952Other current assets
    
    
    445
    
    
    
    836Total current assets
    
    
    91,127
    
    
    
    70,380NET PROPERTY AND EQUIPMENT
    
    
    10,186
    
    
    
    10,321OTHER ASSETSIntangible assets, less accumulated amortization $13 and $12, respectively
    
    
    12
    
    
    
    13Intangible retirement asset
    
    
    1,197
    
    
    
    1,326Investment in unconsolidated affiliates
    
    
    1,720
    
    
    
    1,720Cash value life insurance
    
    
    945
    
    
    
    728Deposits on property and equipment
    
    
    469
    
    
    
    263Total other assets
    
    
    4,343
    
    
    
    4,050TOTAL ASSETS
    
    $
    105,656
    
    
    $
    84,751LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNote payable, bank
    
    $
    4,873
    
    
    $
    10,174Current portion of long-term debt and capital lease obligation
    
    
    1,894
    
    
    
    2,000Accounts payable
    
    
    70,083
    
    
    
    45,216Accounts payable, related parties
    
    
    1,150
    
    
    
    840Other current liabilities
    
    
    4,810
    
    
    
    3,815Total current liabilities
    
    
    82,810
    
    
    
    62,045LONG-TERM LIABILITIESLong-term debt and capital lease obligation, less current portion
    
    
    5,736
    
    
    
    5,982Accrued retirement benefits, less current portion
    
    
    1,197
    
    
    
    1,326Deferred tax liability
    
    
    455
    
    
    
    457Shares subject to mandatory redemption, $1 par value; issued and
outstanding 712 shares and 716 shares respectively
    
    
    2,115
    
    
    
    2,110Total long-term liabilities
    
    
    9,503
    
    
    
    9,875TOTAL LIABILITIES
    
    
    92,313
    
    
    
    71,920COMMITMENTS AND CONTINGENT LIABILITIES  SEE NOTE 6STOCKHOLDERS EQUITYCommon stock, $1 par value; authorized 30,000 shares; issued and
outstanding 1,234 shares and 1,236 shares, respectively
    
    
    1
    
    
    
    1Paid-in capital
    
    
    3,649
    
    
    
    3,635Retained earnings
    
    
    9,693
    
    
    
    9,195Total stockholders equity
    
    
    13,343
    
    
    
    12,831TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    105,656
    
    
    $
    84,751
 See notes to the condensed, consolidated financial statements. 2




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
     Three Months EndedOctober 31,
    
    October 31,2004
    
    2003NET SALES AND OTHER REVENUE
    
    $
    98,972
    
    
    $
    88,442COST OF SALES
    
    
    90,006
    
    
    
    79,818Gross Profit
    
    
    8,966
    
    
    
    8,624OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    8,027
    
    
    
    7,314Operating income
    
    
    939
    
    
    
    1,310OTHER INCOME (EXPENSE)Interest income
    
    
    140
    
    
    
    143Interest expense
    
    
    (278
    )
    
    
    (205
    )Other expense, net
    
    
    (138
    )
    
    
    (62
    )Income before taxes
    
    
    801
    
    
    
    1,248Income tax expense
    
    
    303
    
    
    
    470NET INCOME
    
    $
    498
    
    
    $
    778EARNINGS PER COMMON SHARE
    
    $
    403.45
    
    
    $
    662.00Weighted average common shares outstanding
    
    
    1,234
    
    
    
    1,176SUPPLEMENTAL INFORMATIONNet sales and other revenue, related parties
    
    $
    9,706
    
    
    $
    8,284Purchases, related parties
    
    $
    3,248
    
    
    $
    5,177
 See notes to the condensed, consolidated financial statements. 3




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
     October 31,
    
    October 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    498
    
    
    $
    778Adjustments to reconcile net income to net cash from
operating activities:Depreciation and amortization
    
    
    298
    
    
    
    264(Increase) decrease in:Receivables
    
    
    (13,704
    )
    
    
    (9,211
    )Inventory
    
    
    (7,600
    )
    
    
    (4,944
    )Deferred tax asset
    
    
    (130
    )
    
    
    (47
    )Other current assets
    
    
    391
    
    
    
    111Cash value life insurance
    
    
    (217
    )
    
    
    (212
    )Increase (decrease) in:Accounts payable
    
    
    25,177
    
    
    
    15,559Other current liabilities
    
    
    995
    
    
    
    (999
    )Deferred tax liability
    
    
    (2
    )
    
    
    2Total adjustments
    
    
    5,208
    
    
    
    523Net cash provided by operating activities
    
    
    5,706
    
    
    
    1,301CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (162
    )
    
    
    (2
    )Deposits on property and equipment
    
    
    (206
    )
    
    
    (166
    )Net cash consumed by investing activities
    
    
    (368
    )
    
    
    (168
    )CASH FLOWS FROM FINANCING ACTIVITIESNet short-term borrowings
    
    
    (5,301
    )
    
    
    (3,318
    )Payments on long-term debt and capital lease obligation
    
    
    (352
    )
    
    
    (301
    )Net proceeds from issuance of shares subject
to mandatory redemption
    
    
    5
    
    
    
    (11
    )Net proceeds from issuance of common stock
    
    
    14
    
    
    
    95Net cash consumed by financing activities
    
    
    (5,634
    )
    
    
    (3,535
    )Net decrease in cash
    
    
    (296
    )
    
    
    (2,402
    )Cash at beginning of period
    
    
    2,545
    
    
    
    4,346Cash at end of period
    
    $
    2,249
    
    
    $
    1,944SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Interest paid
    
    $
    302
    
    
    $
    224Income taxes paid
    
    $
    89
    
    
    $
    1,462
 See notes to the condensed, consolidated financial statements. 4




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
     NOTE 1  BASIS OF PRESENTATION The accompanying condensed, 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 condensed, 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. These condensed, 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, 2004 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 three months ended
October 31, 2004 are not necessarily indicative of the results to be expected
for the fiscal year ending July 31, 2005 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 In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 151, Inventory Costs  an
amendment of ARB No. 43, Chapter 4.SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that abnormal amounts be recognized as current
period charges regardless of whether they meet the criterion of so abnormal.
In addition, SFAS No. 151 required that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. This standard does not effect the Companys financial
position, cash flows or results of operations. 5




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data) NOTE 3  EARNINGS PER SHARE SFAS No. 128, Earnings per Sharepromulgates 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. In accordance with SFAS No. 150, the
weighted-average number of common shares outstanding for the period does not
include the shares subject to mandatory redemption. 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
1,234 and 1,176 at October 31, 2004 and 2003, respectively. NOTE 4  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 1,946 at October
31, 2004 and 1,952 at July 31, 2004. 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. The
shareholder must give the Company written notice of the proposed sale and the
Company must redeem for cash the share of stock within ninety days of receiving
such notice, at the price the shareholder paid for the share. Shares held by
single member limited liability companies and sole proprietorships are
mandatorily redeemable upon death of the holder at the price the shareholder
paid for the share. The amount to be paid upon death of these shareholders as
of October 31, 2004 was $2,115. An analysis of common stock and shares subject
to mandatory redemption for the three months ended October 31, 2004 is as
follows: Shares Subject toCommon
    
    MandatoryStock
    
    Redemption(Equity)
    
    (Long-term debt))
    
    TotalNumber of shares  July 31, 2004
    
    
    1,236
    
    
    
    716
    
    
    
    1,952Issuance of common stock
    
    
    7
    
    
    
    
    
    
    
    7Redemption of common stock
    
    
    (13
    )
    
    
    
    
    
    
    (13
    )Recognition of liability per SFAS 150
    
    
    4
    
    
    
    (4
    )
    
    
    Number of shares  October 31, 2004
    
    
    1,234
    
    
    
    712
    
    
    
    1,946Paid in capital  July 31, 2004
    
    $
    3,635
    
    
    $
    2,110
    
    
    $
    5,745Issuance of common stock
    
    
    21
    
    
    
    
    
    
    
    21Redemption of common stock
    
    
    (39
    )
    
    
    
    
    
    
    (39
    )Change in amounts receivable
    
    
    37
    
    
    
    
    
    
    
    37Recognition of liability per SFAS 150
    
    
    (5
    )
    
    
    5
    
    
    
    Paid in capital  October 31, 2004
    
    $
    3,649
    
    
    $
    2,115
    
    
    $
    5,764
 6




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data) NOTE 5  POSTRETIREMENT BENEFITS 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. For the three months ended October 31, 2004 and 2003, benefits
accrued and expensed were $129 and $105, 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 $875 and $659 at October 31, 2004 and July 31, 2004,
respectively. In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers
Disclosures About Pensions and Other Postretirement Benefits.The provisions of
this statement do not change the measurement and recognition provisions of SFAS
No. 87, Employers Accounting for Pensions,SFAS No. 88, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefitsand SFAS No. 106, Employers Accounting for Postretirement
Benefits Other than Pensions.Disclosures in this note reflect the revised
requirements under SFAS No. 132 (revised). Net periodic benefit costs for the Companys SERP for the three months
ended October 31, included the following components: October 31,2004
    
    2003Service cost
    
    $
    48
    
    
    $
    38Interest cost
    
    
    43
    
    
    
    33Amortization of prior losses
    
    
    4
    
    
    
    Amortization of unrecognized prior service cost
    
    
    34
    
    
    
    34Net periodic benefit cost
    
    $
    129
    
    
    $
    105
 NOTE 6  COMMITMENTS AND CONTINGENT LIABILITIES Stock Redemption The Company is required by its Articles of
Incorporation to repurchase stock within 90 days of receiving written notice
from the shareholder requesting redemption of their stock. The redemption
amount is the original purchase price of the stock paid by the shareholder.
The Company was contingently liable for $5.8 million as of October 31, 2004. Other The Company is subject to claims and other actions arising in the
ordinary course of business. Some of these claims and actions have resulted in
lawsuits where the Company is a defendant. Management believes that the
ultimate obligations if any, which may result from unfavorable outcomes of such
lawsuits, will not have a material adverse effect on the financial position,
results of
operations or cash flows of the Company and such obligations, if any, would be
adequately covered by insurance. 7




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data) NOTE 7  SEGMENT INFORMATION The Company has three reportable segments: Wholesale Distribution,
Logistics Services and Direct Customer Services. The Wholesale Distribution
segment is a wholesaler of pharmaceuticals and other veterinary related items.
This segment distributes products primarily to Company shareholders, who are
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. The
Logistic Services segment serves its customers by consolidating, packaging and
delivering animal health products closer to the final destination, resulting in
reduced freight costs and improved delivery performance. The Direct Customer
Services segment serves 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, 2004, 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. The following table summarizes the Companys operations by business
segment: Wholesale
    
    Logistics
    
    Customer
    
    
    
    
    
    ConsolidatedDistribution
    
    Services
    
    Services
    
    Eliminations
    
    TotalThree months ended October 31, 2004:Nets sales and other revenue
    
    $
    99,736
    
    
    $
    1,047
    
    
    $
    11,696
    
    
    $
    (13,507
    )
    
    $
    98,972Cost of sales
    
    
    92,103
    
    
    
    1,011
    
    
    
    10,303
    
    
    
    (13,411
    )
    
    
    90,006Operating, general and
administrative expenses
    
    
    6,682
    
    
    
    
    
    
    
    1,345
    
    
    
    
    
    
    
    8,027Operating income
    
    
    951
    
    
    
    36
    
    
    
    48
    
    
    
    (96
    )
    
    
    939Income before taxes
    
    
    801
    
    
    
    36
    
    
    
    60
    
    
    
    (96
    )
    
    
    801Business segment assets
    
    
    104,863
    
    
    
    284
    
    
    
    909
    
    
    
    (400
    )
    
    
    105,656Three months ended October 31, 2003:Nets sales and other revenue
    
    $
    88,515
    
    
    $
    114
    
    
    $
    10,239
    
    
    $
    (10,426
    )
    
    $
    88,442Cost of sales
    
    
    81,069
    
    
    
    112
    
    
    
    8,990
    
    
    
    (10,353
    )
    
    
    79,818Operating, general and
administrative expenses
    
    
    6,127
    
    
    
    
    
    
    
    1,187
    
    
    
    
    
    
    
    7,314Operating income
    
    
    1,319
    
    
    
    2
    
    
    
    63
    
    
    
    (74
    )
    
    
    1,310Income before taxes
    
    
    1,248
    
    
    
    2
    
    
    
    72
    
    
    
    (74
    )
    
    
    1,248Business segment assets
    
    
    95,147
    
    
    
    194
    
    
    
    878
    
    
    
    (222
    )
    
    
    95,997
 8




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data) NOTE 8  RECLASSIFICATIONS Certain reclassifications have been made to the prior year condensed,
consolidated financial statements to conform to the current year presentation.
Such reclassifications had no impact on results of operation or shareholders
equity. 9




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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 onForm 10-Qcontains forward-looking statements.
Forward-looking statements are contained principally in the sections entitled
Risk Factors That May Affect Future Results and Managements Discussion and
Analysis of Financial Condition and Results of Operations. These 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 customers and the market acceptance of its products;
    
    our ability to establish relationships with suppliers of products;
    
    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. We
discuss many of these risks in this Quarterly Report onForm 10-Qin greater
detail under the heading Risk Factors That May Affect Future Results. Also,
these statements represent our estimates and assumptions only as of the date of
this Quarterly Report onForm 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 services or 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 goods. Readers should review and consider these factors along
with the various disclosures we make in public filings with the Securities and
Exchange Commission. Overview Professional Veterinary Products, Ltd. provides distribution services of
animal health and companion animal products through three business segments,
Wholesale Distribution, Logistics Services, and Direct Customer Services. The
Wholesale Distribution segment is a wholesaler of pharmaceuticals and other
veterinary related items. The Logistics Services segment provides logistics
and distribution service 10




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operations for vendors of animal health products. 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 veterinary 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 derive approximately 13% of our sales and other
revenue from our logistics services and direct customer services segments. For the three months ended October 31, 2004, total revenue increased $10.6
million, or 11.9%, to $99.0 million compared to $88.4 million in the same
period last year. For the quarter, cost of sales increased to $90.0 million
from $79.8 million, and as a percentage of net sales and other revenue, cost of
sales increased to 90.9% from 90.2%. We believe that such an increase in cost
of sales is due to reduced profit margins from the sales of products the
Company receives from various manufacturers. Operating, general and
administrative expenses increased 9.7%, or $713 thousand, to $8.0 million from
$7.3 million in the same period last year. We believe that such an increase is
proportionate to support the Companys increase in net sales and other revenue.
As a percentage of net sales and other revenue, operating, general and
administrative expenses decreased to 8.1% from 8.3%. For the quarter like any
quarter, our largest expenses are labor related, including wages, payroll taxes
and medical insurance. During the quarter, interest expense also increased 35.6%, or $73
thousand, to $278 thousand from $205 thousand in the same period last year. We
believe that the increase in interest expense resulted from increased interest
rates and a higher average outstanding balance under our line of credit. All
of the above factors resulted in a decrease of $280 thousand in net income to
$498 thousand for first quarter of fiscal year 2005 from $778 thousand for the
same period last year. Our operating results reflected a strong demand for our
goods and services but reflected the impact of manufacturer pricing on our
margins. Looking forward, we believe that 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 first quarter ending October 31, 2004 the Companys current
assets increased $20.7 million primarily due to increased accounts receivable
and inventory. These increases are necessary to support the sales volume in
food animal related products during the fall season. Likewise current
liabilities also increased primarily due to an increase in accounts payable
which is the result of increased product purchases from vendors. Results of Operations The following discussion is based on the historical results of operations
for the three month periods ended October 31, 2004 and 2003. 11




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Summary Consolidated Results of Operations Table Three Months EndedOctober 31,(in thousands)2004
    
    2003Net sales and other revenue
    
    $
    98,972
    
    
    $
    88,442Cost of sales
    
    
    90,006
    
    
    
    79,818Gross profit
    
    
    8,966
    
    
    
    8,624Operating, general and administrative
expenses
    
    
    8,027
    
    
    
    7,314Operating income
    
    
    939
    
    
    
    1,310Interest expense, net
    
    
    (138
    )
    
    
    (62
    )Other income (expense)
    
    
    
    
    
    
    Income before taxes
    
    
    801
    
    
    
    1,248Income tax expense
    
    
    303
    
    
    
    470Net income
    
    $
    498
    
    
    $
    778
 Three months ended October 31, 2004 as compared to three months ended October
31, 2003 Net sales and other revenue increased $10.5 million to $99.0 million
compared to $88.4 million for the same period the previous year. Gross profit for the three month period ending October 31, 2004 increased
$342 thousand to $9.0 million compared to $8.6 million for the same period the
previous year. This increase is primarily attributable to increased sales.
Gross profit as a percentage of net sales and other revenue was 9.1% compared
to 9.8% for the same period the previous year. Operating, general and administrative expenses for the three month period
ending October 31, 2004 increased $713 thousand to $8.0 million compared to
$7.3 million for the same period the previous year. This increase is primarily
attributable to support the increase in net sales and other revenue. These
expenses as a percentage of net sales and other revenue were 8.1% compared to
8.3% for the same period the previous year. Operating income for the three month period ending October 31, 2004
decreased $371 thousand to $939 thousand compared to $1.3 million for the same
period the previous year. This decrease is primarily attributable to the
decrease in gross profit. Interest expense increased to $278 thousand for the three month period
ending October 31, 2004, from $205 thousand for the same period in the previous
year while interest income remained flat at $140 thousand compared to $143
thousand in the prior period. The increase is principally related to increased
interest rates and a higher average balance on the Companys revolving line of
credit. Net income decreased by $280 thousand to $498 thousand compared to $778
thousand for the same period the previous year. Operating Segments  three months ended October 31, 2004 as compared to three
months ended October 31, 2003 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. 12




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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 chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Previously, the Company disclosed one reportable segment. For
additional quantitative segment information, see Note 7 of the Companys
Condensed, Consolidated Financial Statements for the Three Month Period Ended
October 31, 2004. The following table summarizes the Companys operations by business
segment: Three Months Ended October 31(in thousands)2004
    
    2003NET SALES AND OTHER REVENUEWholesale Distribution
    
    
    99,736
    
    
    
    88,515Logistics Services
    
    
    1,047
    
    
    
    114Direct Customer Services
    
    
    11,696
    
    
    
    10,239Eliminations
    
    
    (13,507
    )
    
    
    (10,426
    )Consolidated Total
    
    
    98,972
    
    
    
    88,442COST OF SALESWholesale Distribution
    
    
    92,103
    
    
    
    81,069Logistics Services
    
    
    1,011
    
    
    
    112Direct Customer Services
    
    
    10,303
    
    
    
    8,990Eliminations
    
    
    (13,411
    )
    
    
    (10,353
    )Consolidated Total
    
    
    90,006
    
    
    
    79,818OPERATING, GENERAL AND ADMINISTRATIVE
EXPENSESWholesale Distribution
    
    
    6,682
    
    
    
    6,127Logistics Services
    
    
    0
    
    
    
    0Direct Customer Services
    
    
    1,345
    
    
    
    1,187Eliminations
    
    
    0
    
    
    
    0Consolidated Total
    
    
    8,027
    
    
    
    7,314BUSINESS SEGMENT ASSETSWholesale Distribution
    
    
    104,863
    
    
    
    95,147Logistics Services
    
    
    284
    
    
    
    194Direct Customer Services
    
    
    909
    
    
    
    878Eliminations
    
    
    (400
    )
    
    
    (222
    )Consolidated Total
    
    
    105,656
    
    
    
    95,997
 Wholesale Distribution Net sales and other revenue for the three-month period ending October 31,
2004 increased by 12.7% or $11.2 million. Net sales and other revenue for the
three month period ending October 31, 2004 totaled $99.7 million compared to
$88.5 million for the same three month period in the prior fiscal year. Gross profit increased by $187 thousand to $7.6 million compared to $7.4
million for the same three month period in the prior fiscal year. This
increase was primarily due to increased sales but offset by manufacturing
pricing to the Company. Gross profit as a percentage of total revenue was 7.7%
for the 13




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three month period ending October 31, 2004 compared to 8.4% for the
same three month period in the prior fiscal year. Operating, general and administrative expenses increased by $555 thousand
to $6.7 million for three-month period ending October 31, 2004 compared to $6.1
million for the previous year. This increase was primarily due to support the
increase in revenue. Such operating, general and administrative expenses as a
percentage of total revenue for the three-month period ending October 31, 2004
was 6.7% compared to 6.9% for the three month period ended October 31, 2003. Operating income decreased by $368 thousand to $951 thousand for the
three-month period ending October 31, 2004 compared to $1.3 million for the
previous year. This decrease is primarily attributable to the decrease in
gross profit. Assets increased by $9.8 million to $104.9 million for the three-month
period ending October 31, 2004 compared to $95.1 million for the previous year.
This increase was primarily due to an increase in accounts receivable and
inventory. Logistics Services Net sales and other revenue for the three-month period ending October 31,
2004 increased by $933 thousand. Net sales and other revenue for the
three-month period ending October 31, 2004 totaled $1.0 million compared to
$114 thousand for the same period in the previous fiscal year. This increase
is primarily attributable to increased sales to other animal health
wholesalers. Gross profit increased by $34 thousand to $36 thousand during the
three-month period ending October 31, 2004 compared to $2 thousand for the same
period during the previous fiscal year. Gross profit as a percentage of total
revenue was 3.4% for the three-month period ending October 31, 2004 compared to
1.8% for the three month period ended October 31, 2003. Operating, general and administrative expenses did not change for the
three-month period ending October 31, 2004 compared to the previous year. Such
operating, general and administrative expenses as a percentage of total revenue
for the three-month period ending October 31, 2004 were less than .1% and were
also less than .1% during the same three month period ending October 31, 2003. Operating income increased by $34 thousand to $36 thousand for the
three-month period ending October 31, 2004 compared to $2 thousand for the same
period the previous year. This increase is primarily attributable to an
increase in gross profit. Assets increased by $90 thousand to $284 thousand for the three-month
period ending October 31, 2004 compared to $194 thousand for the previous year.
This increase was primarily due to an increase in accounts receivable. Direct Customer Services Net sales and other revenue for the three-month period ending October 31,
2004 increased by 14.2% or $1.5 million. Net sales and other revenue for the
three-month period ending October 31, 2004 totaled $11.7 million compared to
$10.2 million for the same period the previous year. Gross profit increased by $144 thousand to $1.4 million in the three-month
period ending October 31, 2004 compared to $1.3 million for the same period the
previous fiscal year. This increase was primarily due to the increase in
revenue. Gross profit as a percentage of total revenue was 11.9% for the
three-month period ending October 31, 2004 compared to 12.2% for the three
month period ended October 31, 2003. 14




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Assets increased by $31 thousand to $909 thousand for the three-month
period ending October 31, 2004 compared to $878 thousand for the previous year.
This increase was primarily due to an increase in accounts receivable and
inventory. Seasonality in Operating Results The Companys quarterly sales and operating results have varied
significantly in the past and will likely continue to do so in the future.
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. In the last few years the Company has been 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 three month period ended October
31, 2004, there were no additional material commitments for capital
expenditures. The Company also has expended significant funds in the lease and purchase
of its facilities. In March 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 that facility for a total of
87,500 square feet of leased space in York, Pennsylvania. In October 2002, the Company purchased 10 acres of land adjacent to the
current corporate facility in Omaha, Nebraska for approximately $808,000 in
order to provide the Company with land available for future expansion of its
Omaha facility. In addition to the purchase of the additional 10 acres in
Omaha, the Company made significant capital investments in equipment and
furniture, including the purchase of office furniture, computer software,
warehouse and computer equipment. The Company purchased some of the equipment
in February 2003 by using a capital lease in the amount of $343,075, with
interest at 4.58% and monthly payments of $10,218 through February 2006. 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, ProConn, LLC and Exact
Logistics, LLC also were named as borrowers. As part of this amendment and
restatement, the Company, its subsidiaries, and US. Bank entered into an
Amended and Restated Loan Agreement and the Company converted $4,000,000 of the
Companys then current obligations under the original Revolving Credit
Agreement into a term loan and into a Term Promissory Note in the same amount,
which accrues interest at a fixed rate of 5.77% per annum. The Company,
ProConn and Exact Logistics are jointly and severally liable for the
obligations under the Term Promissory Note, which matures June 1, 2008.
Currently, the Term Promissory Note is payable in 59 installments of principal
and interest in the amount of $76,904.14 which are payable monthly through May
1, 2008. As of June 1, 2008, all unpaid principal and interest will be due.
The Company may not prepay the Term Promissory Note without the prior written
consent of U.S. Bank and the payment of a prepayment fee based on the 15




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net
present value of the amount of principal to be prepaid. As of October 31,
2004, the Company had $3,061,140 outstanding on the Term Promissory Note. On December 29, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into a First Amendment to the Amended and Restated Loan Agreement
whereby U.S. Bank agreed to increase the Companys revolving line of credit to $25,000,000 and the Company
agreed to amend certain of its financial covenants under the Amended and
Restated Loan Agreement. The increased revolving line of credit is evidenced
by a Revolving Promissory Note for $25,000,000 between U.S. Bank, the Company,
ProConn and Exact Logistics. The Company, ProConn and Exact Logistics are
jointly and severally liable for the obligations under the Revolving Promissory
Note, which matures on January 1, 2005. The actual principal amount
outstanding varies as the Company borrows and repays its obligations throughout
the term of the loan. Advances made under the Revolving Promissory Note accrue
interest at a variable rate equal to the U.S. Bank reference rate plus 2.70%
(the LIBOR Rate). As of October 31, 2004, the variable interest rate at which
the Revolving Promissory Note accrued interest was 4.70% and the Company had
$4,873,309 outstanding thereunder. Both the Term Promissory Note and the Revolving Promissory Note are
secured by a first and second mortgage held by US Bank on the Companys Omaha
facility as well as a first security interest on all accounts receivable,
inventory, chattel paper, equipment, instruments, investment property, deposit
accounts, documents, letter of credit rights, fixtures, all personal property
and general intangibles. The Amended and Restated Loan Agreement, as amended
by the First Amendment, imposes a number of conditions which must be met by the
Company, ProConn and Exact Logistics on an on-going basis prior to the U.S.
Banks disbursement of loan funds under the Revolving Promissory Note,
including, without limitation providing the Bank with annual audited financial
statements and monthly interim financial statements. Failure to comply with
these conditions will result in a default under the Amended and Restated Loan
Agreement, Revolving Promissory Note and Term Promissory Note which permits
U.S. Bank to accelerate the payment of the outstanding principal and accrued
interest under both notes. In addition, the Companys Articles of Incorporation require the Company
to repurchase stock within ninety (90) days of receiving written notice from a
shareholder requesting redemption of their stock. The redemption amount is the
original purchase price of the stock paid by the shareholder. The Company was
contingently liable for $5.8 million as of October 31, 2004 Operating Activities.Net cash provided by operating activities of $1.3
million for three months ending October 31, 2003 was primarily attributable to
an increase of $15.6 million in accounts payable, which was partially offset by
an increase of $9.2 million in receivables and an increase of $4.9 million in
inventories. Net cash provided by operating activities of $5.7 million for
three months ending October 31, 2004 was primarily attributable to an increase
of $25.2 million in accounts payable, which was partially offset by an increase
of $13.7 million in receivables and an increase of $7.6 million in inventories.
These changes support the purchase and sales of food animal related products
during the fall season. Investing Activities.Net cash consumed by investing activities of $168
thousand for the three months ending October 31, 2003 was primarily
attributable to primarily attributable to investments in equipment and
furniture, including the purchase of office furniture, computer software,
warehouse and computer equipment. Net cash consumed by investing activities of
$368 thousand for the three months ending October 31, 2004 was primarily
attributable to investments in equipment and furniture, including the purchase
of office furniture, computer software, warehouse and computer equipment. Financing Activities. Net cash consumed by financing activities of $3.5
million for period ending October 31, 2003 was primarily attributable to net
loan payments of $3.3 million. Net cash consumed by financing activities of
$5.6 million for period ending October 31, 2004 was primarily attributable to
net loan payments of $5.3 million. The majority of the loan payments were on
the Companys revolving line of credit. 16




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##### Table of Contents



Inflation A portion of our operating expenses are inflation-sensitive with inflation
generally producing increased costs of operations. During the past few years,
the most significant effects of inflation have been on insurance and travel
costs. We historically have tried to limit the effects of inflation through
certain cost control efforts. Off-Balance Sheet Arrangements At October 31, 2004, the Company did not have any off-balance sheet
arrangements. Related Party Transactions In the normal course of business the Company sells to its affiliate, board
of directors and key employees under normal terms and conditions. See Note 9
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, 2004
filed with the Securities and Exchange Commission (SEC). Critical Accounting Policies The SEC recently 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, 2004 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 of revisions 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. 17




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##### Table of Contents



Revenue Recognition The Company derives its revenue primarily from the sale of products,
consignment sales and agency agreements. Revenues are recognized as product is
shipped 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. 101, Revenue Recognition.
The Company recognizes revenue when there is persuasive 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 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 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 13% of the Companys receivables at October 31, 2004. One
customer comprised a significant individual receivable consisting of 11% of the
Companys receivables at October 31, 2003. One vendor comprised 31% of all
purchases the three month period ended October 31, 2004. 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 measurement of current and deferred
income tax liabilities and assets is based on provisions 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. Goodwill and Other Intangible Assets Annually, the Company subjects goodwill and 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. Recent Accounting Changes During the quarter, no new accounting standards were issued that impacted
the Companys financial position, cash flows or results of operations. See
Note 2 to the Condensed, Consolidated Financial Statements. 18




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##### Table of Contents



Risk Factors That May Affect Future Results The risks and uncertainties described below are not the only risks and
uncertainties the Company faces. Additional risks and uncertainties not
presently known to the Company or that are currently deemed immaterial also may
impair its business operations. If any of the following risks actually occur,
the Companys business, financial condition or results of operations may
suffer. Fluctuation of Future Results Due to Factors Outside of Managements Control The Companys operating results may significantly fluctuate, and you
should not rely on them as an indication of its future results. The Companys
future revenues and results of operations may significantly fluctuate due to a
combination of factors, many of which are outside of managements control. The
most notable of these factors include:  
    
    seasonality;
    
    the impact of economic factors on the national veterinary practices;
    
    the timing and effectiveness of marketing programs;
    
    the timing of the introduction of new products and services;
    
    the timing and effectiveness of capital expenditures; and
    
    competition. The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue
without a corresponding reduction to its expenses, operating results may
suffer. The Companys operating results for any particular quarter may not be
indicative of future operating results. You should not rely on
quarter-to-quarter comparisons of results of operations as an indication of the
Companys future performance. Failure to Manage Growth Could Impair Our Business Our business has grown rapidly. Our revenues increased from $63.5 million
in fiscal 1995 to $335 million in fiscal 2004. During that same period, we
significantly expanded our operations in the United States. Our number of
employees increased by approximately 240 individuals during that period. It is difficult to manage this rapid growth, and our future success
depends on our ability to implement and/or maintain:  
    
    Sales and marketing programs;
    
    Customer support programs;
    
    Current product and service lines;
    
    Technological support which equals or exceeds our competitors;
    
    Recruitment and training of new personnel; and
    
    Operational and financial control systems. Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We expect that we will need to continue to improve our
financial and managerial controls and reporting systems and procedures and to
expand the training of our work force. If we are not able to manage the rapid growth, there is a risk our
customer service quality could deteriorate, which may in turn lead to decreased
sales. This could impact our shareholders in two ways  the ability to obtain
products from the Company could be negatively affected and the Companys
profits could decrease. 19




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##### Table of Contents



Loss of Key Personnel Could Hurt Our Business Our future success depends to a significant extent on the skills,
experience and efforts of Company President and Chief Executive Officer, Dr.
Lionel Reilly, and key members of his staff. The loss of any or all of these
individuals could damage our business. In addition, we must continue to
develop and retain a core group of individuals if we are to realize our goal of
continued expansion and growth. We cannot assure you that we will be able to
do so. In addition, our products and services are specialized in nature. In
general, only highly qualified and trained individuals have the necessary
skills to market our products and provide our services. We face intense
competition for the hiring of these professionals. Any failure on our part to
hire, train and retain a sufficient number of qualified professionals would
damage our business. We do not generally enter into employment agreements
requiring these employees to continue in our employment for any period of time.
However, we have an employment agreement with Dr. Reilly, which automatically
renews for successive one year periods unless terminated by either party. There is No Market for Our Stock and the Value of the Stock Will Not Increase There has been no established public trading market for our common stock.
Sales are limited to licensed veterinarians and veterinary clinics, and our
common stock will not be sold, assigned, or otherwise transferred to anyone
other than the Company. The price of each share is fixed at $3,000, as provided
in our Articles of Incorporation. A share will not increase in value. If a
shareholder wishes to redeem his, her, or its share, the shareholder must sell
it to the Company and will receive only the amount he, she, or it paid for the
share. It is Unlikely We Will Pay Dividends Some investors favor companies that pay dividends, particularly in market
downturns. We have never declared or paid any cash dividends on our common
stock. While our Articles of Incorporation and Bylaws approved by the Company
shareholders allow the payment of dividends, we currently intend to retain any
future earnings for funding the growth of our business and repayment of
existing indebtedness, and therefore, we do not currently anticipate declaring
or paying cash dividends on our common stock in the foreseeable future. In
addition, our loan agreements restrict us from paying such dividends. We Rely on Strategic Relationships to Generate Revenue To be successful, we must establish and maintain strategic relationships
with leaders in the manufacturing industry. This is critical to our success
because we believe that these relationships will enable us to:  
    
    Extend the reach of our distribution and services to the
various participants in the veterinary industry;  
    
    Obtain specialized expertise; and  
    
    Generate revenue. Entering into strategic relationships is complicated because some of our
current and future manufacturers are potential strategic partners and these
manufacturers may decide to compete with us in the future. In addition, we may
not be able to establish relationships with key participants in the veterinary
distribution industry if we have established relationships with competitors of
these key participants. Consequently, it is important that we are perceived as
independent of any particular customer or partner. 20




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Some of our agreements with manufacturers run for one year. We may not be
able to renew our existing agreements on favorable terms, or at all. If we lose
the right to distribute products under such agreements, we may lose access to
certain products and lose a competitive advantage. Potential competitors could
sell products from manufacturers that we fail to continue with and erode our
market share. Performance or Security Problems With Our Systems Could Damage Our Business Our information systems are dependent on third party software, global
communications providers, telephone systems and other aspects of technology and
Internet infrastructure that are susceptible to failure. Though we have
implemented redundant systems and security measures, our customer satisfaction
and our business could be harmed if we or our suppliers experience any system
delays, failures, loss of data, outages, computer viruses, break-ins or similar
disruptions. We currently process all customer transactions and data at our
facilities in Omaha, Nebraska. Although we have safeguards for emergencies,
including, without limitation, sophisticated back-up systems, the occurrence of
a major catastrophic event or other system failure at either of our
distribution facilities could interrupt data processing or result in the loss
of stored data. This may result in the loss of customers or a reduction in
demand for our services. Only some of our systems are fully redundant and
although we do carry business interruption insurance, it may not be sufficient
to compensate us for losses that may occur as a result of system failures. If
disruption occurs, our profitability and results of operations may suffer. We Face Significant Competition The market for veterinary distribution services is intensely competitive,
rapidly evolving and subject to rapid technological change. Some of our
competitors have comparable product lines, technical experience and financial
resources. These organizations may be better known and have more customers. We
may be unable to compete successfully against these organizations. Many of our competitors have distribution strategies that directly compete
with us. We have many competitors including: Walco International, Inc., The
Butler Company, Lextron Animal Health, Inc., MWI Veterinary Supply Co., and J.
A. Webster, Inc. d/b/a Webster Veterinary Supply. In addition, we expect that companies and others specializing in the
veterinary products industry will offer competitive products. Some of our
large manufacturers/suppliers may also compete with us through direct marketing
and sales of their products. Increased competition could result in:  
    
    price reductions, decreased revenue, and lower profit margins;  
    
    loss of market share; and  
    
    increased marketing expectations. These and other competitive factors could materially and adversely affect the
Companys results of operations. Changes in the Veterinary Distribution Industry Could Adversely Affect Our
Business The veterinary distribution industry is subject to changing political,
economic and regulatory influences. Both state and federal government agencies
regulate the distribution of certain animal health products and the Company is
subject to regulation, either directly or indirectly, by the U.S. Department of
Agriculture, the Food and Drug Administration (FDA) and the Drug Enforcement
Administration (DEA). To the extent the political party in power changes,
whether in the executive or legislative branch, the regulatory stance these
agencies take could change. Our suppliers are subject to regulation by the
Department of Agriculture, the FDA and the Environmental Protection Agency, and
material changes to 21




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the applicable regulations could affect the suppliers ability to
manufacture certain products which could adversely impact the Companys product
supply. In addition, some of our customers may rely, in part, on farm and
agricultural subsidy programs. Changes in the regulatory positions that impact
the availability of funding for such programs could have an adverse impact on
our customers financial positions which could lead to decreased sales. These factors affect our purchasing practices and operation of our
business. Some of our competitors are consolidating to create integrated
delivery systems with greater market presence. These competitors may try to use
their market power to negotiate price reductions with the manufacturers. If we
were forced to reduce our prices, our operating results would suffer. As the
veterinary distribution industry consolidates, competition for customers will
become more intense. You May be Forced to Sell Your Shares Back to the Company As a shareholder, you may be forced to sell your share of stock back to
the Company under certain circumstances. In the event of your death, the
Company must repurchase your share of stock at the price you paid for such
share of stock. Further, in the event that you are no longer qualified to own
the Company stock, you must sell the share of stock back to the Company, which
will repurchase the share at the price you paid for such share of stock. We
also have the option to repurchase our stock if a shareholder owes money to us
and fails to make payments by the due date at the price the shareholder paid
for the stock. We May Lack the Funds to Repurchase all of the Shares As a shareholder you are not permitted to sell, assign, or otherwise
transfer your share of stock except back to the Company. The shareholder must
give the Company written notice of the proposed sale and we will repurchase the
share of stock within ninety days of receiving such written notice, at the
price the shareholder paid for the share. The Company must also repurchase the
share of stock at the price the shareholder paid for such share of stock in the
event of a shareholders death. In the event a shareholder is no longer
qualified to own the Company stock, the shareholder must sell the share of
stock back to the Company, which will repurchase the share at the price paid by
the shareholder for such share of stock. If substantially all the
shareholders wish to sell their shares or no longer become qualified to own the
Company stock, we will be required to repurchase a large number of shares,
which may divert financial resources that would otherwise be used for
operations and business. In addition, if a significant majority of the shareholders want to sell
their shares at the same time, there is a risk we would not have enough
financial resources to repurchase all outstanding shares within the ninety
days. If we lack adequate funds to repurchase all the shares, you would have
no other means of selling your interest. Investors May Fail to Pay the Installment Payments An investor may choose from two payment plans: (1) one payment for the
full $3,000 cost of the share; or (2) three installments of $1,000 each, with
the second and third installments due thirty and sixty days after the first
installment is paid. It is possible investors may fail to pay all or a
portion of the installment payments when due, thereby depriving the Company of
the anticipated proceeds. We May Not Be Able To Raise Needed Capital In the Future We may require additional capital to finance our growth strategies or
other activities in the future. Our capital requirements will depend on many
factors, including the costs associated with our growth and expansion. To the
extent that our existing sources of cash, plus any cash generated from
operations, are insufficient to fund our activities, we may need to raise
additional funds. If we issue additional stock to raise capital, your
percentage of ownership in us would be reduced. Holders of debt would have
rights, 22




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preferences or privileges senior to those you possess as a holder of our common
stock. Additional financing may not be available when needed and, if such
financing is available, it may not be available on terms favorable to us. In
addition, if we borrow money, we will incur interest charges, which could
negatively impact our profitability. Our Substantial Leverage Could Harm Our Business By Limiting Our Available Cash
and Our Access To Additional Capital As of October 31, 2004, our total long-term debt (excluding current
portions) was approximately $5.7 million, and we had $4.9 million outstanding
under our revolving credit facility and an additional $20.1 million of
borrowing capacity available under such facility. Our degree of leverage could
have important consequences for you, including the following:  
    
    it may limit our ability to obtain additional funds for
working capital, capital expenditures, debt service requirements, or
other purposes on favorable terms or at all;  
    
    a substantial portion of our cash flows from operations must
be dedicated to the payment of principal and interest on our
indebtedness and thus will not be available for other purposes,
including operations, capital expenditures and future business
opportunities;  
    
    it may limit our ability to adjust to changing market
conditions and place us at a competitive disadvantage compared to
those of our competitors that are less leveraged;  
    
    we may be more vulnerable than a less leveraged company to a
downturn in general economic conditions or in our business; or  
    
    we may be unable to carry out capital spending that is
important to our growth. Our debt agreements contain restrictions that limit our flexibility in
operating our business. Our credit agreements contain a number of covenants,
among other things, that restrict our ability to incur additional indebtedness;
pay dividends or make other distributions; make certain investments; use assets
as security in other transactions; and sell certain assets or merge with or
into other companies. In addition, we are required to satisfy and maintain
specified financial ratios and tests. Events beyond our control may affect our
ability to comply with these provisions, and we may not be able to meet those
ratios and tests. The breach of any of these covenants would result in a
default under our credit agreement and the lender could elect to declare all
amounts borrowed under the applicable agreement, together with accrued
interest, to be due and payable and could proceed against the collateral
securing that indebtedness. If any of our indebtedness were to be accelerated,
our assets may not be sufficient to repay in full that indebtedness and the
notes. Our Variable Rate Indebtedness Subjects Us To Interest Rate Risk, Which Could
Cause Our Debt Service Obligations To Increase Significantly Certain of our borrowings, primarily borrowings under our revolving line
of credit, are at variable rates of interest and expose us to interest rate
risk based on market rates. If interest rates increase, our debt service
obligations on the variable rate indebtedness would increase even though the
amount borrowed remained the same, and our net income and cash available for
servicing our indebtedness would decrease. Our variable rate debt for the
quarter ended October 31, 2004 was approximately $4.9 million and our interest
expense was $278 thousand. A 1% increase in the average interest rate would
increase future interest expense by approximately $30 thousand per year
assuming an average outstanding balance under the revolving line of credit of
$12.5 million. 23




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We Rely Substantially On Third-Party Suppliers, and the Loss Of Products Or
Delays In Product Availability From One Or More Third-Party Supplier Could
Substantially Harm Our Business We must contract for the supply of current and future products of
appropriate quantity, quality and cost. Such products must be available on a
timely basis and be in compliance with any regulatory requirements. Failure to
do so could substantially harm our business. We often purchase products from our suppliers under agreements that are of
limited duration or can be terminated on a periodic basis. There can be no
assurance, however, that our suppliers will be able to meet their obligations
under these agreements or that we will be able to compel them to do so. Risks
of relying on suppliers include:  
    
    If an existing agreement expires or a certain product line is
discontinued, then we would not be able to continue to offer our
customers the same breadth of products and our sales and operating
results would likely suffer unless we are able to find an alternate
supply of a similar product.  
    
    Current agreements, or agreements we may negotiate in the
future, may commit us to certain minimum purchase or other spending
obligations. It is possible we will not be able to create the market
demand to meet such obligations, which would create an increased
drain on our financial resources and liquidity.  
    
    If market demand for our products increases suddenly, our
current suppliers might not be able to fulfill our commercial needs,
which would require us to seek new manufacturing arrangements and
may result in substantial delays in meeting market demand. If we
consistently generate more demand for a product than a given
supplier is capable of handling, it could lead to large backorders
and potentially lost sales to competitive products that are readily
available. This could require us to seek or fund new sources of
supply.  
    
    We may not be able to control or adequately monitor the
quality of products we receive from our suppliers. Poor quality
items could damage our reputation with our customers.  
    
    Some of our third party suppliers are subject to ongoing
periodic unannounced inspection by regulatory authorities, including
the FDA, DEA and other federal and state agencies for compliance
with strictly enforced regulations, and we do not have control over
our suppliers compliance with these regulations and standards.
Violations could potentially lead to interruptions in supply that
could cause us to lose sales to readily available competitive
products. Potential problems with suppliers such as those discussed above could
substantially decrease sales, lead to higher costs and damage our reputation
with our customers due to factors such as poor quality goods or delays in order
fulfillment, which may result in decreased sales of our products and
substantially harm our business. We Are Exposed To Potential Risks From Recent Legislation Requiring Companies
To Evaluate Their Internal Control Over Financial Reporting We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent auditors addressing these assessments. During the course of our
testing, we may identify deficiencies which we may not be able to remediate in
time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with
the requirements of Section 404. In addition, if we fail to achieve 24




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and maintain the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. 
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks primarily from changes in U.S.
interest rates. The Company does not engage in financial transactions for
trading or speculative purposes. 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 .47 percentage
points (a 10% change from the interest rate as of October 31, 2004), assuming
no change in the Companys outstanding balance under the line of credit
(approximately $4.9 million as of October 31, 2004), the Companys annualized
income before taxes and cash flows from operating activities would decline by
approximately $23 thousand. Under our Amended and Restated Loan Agreement with U.S. Bank dated May 12,
2003, the Company and its subsidiaries executed a Term Promissory Note in the
amount of $4,000,000 which accrues interest at a fixed rate of 5.77% per annum
and matures June 1, 2008. Currently, the Term Promissory Note is payable in 59
installments of principal and interest in the amount of $76,904 which are
payable monthly through May 1, 2008. As of June 1, 2008, all unpaid principal
and interest will be due. The Company may not prepay the Term Promissory Note
without the prior written consent of U.S. Bank and the payment of a prepayment
fee based on the net present value of the amount of principal to be prepaid.
As of October 31, 2004, the Company had $3,061,140 outstanding on the Term
Promissory Note. Under our First Amendment to the Amended and Restated Loan Agreement with
U.S. Bank, our revolving line of credit was increased to $25,000,000 and
evidenced by a Revolving Promissory Note dated December 29, 2003 among U.S.
Bank, the Company, and its subsidiaries. The Revolving Promissory Note matures
on January 1, 2005. The actual principal amount outstanding varies as the
Company borrows and repays its obligations throughout the term of the loan.
Advances made under the Revolving Promissory Note accrue interest at October
31, 2004, the variable interest rate at which the Revolving Promissory Note
accrued interest was 4.7% and the Company had $4,873,309 outstanding
thereunder. Both the Term Promissory Note and the Revolving Promissory Note are
secured by a first and second mortgage held by U.S. Bank on the Companys Omaha
facility as well as a first security interest on all accounts receivable,
inventory, chattel paper, equipment, instruments, investment property, deposit
accounts, documents, letter of credit rights, fixtures, all personal property
and general intangibles. 25




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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 13(a)-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. Our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as currently in effect
are effective in ensuring 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. Changes in Internal Controls During the quarter ended October 31, 2004, 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 of fraud, if any, within the
Company have been detected. 
 PART IIOTHER 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 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 October 31. (b) Not applicable. 26




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(c) During the quarter ended October 31, 2004, the Company repurchased 13
shares of its common stock as set forth in the following table: Purchases of Equity Securities by the Company and Affiliated Purchasers:(1) Total Number
    
    Maximumof Shares
    
    Number ofPurchased as
    
    Shares ThatPart of
    
    May Yet BePublicly
    
    PurchasedTotal Number
    
    Average
    
    Announced
    
    Under theof Shares
    
    Price Paid
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Per Share
    
    Programs(2)
    
    Programs(3)August 1 - August 31, 2004
    
    
    7
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,952September 1 - September 30, 2004
    
    
    4
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,948October 1 - October 31, 2004
    
    
    2
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,946Total:
    
    
    13
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,946
 (1) The Companys Bylaws require the Company to repurchase stock within
ninety (90) days of receiving written notice from a shareholder requesting
redemption of his, her, or its stock, and under the 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 redemption amount is the original purchase price
of the stock paid by the shareholder. Currently, the price of each share is
fixed at $3,000 as provided in the Articles of Incorporation. There is no
expiration date. (2) Since inception, each shareholder of the Company has been entitled to
have his, her, or its share redeemed in accordance with the Articles of
Incorporation and Bylaws. (3) 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. Each shareholder of the Company may have his, her, or
its share redeemed in accordance with the Articles of Incorporation and Bylaws. 
 ITEM 3: DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter
ended October 31, 2004. 
 ITEM 5: OTHER INFORMATION None. 
 ITEM 6: EXHIBITS (a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K ExhibitNo.
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of Professional Veterinary Products, Ltd. (1)3.2
    
    Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (1)4.1
    
    Certificate of Professional Veterinary Products, Ltd. (1)4.2
    
    Amended and Restated Articles of Incorporation of Professional Veterinary Products, Ltd. (1)
 27




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ExhibitNo.
    
    Description4.3
    
    Amended and Restated Bylaws of Professional Veterinary Products, Ltd. (1)31.1
    
    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 Dr.
Lionel L. Reilly, the Companys Chief Executive Officer #31.2
    
    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
Neal Soderquist, the Companys Chief Financial Officer #32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, by Dr. Lionel L.
Reilly, the Companys Chief Executive Officer, and Neal Soderquist, the
Companys Chief Financial Officer #
   #
    
    Filed herewith. The following footnote indicates a document previously filed as an
exhibit to and incorporated by reference from the following:  (1)
    
    Form S-1 Registration Statement No. 333-86629 filed on
September 7, 1999. 
 SIGNATURES Pursuant to the requirements 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: December 15, 2004
    
    PROFESSIONAL VETERINARY PRODUCTS, LTD./s/ Dr. Lionel L. ReillyDr. Lionel L. Reilly,President and Chief Executive Officer/s/ Neal B. SoderquistNeal B. Soderquist, Chief Financial Officer
 28