UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

Commission file number: 000-26326

PROFESSIONAL VETERINARY PRODUCTS, LTD.

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes      o     No     þ

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes      o     No     þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (May 31, 2005).

Common Stock, $1.00 par value, 2,003

PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED APRIL 30, 2005

PART I    FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

To the Board of Directors and Stockholders
Professional Veterinary Products, Ltd.
Omaha, NE

INDEPENDENT ACCOUNTANT’S REPORT

     We have reviewed the accompanying consolidated balance sheet of Professional Veterinary Products, Ltd. (a Nebraska Corporation) and subsidiaries as of April 30, 2005, and the related statements of consolidated income for the three month and nine month periods ended April 30, 2005 and 2004 and the consolidated statements of cash flows for the nine month periods ended April 30, 2005 and 2004. These financial statements are the responsibility of the company’s management.

     We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

     We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2004, and the related statements of income, retained earnings and cash flows for the year then ended (not presented herein); and in our report dated October 7, 2004, we expressed an unqualified opinion on those financial statements. In our opinion the information set forth in the accompanying consolidated balance sheet as of July 31, 2004, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ Quick & McFarlin, P.C.
Quick & McFarlin, P.C.
Omaha, Nebraska
June 3, 2005

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES

     See notes to the condensed, consolidated financial statements.

2

PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES

     See notes to the condensed, consolidated financial statements.

3

PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES

     See notes to the condensed, consolidated financial statements.

4

PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES

NOTE 1 – BASIS OF PRESENTATION

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

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

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

     These condensed, consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed with the SEC. The Company follows the same accounting policies in preparation of interim financial statements. These policies are presented in Note 2 to the Consolidated Financial Statements included on Form 10-K referred to above.

     The results of operations and cash flows for the nine months ended April 30, 2005 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2005 or any other period. Certain amounts from prior periods have been reclassified to conform to the current period’s presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 151, Inventory Costs – an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that abnormal amounts be recognized as current period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS No. 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. This standard does not affect the Company’s financial position, cash flows or results of operations.

     In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions – an amendment of FASB Statement No. 66, SFAS No. 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29, and SFAS No. 123 (Revised 2004), Share-Based Payment. These standards do not affect the Company’s financial position, cash flows or results of operations.

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

NOTE 3 – PROPERTY AND EQUIPMENT

     Major classes of property and equipment consist of the following:

NOTE 4 – LINE OF CREDIT

     In December 2004, the Company increased the amount of the revolving line of credit from $25,000 to $40,000. This agreement is scheduled to expire in January 2008. The short-term borrowing amounts outstanding under this credit facility were $17,725 and $10,174 at April 30, 2005 and July 31, 2004, respectively. Interest is payable at a variable rate, subject to change each fiscal quarter, equal to the London InterBank Offered Rate (LIBOR) plus a percentage based on the Company’s leverage ratio. The 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. In addition, our debt agreements contain a number of covenants, among other things, that restrict our and our subsidiaries’ ability to pay dividends. The Company was in compliance with all covenants under the borrowing agreements at April 30, 2005 and July 31, 2004.

NOTE 5 – EARNINGS PER SHARE

     SFAS No. 128, Earnings per Share promulgates accounting standards for the computation and manner of presentation of the Company’s earnings per share data. Under SFAS No. 128, the Company is required to present basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. 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 1,245 and 1,187 at April 30, 2005 and 2004, respectively.

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

NOTE 6 – COMMON STOCK

     The Company is authorized to issue 30,000 shares of common stock with a par value of $1. Issued and outstanding shares amounted to 1,995 at April 30, 2005 and 1,952 at July 31, 2004. Holders of common stock are entitled to: a) one vote for each share held on matters submitted to a vote of stockholders, b) a ratable share of dividends declared and c) in the event of liquidation or dissolution, a ratable share of monies after liabilities. Shareholders are not permitted to dispose of their stock except by a sale back to the Company. The shareholder must give the Company written notice of the proposed sale and the Company must redeem for cash the share of stock within ninety days of receiving such notice, at the price the shareholder paid for the share subject to adequate resources being available. 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 April 30, 2005 was $2,164.

     There were 7 and 14 common shares subscribed but unissued as of April 30, 2005 and July 31, 2004, respectively. The amounts receivable on these shares reduced paid-in capital by $12 and $20 at April 30, 2005 and July 31, 2004, respectively. Accounts receivable arising from stock sales is presented as a deduction from shareholders’ equity to the extent such receivable was not paid in cash prior to the date of the report. No finance charges have been generated on any existing payment plan for any share of common stock.

NOTE 7 – POSTRETIREMENT BENEFITS

     On January 1, 2003, the Company adopted a Supplemental Executive Retirement Plan (SERP). The SERP is a nonqualified defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees’ years of service and compensation. For the nine months ended April 30, 2005 and 2004, benefits accrued and expensed were $387 and $314, respectively. The plan is an unfunded supplemental retirement plan and is not subject to the minimum funding requirements of the Employee Retirement Income Security Act (ERISA). While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values of $1,102 and $659 at April 30, 2005 and July 31, 2004, respectively.

     In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures About Pensions and Other Postretirement Benefits. The provisions of this statement do not change the measurement and recognition provisions of SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions. Disclosures in this note reflect the revised requirements under SFAS No. 132 (revised).

     Net periodic benefit costs for the Company’s SERP for the nine months ended April 30, included the following components:

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

NOTE 7 – POSTRETIREMENT BENEFITS (CONTINUED)

     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. The Company expects to recognize $516 of net periodic benefit cost for this postretirement plan in 2005.

NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES

     Stock Redemption – The Company is required by its Articles of Incorporation to repurchase stock within ninety days of receiving written notice from the shareholder requesting redemption of their stock subject to adequate resources being available. The redemption amount is the original purchase price of the stock paid by the shareholder. The Company was contingently liable for $5,899 as of April 30, 2005.

     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 11.4% and 11.3% of the Company’s receivables at April 30, 2005 and July 31, 2004, respectively. One vendor comprised a significant individual payable consisting of 28.6% and 56.2% of the Company’s payables at April 30, 2005 and July 31, 2004, respectively.

     Estimated Rebate – Due to changes in manufacturer contracts and reductions in sales performance incentives earned by the Company, the estimated shareholder performance rebate accrued for the nine months ended was $1,000 versus $4,104 at April 30, 2005 and April 30, 2004, respectively.

     Other – The Company is subject to claims and other actions arising in the ordinary course of business. Some of these claims and actions may result 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.

     Agreements - In February 2005, the Company entered into a written understanding with two individuals who are residents of Texas. Such Texas residents have agreed to construct a 15,625 square foot building (the Building) in Hereford, Texas. It is anticipated that the Building will be completed no later than August 2005 (the Construction Deadline). Assuming the Building is completed by the Construction Deadline, the Company will lease space in the Building pursuant to the terms of a lease that the parties currently are negotiating. If the Building is completed and the parties enter into a lease, the Company will use the Building as a distribution facility commencing in August or September 2005.

NOTE 9 – SEGMENT INFORMATION

     The Company has three reportable segments: Wholesale Distribution, Logistics Services and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of animal health products. This segment distributes products primarily to 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 and business to business type transactions. The Logistic Services segment serves its customers by consolidating, packaging and delivering animal health products closer to the final destination, resulting in reduced freight costs and improved delivery performance. The Direct Customer Services segment serves as a supplier of animal health products to the producer or consumer. Animal health products are shipped to locations closer to the final destination. The segment’s trucking operations transport the products directly to the producer or consumer.

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

     NOTE 9 – 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 the Company’s consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended July 31, 2004, filed with the SEC. The Company evaluates performance based on profit or loss from operations before income taxes. The Company’s reportable segments are strategic business units that serve different types of customers in the animal health industry. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

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

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

NOTE 9 – SEGMENT INFORMATION (CONTINUED)

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

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
April 30, 2005
(unaudited)
(in thousands, except per share data)

NOTE 10 – RECLASSIFICATIONS

     Certain reclassifications have been made to the prior year condensed, consolidated financial statements to conform to the current year presentation. Such reclassifications had no impact on results of operation or shareholders’ equity.

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

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

Forward-Looking Statements

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

	•	the current economic environment affecting the Company and the markets it serves;
	•	sources of revenues and anticipated revenues, including the contribution from the growth of new products and markets;
	•	estimates regarding the Company’s capital requirements and its need for additional financing;
	•	the Company’s ability to attract customers and the market acceptance of its products;
	•	our ability to establish relationships with suppliers of products; and
	•	plans for future products and services and for enhancements of existing products and services.

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

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

Overview

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

12

products and business to business type transactions. The Direct Customer Services segment is a supplier of animal health products to the producer or consumer.

     We generate most of our net sales and other revenue by providing pharmaceuticals, vaccines, supplies, equipment and other veterinary related items to our customers through our wholesale distribution segment. The main factor that impacts our net sales and other revenue is the Company’s ability to offer a broad product line combined with our excellent and knowledgeable customer service. We also derive approximately 13% of our sales and other revenue from our logistics services and direct customer services segments.

     During the quarter ended April 30, 2005, the Company’s gross profit increased $2.2 million compared to the prior period. For the quarter, net income increased by $.5 million or 102.2% to $1 million compared to $.5 million in the prior period. Due to changes in manufacturer contracts and reductions in sales performance incentives earned by the Company, the estimated shareholder performance rebate accrued for the nine months ended April 30, 2005 was $1 million versus $4.1 million for the prior comparative period.

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

Current Assets

     During the nine month period ending April 30, 2005, the Company’s current assets increased $14.6 million primarily due to increased accounts receivable. This increase is necessary to support the increased sales volume.

Current Liabilities

          During the nine month period ending April 30, 2005, the Company’s current liabilities also increased $12.6 million primarily due to an increase in notes payable and accounts payable which is the result of increased product purchases from vendors.

Results of Operations

     The following discussion is based on the historical results of operations for the three month and nine month periods ended April 30, 2004 and 2005.

Summary Consolidated Results of Operations Table For Three Months Ended April 30, 2005

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Three months ended April 30, 2005 as compared to three months ended April 30, 2004

     Net sales and other revenue for the three month period ending April 30, 2005 increased $17.6 million to $102.7 million compared to $85.1 million for the same period the previous year. This increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $10.5 million, an increase in sales to existing customers of $7.1 million, and a decrease in customer rebates of $.3 million. Partially offsetting this increase was an increase in returns of $.3 million.

     Gross profit for the three month period ending April 30, 2005 increased $2.2 million to $10.6 million compared to $8.4 million for the same period the previous year. This increase is primarily attributable to increased sales. Gross profit as a percentage of net sales and other revenue was 10.3% compared to 9.9% for the same period the previous year. This increase in gross profit as a percentage of net sales and other revenue is due to increases in sales performance incentives earned by the Company.

     Operating, general and administrative expenses for the three month period ending April 30, 2005 increased $1.4 million to $8.8 million compared to $7.4 million for the same period the previous year. This increase is primarily attributable to support the increase in net sales and other revenue. These expenses as a percentage of net sales and other revenue were 8.5% compared to 8.7% for the same period the previous year.

     Operating income for the three month period ending April 30, 2005 increased $.8 million to $1.8 million compared to $1 million for the same period the previous year. This increase is primarily attributable to the increase in gross profit margin.

     Interest expense increased to $.4 million for the three month period ending April 30, 2005, from $.3 million for the same period in the previous year while interest income remained the same compared to the same period in the previous year. The increase in interest expense is principally related to increased interest rates and higher average balance on the Company’s line of credit.

     Net income increased by $.5 million to $1 million compared to $.5 million for the same period the previous year.

Operating Segments — three months ended April 30, 2005 as compared to three months ended April 30, 2004

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

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

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

     The Company’s reportable segments are strategic business units that serve different types of customers in the animal health industry. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the Company’s management, who decides how to allocate resources and assesses performance. For additional quantitative segment information, see Note 9 of the Company’s Condensed, Consolidated Financial Statements at April 30, 2005.

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Wholesale Distribution

     Net sales and other revenue for the three month period ending April 30, 2005 increased by 20.9% or $17.6 million. Net sales and other revenue for the three month period ending April 30, 2005 totaled $102.1 million compared to $84.5 million for the same three month period in the prior fiscal year. This increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $7.2 million, an increase in sales to existing customers of $10.5 million, and a decrease in customer rebates of $.4 million. Partially offsetting this increase in net sales and other revenue was a decrease in earnings of affiliates of $.3 million.

     Gross profit increased by $2 million to $9.5 million compared to $7.5 million for the same three month period in the prior fiscal year. This increase was primarily due to increased sales and sales performance incentives earned by the company. Gross profit as a percentage of total revenue was 9.3% for the three month period ending April 30, 2005 compared to 8.9% for the same three month period in the prior fiscal year. This increase in gross profit as a percentage of total revenue is due to increases in sales performance incentives earned by this business segment.

     Operating, general and administrative expenses increased by $1.2 million to $7.6 million for three month period ending April 30, 2005 compared to $6.4 million for the previous year. This increase was primarily due to support the increase in revenue. Such operating, general and administrative expenses as a percentage of total revenue for the three-month period ending April 30, 2005 was 7.5% compared to 7.6% for the three month period ended April 30, 2004.

     Operating income increased by $.8 million to $1.8 million for the three month period ending April 30, 2005 compared to $1 million for the previous year. This increase is primarily attributable to the increase in gross profit margin.

Logistics Services

     Net sales and other revenue for the three month period ending April 30, 2005 decreased by 14.2% or $31 thousand. Net sales and other revenue for the three month period ending April 30, 2005 totaled $188 thousand compared to $219 thousand for the same period in the previous fiscal year. This decrease in net sales and other revenue primarily resulted from an increase in returns of $33 thousand and an increase in customer rebates of $13 thousand.

     Gross profit increased by $1 thousand to $19 thousand during the three month period ending April 30, 2005 compared to $18 thousand for the same period during the previous fiscal year. Gross profit as a percentage of total revenue was 10.1% for the three month period ending April 30, 2005 compared to 8.2% for the three month period ended April 30, 2004. The increase in gross profit primarily resulted from a decrease of cost of sales of $32 thousand. Partially offsetting this increase in gross profit was a decrease in net sales and other revenue of $31 thousand to other animal health wholesalers.

     Operating, general and administrative expenses increased by $1 thousand to $1 thousand for the three month period ending April 30, 2005 compared to zero for the previous year. Such operating, general and administrative expenses as a percentage of total revenue for the three month period ending April 30, 2005 was .5% compared to 0% during the same three month period ending April 30, 2004. The increase in operating, general, and administrative expenses primarily resulted from an increase in general marketing expenses of $600 and an increase in regulatory and license expense of $400.

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     Operating income remained the same during the three month period ending April 30, 2005 compared to the same period during the previous fiscal year. Operating income did not change because the increase in gross profit of $1 thousand from animal health wholesalers was primarily offset by an increase of $1 thousand from operating, general and administrative expenses.

Direct Customer Services

     Net sales and other revenue for the three month period ending April 30, 2005 increased by 43.1% or $2.7 million. Net sales and other revenue for the three month period ending April 30, 2005 totaled $9 million compared to $6.3 million for the same period the previous year. The increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $3.2 million and a decrease in sales to existing customers of $.2 million. This increase in net sales and other revenue was partially offset by an increase in returns of $.2 million and an increase in the customer rebates of $.1 million.

     Gross profit decreased by $.1 million to $1 million in the three month period ending April 30, 2005 compared to $1.1 million for the same period the previous fiscal year. This decrease was primarily due to a decrease in sales performance incentives earned by this business segment. Gross profit as a percentage of total revenue was 11.2% for the three month period ending April 30, 2005 compared to 18.1% for the three month period ended April 30, 2004. This decrease in gross profit as a percentage of total revenue is due to a decrease in sales performance incentives earned by this business segment.

     Operating, general and administrative expenses increased by $.1 million to $1.1 million for three month period ending April 30, 2005 compared to $1 million for the previous year. This increase was primarily due to support the increase in revenue. Such operating, general and administrative expenses as a percentage of total revenue for the three month period ending April 30, 2005 were 12.3% and compared to 14.9% during the same three month period ending April 30, 2004.

     Operating income decreased by $.3 million to $(.1) million for the three month period ending April 30, 2005 compared to an operating income of $.2 million for the same period the previous year. This decrease is primarily attributable to a decrease in gross profit.

Summary Consolidated Results of Operations Table For Nine Months Ended April 30, 2005

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Nine months ended April 30, 2005 as compared to nine months ended April 30, 2004

     Net sales and other revenue for the nine months ended April 30, 2005 increased $45.4 million to $292.4 million compared to $247 million for the same period the previous year. The increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $25.7 million, an increase in sales to existing customers of $18.8 million, and a decrease in the estimated shareholder performance rebate of $3.1 million. This increase in net sales and other revenue was partially offset by an increase in returns of $1.3 million, an increase in the customer rebates of $.8 million, and an increase in the cash discounts of $.2 million.

     Gross profit for the nine month period ended April 30, 2005 increased $4 million to $30.5 million compared to $26.5 million for the same period the previous year. This increase is primarily attributable to increased sales. Gross profit as a percentage of net sales and other revenue was 10.4% compared to 10.7% for the same period the previous year. This decrease in gross profit as a percentage of total revenue is due to the changes in manufacturer contracts and reductions in sales performance incentives earned by the Company.

     Operating, general and administrative expenses for the nine month period ended April 30, 2005 increased $3.9 million to $25.2 million compared to $21.3 million for the same period the previous year. This increase is primarily attributable to support the increase in net sales and other revenue. These expenses as a percentage of net sales and other revenue were 8.6% compared to 8.6% for the same period the previous year.

     Operating income for the nine month period ended April 30, 2005 increased $.1 million to $5.3 million compared to $5.2 million for the same period the previous year. This increase is primarily attributable to the increase in gross profit. Partially offsetting this increase was an increase to operating, general and administrative expenses.

     Interest expense increased to $.9 million for the nine month period ended April 30, 2005, from $.8 million for the same period in the previous year while interest income increased to $.4 million compared to $.3 million in the prior period. The increase in interest expense is principally related to increased interest rates and higher average balance on the Company’s line of credit. Partially offsetting this increase is increased finance charges on accounts receivable. The net change from nine months ended April 30, 2005 compared to nine months ended April 30, 2004 is zero.

     Net income increased by $.1 million to $3 million compared to $2.9 million for the same period the previous year. The increase in net income primarily resulted from an increase in net sales and other revenue of $45.4 million. This increase in net income was partially offset by an increase in cost of sales of $41.4 million and an increase in operating, general and administrative expenses of $3.9 million.

Operating Segments — nine months ended April 30, 2005 as compared to nine months ended April 30, 2004

Wholesale Distribution

     Net sales and other revenue for the nine month period ended April 30, 2005 increased by 18.8% or $46.2 million. Net sales and other revenue for the nine month period ending April 30, 2005 totaled $291.8 million compared to $245.6 million for the same nine month period in the prior fiscal year. The increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $17.8 million, an increase in sales to existing customers of $26.6 million, a decrease in the estimated shareholder performance rebate of $3.1 million, and an increase in earnings from affiliates of $.2 million. This increase in net sales and other revenue was partially offset by an increase in returns of $.9 million and an increase in the customer rebates of $.5 million.

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     Gross profit increased by $3.5 million to $26.9 million compared to $23.4 million for the same nine month period in the prior fiscal year. This increase was primarily due to increased sales. Gross profit as a percentage of total revenue was 9.2% for the nine month period ended April 30, 2005 compared to 9.5% for the same nine month period in the prior fiscal year. This decrease in gross profit as a percentage of total revenue is due to the changes in manufacturer contracts and reductions in sales performance incentives earned by this business segment.

     Operating, general and administrative expenses increased by $3.4 million to $21.6 million for the nine month period ended April 30, 2005 compared to $18.2 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 the nine month period ended April 30, 2005 were 7.4% compared to 7.4% for the nine month period ended April 30, 2004.

     Operating income increased by $.1 million to $5.3 million for the nine month period ended April 30, 2005 compared to $5.2 million for the previous year. This increase is primarily attributable to the increase in gross profit. Partially offsetting this increase was an increase to operating, general and administrative expenses.

Logistics Services

     Net sales and other revenue for the nine month period ended April 30, 2005 increased by $1.3 million. Net sales and other revenue for the nine month period ended April 30, 2005 totaled $1.8 million compared to $.5 million for the same period in the previous fiscal year. The increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $1.4 million and an increase in sales to existing customers of $.1 million. This increase in net sales and other revenue was partially offset by an increase of returns of $.1 million and an increase of sales discounts of $.1 million.

     Gross profit increased by $17 thousand to $48 thousand during the nine month period ended April 30, 2005 compared to $31 thousand for the same period during the previous fiscal year. This increase was primarily due to the increase in revenue. Gross profit as a percentage of total revenue was 2.6% for the nine month period ended April 30, 2005 compared to 6.7% for the nine month period ended April 30, 2004. The increase in gross profit primarily resulted from an increase in net sales and other revenue of $1.4 million and an increase in sales margin income of $35 thousand. Partially offsetting this increase in gross profit was an increase in cost of sales of $1.4 million.

     Operating, general and administrative expenses increased by $1 thousand to $1 thousand during the nine month period ended April 30, 2005 compared to zero for the same period during the previous fiscal year. Such operating, general and administrative expenses as a percentage of total revenue for the nine month period ending April 30, 2005 were 0% compared to 0% for the nine month period ending April 30, 2004. The increase in operating, general, and administrative expenses primarily resulted from an increase in general marketing expenses of $600 and an increase in regulatory and license expense of $400.

     Operating income increased by $16 thousand to $47 thousand for the nine month period ended April 30, 2005 compared to $31 thousand for the same period the previous year. This increase is primarily attributable to the increase in revenue.

Direct Customer Services

     Net sales and other revenue for the nine month period ended April 30, 2005 increased by 30.2% or $7.4 million. Net sales and other revenue for the nine month period ended April 30, 2005 totaled $32 million compared to $24.6 million for the same period the previous year. The increase in net sales and other revenue primarily resulted from an increase in sales to new customers of $6.5 million and an

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increase in sales to existing customers of $1.4 million. This increase in net sales and other revenue was partially offset by an increase in returns of $.3 million and an increase in customer rebates of $.1 million.

     Gross profit increased by $.8 million to $4.1 million in the nine month period ended April 30, 2005 compared to $3.3 million for the same period the previous fiscal year. This increase was primarily due to the increase in revenue. Gross profit as a percentage of total revenue was 12.8% for the nine month period ended April 30, 2005 compared to 13.5% for the nine month period ended April 30, 2004. This decrease in gross profit as a percentage of total revenue is due to a decrease in sales performance incentives earned by this business segment.

     Operating, general and administrative expenses increased by $.5 million to $3.6 million for the nine month period ended April 30, 2005 compared to $3.1 million for the same period the previous year. This increase was primarily due to support the increase in revenue. Such operating, general and administrative expenses as a percentage of total revenue for the nine month period ended April 30, 2005 were 11.4% compared to 12.6% during the same nine month period ended April 30, 2004.

     Operating income increased by $.2 million to $.4 million for the nine month period ended April 30, 2005 compared to $.2 million for the same period the previous year. This increase is primarily attributable to an increase in gross profit. Partially offsetting this increase was an increase to operating, general and administrative expenses.

Seasonality in Operating Results

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

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

Liquidity and Capital Resources

     The Company expends capital primarily to fund day-to-day operations and expand those operations to accommodate sales growth. It is necessary for the Company to expend necessary funds to maintain significant inventory levels in order to fulfill its commitment to its customers. Historically, the Company has financed its cash requirements primarily from short term bank borrowings and cash from operations.

     The Company also has expended significant funds in the lease and purchase of its facilities. In March 2002, the Company signed a lease agreement with Kinsley Equities II Limited Partnership for 70,000 square feet of warehouse space in York, Pennsylvania for an initial term of five years. The Company uses this facility to ship products to its customers in that geographical area of the United States. In June 2003, the Company exercised an option to lease an additional 17,500 square feet of space in that facility for a total of 87,500 square feet of leased space in York, Pennsylvania.

     In October 2002, the Company purchased 10 acres of land adjacent to the current corporate facility in Omaha, Nebraska for approximately $808 thousand in order to provide the Company with land available for future expansion of its Omaha facility. In addition to the purchase of the additional 10 acres in Omaha, the Company made significant capital investments in equipment and furniture, including the purchase of office furniture, computer software, warehouse and computer equipment. The Company

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purchased some of the equipment in February 2003 by using a capital lease in the amount of $343,075, with interest at 4.58% and monthly payments of $10,218 through February 2006.

     In May 2003, the Company amended and restated its Revolving Credit Agreement with U.S. Bank and established a revolving line of credit facility and a term loan facility. The Company’s subsidiaries, ProConn, LLC and Exact Logistics, LLC also were named as borrowers. As part of this amendment and restatement, the Company, its subsidiaries, and US. Bank entered into an Amended and Restated Loan Agreement and the Company converted $4,000,000 of the Company’s then current obligations under the original Revolving Credit Agreement into a term loan and into a Term Promissory Note in the same amount, which accrues interest at a fixed rate of 5.77% per annum. The Company, ProConn and Exact Logistics are jointly and severally liable for the obligations under the Term Promissory Note, which matures June 1, 2008. Currently, the Term Promissory Note is payable in 59 installments of principal and interest in the amount of $76,904 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 April 30, 2005, the Company had $2,684,495 outstanding on the Term Promissory Note.

     On December 28, 2004, the Company, ProConn, Exact Logistics and U.S. Bank entered into a Second Amendment to the Amended and Restated Loan Agreement whereby U.S. Bank agreed to increase the Company’s revolving line of credit from $25,000,000 to $40,000,000 and the Company agreed to amend its financial covenants under the Amended and Restated Loan Agreement. The increased revolving line of credit is evidenced by a Revolving Promissory Note for $40,000,000 among U.S. Bank, the Company, ProConn and Exact Logistics. The Company, ProConn and Exact Logistics are jointly and severally liable for the obligations under the Revolving Promissory Note, which matures on January 1, 2008. 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, subject to change each fiscal quarter, equal to the LIBOR Rate plus a percentage based on the Company’s leverage ratio. As of April 30, 2005, the variable interest rate at which the Revolving Promissory Note accrued interest was 4.59% and the Company had approximately $17.7 million 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 of the Company’s accounts receivable, inventory, chattel paper, equipment, instruments, investment property, deposit accounts, documents, letter of credit rights, fixtures, personal property and general intangibles. The Amended and Restated Loan Agreement 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, meeting certain financial covenants and providing the Bank with annual audited financial statements and monthly interim financial statements. Failure to comply with these conditions will result in a default under the Amended and Restated Loan Agreement, Revolving Promissory Note and Term Promissory Note which permits U.S. Bank to accelerate the payment of the outstanding principal and accrued interest under both notes.

     In February 2005, the Company entered into a written understanding with two individuals who are residents of Texas. Such Texas residents have agreed to construct a 15,625 square foot building (the Building) in Hereford, Texas. It is anticipated that the Building will be completed no later than August 2005 (the Construction Deadline). Assuming the Building is completed by the Construction Deadline, the Company will lease space in the Building pursuant to the terms of a lease that the parties currently are negotiating. If the Building is completed and the parties enter into a lease, the Company will use the Building as a distribution facility commencing in August or September 2005.

     In April 2005, the Company signed a lease agreement with US Bancorp Equipment Finance for

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voice picking equipment to be used in the Omaha, Nebraska and York, Pennsylvania facilities. The initial amount of the lease is in the amount of $207,996, with interest at 6.19% and monthly payments of $6,346 through April 2008.

     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 subject to adequate resources being available. The Company was contingently liable for $5.9 million as of April 30, 2005.

     Operating Activities. Net cash consumed by operating activities of $8 million for nine months ended April 30, 2004 was primarily attributable to an increase of $7 million in receivables and an increase of $12.9 million in inventories and were partially offset by an increase of $10.1 million in accounts payable. Net cash consumed by operating activities of $6.7 million for nine months ended April 30, 2005 was primarily attributable to an increase of $15.8 million in receivables and were partially offset by an increase of $4.4 million in accounts payable and a decrease of $.4 million in inventory.

     Investing Activities. Net cash consumed by investing activities of $1.2 million for the nine months ended April 30, 2004 was primarily attributable to investments in equipment and furniture, including the purchase of office furniture, computer software, warehouse and computer equipment. Net cash consumed by investing activities of $1.1 million for the nine months ended April 30, 2005 was primarily attributable to investments in equipment and furniture, including the purchase of office furniture, computer software, warehouse and computer equipment.

     Financing Activities. Net cash provided by financing activities of $6.8 million for the nine months ended April 30, 2004 was primarily attributable to net loan proceeds of $7.6 million and were partially offset by a decrease of $1 million from the payments on long-term debt and capital lease obligation. Net cash provided by financing activities of $6.9 million for the nine months ended April 30, 2005 was primarily attributable to net loan proceeds of $7.6 million and were partially offset by a decrease of $1 million from the payments on long-term debt and capital lease obligation.

Off-Balance Sheet Arrangements

     At April 30, 2005, the Company did not have any off-balance sheet arrangements.

Critical Accounting Policies

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

     The Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004 filed with the SEC. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. Following are some of the Company’s critical accounting policies impacted by judgments, assumptions and estimates.

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Use of Estimates

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

Revenue Recognition

     The Company derives its revenue primarily from the sale of products, consignment sales and agency agreements. Revenues are recognized as product is received by the customer and related services are performed in accordance with all applicable revenue recognition criteria. For these transactions, the Company applies the provisions of SEC Staff Accounting Bulletin No. 101, “Revenue Recognition.” The revenue from “buy/sell” and consignment transactions are recorded at gross. Agency sales are transactions presented on a net basis. The Company recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the contractual obligations are met, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.

Inventories

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

Major Customer, Major Suppliers and Credit Concentrations

     Other financial instruments, which potentially subject the Company to concentrations of credit risk, are trade accounts receivable and trade payables. One customer comprised a significant individual receivable consisting of 11.4% of the Company’s receivables at April 30, 2005. One customer comprised a significant individual receivable consisting of 14% of the Company’s receivables at April 30, 2004. One vendor comprised 28.6% of the accounts payable balance at April 30, 2005 and 32% of the accounts payable balance at April 30, 2004.

Income Taxes

     The Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carry-forwards that result from events that have been recognized either in the financial statements or the income tax returns, but not both. The measurement of current and deferred income tax liabilities and assets is based on provisions of enacted laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.

Goodwill and Other Intangible Assets

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

     Other identifiable intangible assets consist of the Company trademark and loan origination fees. Trademarks have an indefinite life and therefore are not amortized. Loan origination fees constitute the

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Company’s identifiable intangible asset subject to amortization. Amortization of the loan origination fees is computed on a straight-line basis over the term of the related note. Amortization expense is included in operating, general, and administrative expenses on the Consolidated Statements of Income.

Recent Accounting Changes

     During the quarter, no new accounting standards were issued that impacted the Company’s financial position, cash flows or results of operations. See Note 2 to the Condensed, Consolidated Financial Statements for new standards issued by the Financial Accounting Standards Board during the quarter.

Risk Factors That May Affect Future Results

     The risks and uncertainties described below are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known to the Company or that are currently deemed immaterial also may impair its business operations. If any of the following risks actually occur, the Company’s business, financial condition or results of operations may suffer.

Fluctuation of Future Results Due to Factors Outside of Management’s Control

     The Company’s operating results may significantly fluctuate, and you should not rely on them as an indication of the Company’s future results. Future revenues and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management’s control. The most notable of these factors include:

	•	seasonality;
	•	the impact of economic factors on the national veterinary practices;
	•	the timing and effectiveness of marketing programs;
	•	the timing of the introduction of new products and services;
	•	the timing and effectiveness of capital expenditures;
	•	changes in manufacturer contracts; and
	•	competition.

The Company may be unable to reduce operating expenses quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue without a corresponding reduction to its expenses, operating results may suffer. The Company’s operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company’s future performance.

Failure to Manage Growth Could Impair Our Business

     Our business has grown rapidly. Our revenues increased from $63.5 million in fiscal 1995 to $335 million in fiscal 2004. During that same period, we significantly expanded our operations in the United States. Our number of employees increased by approximately 240 individuals during that period.

     It is difficult to manage this rapid growth, and our future success depends on our ability to implement and/or maintain:

	•	Sales and marketing programs;
	•	Customer support programs;
	•	Current product and service lines;
	•	Technological support which equals or exceeds our competitors;
	•	Recruitment and training of new personnel; and
	•	Operational and financial control systems.

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Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures and to expand the training of our work force.

     If we are not able to manage the rapid growth, there is a risk our customer service quality could deteriorate, which may in turn lead to decreased sales. This could impact our shareholders in two ways – the ability to obtain products from the Company could be negatively affected and the Company’s profits could decrease.

Loss of Key Personnel Could Hurt Our Business

     Our future success depends to a significant extent on the skills, experience and efforts of Company President and Chief Executive Officer, Dr. Lionel Reilly, and key members of his staff. The loss of any or all of these individuals could damage our business. In addition, we must continue to develop and retain a core group of individuals if we are to realize our goal of continued expansion and growth. We cannot assure you that we will be able to do so.

     In addition, our products and services are specialized in nature. In general, only highly qualified and trained individuals have the necessary skills to market our products and provide our services. We face intense competition for the hiring of these professionals. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would damage our business. We do not generally enter into employment agreements requiring these employees to continue in our employment for any period of time. However, we have an employment agreement with Dr. Reilly, which automatically renews for successive one year periods unless terminated by either party.

There is No Market for Our Stock and the Value of the Stock Will Not Increase

     There has been no established public trading market for our common stock. Sales are limited to licensed veterinarians and veterinary clinics, and our common stock will not be sold, assigned, or otherwise transferred to anyone other than the Company. The price of each share is fixed at $3,000, as provided in our Articles of Incorporation. A share will not increase in value. If a shareholder wishes to redeem his, her, or its share, the shareholder must sell it to the Company and will receive only the amount he, she, or it paid for the share.

It is Unlikely We Will Pay Dividends

     Some investors favor companies that pay dividends, particularly in market downturns. We have never declared or paid any cash dividends on our common stock. While our Articles of Incorporation and Bylaws approved by the Company shareholders allow the payment of dividends, we currently intend to retain any future earnings for funding the growth of our business and repayment of existing indebtedness, and therefore, we do not currently anticipate declaring or paying cash dividends on our common stock in the foreseeable future. In addition, our loan agreements restrict us from paying such dividends.

We Rely on Strategic Relationships to Generate Revenue

     To be successful, we must establish and maintain strategic relationships with leaders in the manufacturing industry. This is critical to our success because we believe that these relationships will enable us to:

•

Extend the reach of our distribution and services to the various participants in the veterinary industry;

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	•	Obtain specialized expertise; and
	•	Generate revenue.

     Entering into strategic relationships is complicated because some of our current and future manufacturers are potential strategic partners, and these manufacturers may decide to compete with us in the future. In addition, we may not be able to establish relationships with key participants in the veterinary distribution industry if we have established relationships with competitors of these key participants. Consequently, it is important that we are perceived as independent of any particular customer or partner.

     Some of our agreements with manufacturers run for one year. We may not be able to renew our existing agreements on favorable terms, or at all. If we lose the right to distribute products under such agreements, we may lose access to certain products and lose a competitive advantage. Potential competitors could sell products from manufacturers that we fail to continue with and erode our market share.

Performance or Security Problems With Our Systems Could Damage Our Business

     Our information systems are dependent on third party software, global communications providers, telephone systems and other aspects of technology and Internet infrastructure that are susceptible to failure. Though we have implemented redundant systems and security measures, our customer satisfaction and our business could be harmed if we or our suppliers experience any system delays, failures, loss of data, outages, computer viruses, break-ins or similar disruptions. We currently process all customer transactions and data at our facilities in Omaha, Nebraska. Although we have safeguards for emergencies, including, without limitation, sophisticated back-up systems, the occurrence of a major catastrophic event or other system failure at either of our distribution facilities could interrupt data processing or result in the loss of stored data. This may result in the loss of customers or a reduction in demand for our services. Only some of our systems are fully redundant and although we do carry business interruption insurance, it may not be sufficient to compensate us for losses that may occur as a result of system failures. If disruption occurs, our profitability and results of operations may suffer.

We Face Significant Competition

     The market for veterinary distribution services is intensely competitive, rapidly evolving and subject to rapid technological change. Some of our competitors have comparable product lines, technical experience and financial resources. These organizations may be better known and have more customers. We may be unable to compete successfully against these organizations.

     Many of our competitors have distribution strategies that directly compete with us. We have many competitors including: Walco International, Inc., The Butler Company, Lextron Animal Health, Inc., MWI Veterinary Supply Co., and J. A. Webster, Inc. d/b/a Webster Veterinary Supply.

     In addition, we expect that companies and others specializing in the veterinary products industry will offer competitive products. Some of our large manufacturers/suppliers may also compete with us through direct marketing and sales of their products. Increased competition could result in:

	•	price reductions, decreased revenue, and lower profit margins;
	•	loss of market share; and
	•	increased marketing expectations.

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These and other competitive factors could materially and adversely affect the Company’s results of operations.

Changes in the Veterinary Distribution Industry Could Adversely Affect Our Business

     The veterinary distribution industry is subject to changing political, economic and regulatory influences. Both state and federal government agencies regulate the distribution of certain animal health products and the Company is subject to regulation, either directly or indirectly, by the U.S. Department of Agriculture, the Food and Drug Administration (FDA) and the Drug Enforcement Administration (DEA). To the extent the political party in power changes, whether in the executive or legislative branch, the regulatory stance these agencies take could change. Our suppliers are subject to regulation by the Department of Agriculture, the FDA and the Environmental Protection Agency, and material changes to the applicable regulations could affect the suppliers ability to manufacture certain products which could adversely impact the Company’s product supply. In addition, some of our customers may rely, in part, on farm and agricultural subsidy programs. Changes in the regulatory positions that impact the availability of funding for such programs could have an adverse impact on our customers’ financial positions which could lead to decreased sales.

     These factors affect our purchasing practices and operation of our business. Some of our competitors are consolidating to create integrated delivery systems with greater market presence. These competitors may try to use their market power to negotiate price reductions with the manufacturers. If we were forced to reduce our prices, our operating results would suffer. As the veterinary distribution industry consolidates, competition for customers will become more intense.

You May be Forced to Sell Your Shares Back to the Company

     As a shareholder, you may be forced to sell your share of stock back to the Company under certain circumstances. In the event of your death, the Company must repurchase your share of stock at the price you paid for such share of stock. Further, in the event that you are no longer qualified to own the Company stock, you must sell the share of stock back to the Company, which will repurchase the share at the price you paid for such share of stock. We also have the option to repurchase our stock if a shareholder owes money to us and fails to make payments by the due date at the price the shareholder paid for the stock.

We May Lack the Funds to Repurchase all of the Shares

     As a shareholder you are not permitted to sell, assign, or otherwise transfer your share of stock except back to the Company. The shareholder must give the Company written notice of the proposed sale, and we will repurchase the share of stock within ninety days of receiving such written notice, at the price the shareholder paid for the share. The Company must also repurchase the share of stock at the price the shareholder paid for such share of stock in the event of a shareholder’s death. In the event a shareholder is no longer qualified to own the Company stock, the shareholder must sell the share of stock back to the Company, which will repurchase the share at the price paid by the shareholder for such share of stock. If substantially all the shareholders wish to sell their shares or no longer become qualified to own the Company stock, we will be required to repurchase a large number of shares, which may divert financial resources that would otherwise be used for operations and business.

     In addition, if a significant majority of the shareholders want to sell their shares at the same time, there is a risk we would not have enough financial resources to repurchase all outstanding shares within the ninety days. If we lack adequate funds to repurchase all the shares, you would have no other means of selling your interest.

Investors May Fail to Pay the Installment Payments

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     An investor may choose from two payment plans: (1) one payment for the full $3,000 cost of the share; or (2) three installments of $1,000 each, with the second and third installments due thirty and sixty days after the first installment is paid. It is possible investors may fail to pay all or a portion of the installment payments when due, thereby depriving the Company of the anticipated proceeds.

We May Not Be Able To Raise Needed Capital In the Future

     We may require additional capital to finance our growth strategies or other activities in the future. Our capital requirements will depend on many factors, including the costs associated with our growth and expansion. To the extent that our existing sources of cash, plus any cash generated from operations, are insufficient to fund our activities, we may need to raise additional funds. If we issue additional stock to raise capital, your percentage of ownership in us would be reduced. Holders of debt would have rights, 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 April 30, 2005, our total long-term debt (excluding current portions) was approximately $5.4 million, and we had $17.7 million outstanding under our revolving credit facility and an additional $22.3 million of borrowing capacity available under such facility. Our degree of leverage could have important consequences for you, including the following:

	•	it may limit our ability to obtain additional funds for working capital, capital expenditures, debt service requirements, or other purposes on favorable terms or at all;
	•	a substantial portion of our cash flows from operations must be dedicated to the payment of principal and interest on our indebtedness and thus will not be available for other purposes, including operations, capital expenditures and future business opportunities;
	•	it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to those of our competitors that are less leveraged;
	•	we may be more vulnerable than a less leveraged company to a downturn in general economic conditions or in our business; or
	•	we may be unable to carry out capital spending that is important to our growth.

     Our debt agreements contain restrictions that limit our flexibility in operating our business. Our credit agreements contain a number of covenants, among other things, that restrict our ability to incur additional indebtedness; pay dividends or make other distributions; make certain investments; use assets as security in other transactions; and sell certain assets or merge with or into other companies. In addition, we are required to satisfy and maintain specified financial ratios and tests. Events beyond our control may affect our ability to comply with these provisions, and we may not be able to meet those ratios and tests. The breach of any of these covenants would result in a default under our credit agreement and the lender could elect to declare all amounts borrowed under the applicable agreement, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness. If any of our indebtedness were to be accelerated, our assets may not be sufficient to repay in full that indebtedness and the notes.

Our Variable Rate Indebtedness Subjects Us To Interest Rate Risk, Which Could Cause Our Debt Service Obligations To Increase Significantly

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     Certain of our borrowings, primarily borrowings under our revolving line of credit, are at variable rates of interest and expose us to interest rate risk based on market rates. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease. Our variable rate debt for the quarter ended April 30, 2005 was approximately $17.7 million and our interest expense was $917 thousand. A 1% increase in the average interest rate would increase future interest expense by approximately $223 thousand per year assuming an average outstanding balance under the revolving line of credit of $22.3 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:

	•	If an existing agreement expires or a certain product line is discontinued, then we would not be able to continue to offer our customers the same breadth of products and our sales and operating results would likely suffer unless we are able to find an alternate supply of a similar product.
	•	Current agreements, or agreements we may negotiate in the future, may commit us to certain minimum purchase or other spending obligations. It is possible we will not be able to create the market demand to meet such obligations, which would create an increased drain on our financial resources and liquidity.
	•	If market demand for our products increases suddenly, our current suppliers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand. If we consistently generate more demand for a product than a given supplier is capable of handling, it could lead to large backorders and potentially lost sales to competitive products that are readily available. This could require us to seek or fund new sources of supply.
	•	We may not be able to control or adequately monitor the quality of products we receive from our suppliers. Poor quality items could damage our reputation with our customers.
	•	Some of our third party suppliers are subject to ongoing periodic unannounced inspection by regulatory authorities, including the FDA, DEA and other federal and state agencies for compliance with strictly enforced regulations, and we do not have control over our suppliers’ compliance with these regulations and standards. Violations could potentially lead to interruptions in supply that could cause us to lose sales to readily available competitive products.

Potential problems with suppliers such as those discussed above could substantially decrease sales, lead to higher costs and damage our reputation with our customers due to factors such as poor quality goods or delays in order fulfillment, which may result in decreased sales of our products and substantially harm our business.

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We Are Exposed To Potential Risks From Recent Legislation Requiring Companies To Evaluate Their Internal Control Over Financial Reporting

     We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     The interest payable on the Company’s revolving line of credit is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates on variable rate debt increased by .459 percentage points (a 10% change from the interest rate as of April 30, 2005), assuming no change in the Company’s outstanding balance under the line of credit (approximately $17.7 million as of April 30, 2005), the Company’s annualized income before taxes and cash flows from operating activities would decline by approximately $81 thousand.

     Under our Amended and Restated Loan Agreement with U.S. Bank dated May 12, 2003, the Company and its subsidiaries executed a Term Promissory Note in the amount of $4,000,000 which accrues interest at a fixed rate of 5.77% per annum and matures June 1, 2008. Currently, the Term Promissory Note is payable in 59 installments of principal and interest in the amount of $76,904 which are payable monthly through May 1, 2008. As of June 1, 2008, all unpaid principal and interest will be due. The Company may not prepay the Term Promissory Note without the prior written consent of U.S. Bank and the payment of a prepayment fee based on the net present value of the amount of principal to be prepaid. As of April 30, 2005, the Company had $2,684,495 outstanding on the Term Promissory Note.

     Under our Second Amendment to the Amended and Restated Loan Agreement with U.S. Bank, our revolving line of credit was increased to $40,000,000 and evidenced by a Revolving Promissory Note dated December 28, 2004, among U.S. Bank, the Company, and its subsidiaries. The Revolving Promissory Note matures on January 1, 2008. 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, and at April 30, 2005, the variable interest rate at which the Revolving Promissory Note accrued interest was 4.59% and the Company had approximately $17.7 million outstanding thereunder.

     Both the Term Promissory Note and the Revolving Promissory Note are secured by a first and second mortgage held by U.S. Bank on the Company’s Omaha facility as well as a first security interest on all of the Company’s accounts receivable, inventory, chattel paper, equipment, instruments, investment property, deposit accounts, documents, letter of credit rights, fixtures, personal property and general intangibles.

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Section 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer as of the end of the period covered by this quarterly report. Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) accumulated and communicated to Company management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding disclosures, and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Controls

     During the quarter ended April 30, 2005, there were no significant changes in our internal control over financial reporting that have materially affected or that are reasonably likely to affect the Company’s internal control over financial reporting, the Company took no corrective actions regarding our internal controls, and the Company is not aware of any other factors that could significantly affect these controls.

Limitations on the Effectiveness of Controls

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

PART II
OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

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

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

     (a) Not applicable.

     (b) Not applicable.

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     (c) During the quarter ended April 30, 2005, the Company repurchased seven shares of its common stock as set forth in the following table:

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

     (2) Since inception, each shareholder of the Company has been entitled to have his, her, or its share redeemed in accordance with the Articles of Incorporation and Bylaws.

     (3) The maximum number of shares that may be purchased by the Company varies from time to time due to the addition of new shareholders and on-going redemption of shares. Each shareholder of the Company may have his, her, or its share redeemed in accordance with the Articles of Incorporation and Bylaws.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

     None.

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

     None.

ITEM 5: OTHER INFORMATION

     None.

ITEM 6: EXHIBITS

INDEX OF EXHIBITS

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

	(1)	Form 10-Q Quarterly Report for the period ended January 31, 2005 filed March 17, 2005.
	(2)	Form 8-K Current Report dated March 7, 2005 and filed March 11, 2005.
	(3)	Form S-1 Registration Statement No. 333-86629 filed on September 7, 1999.

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SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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