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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended July 31, 2004; 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.  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)
 Securities Registered Pursuant to Section 12(b) of the Act:None
Securities Registered Pursuant to Section 12(g) of the Act:Common Stock, par value $1.00 per share
(Title of Class)
 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 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 if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes o No x As of August 31, 2004, the aggregate market value of the voting and
non-voting Common Stock held by non-affiliates of the Registrant was
$5,788,000. Shares of Common Stock held by each executive officer and director
of the Registrant have been excluded in that such persons may be deemed to be
affiliates of the Registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes. As of September 30,
2004, 1,944 shares of the Registrants Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrants 2004
Annual Meeting of Stockholders to be filed within 120 days of the fiscal year
ended July 31, 2004 are incorporated by reference into Part III of this Annual
Report on Form 10-K.




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PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-K FOR THE FISCAL
YEAR ENDED JULY 31, 2004 PART IITEM 1. BUSINESS
    
    
    1ITEM 2. PROPERTIES
    
    
    7ITEM 3. LEGAL PROCEEDINGS
    
    
    7ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    7PART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    8ITEM 6. SELECTED FINANCIAL DATA
    
    
    9ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
    
    
    9ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    26ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    27ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    27ITEM 9A. CONTROLS AND PROCEDURES
    
    
    27ITEM 9B. OTHER INFORMATION
    
    
    28PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
    
    
    28ITEM 11. EXECUTIVE COMPENSATION
    
    
    28ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    28ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    29ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    29PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    29SIGNATURES
    
    II-3Statement re Computation of Per Share EarningsComputation of Ratio of Earnings to Fixed ChargesConsent of Quick & McFarlin, P.C.Power of AttorneyPower of AttorneyPower of AttorneyPower of AttorneyPower of AttorneyPower of AttorneyPower of AttorneyPower of AttorneyCertificationCertificationsSchedule of Allowances




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PART I THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE COMPANYS CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY AND ITS
INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANYS ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY
DESCRIBED ELSEWHERE IN THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW
INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. 
 ITEM 1. BUSINESS Overview The Company is a leading wholesale distributor of animal health products
to practicing veterinarians and their related businesses. The Company
distributes approximately 18,000 different items including biologicals,
pharmaceuticals, parasiticides, instruments and equipment. Routinely some
12,000 items are inventoried for immediate shipment. The balance of items are
either drop-shipped from the manufacturer to the customer or are special order
items. The Company primarily sells branded products as marketed by the major
animal health manufacturers and suppliers. The Company does not currently
private label any products, but would consider a private label product
agreement if there was a decisive competitive advantage for doing such. The Company operates through its three operating segments: Wholesale
Distribution, Logistics Services, and Direct Customer Services. The Wholesale
Distribution segment is a wholesaler of pharmaceuticals and other veterinary
related items and accounted for 90% of net sales and other revenue during
fiscal year 2004. This segment distributes products primarily to Company
shareholders, who are licensed veterinarians or business entities comprised of
licensed veterinarians. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Operating Segments below and in Note 13
of the Companys 2004 Consolidated Financial Statements for quantitative
segment information. The Companys business strategy is to be the leading supplier of animal
health products to veterinarians and veterinary clinics by offering a complete
assortment of items at competitive prices which are supported by superior
levels of customer service. The Company believes that this strategy provides it
with a competitive advantage by combining the broad product selection with
everyday low prices and support from very efficient operations. The shareholder
veterinary clinics are able to lower their product acquisition costs which both
increases profitability and gives them a competitive market advantage. The Company has heavily invested in electronic information systems to
maximize efficiencies. All phases of the transactional process are
electronically driven. The Company believes this advanced electronic technology
will assist in earlier adoption of electronic commerce through the internet by
both its customers and suppliers. Background The Company was founded in 1982 by veterinarians whose primary interests
were food animal related and was chartered on August 2, 1982 as a Missouri
corporation. Since January 1, 1983 the Company has operated from various
facilities in Omaha, Nebraska. After obtaining shareholder approval, the
Company surrendered its Missouri charter and became a Nebraska corporation on
September 22, 1999. Initially, the Company distributed its products predominately to existing
shareholders who were veterinarians or business entities established to deliver
veterinary services and/or products in which 1




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medical decisions were made by licensed veterinarians. Each shareholder and
all of the shareholders affiliates were and are limited to ownership of one
share of common stock. In fiscal year 2004, net sales and other revenue to
non-shareholders totaled $81.6 million or 24% of total net sales and other
revenue. The Companys fiscal year begins on August 1 and concludes on July 31 of
the following year. Value-Added Services The Company offers its customers and suppliers a comprehensive menu of
value-added services. These services allow individual customers various
selections based on their individual needs. The Company manages a database of
all transactions so that its customers may maximize their participation in
promotions frequently offered by suppliers. The customer is periodically
apprised, either by phone or mailings, of their level of participation in these
promotions. This promotional tracking service gives the customer the option to
maximize their participation in a promotion which can ultimately increase their
profitability and allow them to more effectively compete in certain markets. The Company has developed a multi-day inventory management and purchasing
techniques seminar for its customers. This seminar is held at either of the two
company locations. The customer is trained to better use the Companys
resources and also be increasingly efficient in managing their product and
inventory activities. The Company has Electronic Data Interchange (EDI) capability which
provides the supplier with product sales and movement. The supplier is able to
monitor sales activities, advertising effectiveness and market trends in an
efficient manner. The Company also assists the manufacturer in the design of
effective promotions. The historical transactional database and the promotional
tracking service are unique tools to assist the manufacturer in tailoring
effective promotions. Our Shareholders As of July 31, 2004, the Company had 1,952 shareholders, all of whom were
veterinarians or veterinary clinics. These shareholders are principally located
from the Rocky Mountains to the Atlantic Seaboard with some presence in the
southern United Sates. Our shareholders also are our primary customers. No
shareholder represented more than 2% of the Companys total revenues during
fiscal year 2004. Due to the geographical location of the majority of its shareholders,
nearly 48% of the Companys gross sales are related to products used for the
treatment and/or prevention of diseases in food animals. The balance of product
sales are for the treatment and/or prevention of diseases in companion animals
and equine. Rebates to Shareholders The Company and its shareholders are in a contractual relationship
evidenced in the Companys Amended and Restated Articles of Incorporation
(Articles of Incorporation) which requires that all sales of Company products
to Company shareholders be at no more than 5% over the cost of the Company as
determined by a certified public accountant. Based on this requirement, a
certified public accounting firm (not the same firm who was appointed auditors
of the Company) annually makes a determination of the shareholders product
costs. This valuation of the shareholder product costs is then divided by 95%
and compared to shareholder sales including any vendor rebates. Amounts in
excess of this computation are overcharges which are then rebated back to
shareholders by credit memo. Such rebates are made on a pro rata basis to
shareholders, based on the aggregate amount of products purchased by each
shareholder during the year for which the rebate is made. Rebates are included
in the Companys financial statements and are netted against sales and accounts
receivable on the Companys financial statements. The Company recently modified its policies and procedures relating to the
shareholder rebate in 2




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order to address concerns regarding late payments by shareholders.
Effective August 1, 2003, the determination of the amount rebated back to
shareholders by credit memo during any fiscal year will include a review of
whether the respective shareholder made timely payments to the Company and
whether there are any past due invoices as of the end of the fiscal year. The
Company will determine the shareholders average days to pay which is the
number of days past the due date on which the Company receives the shareholder
payment. If the average days to pay exceeds 30 days, the amount of the rebate
credited back to the shareholder will be reduced according to the Companys
then current reduction percentage policy. If a shareholder has any unpaid
amount which is more than 90 days past due as of the fiscal year end, no rebate
will be issued to the shareholder for that fiscal year. Company Subsidiaries The Company has two direct wholly-owned subsidiaries: Exact Logistics, LLC
and ProConn, LLC. Exact Logistics, LLC and ProConn, LLC both were organized in
the State of Nebraska on December 6, 2000 and are limited liability companies
that are single member entities and 100% owned by the Company. The purpose of
Exact Logistics, LLC is to act as a contract logistics partner to warehouse and
ship products. The purpose of ProConn, LLC is to act as a supplier of animal
health products directly to the producer and/or consumer. Producers and end
users order veterinary products directly from ProConn instead of the
manufacturer or supplier and ProConn then sells and delivers the products
directly to producers and consumers. ProConn is responsible for all shipping,
billing and related services. As part of its business operations, ProConn
enters into agreements with veterinarians of record pursuant to which ProConn
agrees to pay the veterinarian of record a percentage of the sale received by
ProConn from qualified purchases. The veterinarian of record is responsible
for providing various services to the producers and consumers, including,
without limitation, conducting on-site visits of producers facilities,
reviewing the producers or consumers data pertaining to purchases from
ProConn, and maintaining compliance with all pharmaceutical-related laws,
regulations and any applicable food safety guidelines. Operating Segments 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 is 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. Financial Information About Operating Segments The sales and operating profits of each operating segment and the
identifiable assets attributable to each operating segment for each of the
three years in the period ended July 31, 2004 are set forth in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Operating Segments below and in Note 13 of Notes to Consolidated
Financial Statements. 3




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Financial Information About Geographic Areas All of the Companys customers are located in the United States. The
Company does not export any products outside of the United States. All of the
Companys assets are located within the United States. MARKETLink In August 1999, the Company, American Animal Hospital Association (AAHA)
and AAHA Services Corporation (SERVCO) d/b/a MARKETLink, a wholly-owned
subsidiary of AAHA, entered into an agreement pursuant to which the Company
became the logistics partner for MARKETLink, a buying group and distribution
service provided by AAHA to its veterinary clinic members. AAHAs members
include over 13,000 veterinarians in over 7,000 animal hospitals providing
veterinary services to companion animals. AAHA established MARKETLink based on
a belief that it was possible to improve the purchasing economics of its
members practices by allowing members to buy animal health products at low
average prices while maintaining or exceeding the level of service obtained by
existing distributors. Under MARKETLink, members of AAHA are able to purchase products directly
from MARKETLink at a cost savings. Under the terms of the August 1999
Agreement, SERVCO has certain responsibilities, including, without limitation,
marketing the MARKETLink program, determining the mix, price, sales and
shipping policies and line of products, and being responsible for all aspects
of the credit approval, accounts receivable and collections in connection with
the sale of MARKETLink products. The Companys responsibilities include,
without limitation, purchasing and managing the required inventory, paying all
accounts payable and complying with other contract terms with manufacturers,
suppliers or customers relating to shipping, receiving and billing for
MARKETLink products, maintaining sales and service representatives for all
in-bound and out-bound telephone sales necessary to process orders,
cross-selling alternative products, implementing special promotional programs,
and fulfilling and shipping all orders received via the Companys MARKETLink
sales and service representatives or the SERVCO email order entry system,
including at the time of shipment an MARKETLink invoice in the shipment. In June 2000, the Company purchased a 20% interest in MARKETLink for
$1,500,000. After the transaction, the remaining 80% continued to be owned by
AAHA. Lionel L. Reilly, the Companys CEO and President serves on the Board
of Directors of SERVCO. During the fiscal year ended July 31, 2004, MARKETLink represented
approximately 9% of the Companys total revenues. Customers and Suppliers Management does not consider the Companys business to be dependent on a
single customer or a few customers, and the loss of any of our customers
(excluding MARKETLink) would not have a material adverse effect on our results.
Except for MARKETLink, which comprised approximately 9% of the Companys total
revenues during the fiscal year ended July 31, 2004, no single customer
accounted for more than 2% of our fiscal 2004 revenues. The Company currently
has an agreement with MARKETLink and believes that its relationship with
MARKETLink currently is good and will be a long lasting relationship. The
Company typically does not enter into long-term contracts with its customers.
To offset the loss of any customers, the Company continually seeks to diversify
its customer base. The changing trends of veterinary medicine has resulted in a gradual shift
toward the sale of more companion animal products which products account for
nearly 52% of the Companys revenues in fiscal year 2004. Historically,
companion animal product related transactions have enjoyed higher margins than
sales of food producing animal products. However, as competition increases in
the companion animal sector it is likely that margins will begin to erode. We
believe there is likely to be consolidation of the many small privately owned
veterinary clinics, which will result in an increasing number of larger
veterinary practice business units. As a result, the larger veterinary
practices will have increased purchasing leverage and will negotiate for lower
product costs which will reduce margins at the 4




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distribution level and impact Company revenue and net income. There are two major types of transactions that affect the flow of products
to the Companys customers. Traditional buy/sell transactions account for a
significant majority of the Companys business. In this type of transaction the
customer places an order with the Company, which is then picked, packed,
shipped, invoiced to the customer, followed by payment from the customer to the
Company. There are a few product lines where the Company provides all
transactional activities described above, except that the manufacturer retains
title to the product. The manufacturer retains title in accordance with the
distribution agreements for these products. Within these agreements the
manufacturer determines if any promotional funds or rebates will be given to
the Company. Animal health manufacturers create and implement sales promotions
for the products they distributed to the veterinarian. These promotions reward
the veterinarian for their purchase of certain products or volume of products.
The Company submits the relevant purchase data to the manufacturer. The
Company is paid or reimbursed by the manufacturer, and the veterinarian
receives value pursuant to the terms of the promotion. The consignment
transactions account for approximately 1 1/2 percent (1.5%) of the Companys
business. The Company inventories these products for the manufacturer but does
not pay the manufacturer until the product is sold to the customer and reported
to the manufacturer. The Company is responsible for maintaining insurance on
the products but the value of the product is not included in the inventory for
accounting purposes. A second transaction model used by the Company is termed the agency
agreement. Under this approach, the Company receives orders for products from
its customer. The Company transmits the order to the manufacturer who then
picks, packs, ships, invoices and collects payment from the customer. The
Company receives a commission payment for soliciting the order as well as other

customer service activities. The Companys operating expenses associated with
this type of sale may be lower than the traditional buy/sell transaction.
Agency selling allows the manufacturer and the Company to immediately react to
market conditions. This arrangement allows the manufacturer to establish and
standardize price of its products in the market. This current information often
is used by the Company and the various manufacturers to develop data based
marketing programs. The mode of selling products to veterinarians is dictated
by the manufacturer. Product returns from our customers and to our suppliers occur in the
ordinary course of business. The Company extends to its customers the same
return of goods policies as extended to the Company by the various
manufacturers. The Company does not believe its operations will be adversely
impacted due to the return of products. Product returns have a minimum impact
on the Companys performance. Our two largest vendors comprised 31.1% and 12.9%, respectively of all of
the Companys purchases for fiscal year 2004. One vendor comprised 24.7% of
all of the Companys purchases for fiscal year 2003. Management believes the
loss of any major vendor may have a material adverse effect on our results
including the loss of one or both of our two largest vendors. The Animal Health Industry A national veterinary organization lists over 22,000 veterinary practices
in the United States. There are some 45,700 veterinarians practicing in the
various disciplines of veterinary medicine. This survey indicated nearly 76% of
the veterinarians in private clinical practice predominately specialize in
companion animal medicine. We believe, based on industry sources, the U.S. animal health manufacturer
sales of biologicals, pharmaceuticals, insecticides and other packaged goods
was over $4.4 billion for calendar year 2003. This segment of business in
which the Company participates is intended to meet the product and supply needs
of the private clinical practice. The actual Compounded Annual Growth Rate for
the last 5 years has averaged 2% and is forecasted to remain in the 2% range
for the next 5 years. Consolidation is a primary force reshaping the animal health industry. We
believe, based on industry sources, sales by the top ten animal health product
manufacturers account for over 75% of the 5




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U.S. market. At this time, the top five U.S. animal health product
companies have a market share that nears 60% of the total animal health
business. Livestock production continues the consolidation trend that started a
number of years ago. Agribusiness integrators continue to build larger
livestock raising facilities. Improved management systems coupled with new
preventative products have resulted in an ongoing reduction in food producing
animal product sales for the past several years. There also has been a loss of
market share in several key product groups due to generic competition. The
generic products generally sell for lower prices which causes a pricing
deflation in the market. The companion animal market is experiencing considerable growth. Several
new therapeutic and preventative products have contributed to most of this
increased sales volume. Nutraceuticals (nutritional pharmaceuticals) have an
increasing presence in the companion animal market. Based on industry sources,
during the past five years companion animal product sales have grown to nearly
50% of the total U.S. market. Competition Distribution of animal health products is characterized by either
ethical or OTC channels of product movement. Ethical distribution is
defined as those sales of goods to licensed veterinarians for use in their
professional practice. Many of these products are prescription and must only be
sold to a licensed professional. OTC (over-the-counter) distribution is the
movement of non-prescription goods to the animal owner and the end user. Many
of these products will also be purchased by the licensed veterinarian for
professional use or for resale to their client. There are numerous ethical distribution companies operating in the same
geographical regions as the Company and competition in this distribution
industry is intense. Our competitors include other animal health distribution
companies and manufacturers of animal health products who sell directly to
veterinarians and veterinary clinics. Most of the animal health distribution
competitors generally offer a similar range of products at prices often
comparable to the Companys. The Company seeks to distinguish itself from its
competitors by offering a higher level of customer service as well as having
its principal customers also as its shareholders/owners. In addition to
competition from other distributors, the Company also faces existing and
potentially increased competition from manufacturers who distribute some
percentage of their products directly to veterinarians. Although the Company
competes against direct sales by manufacturers and suppliers, it is often able
to compete with such direct sales by adding new value-added services and
pricing differentiation. The role of the animal health distributor has changed dramatically during
the last decade. Successful distributors have shifted from a selling mentality
to providing products and services in a consultative environment. Declining
profit margins typify current financial trends. Currently there is an over
capacity in the animal health distribution network, although there have been
few animal health distributor mergers or acquisitions. We believe the Company
must continue to add value to the distribution channel, and reduce the
redundancies that exist, while removing unnecessary costs associated with
product movement. Government Regulation Both state and federal government agencies regulate the manufacturing and
distribution of certain animal health products such as pharmaceuticals,
vaccines, insecticides and certain controlled substances. Our suppliers of
these products are typically regulated by one or more of the following federal
agencies, the U.S. Department of Agriculture, the Food and Drug Administration
(FDA) and the Drug Enforcement Administration (DEA), as well as several state
agencies and therefore, the Company is subject, either directly or indirectly,
to regulation by the same agencies. Several states and the DEA require the
Company to be registered or otherwise keep a current permit or license to
handle controlled substances. Manufacturers of vaccines are required by the
Department of Agriculture to comply with various storage and shipping criteria
and requirements for the vaccines. To the extent the Company 6




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distributes such products, the Company must comply with the same
Department of Agriculture, FDA and EPA requirements including, without
limitation, the storage and shipping requirements for vaccines. Several State Boards of Pharmacy require the Company to be licensed in
their respective states for the sale of animal health products within their
jurisdictions. Some states (as well as certain cities and counties) require the
Company to collect sales taxes/use taxes on differing types of animal health
products. The Company is subject to laws governing its relationship with employees,
including minimum wage requirements, overtime, working conditions and
citizenship requirements. Environmental Considerations The Company does not manufacture, re-label or in any way alter the
composition or packaging of products. All products are distributed in
compliance with the relevant rules and regulations as approved by various State
and Federal regulatory agencies. The Companys business practices create no or
minimal impact on the environment. Employees As of July 31, 2004 the Company had 307 employees. We are not subject to
any collective bargaining agreements and have not experienced any work
stoppages. We believe that we have a stable and productive workforce and
consider our relationships with our employees to be good. 
 ITEM 2. PROPERTIES The Company owns its building, which contains nearly 100,000 square feet
of open warehouse space and 40,000 square feet of finished office area. The
building is a facility the Company constructed and completed in late 1999 and
is located on 9.6 acres of land in a newly developed industrial subdivision of
Omaha, Nebraska. The latest in technology was incorporated into the design of
the new facility to maximize distribution efficiencies. The building is
subject to a first and second mortgage held by US Bank. In October 2002, the
Company purchased 10 acres of land adjacent to the current corporate facility
in Omaha, Nebraska for $808,274 in order to provide the Company with land
available for future expansion of its Omaha facility. 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. The initial term of the lease is 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
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. Management believes that our existing facilities are and will be adequate
for the conduct of our business during the next fiscal year. 
 ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended July 31, 2004. 7




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PART II 
  ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 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 September 30, 2004, there were 1,944 record holders of the
Companys common stock. Holders of common stock have no preemptive rights or rights to convert
their common stock into any other securities. There are not redemption or
sinking fund provisions applicable to the common stock other than 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. During the fiscal year ended July 31, 2004, the Company (including its
affiliated purchasers) repurchased 37 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, 2003
    
    
    4
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,842September 1 - September 30, 2003
    
    
    3
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,850October 1 - October 31, 2003
    
    
    6
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,857November 1 - November 30, 2003
    
    
    3
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,863December 1 - December 31, 2003
    
    
    4
    
    
    $
    2,500
    
    
    
    
    
    
    
    1,872January 1 - January 31, 2004
    
    
    3
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,876February 1 - February 29, 2004
    
    
    7
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,876March 1 - March 31, 2004
    
    
    2
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,889April 1 - April 30, 2004
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    1,904May 1, 2004 - May 31, 2004
    
    
    1
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,916June 1, 2004 - June 30, 2004
    
    
    1
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,929July 1, 2004 - July 31, 2004
    
    
    3
    
    
    $
    3,000
    
    
    
    
    
    
    
    1,952Total:
    
    
    37
    
    
    $
    2,946
    
    
    
    
    
    
    
    1,952
 (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 8




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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 6.SELECTED FINANCIAL DATA The historical selected financial data set forth below for the five years
ended July 31, 2000, 2001, 2002, 2003 and 2004 are derived from the Companys
Financial Statements included elsewhere in this report and should be read in
conjunction with those financial statements and notes thereto. The financial
data for the periods ended July 31, 2004, July 31, 2003 and July 31, 2002 is
consolidated and includes accounts of Exact Logistics, LLC and ProConn, LLC
from December 6, 2000, the date the Company became the sole member of Exact
Logistics, LLC and ProConn, LLC. All amounts are in thousands except per
share data. 2000
    
    2001
    
    2002
    
    2003
    
    2004(Restated)
    
    (Restated)For the Fiscal Year:Net sales and other
revenues
    
    
    176,275
    
    
    
    197,523
    
    
    
    239,922
    
    
    
    298,919
    
    
    
    335,421Operating income
    
    
    1,410
    
    
    
    1,320
    
    
    
    2,143
    
    
    
    5,177
    
    
    
    5,292Net income
    
    
    547
    
    
    
    387
    
    
    
    1,109
    
    
    
    3,214
    
    
    
    2,978Income per share:Operating income
    
    
    1,109.40
    
    
    
    912.08
    
    
    
    1,386.42
    
    
    
    2,987.10
    
    
    
    4,421.11Net Income
    
    
    430.55
    
    
    
    267.58
    
    
    
    717.14
    
    
    
    1,854.47
    
    
    
    2,487.77Common shares
outstanding used in the
calculation
    
    
    1,271
    
    
    
    1,447
    
    
    
    1,546
    
    
    
    1,733
    
    
    
    1,197At Fiscal Year End:Total assets
    
    
    59,612
    
    
    
    50,737
    
    
    
    68,634
    
    
    
    84,402
    
    
    
    84,751Total long-term obligations
    
    
    6,013
    
    
    
    5,565
    
    
    
    5,076
    
    
    
    7,972
    
    
    
    5,982
 
 ITEM 7. 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 annual
report. 9




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Forward-Looking Statements This Annual Report onForm 10-Kcontains forward-looking statements.
Forward-looking statements are contained principally in the sections entitled
Business, 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 Annual Report onForm 10-Kin 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 Annual Report onForm 10-K, and we undertake no obligation to publicly
update or revise these forward-looking statements. 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 operations for vendors of animal health products. The
Direct Customer Services segment is a supplier of animal health products to the
producer or consumer. The Companys revenues have increased from $63.5 million in fiscal year
1995 to $335.4 million in fiscal year 2004. Initially, the Company distributed
its products predominately to existing shareholders. In fiscal year 2004, net
sales and other revenue to non-shareholders totaled $81.6 million or 24% of
total net sales and other revenue. The Companys Wholesale Distribution segment comprises the majority of its
operations, representing 90% of consolidated net sales and other revenue in
fiscal 2004. Revenues are primarily earned by effectively distributing
products to veterinarians or veterinary practices. The main factor that
impacts net sales is the Companys ability to offer a broad product line
through excellent and knowledgeable customer service. We expect the trend of increases in sales to continue as we continue to
increase the number and type of customer accounts. We will continue our
strategy of supporting the food producing animal veterinarian with a broad
range of products and value-added services. However, sales in the food
producing animal sector are subject to very low margins. In view of the
increasing maturity of the food producing animal market, the Company must
continue to look for future growth in the companion animal sector. The
changing trends of veterinary medicine has resulted in a gradual shift toward
the sale of 10




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more companion animal products which products account for nearly 52% of
the Companys revenues in fiscal year 2004. Historically, companion animal product related transactions have enjoyed
higher margins than sales of food producing animal products. We believe that as
competition increases in the companion animal sector it is likely that margins
will begin to erode. We also believe that there is likely to be consolidation
of the many small privately owned veterinary clinics, which will result in an
increasing number of larger veterinary practice business units. As a result,
the larger veterinary practices will have increased purchasing leverage and
will negotiate for lower product costs which will reduce margins at the
distribution level and impact Company revenue and net income. Results of Operations The following discussion is based on the historical results of operations
for fiscal 2004, 2003 and 2002. Summary Consolidated Results of Operations Table July 31, 2004
    
    July 31, 2003
    
    July 31, 2002Net sales and other revenue
    
    $
    335,421
    
    
    $
    298,919
    
    
    $
    239,922Cost of sales
    
    
    301,393
    
    
    
    268,008
    
    
    
    219,851Gross profit
    
    
    34,028
    
    
    
    30,911
    
    
    
    20,071Operating, general and
administrative expenses
    
    
    28,736
    
    
    
    25,734
    
    
    
    17,928Operating income
    
    
    5,292
    
    
    
    5,177
    
    
    
    2,143Interest expense, net
    
    
    (678
    )
    
    
    (308
    )
    
    
    (373
    )Other income (expense)
    
    
    113
    
    
    
    119
    
    
    
    (22
    )Income before taxes
    
    
    4,727
    
    
    
    4,988
    
    
    
    1,748Income tax expense
    
    
    1,749
    
    
    
    1,774
    
    
    
    639Net income
    
    $
    2,978
    
    
    $
    3,214
    
    
    $
    1,109
 Fiscal 2004 Compared to Fiscal 2003: Net sales and other revenue for the fiscal year ending July 31, 2004
increased by 12.2% or $36.5 million. Net sales and other revenue for the 2004
fiscal year totaled $335.4 million compared to $298.9 million for the previous
fiscal year. The growth was principally attributable to sales to new customers
of $42.5 million despite a slight decrease in sales to existing customers of
$6.0 million. Gross profit consists of net sales and other revenue minus cost of sales
before operating expenses, other income (expense), and taxes are deducted.
Gross profit increased by $3.1 million to $34.0 million for fiscal year 2004
compared to $30.9 million for the previous fiscal year. This increase was
primarily due to the increase in revenue. Gross profit as a percentage of
total revenue was 10.1% for fiscal 2004 compared to 10.3% for fiscal 2003. Operating, general and administrative expense consists mainly of payroll,
warehouse operating supplies, insurance, professional fees and other general
corporate expenses. Operating, general and administrative expenses increased by
$3.0 million to $28.7 million for fiscal year 2004 compared to $25.7 million
for the previous year. This increase was primarily due to support the increase
in revenue. Such 11




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##### Table of Contents



operating, general and administrative expenses as a percentage of total revenue
remained constant for fiscal 2004 at 8.6%. Operating income increased by $115 thousand to $5.3 million for fiscal
year 2004 compared to $5.2 million for the previous year. This small increase
is primarily attributable to the increase in gross profit while operating,
general and administrative expenses only slightly increased. Companys other income (expense) was $565 thousand (expense) for fiscal
year 2004 as compared to $189 thousand (expense) for the previous year. In
addition, interest income for the period ending July 31, 2004 decreased to $471
thousand as compared to $767 thousand for the same period of the previous year,
a decrease of $296 thousand. The decrease was due to a decrease in the finance
charged on past due accounts receivable. Interest income was partially offset
by additional interest expense of $74 thousand to $1.1 million which was due
principally on outstanding debt. Fiscal 2003 Compared to Fiscal 2002: Net sales and other revenue for the fiscal year ending July 31, 2003
increased by 24.6% or $59 million. Net sales and other revenue for the 2003
fiscal year totaled $298.9 million compared to $239.9 million for the previous
fiscal year. The growth was principally attributable to increased sales to
existing customers of $39.1 million and to new customers of $19.9 million. Gross profit consists of net sales and other revenue minus cost of sales
before operating expenses, other income (expense), and taxes are deducted.
Gross profit increased by $10.8 million to $30.9 million compared to $20.1
million for the previous fiscal year. This increase was primarily due to the
increase in revenue plus a reduction in outbound freight costs. Gross profit
as a percentage of total revenue was 10.3% for fiscal 2003 compared to 8.4% for
fiscal 2002. Operating, general and administrative expense consists mainly of payroll,
warehouse operating supplies, insurance, professional fees and other general
corporate expenses. Operating, general and administrative expenses increased by
$7.8 million to $25.7 million for fiscal year 2003 compared to $17.9 million
for the previous year. This increase was primarily due to support the increase
in revenue plus expenses associated with the additions of the York Pennsylvania
warehouse and ProConn LLC. Such operating, general and administrative expenses
as a percentage of total revenue for fiscal 2003 was 8.6% compared to 7.5% for
fiscal 2002. Operating income increased by $3.1 million to $5.2 million for fiscal year
2003 compared to $2.1 million for the previous year. This increase is
primarily attributable to the increase in gross profit despite the increase in
operating, general and administrative expenses. Companys other income (expense) was $189 thousand (expense) for fiscal
year 2003 as compared to $395 thousand (expense) for the previous year. In
addition, interest income for the period ending July 31, 2003 increased to $767
thousand as compared to $477 thousand for the same period of the previous year,
an increase of $290 thousand. The increase was due to an increase in the
finance charged on past due accounts receivable. The increased income was
partially offset by interest expense of $1.1 million which was due principally
on outstanding debt. Fiscal 2002 Compared to Fiscal 2001: Net sales and other revenue for the fiscal year ending July 31, 2002
increased by 21.5% or $42.4 million. Net sales and other revenue for the 2002
fiscal year totaled $239.9 million compared to $197.5 million for the previous
fiscal year. The growth was principally attributable to increased sales to
existing customers of $27.1 million and to new customers of $15.3 million. Gross profit increased by $4.2 million to $20.1 million compared to $15.9
million for the previous fiscal year. This increase was primarily due to the
increase in revenue. Gross profit as a percentage of total revenue was 8.4%
for fiscal 2002 compared to 8.0% for fiscal 2001. 12




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##### Table of Contents



Operating, general and administrative expenses increased by $3.4 million
to $17.9 million for fiscal year 2002 compared to $14.5 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 fiscal 2002 was 7.4% vs. 7.4% for fiscal 2001. Operating income increased by $823 thousand to $2.1 million for fiscal
year 2002 compared to $1.3 million for the previous year. This increase is
primarily attributable to the increase in gross profit as a percentage of total
revenue while maintaining the percentage of operating, general and
administrative expenses. Companys other income (expense) was $395 thousand (expense) for fiscal
year 2002 as compared to $626 thousand (expense) for the previous year. In
addition, interest expense for the period ending July 31, 2003 decreased to
$850 thousand as compared to $1.0 million for the same period of the previous
year  a decrease of $156 thousand. The reduction was due to a decrease in the
interest rate charged on the Companys revolving line of credit. Contractual obligations and commitments The Companys contractual obligations (in thousands) at July 31, 2004
mature as follows: PAYMENTS DUE BY PERIODLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLoans payable to banks
    
    $
    10,174
    
    
    $
    10,174
    
    
    $
    
    
    
    $
    
    
    
    
    Capital lease commitments
    
    
    187
    
    
    
    117
    
    
    
    70
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    2,478
    
    
    
    979
    
    
    
    1,488
    
    
    
    11
    
    
    
    Long-term debt obligations
(including current
portion)
    
    
    7,795
    
    
    
    1,883
    
    
    
    2,928
    
    
    
    2,984
    
    
    
    Total contractual
obligations
    
    $
    20,634
    
    
    $
    13,153
    
    
    $
    4,486
    
    
    $
    2,995
    
    
    
    
 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 $5.7 million as of July 31, 2004. Operating Segments 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 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. 13




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##### Table of Contents



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. See Note 13 of the Companys
2004 Consolidated Financial Statements for additional quantitative segment
information. The following table summarizes the Companys operations by business
segment: Year EndedJuly 31, 2004
    
    July 31, 2003
    
    July 31, 2002(in thousands)NET SALES AND OTHER REVENUEWholesale Distribution
    
    $
    333,290
    
    
    $
    297,007
    
    
    $
    239,778Logistics Services
    
    
    1,246
    
    
    
    2,076
    
    
    
    2,578Direct Customer Services
    
    
    31,479
    
    
    
    24,223
    
    
    
    954Eliminations
    
    
    (30,594
    )
    
    
    (24,387
    )
    
    
    (3,388
    )Consolidated Total
    
    $
    335,421
    
    
    $
    298,919
    
    
    $
    239,922COST OF SALESWholesale Distribution
    
    
    303,248
    
    
    
    269,582
    
    
    
    219,841Logistics Services
    
    
    1,190
    
    
    
    1,955
    
    
    
    2,542Direct Customer Services
    
    
    27,325
    
    
    
    20,842
    
    
    
    882Eliminations
    
    
    (30,370
    )
    
    
    (24,371
    )
    
    
    (3,414
    )Consolidated Total
    
    $
    301,393
    
    
    $
    268,008
    
    
    $
    219,851OPERATING, GENERAL AND
ADMINISTRATIVE EXPENSESWholesale Distribution
    
    
    24,692
    
    
    
    22,245
    
    
    
    17,794Logistics Services
    
    
    
    
    
    
    1
    
    
    
    1Direct Customer Services
    
    
    4,044
    
    
    
    3,488
    
    
    
    133Eliminations
    
    
    
    
    
    
    
    
    
    
    Consolidated Total
    
    $
    28,736
    
    
    $
    25,734
    
    
    $
    17,928BUSINESS SEGMENT ASSETSWholesale Distribution
    
    $
    84,128
    
    
    $
    83,842
    
    
    $
    68,597Logistics Services
    
    
    248
    
    
    
    192
    
    
    
    640Direct Customer Services
    
    
    666
    
    
    
    394
    
    
    
    2,401Eliminations
    
    
    (291
    )
    
    
    (26
    )
    
    
    (3,004
    )Consolidated Total
    
    $
    84,751
    
    
    $
    84,402
    
    
    $
    68,634
 Operating Segments: Fiscal 2004 Compared to Fiscal 2003 Wholesale Distribution Net sales and other revenue for the fiscal year ending July 31, 2004
increased by 12.2% or $36.3 million. Net sales and other revenue for the 2004
fiscal year totaled $333.3 million compared to $297 million for the previous
fiscal year. Gross profit increased by $2.6 million to $30 million for fiscal year 2004
compared to $27.4 million for the previous fiscal year. This increase was
primarily due to the increase in revenue. Gross profit as a percentage of total
revenue was 9.0% for fiscal 2004 compared to 9.2% for fiscal 2003. 14




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##### Table of Contents



Operating, general and administrative expenses increased by $2.4 million
to $24.7 million for fiscal year 2004 compared to $22.2 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 fiscal 2004 remained constant at 7.4%. Operating income increased by $170 thousand to $5.4 million for fiscal
year 2004 compared to $5.2 million for the previous year. This increase is
primarily attributable to the increase in gross profit less the increase in
operating, general and administrative expenses. Assets increased by $286 thousand to $84.1 million for fiscal year 2004
compared to $83.8 million for the previous year. This increase was primarily
due to an increase in inventories and other assets which were partially offset
by a decrease in cash and accounts receivable. Logistics Services Net sales and other revenue for the fiscal year ending July 31, 2004
decreased by 40% or $830 thousand. Net sales and other revenue for the 2004
fiscal year totaled $1.2 million compared to $2.1 million for the previous
fiscal year. Gross profit decreased by $65 thousand to $56 thousand compared to $121
thousand for the previous fiscal year. Gross profit as a percentage of total
revenue was 4.5% for fiscal 2004 compared to 5.8% for fiscal 2003. Operating, general and administrative expenses decreased by $1 thousand to
$0 for fiscal year 2004 compared to the previous year. Such operating, general
and administrative expenses as a percentage of total revenue for fiscal 2004
was less than 1%, fiscal 2003 was also less than 1%. Operating income decreased by $64 thousand to $56 thousand for fiscal year
2004 compared to $120 thousand for the previous year. This decrease is
primarily attributable to the decrease in gross profit. Assets increased by $56 thousand to $248 thousand for fiscal year 2004
compared to $192 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 fiscal year ending July 31, 2004
increased by 30% or $7.3 million. Net sales and other revenue for the 2004
fiscal year totaled $31.5 million compared to $24.2 million for the previous
fiscal year. Gross profit increased by $773 thousand to $4.2 million compared to $3.4
million for the previous fiscal year. This increase was primarily due to the
increase in revenue. Gross profit as a percentage of total revenue was 13.2%
for fiscal 2004 compared to 14.0% for fiscal 2003. Operating, general and administrative expenses increased by $556 thousand
to $4 million for fiscal year 2004 compared to $3.5 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 fiscal 2004 were 12.8% vs. 14.4% for fiscal 2003. Operating income increased by $219 thousand to $111 thousand for fiscal
year 2004 compared to $108 thousand (loss) for the previous year. This
increase is primarily attributable to the increase in gross profit while
operating, general and administrative expenses increased to a lesser degree. Assets increased by $272 thousand to $666 thousand for fiscal year 2004
compared to $394 thousand for the previous year. This increase was primarily
due to an increase in accounts receivable. 15




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##### Table of Contents



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. However between March 2002
and June 2003, the Company expended significant funds on various capital
expenditures. On March 15, 2002, the Company signed a lease agreement in March
2002 with Kinsley Equities II Limited Partnership for 70,000 square feet of
warehouse space in York, Pennsylvania. The initial term of the lease is 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 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 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, Nebraska, 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. Historically, the Company has financed its cash requirements primarily
from short term bank borrowings and cash from operations. At the year end,
July 31, 2004, there were no additional material commitments for capital
expenditures. In May 2003, the Company and U.S. Bank mutually agreed to amend and
restate the Companys Revolving Credit Agreement with U.S. Bank dated December
1, 2001 in its entirety and to establish a revolving line of credit facility
and a term loan facility and to add the Companys subsidiaries, ProConn, LLC
and Exact Logistics, LLC as borrowers. As part of this amendment and
restatement, the Company, ProConn, Exact Logistics and US. Bank entered into an
Amended and Restated Loan Agreement dated May 12, 2003 and the Company

converted $4,000,000 of the Companys then current obligations under the
original Revolving Credit Agreement into a term loan. The Company, ProConn,
Exact Logistics and U.S. Bank entered into a Term Promissory Note dated May 12,
2003 in the amount of $4,000,000 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. The Term
Promissory Note matures June 1, 2008. The payment terms for the Term
Promissory Note provide that the Company make interest payments of $614.11 per
day from May 12, 2003 through May 31, 2003. Thereafter, 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 net present value of the amount of
principal to be prepaid. As of July 31, 2004, the Company had $3,244,892
outstanding on the Term Promissory Note. 16




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On November 26, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into an Extension Agreement to extend the maturity of the revolving
line of credit by 60 days in order to negotiate an increase to such line of
credit. 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 dated December 29, 2003 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. The Revolving Promissory Note
matures on January 1, 2005. The maximum amount which can be borrowed
thereunder is $25,000,000. 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 July 31, 2004, the variable interest rate at which the Revolving
Promissory Note accrued interest was 4.2% and the Company had $10,173,597
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. For the fiscal year ending July 31, 2002, net cash provided by operating
activities of $219 thousand was primarily attributable to increases of $1.4
million in accounts receivable and $14.6 million in inventories. These were
partially offset by an increase of $13.2 million in accounts payable. For the
fiscal year ending July 31, 2003, net cash consumed by operating activities of
$1.9 million was primarily attributable to an increase of $7.2 million in
accounts receivable and $1.8 million in inventories. These were partially
offset by an increase of $1.5 million in accounts payable. For the fiscal year
ending July 31, 2004, net cash provided by operating activities of $121
thousand was primarily attributable to decreases of $1.5 million in accounts
receivable and $1.1 million in accounts payable. These were partially offset
by an increase of $1.9 million in inventories. Net cash consumed by investing activities of $1.8 million in fiscal year
ending July 31, 2002 was primarily attributable to investments in equipment,
including the purchase of office, warehouse and computer equipment. These
investments in equipment were mainly in the new distribution center in York,
Pennsylvania. Net cash consumed by investing activities of $2.5 million in
fiscal year ending July 31, 2003 was primarily attributable to investments in
land, equipment, including the purchase of office, warehouse and computer
equipment. Net cash consumed by investing activities of $1.4 million in fiscal
year ending July 31, 2004 was primarily attributable to investments in
equipment, including the purchase of office, warehouse and computer equipment. In the fiscal year ending July 31, 2002, net cash provided by financing
activities of $2.3 million was primarily attributable to an increase of $2.2
million in loan proceeds, and $133 thousand from net proceeds from issuance of
common stock. In the fiscal year ending July 31, 2003, net cash provided by
financing activities of $7.4 million was primarily attributable to an increase
of $6.6 million in loan proceeds, and $797 thousand from net proceeds from
issuance of common stock. In the fiscal year ending July 31, 2004, net cash
consumed by financing activities of $544 thousand was primarily attributable to
a decrease of $944 thousand in loan proceeds, and $400 thousand from net
proceeds from the issuance of shares subject to mandatory redemption and the
issuance of common stock. 17




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The Companys Articles of Incorporation prohibit shareholders from
selling, assigning, or otherwise transferring their common stock to any person
or entity, other than to the Company. The Company is required to by its
Articles of Incorporation to repurchase shares of common stock within ninety
(90) days of receiving written notice from the shareholder requesting
redemption of his, her, or its stock. The redemption amount is the original
purchase price of the stock paid by the stockholder. The Company was
contingently liable for $5.7 million as of July 31, 2004. Inflation Most of our operating expenses are inflation-sensitive with inflation
generally producing increased costs of operations. During the past three
years, the most significant effects of inflation have been on employee wages
and costs of products. We historically have limited the effects of inflation
through certain cost control efforts. Off-Balance Sheet Arrangements At July 31, 2004, the Company did not have any off-balance sheet
arrangements. Critical Accounting Policies The Securities and Exchange Commission (SEC or the Commission)
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 Consolidated Financial Statements. 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. 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. 18




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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 11.3% of the Companys receivables at July 31, 2004. One
customer comprised a significant individual receivable consisting of 14.4% of
the Companys receivables at July 31, 2003. Two vendors comprised 31.1% and
12.9% of all purchases for fiscal year 2004. One vendor comprised 24.7% of all
purchases for fiscal year 2003. 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. For further discussion, see Note 7 to the
Consolidated Financial Statements. Goodwill and Other Intangible Assets Beginning August 1, 2002, all goodwill amortization ceased in accordance
with SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
required the Company to evaluate its existing intangible assets and goodwill
that were acquired in prior business purchase combinations, and to make any
necessary reclassifications in order to conform with the new criteria in SFAS
No. 141 for recognition apart from goodwill. The Company then had up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting units carrying amount. To the extent a
reporting units carrying amount exceeds its fair value, an indication exists
that the reporting units goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting units goodwill,
determined by allocating the reporting units fair value to all of its assets
(recognized and unrecognized) and the liabilities in a manner similar to a
purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption. The
Companys policy is to perform its annual impairment testing for all reporting
units as of the fourth quarter of each fiscal year. For further discussion of
the Companys adoption of SFAS No. 142, see Note 12 to the consolidated
financial statements. 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 for the years ended July 31, 2004, 2003, and 2002, is
included in interest expense on the Consolidated Statements of Income. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation Number 46,
Consolidation of Variable Interest Entities and Interpretation of ARB No. 51,
(FIN 46). A revision of FIN 46 was issued in December 2003. The revised FIN
46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling 19




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financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the effective date for
the provisions of FIN 46 has been deferred to periods ending after March 15,
2004. Effective January 31, 2004, the Company adopted FIN 46. This standard
does not effect the Companys financial position, cash flows or results of
operation. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, to
require more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company adopted SFAS No. 149 beginning in the first
quarter of fiscal 2004. This standard does not effect the Companys financial
position, cash flows or results of operation. In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for issuer
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. Instruments that fall within
the scope of SFAS No. 150 must be classified as a liability. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective for the beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of non-public entities. Management adopted SFAS No. 150 during the
first quarter of the current fiscal year. The Companys shares of common stock
issued to single member limited liability companies and sole proprietorships
are subject to mandatory redemption upon death of the shareholder at the price
the shareholder paid for the share. These shares are presented as liabilities
under the provision of SFAS No. 150 within the long-term liability section on
the Consolidated Balance Sheets. The adoption of SFAS No. 150 did not have a
material impact on the Companys consolidated results of operations. However,
the adoption of SFAS No. 150 did impact the Companys consolidated presentation
of financial position. Single member limited liability companies and sole
proprietorships comprised 716 shares at July 31, 2004. These shares, including
associated additional paid-in capital net of amounts receivable, were
reclassified to long-term liabilities in the amount of $2.1 million. 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 may also
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 quarterly 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 important 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; 20




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
    
    the timing and effectiveness of capital expenditures;
    
    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 have
significantly expanded our operations in the United States. Our number of
employees increased by approximately 240 individuals during this 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
    
    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, 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. 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 21




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for successive one year periods unless terminated by either party. For
additional information, see Employment Agreement. 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
prior to this offering, and there will be no established public trading market
after this offering. Sales are limited to licensed veterinarians/veterinary
clinics  our common stock will not be sold, assigned, or otherwise transferred
to anyone else. 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 share, the shareholder must sell it to the Company and
will receive only the amount he or she paid for the share. Shares may not be
sold, assigned, or otherwise transferred by a shareholder to anyone other than
the Company. 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 growth of our business, 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 prohibit 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  
    
    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. 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 of our 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 our customer transactions and data at our
facilities in Omaha, Nebraska. Although we have safeguards 22




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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, only 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 than
us. 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.
    
    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 US 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 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. 23




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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 in the event of a shareholders death, at the price the
shareholder paid for such share of stock. Further, 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 offering proceeds. We May Not Be Able To Raise Needed Capital In the Future 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, 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 July 31, 2004, our total long-term debt (excluding current portions)
was approximately $6 million, and we had $10.2 million outstanding under our
revolving credit facility and an additional 24




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$14.8 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 and our subsidiaries ability to obtain
additional financial 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 a 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 and our subsidiaries 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 merger 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 or our subsidiaries 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 lenders 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 year
ended July 31, 2004 was approximately $10.2 million and our interest expense
was $542 thousand. A 1% increase in the average interest rate would increase
future interest expense by approximately $129 thousand per year assuming an
average outstanding balance under the revolving line of credit of $14 million. 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: 25




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
    
    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, damage our reputation with
our customers due to factors such as poor quality goods or delays in order
fulfillment, resulting in our being unable to effectively sell our products and
substantially harm our business. 
 ITEM 7A. 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 rose .42 percentage points (a
10% change from the interest rate as of July 31, 2004), assuming no change in
the Companys outstanding balance under the line of credit (approximately $10.2
million as of July 31, 2004), the Companys annualized income before taxes and
cash flows from operating activities would decline by approximately $43
thousand. In May 2003, the Company and U.S. Bank mutually agreed to amend and
restate the Companys Revolving Credit Agreement with U.S. Bank dated December
1, 2001 in its entirety and to establish a revolving line of credit facility
and a term loan facility and to add the Companys subsidiaries, ProConn, LLC
and Exact Logistics, LLC as borrowers. As part of this amendment and
restatement, the Company, ProConn, Exact Logistics and US. Bank entered into an
Amended and Restated Loan Agreement dated May 12, 2003 and the Company
converted $4,000,000 of the Companys then current obligations under the
original Revolving Credit Agreement into a term loan. The Company, ProConn,
Exact Logistics and U.S. Bank entered into a Term Promissory Note dated May 12,
2003 in the amount of $4,000,000 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. The Term
Promissory Note matures June 1, 2008. The payment terms for the Term
Promissory Note provide that the Company 26




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make interest payments of $614.11 per day from May 12, 2003 through May
31, 2003. Thereafter, 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 net present value of the amount of principal to be prepaid. As of July 31,
2004, the Company had $3,244,892 outstanding on the Term Promissory Note. On November 26, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into an Extension Agreement to extend the maturity of the revolving
line of credit by 60 days in order to negotiate an increase to such line of
credit. 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 dated December 29, 2003 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. The Revolving Promissory Note
matures on January 1, 2005. The maximum amount which can be borrowed
thereunder is $25,000,000. 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 July 31, 2004, the variable interest rate at which the Revolving
Promissory Note accrued interest was 4.2% and the Company had $10,173,597
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. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 15. Exhibits and Financial Statement Schedules for the
Companys Financial Statements, and the notes thereto, Supplementary Data, and
the financial statement schedules filed as part of this report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in accountants during our two most recent fiscal years. 
 ITEM 9A. 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 annual
report. Our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures as 27




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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 July 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. 
 ITEM 9B. OTHER INFORMATION The Registrant is not aware of any information required to be disclosed in
a report on Form 8-K during the fourth quarter ended July 31, 2004. 
 PART III Incorporated by reference in Items 10, 11, 12, 13, and 14 below are
certain sections of the Companys definitive proxy statement, to be filed
pursuant to Regulation 14A within 120 days after July 31, 2004. 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Incorporated by reference in this Annual Report is the information
required by this Item 10 contained in the sections entitled Proposal: Election
of Directors, Information About Directors and Executive Officers and
Section 16(b) Beneficial Ownership Reporting Compliance of the Companys
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after July 31, 2004. 
 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference in this Annual Report is the information
required by this Item 11 contained in the section entitled Information About
Directors and Executive Officers  Executive Compensation, of the Companys
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after July 31, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference in this Annual Report is the information
required by this Item 12 28




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##### Table of Contents



contained in the section entitled Security Ownership of Certain
Beneficial Owners and Management, of the Companys definitive proxy statement,
to be filed pursuant to Regulation 14A with the SEC within 120 days after July
31, 2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference in this Annual Report is the information
required by this Item 13 contained in the section entitled the Information
About Directors and Executive OfficersCertain Transactions of the Companys
definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC
within 120 days after July 31, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated by reference in this Annual Report is the information
required by this Item 14 contained in the section entitled the Information
About Directors and Executive OfficersAudit Fees of the Companys definitive
proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120
days after July 31, 2004. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)
    
    Financial StatementsThe following financial statements are filed as part of this report:
 Report of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets as of July 31, 2004 and July 31, 2003
    
    F-2Consolidated Statements of Income Years Ended July 31, 2004, 2003, and
2002
    
    F-3Consolidated Statements of Stockholders Equity Years Ended July 31, 2004
2003, and 2002
    
    F-4Consolidated Statements of Cash
Flows Years Ended July 31, 2004, 2003, and
2002
    
    F-5Notes to Consolidated Financial Statements
    
    F-6  F-19
 29




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##### Table of Contents



To the Audit Committee
Professional Veterinary Products, Ltd.
Omaha, Nebraska 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have audited the accompanying consolidated balance sheets of
Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2004 and
2003, and the related consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended July 31, 2004.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2004, in conformity with U.S.
generally accepted accounting principles. /s/ Quick & McFarlin, P.C.
Quick & McFarlin, P.C.
Omaha, Nebraska
October 7, 2004 F-1




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
July 31, 2004 and 2003
(in thousands, except share data)
 July 31,
    
    July 31,2004
    
    2003ASSETSCURRENT ASSETSCash
    
    $
    2,545
    
    
    $
    4,346Accounts receivable, less allowance for doubtfulaccounts $821 and $760, respectively
    
    
    22,117
    
    
    
    22,718Accounts receivable, related parties
    
    
    3,248
    
    
    
    4,133Inventory, less allowance for obsolete inventory $129 and $0, respectively
    
    
    40,682
    
    
    
    38,817Deferred tax asset
    
    
    952
    
    
    
    343Other current assets
    
    
    836
    
    
    
    489Total
current assets
    
    
    70,380
    
    
    
    70,846NET PROPERTY AND EQUIPMENT
    
    
    10,321
    
    
    
    10,298OTHER ASSETSIntangible assets, less accumulated
amortization $12 and $10, respectively
    
    
    13
    
    
    
    15Intangible retirement asset
    
    
    1,326
    
    
    
    1,334Investment in unconsolidated affiliates
    
    
    1,720
    
    
    
    1,583Cash value life insurance
    
    
    728
    
    
    
    295Deposits on property and equipment
    
    
    263
    
    
    
    31Total other assets
    
    
    4,050
    
    
    
    3,258TOTAL ASSETS
    
    $
    84,751
    
    
    $
    84,402LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESNote payable, bank
    
    $
    10,174
    
    
    $
    9,765Current portion of long-term debt and capital lease obligation
    
    
    2,000
    
    
    
    1,363Accounts payable
    
    
    45,216
    
    
    
    46,154Accounts payable, related parties
    
    
    840
    
    
    
    1,022Other current liabilities
    
    
    3,815
    
    
    
    4,897Total current liabilities
    
    
    62,045
    
    
    
    63,201LONG-TERM LIABILITIESLong-term debt and capital lease obligation, less current portion
    
    
    5,982
    
    
    
    7,972Accrued retirement benefits, less current portion
    
    
    1,326
    
    
    
    1,334Deferred tax liability
    
    
    457
    
    
    
    332Shares subject to mandatory redemption, $1 par value; issued and
outstanding 716 shares and 0 shares, respectively
    
    
    2,110
    
    
    
    Total long-term liabilities
    
    
    9,875
    
    
    
    9,638TOTAL LIABILITIES
    
    
    71,920
    
    
    
    72,839COMMITMENTS AND CONTINGENT LIABILITIES  SEE NOTE 11STOCKHOLDERS EQUITYCommon stock, $1 par value; authorized 30,000 shares; issued andoutstanding 1,236 shares and 1,845 shares, respectively
    
    
    1
    
    
    
    2Paid-in capital
    
    
    3,635
    
    
    
    5,344Retained earnings
    
    
    9,195
    
    
    
    6,217Total stockholders equity
    
    
    12,831
    
    
    
    11,563TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    84,751
    
    
    $
    84,402
 The accompanying notes are an integral part of these financial statements. F-2




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 Years Ended July 31, 2004, 2003 and 2002
(in thousands, except per share amounts)
 July 31,
    
    July 31,
    
    July 31,2004
    
    2003
    
    2002NET SALES AND OTHER REVENUE
    
    $
    335,421
    
    
    $
    298,919
    
    
    $
    239,922COST OF SALES
    
    
    301,393
    
    
    
    268,008
    
    
    
    219,851Gross profit
    
    
    34,028
    
    
    
    30,911
    
    
    
    20,071OPERATING, GENERAL AND
ADMINISTRATIVE EXPENSES
    
    
    28,736
    
    
    
    25,734
    
    
    
    17,928Operating income
    
    
    5,292
    
    
    
    5,177
    
    
    
    2,143OTHER INCOME (EXPENSE)Interest income
    
    
    471
    
    
    
    767
    
    
    
    477Interest expense
    
    
    (1,149
    )
    
    
    (1,075
    )
    
    
    (850
    )Equity in earnings of unconsolidated affiliate
    
    
    137
    
    
    
    92
    
    
    
    (22
    )Other
    
    
    (24
    )
    
    
    27
    
    
    
    Other expense  net
    
    
    (565
    )
    
    
    (189
    )
    
    
    (395
    )Income before taxes
    
    
    4,727
    
    
    
    4,988
    
    
    
    1,748Income tax expense
    
    
    1,749
    
    
    
    1,774
    
    
    
    639NET INCOME
    
    $
    2,978
    
    
    $
    3,214
    
    
    $
    1,109EARNINGS PER COMMON SHARE
    
    $
    2,487.77
    
    
    $
    1,854.47
    
    
    $
    717.14Weighted average common shares outstanding
    
    
    1,197
    
    
    
    1,733
    
    
    
    1,546SUPPLEMENTAL INFORMATIONNet sales and other revenue  related parties
    
    $
    33,718
    
    
    $
    27,325
    
    
    $
    17,782Purchases  related parties
    
    $
    15,616
    
    
    $
    14,908
    
    
    $
    14,890
 The accompanying notes are an integral part of these financial statements. F-3




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY  Years Ended July 31, 2004, 2003 and 2002
(in thousands, except common shares issued)
 Common
    
    
    
    
    
    AdditionalShares
    
    Common
    
    Paid-in
    
    RetainedIssued
    
    Stock
    
    Capital
    
    Earnings
    
    TotalBALANCE AT JULY 31, 2001 (restated)
    
    
    1,534
    
    
    $
    2
    
    
    $
    4,415
    
    
    $
    1,894
    
    
    $
    6,311Issuance of stock
    
    
    36
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    108Redemption of stock
    
    
    (26
    )
    
    
    
    
    
    
    (77
    )
    
    
    
    
    
    
    (77
    )Net change in Accounts receivable, stock
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    101Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,109
    
    
    
    1,109BALANCE AT JULY 31, 2002
    
    
    1,544
    
    
    
    2
    
    
    
    4,547
    
    
    
    3,003
    
    
    
    7,552Issuance of stock
    
    
    330
    
    
    
    
    
    
    
    990
    
    
    
    
    
    
    
    990Redemption of stock
    
    
    (29
    )
    
    
    
    
    
    
    (87
    )
    
    
    
    
    
    
    (87
    )Net change in Accounts receivable, stock
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    
    
    
    
    (106
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,214
    
    
    
    3,214BALANCE AT JULY 31, 2003
    
    
    1,845
    
    
    
    2
    
    
    
    5,344
    
    
    
    6,217
    
    
    
    11,563Issuance of stock
    
    
    144
    
    
    
    
    
    
    
    432
    
    
    
    
    
    
    
    432Redemption of stock
    
    
    (37
    )
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    (109
    )Net change in Accounts receivable, stock
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,978
    
    
    
    2,978Reclassification of shares subject to
mandatory redemption
    
    
    (716
    )
    
    
    (1
    )
    
    
    (2,109
    )
    
    
    
    
    
    
    (2,110
    )BALANCE AT JULY 31, 2004
    
    
    1,236
    
    
    $
    1
    
    
    $
    3,635
    
    
    $
    9,195
    
    
    $
    12,831
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data)
 July 31,
    
    July 31,
    
    July 31,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    2,978
    
    
    $
    3,214
    
    
    $
    1,109Adjustments to reconcile net income to net cash
from operating activities:Depreciation and amortization
    
    
    1,105
    
    
    
    1,105
    
    
    
    619(Gain) loss on sale of property
    
    
    24
    
    
    
    (27
    )
    
    
    Equity in loss (income) from affiliate
    
    
    (137
    )
    
    
    (92
    )
    
    
    22(Increase) decrease in:Receivables
    
    
    1,486
    
    
    
    (7,158
    )
    
    
    (1,419
    )Inventory
    
    
    (1,865
    )
    
    
    (1,826
    )
    
    
    (14,649
    )Deferred tax asset
    
    
    (609
    )
    
    
    (118
    )
    
    
    (109
    )Other current assets
    
    
    (347
    )
    
    
    (453
    )
    
    
    216Cash value life insurance
    
    
    (433
    )
    
    
    (227
    )
    
    
    (35
    )Other assets
    
    
    (4
    )
    
    
    (16
    )
    
    
    Increase (decrease) in:Accounts payable
    
    
    (1,120
    )
    
    
    1,488
    
    
    
    13,202Other current liabilities
    
    
    (1,082
    )
    
    
    2,314
    
    
    
    1,051Deferred tax liability
    
    
    125
    
    
    
    (90
    )
    
    
    212Total adjustments
    
    
    (2,857
    )
    
    
    (5,100
    )
    
    
    (890
    )Net cash provided (consumed) by operating activities
    
    
    121
    
    
    
    (1,886
    )
    
    
    219CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (1,150
    )
    
    
    (2,546
    )
    
    
    (1,839
    )Proceeds from sale of assets
    
    
    
    
    
    
    41
    
    
    
    Deposits on property and equipment
    
    
    (228
    )
    
    
    (15
    )
    
    
    Net cash consumed by investing activities
    
    
    (1,378
    )
    
    
    (2,520
    )
    
    
    (1,839
    )CASH FLOWS FROM FINANCING ACTIVITIESNet short-term borrowings
    
    
    409
    
    
    
    2,868
    
    
    
    2,603Proceeds from long-term debt
    
    
    
    
    
    
    4,000
    
    
    
    Proceeds from capital lease obligation
    
    
    
    
    
    
    343
    
    
    
    Payments of long-term debt and capital lease obligation
    
    
    (1,353
    )
    
    
    (580
    )
    
    
    (449
    )Net proceeds from issuance of shares
subject to mandatory redemption
    
    
    117
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    283
    
    
    
    797
    
    
    
    133Net cash provided (consumed) by financing activities
    
    
    (544
    )
    
    
    7,428
    
    
    
    2,287Net increase (decrease) in cash
    
    
    (1,801
    )
    
    
    3,022
    
    
    
    667Cash at beginning of year
    
    
    4,346
    
    
    
    1,324
    
    
    
    657Cash at end of year
    
    $
    2,545
    
    
    $
    4,346
    
    
    $
    1,324Supplemental disclosure of cash flow information:Interest paid
    
    $
    1,139
    
    
    $
    1,045
    
    
    $
    859Income taxes paid
    
    $
    3,866
    
    
    $
    876
    
    
    $
    86
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data)
 NOTE 1  BUSINESS DESCRIPTION: Professional Veterinary Products, Ltd. (the Company), a Nebraska
corporation, is a wholesale distributor of animal health related
pharmaceuticals and other veterinary related items. Founded in 1982 and
headquartered in Omaha, Nebraska, the Company provides products and other
services primarily to its shareholders. Shareholders are limited to the
ownership of one share of stock and must be a licensed veterinarian or business
entity comprised of licensed veterinarians. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Consolidation The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. The term the
Company used herein means Professional Veterinary Products, Ltd. and its
subsidiaries unless otherwise indicated by the context. All material
intercompany accounts and transactions have been eliminated in consolidation.
Investments in companies in which the Company exercises significant influence,
but not control, are accounted for using the equity method of accounting.
Investments in companies in which the Company has less than a 20% ownership
interest, and does not exercise significant influence, are accounted for at
cost. 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 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. Cash and Cash Equivalents The Company considers all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. Accounts Receivable The accounts receivable arise in the normal course
of business and are reduced by a valuation allowance that reflects managements
best estimate of the amounts that will not be collected. In addition to
reviewing delinquent accounts receivable, management considers many factors in
estimating its general allowance, including historical data, experience, credit
worthiness and economic trends. From time to time, management may adjust its
assumptions for anticipated changes in any of those or other factors expected
to affect collectability. The allowance for doubtful accounts was $821 and
$760 for 2004 and 2003, respectively. Inventory 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. The reserve for inventory obsolescence was $129 and $0 for 2004 and
2003, respectively. F-6




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): Property, Equipment and Depreciation Property and equipment are stated
at cost. Depreciation expense was $1,103, $952 and $604 for 2004, 2003 and
2002, respectively. Depreciation has been calculated using primarily the
straight-line method over the estimated useful lives of the respective classes
of assets as follows: Building
Furniture, fixtures and equipment
Computer equipment
Software
    
    40   years
7    years
5    years
3-5 years
 Leasehold improvements are amortized over the shorter of the remaining
term of the lease or the useful life of the improvement utilizing the
straight-line method. Major additions and betterments that extend the useful
lives of property and equipment are capitalized and depreciated over their
estimated useful lives. Expenditures for maintenance and repairs are charged
to expense as incurred. Property and equipment are reviewed annually for
impairment in accordance with Statement of Financial Accounting Standard (SFAS)
No. 121. Capitalized Leases Property under capital leases is amortized over the
lives of the respective leases. Amortization of capital leases is included in
depreciation expense. Goodwill and Other Intangible Assets Beginning August 1, 2002, all
goodwill amortization ceased in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 required the Company to evaluate its
existing intangible assets and goodwill that were acquired in prior business
purchase combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. The Company then had up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
units carrying amount. To the extent a reporting units carrying amount
exceeds its fair value, an indication exists that the reporting units goodwill
may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting units goodwill, determined by allocating
the reporting units fair value to all of its assets (recognized and
unrecognized) and the liabilities in a manner similar to a purchase price
allocation in accordance with SFAS No. 141, to its carrying amount, both of
which would be measured as of the date of adoption. The Companys policy is to
perform its annual impairment testing for all reporting units as of the fourth
quarter of each fiscal year. For further discussion of the Companys adoption
of SFAS No. 142, see Note 12 to the consolidated financial statements. Other identifiable intangible assets consist of the Company trademark and
loan origination fees. Trademarks have an indefinite life and therefore are
not amortized. The original trademark subject to amortization was $5.
Accumulated amortization was $1 for 2004 and 2003. Loan origination fees
constitute the Companys identifiable intangible asset subject to amortization.
The original loan origination fee subject to amortization was $20.
Accumulated amortization was $11 and $9 for July 31, 2004 and 2003,
respectively. Amortization of the loan origination fees is computed on a
straight-line basis over the term of the related note. Amortization expense of
$2, for the years ended July 31, 2004, 2003, and 2002, is included in interest
expense on the Consolidated Statements of Income. The estimated aggregate
amortization expense for the five succeeding fiscal years is $9. F-7




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): The following schedule reflects net income adjusted to exclude goodwill
and other intangible asset amortization and impairment charges for the years
ended July 31: 2004
    
    2003
    
    2002Net income as reported
    
    $
    2,978
    
    
    $
    3,214
    
    
    $
    1,109Impairment charge
    
    
    
    
    
    
    151
    
    
    
    Amortization, net of taxes
    
    
    
    
    
    
    
    
    
    
    79Pro forma net income
    
    $
    2,978
    
    
    $
    3,365
    
    
    $
    1,188Earnings per share as reported
    
    $
    2,487.77
    
    
    $
    1,854.47
    
    
    $
    717.14Impairment charge
    
    
    
    
    
    
    87.21
    
    
    
    Amortization, net of taxes
    
    
    
    
    
    
    
    
    
    
    50.88Pro forma net earnings per share
    
    $
    2,487.77
    
    
    $
    1,941.68
    
    
    $
    768.02
 Long-Lived Assets SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, requires the Company to review long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable or that the useful
lives of these assets are no longer appropriate. Each impairment test is based
on a comparison of the estimated fair market value to the recorded value of the
asset. No current impairment exists and none have been recognized. 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. Advertising The Company expenses advertising costs as incurred.
Advertising expense was $64, $46 and $32 for 2004, 2003 and 2002, respectively. Direct Shipping and Handling Costs Freight and other direct shipping
costs are included in Cost of sales on the Consolidated Statements of Income.
Direct handling costs are reflected in Operating, general and administrative
expenses. Such costs represent direct compensation costs of employees who
pick, pack and otherwise prepare merchandise for shipment to the Companys
customers. Fair Value of Financial Instruments The carrying amounts reported on the
balance sheets approximate the fair value for cash, accounts receivable,
short-term borrowings and all other variable rate debt (including borrowings
under credit agreements). The carrying amounts reported for long-term debt
approximate fair value because the interest approximates current market rates
for financial instruments with similar maturities and terms. Concentrations of Credit Risk The Companys cash funds are located in a
single financial institution in the United States. Deposits in these bank
accounts may, at times, exceed the $100,000 federally insured limit. F-8




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): 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 11.3% and 14.4% of the
Companys receivables at July 31, 2004 and 2003, respectively. Two vendors
comprised 31.1% and 12.9% of all purchases for fiscal year 2004. One vendor
comprised 24.7% of all purchases for fiscal year 2003. 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 1,197, 1,733 and 1,546 for
2004, 2003 and 2002, respectively. Accounting Changes In May 2003, the Financial Accounting Standards Board
(FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for issuer classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. Instruments
that fall within the scope of SFAS No. 150 must be classified as a liability.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of non-public entities. Management adopted SFAS No. 150
during the first quarter of the current fiscal year. The Companys shares of
common stock issued to single member limited liability companies and sole
proprietorships are subject to mandatory redemption upon death of the
shareholder at the price the shareholder paid for the share. These shares are
presented as liabilities under the provision of SFAS No. 150 within the
long-term liability section on the Consolidated Balance Sheets. The adoption
of SFAS No. 150 did not have a material impact on the Companys consolidated
results of operations. However, the adoption of SFAS No. 150 did impact the
Companys consolidated presentation of financial position. Single member
limited liability companies and sole proprietorships comprised 716 shares at
July 31, 2004. These shares, including associated additional paid-in capital
net of amounts receivable, were reclassified to long-term liabilities in the
amount of $2,110 (see Note 6). Recent Accounting Pronouncements In December 2003, the FASB revised SFAS
No. 132, Employers Disclosures about Pensions and Other Postretirement
Benefitsto require additional disclosures related to pensions and post
retirement benefits. While retaining the existing disclosure requirements for
pensions and postretirement benefits, additional disclosures are required
related to pension plan assets, obligations, contributions and net benefit
costs, beginning with fiscal years ending after December 15, 2003. Additional
disclosures pertaining to benefit payments are required for fiscal years ending
after June 30, 2004. The SFAS No. 132 revisions also include additional
disclosure requirements for interim financial reports beginning after December
15, 2003. Our disclosure in this note reflects the revised requirements under
SFAS No. 132 (revised). This standard does not effect the Companys financial
position, cash flows or results of operation. F-9




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued): In January 2003, the FASB issued FASB Interpretation Number 46,
Consolidation of Variable Interest Entities and Interpretation of ARB No. 51,
(FIN 46). A revision of FIN 46 was issued in December 2003. The revised FIN
46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the effective date for the provisions of
FIN 46 has been deferred to periods ending after March 15, 2004. Effective
January 31, 2004, the Company adopted FIN 46. This standard does not effect
the Companys financial position, cash flows or results of operation. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company adopted SFAS No. 149 beginning in the first
quarter of fiscal 2004. This standard does not effect the Companys financial
position, cash flows or results of operation. Reclassifications Certain prior year amounts have been reclassified to
conform to the July 31, 2004 presentation. Such reclassifications had no
impact on results of operation or shareholders equity. NOTE 3  REBATES: At each fiscal year end, the Company nets rebates due to stockholders
against accounts receivable. Rebates are paid in the form of credits against
future purchases, never in cash. The Company offset accounts receivable as
follows: 2004
    
    2003Accounts receivable, net of allowance
    
    $
    30,625
    
    
    $
    33,132Less  rebates
    
    
    5,260
    
    
    
    6,281Accounts receivable, net
    
    $
    25,365
    
    
    $
    26,851
 Net sales and other revenue reported on the Consolidated Statements of
Income were reduced by rebates as follows: 2004
    
    2003
    
    2002Gross sales and other revenues
    
    $
    340,681
    
    
    $
    305,200
    
    
    $
    246,942Less  rebates
    
    
    5,260
    
    
    
    6,281
    
    
    
    7,020Net sales and other revenue
    
    $
    335,421
    
    
    $
    298,919
    
    
    $
    239,922
 F-10




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 4  PROPERTY AND EQUIPMENT: Major classes of property and equipment consist of the following: 2004
    
    2003Land
    
    $
    1,762
    
    
    $
    1,762Buildings
    
    
    5,045
    
    
    
    5,018Leasehold improvements
    
    
    188
    
    
    
    188Equipment
    
    
    7,120
    
    
    
    6,15714,115
    
    
    
    13,125Less  accumulated depreciation
    
    
    3,794
    
    
    
    2,827$
    10,321
    
    
    $
    10,298
 NOTE 5  INVESTMENT IN UNCONSOLIDATED AFFILIATES: The Company purchased a 20% interest in SERVCO in June 2000 for $1,500.
American Animal Hospital Association (AAHA) owns the remaining 80%. The
Company determined that it has significant influence over SERVCO and
accordingly should account for its 20% ownership interest using the equity
method of accounting for investments. The excess of purchase price over
underlying equity (which represents goodwill) is being tested for impairment in
accordance with applicable accounting standards. The amount of unamortized
goodwill tested for impairment was $1,350 at July 31, 2004 and 2003. No
current impairment exists and none has been recognized. The Company holds a 5%
interest in Agri-Laboratories, Ltd., which is carried at cost. The amounts
presented on the balance sheet consisted of: 2004
    
    2003Investment in SERVCO (equity method)
    
    $
    1,576
    
    
    $
    1,439Investment in Agri-Laboratories, Ltd. (cost method)
    
    
    144
    
    
    
    144$
    1,720
    
    
    $
    1,583
 Included in the Companys consolidated retained earnings is $226 of
undistributed earnings of SERVCO. NOTE 6  COMMON STOCK: The Company is authorized to issue 30,000 shares of common stock with a
par value of $1.00. Issued and outstanding shares amounted to 1,952 at July
31, 2004 and 1,845 at July 31, 2003. 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 July 31, 2004 was $2,110. F-11




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 6  COMMON STOCK (continued): An analysis of common stock and shares subject to mandatory redemption for
the year ended July 31, 2004 is as follows: Shares Subject toCommon Stock
    
    Mandatory Redemption(Equity)
    
    (Long-term Liabilities)
    
    TotalNumber of shares  July 31, 2003
    
    
    1,845
    
    
    
    
    
    
    
    1,845Issuance of common stock
    
    
    144
    
    
    
    
    
    
    
    144Redemption of common stock
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Recognition of liability per SFAS 150
    
    
    (716
    )
    
    
    716
    
    
    
    Number of shares  July 31, 2004
    
    
    1,236
    
    
    
    716
    
    
    
    1,952Paid in capital  July 31, 2003
    
    $
    5,344
    
    
    $
    
    
    
    $
    5,344Issuance of common stock
    
    
    432
    
    
    
    
    
    
    
    432Redemption of common stock
    
    
    (108
    )
    
    
    
    
    
    
    (108
    )Change in amounts receivable
    
    
    77
    
    
    
    
    
    
    
    77Recognition of liability per SFAS 150
    
    
    (2,110
    )
    
    
    2,110
    
    
    
    Paid in capital  July 31, 2004
    
    $
    3,635
    
    
    $
    2,110
    
    
    $
    5,745
 NOTE 7  INCOME TAXES: Significant components of income tax expense are as follows: 2004
    
    2003
    
    2002CurrentFederal
    
    $
    1,931
    
    
    $
    1,855
    
    
    $
    498State
    
    
    302
    
    
    
    127
    
    
    
    382,233
    
    
    
    1,982
    
    
    
    536DeferredFederal
    
    
    (420
    )
    
    
    (195
    )
    
    
    96State
    
    
    (64
    )
    
    
    (13
    )
    
    
    7(484
    )
    
    
    (208
    )
    
    
    103Total
    
    $
    1,749
    
    
    $
    1,774
    
    
    $
    639
 A reconciliation of income tax expense computed using the U.S. federal
statutory income tax rate of 34% of income before income taxes to the actual
provision for income taxes is as follows: 2004
    
    2003
    
    2002Expected tax at U.S. statutory rate
    
    $
    1,607
    
    
    $
    1,696
    
    
    $
    594State taxes, net of federal effect
    
    
    199
    
    
    
    83
    
    
    
    25Other, net
    
    
    (57
    )
    
    
    (5
    )
    
    
    20$
    1,749
    
    
    $
    1,774
    
    
    $
    639
 F-12




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 7  INCOME TAXES (continued): Deferred tax assets and liabilities reflect the future tax consequences of
events that have already been recognized in the consolidated financial
statements or income tax returns. At July 31, the deferred tax asset and
liability consisted of the following: 2004
    
    2003Current deferred tax asset (liability):Uniform capitalization
    
    $
    311
    
    
    $
    264Allowance for doubtful accounts
    
    
    329
    
    
    
    Inventory valuation
    
    
    52
    
    
    
    Deferred compensation
    
    
    260
    
    
    
    79Total
current net deferred tax asset
    
    $
    952
    
    
    $
    343Noncurrent deferred tax asset (liability):Excess of tax over book depreciation
    
    $
    (475
    )
    
    $
    (378
    )Amortization
    
    
    48
    
    
    
    46Profit in SERVCO
    
    
    (30
    )
    
    
    Total noncurrent net deferred tax liability
    
    $
    (457
    )
    
    $
    (332
    )
 NOTE 8  LONG-TERM DEBT: At July 31, long-term debt is summarized as follows: 2004
    
    2003Note payable, maturing in 2005, secured by certain
assets, 9.10% interest
    
    $
    836
    
    
    $
    937Note payable, maturing in 2005, secured by certain
assets, 8.66% interest
    
    
    169
    
    
    
    487Note payable, maturing in 2008, secured by certain
assets, 5.77% interest
    
    
    3,244
    
    
    
    3,955Note payable, maturing in 2009, secured by certain
assets, 7.42% interest
    
    
    3,546
    
    
    
    3,658Capital lease obligation, expiring in 2006, secured by
computer equipment, 4.58% interest
    
    
    187
    
    
    
    2987,982
    
    
    
    9,335Less  current portion
    
    
    2,000
    
    
    
    1,363$
    5,982
    
    
    $
    7,972
 The aggregate schedule of maturities of long-term debt obligations for the
five years subsequent to July 31, 2004 are as follows: 2005
    
    $
    2,0002006
    
    
    1,0062007
    
    
    9932008
    
    
    9992009
    
    
    2,984$
    7,982
 F-13




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 8  LONG-TERM DEBT (continued): At July 31, 2004, the Company had in place a revolving line of credit that
provides for borrowings up to $25,000. This agreement is scheduled to expire
in January 2005. The short-term borrowing amounts outstanding under this
credit facility were $10,174 and $9,765 at July 31, 2004 and 2003,
respectively. Interest is payable at 2.70% over the London InterBank Offered
Rate (LIBOR). The weighted average interest rates of borrowings outstanding
under the revolving credit agreement were 3.86%, 4.12%, and 5.00% for the years
ended July 31, 2004, 2003 and 2002, respectively. The average dollar amounts
of the borrowing were $13,853 and $14,144 for the years ended July 31, 2004 and
2003, respectively. The line of credit is secured by substantially all of the
Companys assets. Under these debt and credit agreements, the Company is required to
maintain certain net worth and leverage ratios. The Company was in compliance
with all covenants under the borrowing agreements at July 31, 2004 and 2003. NOTE 9  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. Accounts
receivable, related parties on the balance sheet include amounts receivable on
demand as of July 31 from the following: 2004
    
    2003Affiliate (SERVCO)
    
    $
    2,966
    
    
    $
    3,864Board of Directors
    
    
    276
    
    
    
    263Officer and employees
    
    
    6
    
    
    
    6$
    3,248
    
    
    $
    4,133
 Net sales on the Consolidated Statements of Income include sales to
related parties as follows: 2004
    
    2003
    
    2002Affiliate (SERVCO)
    
    $
    31,725
    
    
    $
    24,289
    
    
    $
    14,433Board of Directors
    
    
    1,914
    
    
    
    2,959
    
    
    
    3,292Officer and employees
    
    
    79
    
    
    
    77
    
    
    
    57$
    33,718
    
    
    $
    27,325
    
    
    $
    17,782
 Accounts payable to related parties, shown on the balance sheet, consist
of $840 and $1,022 due to Agri-Laboratories as of July 31, 2004 and 2003,
respectively. Purchases from Agri-Laboratories were $15,616, $14,908 and
$14,890 for 2004, 2003 and 2002, respectively. NOTE 10  PROFIT-SHARING AND 401(k) RETIREMENT PLAN: The Company provides a non-contributory profit-sharing plan covering all
full-time employees who qualify as to age and length of service. It has been
the Companys policy to make contributions to the plan as provided annually by
the Board of Directors. The total provision for the contribution to the plan
was $528, $439 and $490 for 2004, 2003 and 2002, respectively. The Company also provides a contributory 401(k) retirement plan covering
all full-time employees who qualify as to age and length of service. It is the
Companys policy to match a maximum allowable 100% employee contribution with a
3% contribution. The total provision to the plan was $229, $177 and $94 for
2004, 2003 and 2002, respectively. F-14




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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 10  PROFIT-SHARING AND 401(k) RETIREMENT PLAN (continued): 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 year ended July 31, 2004 and 2003, benefits accrued and
expensed were $418 and $232, respectively. The vested benefit obligation and
accumulated benefit obligation were $1,525 and $1,976, respectively, at July
31, 2004. 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 $659
and $220 at July 31, 2004 and 2003, 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). The following set forth the change in benefit obligations, change in plan
assets, funded status and amounts recognized in the balance sheet as of July 31
for the Companys SERP: 2004
    
    2003Change in Benefit Obligation:Projected benefit obligation  July 31
    
    $
    2,094
    
    
    $
    1,837Service cost
    
    
    151
    
    
    
    80Interest cost
    
    
    131
    
    
    
    72Actuarial loss
    
    
    367
    
    
    
    105Benefit Payments
    
    
    0
    
    
    
    0Projected benefit obligation  July 31
    
    $
    2,743
    
    
    $
    2,094Fair Value of Plan Assets  July 31
    
    $
    0
    
    
    $
    0Funded Status:Funded status
    
    
    ($2,743
    )
    
    
    ($2,094
    )Unrecognized actuarial loss
    
    
    472
    
    
    
    105Unrecognized prior service cost
    
    
    1,621
    
    
    
    1,757Net amount recognized
    
    
    ($650
    )
    
    
    ($232
    )Balance Sheet Amounts:Accrued retirement benefits
    
    
    ($1,976
    )
    
    
    ($1,566
    )Intangible retirement asset
    
    
    1,326
    
    
    
    1,334Net amount recognized
    
    
    ($650
    )
    
    
    ($232
    )
 F-15




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 10  PROFIT-SHARING AND 401(k) RETIREMENT PLAN (continued): Net periodic benefit costs for the Companys SERP for the year ended July
31 included the following components: 2004
    
    2003Service cost
    
    $
    151
    
    
    $
    80Interest cost
    
    
    131
    
    
    
    72Amortization of unrecognized prior service costs
    
    
    136
    
    
    
    80Net periodic cost
    
    $
    418
    
    
    $
    232
 The weighted average discount rate and rate of increase in compensation
levels used to compute the actuarial present value of projected benefit
obligations were 6.25% and 4.00%, respectively, at July 31, 2004. NOTE 11  COMMITMENTS AND CONTINGENT LIABILITIES: Operating and Capital Leases The Company has operating and capital
leases covering certain property, equipment, and computer hardware and software
expiring at various dates through 2009. Capitalized lease property consists of
computer equipment having a net carrying cost of $240 at July 31, 2004. Future
minimum lease payments under operating and capital leases that have initial or
remaining noncancelable lease terms in excess of one year at July 31, 2004 are
as follows: Operating
    
    Capital2005
    
    $
    979
    
    
    $
    1232006
    
    
    799
    
    
    
    712007
    
    
    662
    
    
    
    02008
    
    
    27
    
    
    
    02009
    
    
    11
    
    
    
    0Total minimum payments
    
    $
    2,478
    
    
    
    194Less  interest on capital leases
    
    
    
    
    
    
    7Present value of net minimum lease payments (incl. in Note 8)
    
    
    
    
    
    $
    187
 Lease expense was $955, $784 and $447 for the years ended July 31, 2004,
2003 and 2002, respectively. 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 $5.7 million as of July 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. F-16




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 12  GOODWILL IMPAIRMENT: On August 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
required the Company to evaluate its existing intangible assets and goodwill
that were acquired in prior purchase business combinations, and to make any
necessary reclassifications in order to conform with the new criteria in SFAS
No. 141 for recognition apart from goodwill. Accordingly, the Company was
required to reassess the useful lives and residual values of all identifiable
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments. In addition, to the extent an
intangible asset is then determined to have an indefinite useful life, the
Company was required to test the intangible asset for impairment in accordance
with the provisions of SFAS No. 142. Under the provisions of SFAS No. 142, the Company was required to perform
transitional goodwill impairment tests as of August 1, 2002. To accomplish
this, the Company identified its reporting units and determined the carrying
value of its one reporting unit by assigning the assets, liabilities, existing
goodwill and intangible assets to the reporting unit as of the date of
adoption. The Company then had up to six months from the date of adoption to
determine the fair value of its reporting unit and compare it to the reporting
units carrying amount. To the extent a reporting units carrying amount
exceeds its fair value, an indication exists that the reporting units goodwill
may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting units goodwill, determined by allocating
the reporting units fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with SFAS No. 141, to its carrying amount, both of
which would be measured as of the date of adoption. This second step was
completed and indicated a 100% impairment of the goodwill associated with the
assets acquired by the Wholesale Distribution segment in connection with its
acquisition of Am-V-Co. This resulted in a charge to earnings of $151 during
the first quarter of fiscal 2003. No additional impairment exists at July 31,
2004 and none has been recognized. The changes in the carrying amount of
goodwill and other intangible assets for the year ended July 31, 2004, are as
follows: DirectWholesale
    
    Logistics
    
    CustomerDistribution
    
    Services
    
    Services
    
    TotalBalance as of August 1, 2003
    
    $
    15
    
    
    $
    0
    
    
    $
    0
    
    
    $
    15Goodwill acquired during the year
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Impairment loss
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Amortization of other intangible assets
    
    
    (2
    )
    
    
    0
    
    
    
    0
    
    
    
    (2
    )Balance as of July 31, 2004
    
    $
    13
    
    
    $
    0
    
    
    $
    0
    
    
    $
    13
 NOTE 13  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 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. F-17




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 13  SEGMENT INFORMATION (continued): The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as detailed in Note 2 to these
consolidated financial statements. 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: DirectWholesale
    
    Logistics
    
    Customer
    
    
    
    
    
    ConsolidatedDistribution
    
    Services
    
    Services
    
    Eliminations
    
    TotalFor the year ended
July 31, 2004Net sales and other revenue
    
    $
    333,290
    
    
    $
    1,246
    
    
    $
    31,479
    
    
    $
    (30,594
    )
    
    $
    335,421Cost of sales
    
    
    303,248
    
    
    
    1,190
    
    
    
    27,325
    
    
    
    (30,370
    )
    
    
    301,393Operating, general and
administrative expenses
    
    
    24,692
    
    
    
    
    
    
    
    4,044
    
    
    
    
    
    
    
    28,736Operating income
    
    
    5,350
    
    
    
    56
    
    
    
    111
    
    
    
    (225
    )
    
    
    5,292Income before taxes
    
    $
    4,727
    
    
    $
    56
    
    
    $
    169
    
    
    $
    (225
    )
    
    $
    4,727Business segment assets
    
    $
    84,128
    
    
    $
    248
    
    
    $
    666
    
    
    $
    (291
    )
    
    $
    84,751For the year ended
July 31, 2003Net sales and other revenue
    
    $
    297,007
    
    
    $
    2,076
    
    
    $
    24,223
    
    
    $
    (24,387
    )
    
    $
    298,919Cost of sales
    
    
    269,582
    
    
    
    1,955
    
    
    
    20,842
    
    
    
    (24,371
    )
    
    
    268,008Operating, general and
administrative expenses
    
    
    22,245
    
    
    
    1
    
    
    
    3,488
    
    
    
    
    
    
    
    25,734Operating income
    
    
    5,180
    
    
    
    120
    
    
    
    (108
    )
    
    
    (15
    )
    
    
    5,177Income before taxes
    
    $
    4,988
    
    
    $
    120
    
    
    $
    (105
    )
    
    $
    (15
    )
    
    $
    4,988Business segment assets
    
    $
    83,842
    
    
    $
    192
    
    
    $
    394
    
    
    $
    (26
    )
    
    $
    84,402For the year ended
July 31, 2002Net sales and other revenue
    
    $
    239,778
    
    
    $
    2,578
    
    
    $
    954
    
    
    $
    (3,388
    )
    
    $
    239,922Cost of sales
    
    
    219,841
    
    
    
    2,542
    
    
    
    882
    
    
    
    (3,414
    )
    
    
    219,851Operating, general and
administrative expenses
    
    
    17,794
    
    
    
    1
    
    
    
    133
    
    
    
    
    
    
    
    17,928Operating income
    
    
    2,143
    
    
    
    35
    
    
    
    (61
    )
    
    
    26
    
    
    
    2,143Income before taxes
    
    $
    1,748
    
    
    $
    35
    
    
    $
    (61
    )
    
    $
    26
    
    
    $
    1,748Business segment assets
    
    $
    68,597
    
    
    $
    640
    
    
    $
    2,401
    
    
    $
    (3,004
    )
    
    $
    68,634
 F-18




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##### Table of Contents



PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2004, 2003, and 2002
(in thousands, except for per share data) NOTE 14  SELECTED QUARTERLY FINANCIAL DATA: The following presents certain unaudited quarterly financial data and
certain audited year-end financial data: Quarters endedOctober 31,
    
    January 31,
    
    
    
    
    
    
    
    
    
    Year ended2001
    
    2002
    
    April 30,
    
    July 31,
    
    July 31,(restated)
    
    (restated)
    
    2002
    
    2002
    
    2002Revenues
    
    $
    59,153
    
    
    $
    55,483
    
    
    $
    63,131
    
    
    $
    62,155
    
    
    $
    239,922Gross profit
    
    
    4,336
    
    
    
    4,308
    
    
    
    6,425
    
    
    
    5,002
    
    
    
    20,071Operating income
    
    
    738
    
    
    
    418
    
    
    
    1,643
    
    
    
    (656
    )
    
    
    2,143Net income
    
    
    342
    
    
    
    110
    
    
    
    1,111
    
    
    
    (454
    )
    
    
    1,109Net income per share
    
    $
    222.40
    
    
    $
    70.43
    
    
    $
    717.93
    
    
    $
    (293.83
    )
    
    $
    717.14Weighted average
common shares
outstanding
    
    
    1,536
    
    
    
    1,557
    
    
    
    1,548
    
    
    
    1,544
    
    
    
    1,546
 Quarters ended
    
    Year endedOctober 31,
    
    January 31,
    
    April 30,
    
    July 31,
    
    July 31,2002
    
    2003
    
    2003
    
    2003
    
    2003Revenues
    
    $
    75,236
    
    
    $
    68,025
    
    
    $
    74,624
    
    
    $
    81,034
    
    
    $
    298,919Gross profit
    
    
    6,723
    
    
    
    8,107
    
    
    
    8,887
    
    
    
    7,194
    
    
    
    30,911Operating income
    
    
    301
    
    
    
    1,730
    
    
    
    2,601
    
    
    
    545
    
    
    
    5,177Net income
    
    
    114
    
    
    
    964
    
    
    
    1,723
    
    
    
    413
    
    
    
    3,214Net income per share
    
    $
    69.66
    
    
    $
    560.45
    
    
    $
    980.33
    
    
    $
    227.66
    
    
    $
    1,854.47Weighted average
common shares
outstanding
    
    
    1,641
    
    
    
    1,721
    
    
    
    1,757
    
    
    
    1,812
    
    
    
    1,733
 Quarters ended
    
    Year endedOctober 31,
    
    January 31,
    
    April 30,
    
    July 31,
    
    July 31,2003
    
    2004
    
    2004
    
    2004
    
    2004Revenues
    
    $
    88,442
    
    
    $
    73,446
    
    
    $
    85,075
    
    
    $
    88,458
    
    
    $
    335,421Gross profit
    
    
    8,624
    
    
    
    9,462
    
    
    
    8,427
    
    
    
    7,515
    
    
    
    34,028Operating income
    
    
    1,310
    
    
    
    2,815
    
    
    
    1,065
    
    
    
    102
    
    
    
    5,292Net income
    
    
    778
    
    
    
    1,662
    
    
    
    503
    
    
    
    35
    
    
    
    2,978Net income per share
    
    $
    662.00
    
    
    $
    1,403.25
    
    
    $
    417.94
    
    
    $
    27.86
    
    
    $
    2,487.77Weighted average
common shares
outstanding
    
    
    1,176
    
    
    
    1,185
    
    
    
    1,202
    
    
    
    1,225
    
    
    
    1,197
 F-19




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##### Table of Contents



(b) Exhibits Regulation S-KExhibit Number
    
    Document3.1
    
    
    Articles of Incorporation of Professional Veterinary Products, Ltd. (1)3.2
    
    
    Bylaws of Professional Veterinary Products, Ltd. (1)4.1
    
    
    Certificate of Professional Veterinary Products, Ltd. (1)4.2
    
    
    Article V of the Articles of Incorporation of Professional Veterinary Products,
Ltd., which defines the rights of holders of the securities being registered (1)4.3
    
    
    Article II of the Bylaws of Professional Veterinary Products, Ltd., which defines
the rights of holders of the securities being registered (1)10.1
    
    
    Warranty Deed for real estate at 10100 J Street, Omaha, Nebraska from Professional
Veterinary Products, Ltd. to Duane E. and Barbara G. Miller (1)10.2
    
    
    Warranty Deed for real estate at 10077 South 134th Street, Omaha, Nebraska from
Hilltop Industrial Park to Professional Veterinary Products, Ltd. (1).10.3
    
    
    Lease of building located at 10100 J Street, Omaha, Nebraska between Professional
Veterinary Products, Ltd. and Duane E. and Barbara G. Miller (1).10.4
    
    
    Construction Agreement for building at 10077 South 134th Street, Omaha, Nebraska
between Professional Veterinary Products, Ltd. and Mudra Construction, Ltd. (1).10.5
    
    
    Sales Agency Agreement between Professional Veterinary Products, Ltd. and Bayer
Corporation (1).*10.6
    
    
    Sales Agency Agreement between Professional Veterinary Products, Ltd. and Merial
LLC (1).*10.7
    
    
    Select Distributors Marketing Agreement between Professional Veterinary Products,
Ltd. and the Animal Health Group of Pfizer, Inc. (1).*10.8
    
    
    Supply and Distribution Agreement between Professional Veterinary Products, Ltd.
and Schering-Plough Animal Health Corporation (1).*10.9
    
    
    Distributor Agreement between Professional Veterinary Products, Ltd. and The Upjohn
Company (1).*10.10
    
    
    Distribution Agreement between Professional Veterinary Products, Ltd. and Fort
Dodge Animal Health (1).10.11
    
    
    Purchase and Sale Agreement between Professional Veterinary Products, Ltd., AAHA
Services Corporation and American Animal Hospital Association (2)10.12
    
    
    Lease of building located in York, Pennsylvania between Professional Veterinary
Products, Ltd. and Kinsley Equities II Limited Partnership (4)10.13
    
    
    Amended and Restated Loan Agreement dated May 12, 2003 between Professional
Veterinary Products, Ltd., ProConn, LLC, Exact Logistics, LLC and U.S. Bank,
N.A.(5)10.14
    
    
    Revolving Promissory Note dated May 12, 2003 between Professional Veterinary
Products, Ltd., ProConn, LLC, Exact Logistics, LLC and U.S. Bank, N.A.(5)10.15
    
    
    Term Promissory Note dated May 12, 2003 between Professional Veterinary Products,
Ltd., ProConn, LLC, Exact Logistics, LLC and U.S. Bank, N.A.(5)10.16
    
    
    Security Agreement (PA Equipment) dated May 12, 2003 between Professional
Veterinary Products, Ltd. and U.S. Bank, N.A.(5)10.17
    
    
    Security Agreement (Blanket) dated May 12, 2003 between Professional Veterinary
Products, Ltd. and U.S. Bank, N.A. (5)10.18
    
    
    Security Agreement dated May 12, 2003 between ProConn, LLC and U.S. Bank, N.A.(5)10.19
    
    
    Security Agreement dated May 12, 2003 between Exact Logistics and U.S. Bank, N.A.(5)10.20
    
    
    Assignment of Lease and Rents dated May 12, 2003 between Professional Veterinary
Products, Ltd. and U.S. Bank, N.A. (5)10.21
    
    
    Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture
Filing dated May 12, 2003 between Professional Veterinary Products, Ltd. and U.S.
Bank, N.A. (5)10.22
    
    
    Supplemental Executive Retirement Plan(5)11
    
    
    Statement re Computation of Per Share Earnings (6)12
    
    
    Computation of Ratio of Earnings to Fixed Charges (6)21
    
    
    List of Subsidiaries (3)
 II-1




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##### Table of Contents



Regulation S-KExhibit Number
    
    Document23
    
    
    Consent of Quick & McFarlin, P.C. (6)24.1
    
    
    Power of Attorney executed by Buddy D. Ray (6)24.2
    
    
    Power of Attorney executed by Chester L. Rawson (6)24.3
    
    
    Power of Attorney executed by Amy Lynne Hinton (6)24.4
    
    
    Power of Attorney executed by Steven E. Wright (6)24.5
    
    
    Power of Attorney executed by Michael B. Davis (6)24.6
    
    
    Power of Attorney executed by G.W. Buckaloo, Jr. (6)24.7
    
    
    Power of Attorney executed by Tom Latta (6)24.8
    
    
    Power of Attorney executed by William Swartz (6)31
    
    
    Certifications 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 and CFO (6)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 (6)99
    
    
    Schedule of Allowances (6)
 The following footnotes indicate a document previously filed as an
exhibit to and incorporated by reference from the following:  (1)
    
    Form S-1 Registration Statement filed on September 7, 1999.(2)
    
    Post-Effective Amendment No. 1 to the Form S-1 Registration
Statement No. 333-86629 filed on November 3, 2000.(3)
    
    Form S-1 Registration Statement No. 333-72962 filed on
November 8, 2001.(4)
    
    Form 10-K for the fiscal year ended July 31, 2002 filed
October 29, 2002.(5)
    
    Post-Effective Amendment No. 1 to the Form S-1 Registration
State No. 333-72962 filed on August 29, 2003. The following footnotes are references to the following:  (6)
    
    Filed herewith.(*)
    
    Portions of these exhibits have been redacted pursuant to a
request for confidential treatment which was granted by the
Securities and Exchange Commission. II-2




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##### Table of Contents



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:
October 29, 2004 PROFESSIONAL VETERINARY PRODUCTS, LTD.By:
    /s/ Lionel L. ReillyDr. Lionel L. Reilly, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Signature
    
    Capacity
    
    Date/s/ Lionel L. Reilly
    
    President & CEO
    
    October  29, 2004Dr. Lionel L. Reilly/s/ Neal B. Soderquist
    
    Chief Financial Officer
    
    October  29, 2004Neal B. Soderquist*
    
    Director
    
    October  29, 2004Dr. Buddy D. Ray*
    
    Director
    
    October  29, 2004Dr. G.W. Buckaloo, Jr.*
    
    Director
    
    October  29, 2004Dr. Tom Latta*
    
    Director
    
    October  29, 2004Dr. Steven E. Wright*
    
    Director
    
    October  29, 2004Dr. Michael B. Davis*
    
    Director
    
    October  29, 2004Dr. Amy Lynne Hinton
 II-3




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##### Table of Contents



Signature
    
    Capacity
    
    Date*
    
    Director
    
    October 29, 2004Dr. Chester L. Rawson*Director
    
    October 29, 2004Dr. William Swartz
 *By:
    
    /s/ Lionel L. ReillyDr. Lionel L. ReillyAs: Attorney-in-fact
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