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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended October 31, 2003; or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________ to ____________.
Commission file number: 000-26326
PROFESSIONAL VETERINARY PRODUCTS, LTD.
(Exact name of registrant as specified in its charter)
Nebraska 5047 37-1119387
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or organization) Classification Code Number) Identification No.)
10077 South 134th Street
Omaha, Nebraska 68138
(402) 331-4440
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the proceeding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 30, 2003
----- --------------------------------
Common Stock, $1.00 par value 1,863
PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED OCTOBER 31, 2003
PART I: FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Independent Accountant's Report 1
Consolidated Balance Sheets as of October 31, 2003
and July 31, 2003 2
Consolidated Statements of Income for the three months
ended October 31, 2003 and 2002 3
Consolidated Statements of Cash Flow for the three months
ended October 31, 2003 and 2002 4
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES 19
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 21
ITEM 1: FINANCIAL STATEMENTS
To the Board of Directors and Stockholders
Professional Veterinary Products, Ltd.
Omaha, NE
INDEPENDENT ACCOUNTANT'S REPORT
We have reviewed the accompanying consolidated balance sheet of
Professional Veterinary Products, Ltd. (a Nebraska Corporation) and subsidiaries
as of October 31, 2003, and the related statements of consolidated income for
the three month periods ended October 31, 2003 and 2002 and the consolidated
statements of cash flows for the three month periods ended October 31, 2003 and
2002. We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of
Professional Veterinary Products, Ltd.
A review of interim financial information consists principally of
inquiries of Company personnel and analytical procedures applied to financial
data. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in order for them
to be in conformity with generally accepted accounting principles.
The July 31, 2003 balance sheet included in these financial statements
was audited by us. Our audit report dated October 15, 2003 expressed an
unqualified opinion on that balance sheet.
/s/ Quick & McFarlin, P.C.
Quick & McFarlin, P.C.
Omaha, Nebraska
December 8, 2003
1
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 2003 (UNAUDITED) AND JULY 31, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 31, JULY 31,
2003 2003
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,916 $ 4,346
Accounts receivable, trade - net of allowance for doubtful
accounts $813 and $760, respectively 32,417 22,718
Accounts receivable, related parties 3,645 4,133
Inventory 43,761 38,817
Deferred tax asset 311 264
Other current assets 378 489
------------------ ------------------
Total current assets 82,428 70,767
------------------ ------------------
NET PROPERTY AND EQUIPMENT 10,038 10,298
------------------ ------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization $11 and $10, respectively 14 15
Intangible retirement asset 1,230 1,334
Investment in unconsolidated affiliates 1,583 1,583
Cash value life insurance 507 295
Other assets 197 31
------------------ ------------------
Total other assets 3,531 3,258
------------------ ------------------
TOTAL ASSETS $ 95,997 $ 84,323
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable, bank $ 6,447 $ 9,765
Current portion of long-term debt and capital lease obligation 1,386 1,363
Accounts payable, trade 60,428 46,154
Accounts payable, related parties 2,307 1,022
Other current liabilities 3,898 4,897
------------------ ------------------
Total current liabilities 74,466 63,201
------------------ ------------------
LONG-TERM LIABILITIES:
Long-term debt and capital lease obligation, less current portion 7,620 7,972
Accrued retirement benefits, less current portion 1,230 1,334
Deferred tax liability 255 253
Shares subject to mandatory redemption, $1 par value; issued and
outstanding 678 shares and 0 shares, respectively 1,981 -
------------------ ------------------
Total long-term liabilities 11,086 9,559
------------------ ------------------
TOTAL LIABILITIES 85,552 72,760
------------------ ------------------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; authorized 30,000 shares; issued and
outstanding 1,179 shares and 1,845 shares, respectively 1 2
Paid-in capital 3,448 5,344
Retained earnings 6,996 6,217
------------------ ------------------
Total stockholders' equity 10,445 11,563
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 95,997 $ 84,323
================== ==================
See notes to the condensed, consolidated financial statements.
2
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTH PERIODS ENDED OCTOBER 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2002
---------------- ----------------
NET SALES AND OTHER REVENUE
(including net revenue from related parties of
$8,284 and $5,620, respectively) $ 88,442 $ 75,236
COST OF SALES
(including purchases from related parties of
$5,177 and $4,118, respectively) 79,818 68,513
---------------- ----------------
Gross profit 8,624 6,723
OPERATING, GENERAL, AND
ADMINISTRATIVE EXPENSES 7,314 6,422
---------------- ----------------
Operating income 1,310 301
---------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 143 128
Interest expense (205) (240)
---------------- ----------------
Other expense - net (62) (112)
---------------- ----------------
Income before taxes 1,248 189
Income tax expense 470 75
---------------- ----------------
Net income $ 778 $ 114
================ ================
Net earnings per share of
common stock $ 662.00 $ 69.66
================ ================
Weighted average common
shares outstanding 1,176 1,641
================ ================
See notes to the condensed, consolidated financial statements.
3
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED OCTOBER 31, 2003 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OCTOBER 31, OCTOBER 31,
2003 2002
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 778 $ 114
---------------- ---------------
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 264 357
(Increase) decrease in:
Receivables (9,211) (11,440)
Inventories (4,944) (8,667)
Deferred tax asset (47) -
Other current assets 111 (3)
Cash value life insurance (212) -
Increase (decrease) in:
Accounts payable 15,559 6,257
Other current liabilities (999) (460)
Deferred tax liability 2 3
---------------- ---------------
Total adjustments 523 (13,953)
---------------- ---------------
Net cash provided (consumed) by operating activities 1,301 (13,839)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2) (946)
Deposits on property and equipment (166) (119)
---------------- ---------------
Net cash consumed by investing activities (168) (1,065)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing (repayment) (3,318) 8,124
Bank overdraft - 5,245
Payments of long-term debt (301) (117)
Payments of capital lease obligation (28) -
Net payments for redemptions of shares subject to mandatory redemption (11) -
Net proceeds from issuance of common stock 95 421
---------------- ---------------
Net cash provided (consumed) by financing activities (3,563) 13,673
---------------- ---------------
Net decrease in cash (2,430) (1,231)
Cash at beginning of period 4,346 1,324
---------------- ---------------
Cash at end of period $ 1,916 $ 93
================ ===============
Supplemental disclosure of cash flow information:
Interest paid $ 224 $ 217
================ ===============
Income taxes paid $ 1,462 $ 341
================ ===============
See notes to the condensed, consolidated financial statements.
4
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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, 2003 filed with the SEC. The Company follows the same accounting
policies in preparation of interim financial statements. These policies are
presented in Note 2 to the Consolidated Financial Statements included on Form
10-K referred to above.
The results of operations and cash flows for the three months ended
October 31, 2003 are not necessarily indicative of the results to be expected
for the fiscal year ending July 31, 2004 or any other period. Certain amounts
from prior periods have been reclassified to conform to the current period's
presentation.
NOTE 2 - ACCOUNTING CHANGES:
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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 in the first quarter of the fiscal
year ending July 31, 2004. 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. They are required to be
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. Shares issued to
single member limited liability companies
5
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 - ACCOUNTING CHANGES (CONTINUED):
and sole proprietorships are mandatorily redeemable upon death of the holder at
the price the shareholder paid for the share. Single member limited liability
companies and sole proprietorships comprised 678 shares at October 31, 2003.
These shares, including associated additional paid-in capital net of amounts
receivable, were reclassified to long-term liabilities in the amount of $1,981
(see Note 5).
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS:
In January 2003, FASB issued FASB Interpretation Number 46,
"Consolidation of Variable Interest Entities," (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest entities.
Under current practice, two enterprises generally have been included in
consolidated financial statements because one enterprise controls the other
through voting interests. FIN 46 defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among the parties involved. This interpretation applies immediately to variable
interest entities created after January 31, 2003. Initially, FIN 46 was to apply
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. At its October 8, 2003 meeting, the FASB
agreed to defer the effective date of FIN 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of FIN 46
at the end of periods ending after December 15, 2003. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of the beginning of
the first year restated. We intend to adopt FIN 46 as of our second fiscal
quarter ended January 31, 2004, and we do not expect the adoption of FIN 46 to
impact our financial position, cash flows, or results of operation.
In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends SFAS 133
"Accounting for Derivative Instruments and Hedging Activities", to require more
consistent reporting of contracts as either derivatives or hybrid instruments.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003. We adopted SFAS 149 beginning in the first quarter of fiscal 2004 and it
did not have a material impact on our financial position, cash flows or results
of operations.
NOTE 4 - 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 1,176 and
1,641 at October 31, 2003 and 2002, respectively.
6
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - 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 1,857 at October 31,
2003 and 1,544 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 holders as of
October 31, 2003 was $1,981. An analysis of common stock and shares subject to
mandatory redemption for the three months ended October 31, 2003 is as follows:
Shares Subject to
Common Stock Mandatory Redemption
(Equity) (Long-term Liabilities) Total
--------------------------------------------------------------------
Number of Shares - July 31, 2003 1,845 - 1,845
Recognition of liability per FASB 150 (674) 674 -
Issuance of common stock 17 8 25
Redemption of common stock (9) (4) (13)
----------- --------------- -----------
Number of Shares - July 31, 2003 1,179 678 1,857
=========== =============== ===========
Shares Subject to
Mandatory Redemption
APIC (Equity) (Long-term Liabilities) Total
--------------------------------------------------------------------
Additional paid-in capital-July 31, 2003 $ 5,344 $ - $ 5,344
Recognition of liability FASB 150 (1,991) 1,991 -
Issuance of common stock 51 24 75
Redemption of common stock (27) (12) (39)
Change in amounts receivable 71 (22) 49
----------- --------------- -----------
Additional paid-in capital- October 31, 2003 $ 3,448 $ 1,981 $ 5,429
=========== =============== ===========
NOTE 6 - 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 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.
7
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - 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, 2003, filed with the SEC. The
Company evaluates performance based on profit or loss from operations before
income taxes.
The Company's reportable segments are strategic business units that serve
different types of customers in the animal health industry. The separate
financial information of each segment is presented consistent with the way
results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The following table summarizes the Company's operations by business
segment:
Direct
Wholesale Logistics Customer Consolidated
Distribution Services Services Eliminations Total
--------------- --------------- --------------- ----------------- ------------------
Three months ended October 31, 2003
Net sales and other revenue $ 88,515 $ 114 $ 10,239 $ (10,426) $ 88,442
Cost of sales 81,069 112 8,990 (10,353) 79,818
Operating, general and
administrative expenses 6,127 - 1,187 - 7,314
Operating income 1,319 2 63 (74) 1,310
Income before taxes 1,248 2 72 (74) 1,248
Three months ended October 31, 2002
Net sales and other revenue 74,673 1,113 6,177 (6,727) 75,236
Cost of sales 68,757 1,080 5,295 (6,619) 68,513
Operating, general and
administrative expenses 5,615 - 807 - 6,422
Operating income 301 33 74 (107) 301
Income before taxes 189 33 74 (107) 189
NOTE 7 - 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.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make written
or oral forward-looking statements, including statements made in this report,
that represent the Company's expectations or beliefs concerning future events,
including statements regarding future sales, future profits and other results of
operations, the continuation of historical trends, the sufficiency of cash
balances and cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs, and the effects of any
regulatory changes. Such statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions you that any forward-looking statements made by The Company in this
report, in other reports filed by the Company with the Securities and Exchange
Commission or in other announcements by the Company are qualified by certain
risks and other important factors that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and factors
include, but are not limited to, the risk factors set forth in the section below
entitled "Business Trends and Risk Factors That May Affect Future Performance".
RESULTS OF OPERATIONS
The following discussion is based on the historical results of
operations for the three month periods ended October 31, 2003 and October 31,
2002
SUMMARY CONSOLIDATED RESULTS OF OPERATIONS TABLE
------------------------------------ ---------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31,
(IN THOUSANDS)
------------------------------------ ---------------------------------------------------------------
2003 2002
---- ----
Net sales and other revenue $ 88,442 $ 75,236
Cost of sales 79,818 68,513
Gross profit 8,624 6,723
Operating, general and
administrative expenses 7,314 6,422
Operating income 1,310 301
Interest expense, net (62) (112)
Other income (expense) - -
Income before taxes 1,248 189
Income tax expense 470 75
Net income 778 114
------------------------------------ ---------------------------- ----------------------------------
THREE MONTHS ENDED OCTOBER 31, 2003 AS COMPARED TO THREE MONTHS ENDED OCTOBER
31, 2002
Net sales and other revenue increased $13.2 million to $88.4 million
compared to $75.2 million for the same period the previous year. The 18% growth
was principally attributable to increased sales to existing customers of $2.7
million and to new customers of $10.5 million.
Gross profit increased $1.9 million to $8.6 million compared to $6.7
million for the same period the previous year. This increase is primarily
attributable to the increase in net sales and other revenue. Gross profit as a
percentage of net sales and other revenue was 9.8% compared to 8.9% for the same
period the previous year.
Operating, general and administrative expenses increased $892 thousand
to $7.3 million compared to $6.4 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 was
8.3% compared to 8.5% for the same period the previous year.
9
Operating income increased $1 million to $1.3 million compared to $301
thousand for the same period the previous year. This increase is primarily
attributable to the increase in gross profit of $1.9 million which was partially
offset by the increase in operating, general and administrative expenses of $892
thousand. The Company's other income (expense) decreased to $62 thousand
(expense) from the $112 thousand (expense) for the same period the previous
year. Interest expense decreased from $240 thousand to $205 thousand. The
decrease is principally related to a lower average balance on the revolving line
of credit.
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.
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. The following table summarizes the
Company's operations by business segment:
- ------------------------------------------------- --------------------------------------------------------------------
THREE MONTHS ENDED OCTOBER 31
(IN THOUSANDS)
--------------------------------------------------------------------
2003 2002
---- ----
NET SALES
Wholesale Distribution $ 88,515 $ 74,673
Logistics Services 114 1,113
Direct Customer Services 10,239 6,177
Eliminations (10,426) (6,727)
------------- ------------
CONSOLIDATED TOTAL 88,442 75,236
COST OF SALES
Wholesale Distribution 81,069 68,757
Logistics Services 112 1,080
Direct Customer Services 8,990 5,295
Eliminations (10,353) (6,619)
------------- ------------
CONSOLIDATED TOTAL 79,818 68,513
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Wholesale Distribution 6,127 5,615
Logistics Services 0 0
Direct Customer Services 1,187 807
Eliminations 0 0
------------- ------------
CONSOLIDATED TOTAL 7,314 6,422
- ------------------------------------------------- ----------------------------------- --------------------------------
Wholesale Distribution
Net sales and other revenue for the three-month period ending October
31, 2003 increased by 18.5% or $13.8 million. Net sales and other revenue for
the three month period ending October 31, 2003 totaled $88.5 million compared to
$74.7 million for the same three month period in the prior fiscal year.
10
Gross profit increased by $1.5 million to $7.4 million compared to $5.9
million for the same three month period in fiscal 2002. This increase was
primarily due to the increase in revenue. Gross profit as a percentage of total
revenue was 8.4% for the three month period ending October 31, 2003 compared to
7.9% for the same three month period in fiscal 2002.
Operating, general and administrative expenses increased by $512
thousand to $6.1 million for three-month period ending October 31, 2003 compared
to $5.6 million for the previous year. This increase was primarily due to
support the increase in revenue. Such operating, general and administrative
expenses as a percentage of total revenue for the three-month period ending
October 31, 2003 was 7.9% compared to 7.5% for the three month period ended
October 31, 2002.
Operating income increased by $1 million to $1.3 million for the
three-month period ending October 31, 2003 compared to $301 thousand for the
previous year. This increase is primarily attributable to the increase in gross
profit.
Logistics Services
Net sales and other revenue for the three-month period ending October
31, 2003 decreased by $1 million. Net sales and other revenue for the
three-month period ending October 31, 2003 totaled $114 thousand compared to
$1.1 million for the same period in the previous fiscal year.
Gross profit decreased by $31 thousand to $2 thousand during the
three-month period ending October 31, 2003 compared to $33 thousand for the same
period during the previous fiscal year. Gross profit as a percentage of total
revenue was 1.8% for the three-month period ending October 31, 2003 compared to
3.0% for the three month period ended October 31, 2002.
Operating, general and administrative expenses did not change for the
three-month period ending October 31, 2003 compared to the previous year. Such
operating, general and administrative expenses as a percentage of total revenue
for the three-month period ending October 31, 2003 was less than 0.1% and was
also less than 0.1% during the same three month period during fiscal 2002.
Operating income decreased by $31 thousand to $2 thousand for the
three-month period ending October 31, 2003 compared to $33 thousand for the same
period the previous year. This decrease is primarily attributable to the
decrease in gross profit.
Direct Customer Services
Net sales and other revenue for the three-month period ending October
31, 2003 increased by 65.8% or $4 million. Net sales and other revenue for the
three-month period ending October 31, 2003 totaled $10.2 million compared to
$6.2 million for the same period the previous year.
Gross profit increased by $367 thousand to $1.2 million in the
three-month period ending October 31, 2003 compared to $882 thousand 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 12.2% for
the three-month period ending October 31, 2003 compared to 14.3% for the three
month period ended October 31, 2002.
Operating, general and administrative expenses increased by $380
thousand to $1.2 million for the three-month period ending October 31, 2003
compared to $807 thousand for the same period previous year. This increase was
primarily due to support the increase in revenue. Such operating, general and
administrative expenses as a percentage of total revenue for the three-month
period ending October 31, 2003 was 11.6% compared to 13.1% for the three month
period ended October 31, 2002.
Operating income decreased by $11 thousand to $63 thousand for the
three-month period ending October 31, 2003 compared to $74 thousand for the same
period previous year.
11
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 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 end of the
three month period ended October 31, 2003, 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 October 31,
2003, the Company had $3,781,317 outstanding on the Term Promissory Note.
12
Under the Amended and Restated Loan Agreement, U.S. Bank agreed to loan
the Company up to $17,500,000 through a revolving line of credit which is
evidenced by a Revolving Promissory Note dated May 12, 2003 for $17,500,000
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 an
annual basis, but is renewable by its terms annually on December 1st of each
year. The maximum amount which can be borrowed thereunder is $17,500,000. 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 October 31, 2003, the variable
interest rate at which the Revolving Promissory Note accrued interest was 3.82%
and the Company had $6,446,681 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 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.
As in previous years, the Company's capital expenditures were made to
finance day-to-day operations and to expand its operations to accommodate the
growth in the number of customers and corresponding growth in sales. Inventory
needs and expenses associated therewith continue to grow. Capital requirements
have been funded primarily from short-term bank borrowings and cash derived from
its operations.
OPERATING ACTIVITIES. Net cash consumed by operating activities of
$13.8 million for period ending October 31, 2002 was primarily attributable to
an increase of $11.4 million in receivables and an increase of $8.7 million in
inventories. These were partially offset by an increase of $6.3 million in
accounts payable. Net cash provided by operating activities of $1.3 million for
period ending October 31, 2003 was primarily attributable to an increase of
$15.6 million in accounts payable. These were partially offset by an increase of
$9.2 million in receivables and an increase of $4.9 million in inventories.
INVESTING ACTIVITIES. Net cash consumed by investing activities of $1.1
million for period ending October 31, 2002 was primarily attributable to the
purchase of 10 acres of land adjoining the current corporate headquarters in
Omaha, Nebraska for $808 thousand plus investments in equipment, including the
purchase of office, warehouse and computer equipment. Net cash consumed by
investing activities of $168 thousand for period ending October 31, 2003 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
$13.7 million for period ending October 31, 2002 was primarily attributable to
net loan proceeds of $8.1 million. Net cash consumed by financing activities of
$3.6 million for period ending October 31, 2003 was primarily attributable to
net loan payments of $3.3 million.
OFF-BALANCE SHEET ARRANGEMENTS
At October 31, 2003, the Company did not have any off-balance sheet
arrangements.
RELATED PARTY TRANSACTIONS
In the normal course of business the Company sells to its affiliate,
board of directors and key employees under normal terms and conditions. See Note
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, 2003
filed with the SEC.
13
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 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, 2003 filed
with the SEC. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, management of the Company is required to make certain estimates and
assumptions during the preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. These estimates and assumptions impact the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
they are determined to be necessary. Actual results could differ from those
estimates. Following are some of the Company's critical accounting policies
impacted by judgments, assumptions and estimates.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from those
estimates.
REVENUE RECOGNITION
The Company derives its revenue primarily from the sale of products,
consignment sales and agency agreements. Revenues are recognized as product is
shipped and related services are performed in accordance with all applicable
revenue recognition criteria. For these transactions, the Company applies the
provisions of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition." The
Company recognizes revenue when there is persuasive evidence of an arrangement,
title and risk of loss have passed, delivery has occurred or the contractual
obligations are met, the sales price is fixed or determinable and collection of
the related receivable is reasonably assured.
INVENTORIES
Inventories consist substantially of finished goods held for resale and
are valued at the lower of cost or market, not in excess of net realizable
value. Cost is determined primarily by the weighted average cost method.
MAJOR CUSTOMER, MAJOR SUPPLIERS AND CREDIT CONCENTRATIONS
Other financial instruments, which potentially subject the Company to
concentrations of credit risk, are trade accounts receivable and trade payables.
One customer comprised a significant individual receivable consisting of 9.4% of
the Company's receivables at October 31, 2003. One customer comprised a
significant individual receivable consisting of 9.6% of the Company's
receivables at October 31, 2002. One vendor comprised 30.4% of all purchases for
the three month period ended October 31, 2003.
14
INCOME TAXES
The Company provides for income taxes using the asset and liability
method under which deferred income taxes are recognized for the estimated future
tax effects attributable to temporary differences and carry-forwards that result
from events that have been recognized either in the financial statements or the
income tax returns, but not both. The measurement of current and deferred income
tax liabilities and assets is based on provisions of enacted laws. Valuation
allowances are recognized if, based on the weight of available evidence, it is
more likely than not that some portion of the deferred tax assets will not be
realized.
GOODWILL AND OTHER INTANGIBLE ASSETS
Annually, the Company subjects goodwill and other identifiable
intangible assets with indefinite lives to an impairment test, in accordance
with accounting procedures generally accepted in the United States. Other
intangible assets continue to be amortized over their useful lives
Other identifiable intangible assets consist of the Company trademark
and loan origination fees. Trademarks have an indefinite life and therefore are
not amortized. Loan origination fees constitute the Company's identifiable
intangible asset subject to amortization. Amortization of the loan origination
fees is computed on a straight-line basis over the term of the related note.
Amortization expense is included in interest expense on the Consolidated
Statements of Income.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (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 in the first quarter of the fiscal
year ending July 31, 2004. 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. They are required to be
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. Shares issued to
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. Single member limited liability companies and sole
proprietorships comprised 678 shares at October 31, 2003. These shares,
including associated additional paid-in capital net of amounts receivable, were
reclassified to long-term liabilities in the amount of $1,981,000 (see Note 5 to
the Condensed, Consolidated Financial Statements).
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued FASB Interpretation Number 46,
"Consolidation of Variable Interest Entities," (FIN 46). This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest entities.
Under current practice, two enterprises generally have been included in
consolidated financial statements because one enterprise controls the other
through voting interests. FIN 46 defines the concept of "variable interests" and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among the parties involved. This interpretation applies immediately to variable
interest entities created after January 31, 2003. Initially, FIN 46 was to apply
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. At its October 8, 2003 meeting, the FASB
agreed to defer the effective date of FIN 46 for variable interests held by
public companies in all entities that were acquired prior to February 1, 2003.
The deferral will require that public companies adopt the provisions of FIN 46
at the end of periods ending after December 15, 2003. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of the beginning of
the first year restated. We intend to adopt FIN 46 as of our second fiscal
quarter ended January 31, 2004, and we do not expect the adoption of FIN 46 to
impact our financial position, cash flows, or results of operation.
15
In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends SFAS 133
"Accounting for Derivative Instruments and Hedging Activities", to require more
consistent reporting of contracts as either derivatives or hybrid instruments.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003. We adopted SFAS 149 beginning in the first quarter of fiscal 2004 and it
did not have a material impact on our financial position, cash flows or results
of operations
BUSINESS TRENDS AND 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:
o seasonality;
o the impact of economic factors on the national veterinary
practices;
o the timing and effectiveness of marketing programs;
o the timing of the introduction of new products and services;
o the timing and effectiveness of capital expenditures;
o 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 BUSINESS
The Company's business has grown rapidly. The Company's revenues
increased from $63.5 million in fiscal 1995 to $299 million in fiscal 2003.
During that same period the Company has significantly expanded its operations in
the United States. The number of employees increased by approximately 205
individuals during this period.
It is difficult to manage this rapid growth, and future success depends
on the Company's ability to implement and/or maintain:
o Sales and marketing programs
o Customer support programs
o Current product and service lines
o Technological support which equals or exceeds our competitors
o Recruitment and training of new personnel
o Operational and financial control systems
16
The Company's ability to successfully offer products and services and
implement its business plan in a rapidly evolving market requires an effective
planning and management process. Management expects that the Company will need
to continue to improve its financial and managerial controls, reporting systems
and procedures and to expand the training of its work force.
If the Company is not able to manage the rapid growth, there is a risk
its customer service quality could deteriorate, which may in turn lead to
decreased sales. This could impact 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 BUSINESS
The Company's 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 business. The Company has purchased two life insurance
policies on the life of Dr. Reilly. Both policies are flexible premium
adjustable life insurance policies for $500,000. The Company is the beneficiary
of one of the policies and the Lionel Reilly Trust is the beneficiary of the
other policy.
In addition, the Company's 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 Company services. The
Company faces intense competition for the hiring of these professionals. Any
failure on the Company's part to hire, train and retain a sufficient number of
qualified professionals would damage business. The Company does not generally
enter into employment agreements requiring these employees to continue in
employment for any period of time.
THE COMPANY RELIES ON STRATEGIC RELATIONSHIPS TO GENERATE REVENUE
To be successful, the Company must establish and maintain strategic
relationships with leaders in the manufacturing industry. This is critical to
its success because management believes that these relationships will enable us
to (1) extend the reach of the Company's distribution and services to the
various participants in the veterinary industry; (2) obtain specialized
expertise; and (3) generate revenue.
Entering into strategic relationships is complicated because some of
the Company's current and future manufacturers are potential strategic partners
and these manufacturers may decide to compete with us in the future. In
addition, the Company may not be able to establish relationships with key
participants in the veterinary distribution industry if it has established
relationships with competitors of these key participants. Consequently, it is
important that the Company is perceived as independent of any particular
customer or partner.
Most of the Company's agreements with manufacturers run for one year.
The Company may not be able to renew its existing agreements on favorable terms,
or at all. If the Company loses the right to distribute products under such
agreements, the Company may lose access to certain of its products and lose a
competitive advantage. Potential competitors could sell products from
manufacturers that it fails to continue with and erode the Company's market
share.
PERFORMANCE OR SECURITY PROBLEMS WITH SYSTEMS COULD DAMAGE BUSINESS
The Company's customer satisfaction and its business could be harmed if
the Company or its suppliers experience any system delays, failures or loss of
data. The Company currently process all of its customer transactions and data at
its facilities in Omaha, Nebraska. Although the Company has safeguards for
emergencies, including, without limitation, sophisticated back-up systems, the
occurrence of a major catastrophic event or other system failure at either of
its distribution facilities could interrupt data processing or result in the
loss of stored data. Only some of the Company's systems are fully redundant and
although the Company carries business interruption insurance, it may not be
sufficient to compensate us for losses that may occur as a result of system
failures.
17
THE COMPANY FACES SIGNIFICANT COMPETITION
The market for veterinary distribution services is intensely
competitive, rapidly evolving and subject to rapid technological change. Some of
the Company's competitors have comparable product lines, technical experience
and financial resources. These organizations may be better known and have more
customers than us. The Company may be unable to compete successfully against
these organizations.
Many of the Company's competitors have distribution strategies that
directly compete with us. The Company has many competitors including:
o Walco International, Inc.
o Lextron Animal Health, Inc.
o J. A. Webster, Inc. d/b/a Webster Veterinary Supply
o The Butler Company
o MWI Veterinary Supply Co.
In addition, management expects that companies and others specializing
in the veterinary products industry will offer competitive products. Some of the
Company's large manufacturers/suppliers may also compete with us through direct
marketing and sales of their products. Increased competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
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 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. The Company's 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 the Company's 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 the Company's customers' financial positions which could
lead to decreased sales.
These factors affect the Company's purchasing practices and operation
of its business. Some of the Company's 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 the Company were forced to reduce its prices, the Company's
operating results would suffer. As the veterinary distribution industry
consolidates, competition for customers will become more intense.
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.
18
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 0.38 percentage
points (a 10% change from the interest rate as of October 31, 2003), assuming no
change in the Company's outstanding balance under the line of credit
(approximately $6.4 million as of October 31, 2003), the Company's annualized
income before taxes and cash flows from operating activities would decline by
approximately $24 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 make interest payments of $614 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 which are payable monthly
through May 1, 2008. As of June 1, 2008, all unpaid principal and interest will
be due. The Company may not prepay the Term Promissory Note without the prior
written consent of U.S. Bank and the payment of a prepayment fee based on the
net present value of the amount of principal to be prepaid. As of October 31,
2003, the Company had $3,781,317 outstanding on the Term Promissory Note.
Under the Amended and Restated Loan Agreement, U.S. Bank agreed to loan
the Company up to $17,500,000 through a revolving line of credit which is
evidenced by a Revolving Promissory Note dated May 12, 2003 for $17,500,000
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 an
annual basis, but is renewable by its terms annually on December 1st of each
year. The maximum amount which can be borrowed thereunder is $17,500,000. 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 (the LIBOR Rate) plus 2.70%. As of October 31, 2003, the variable
interest rate at which the Revolving Promissory Note accrued interest was 3.82%
and the Company had $6,446,681 outstanding thereunder.
Both the Term Promissory Note and the Revolving Promissory Note are
secured by a first and second mortgage held by U.S. Bank on the Company's Omaha
facility as well as a first security interest on all accounts receivable,
inventory, chattel paper, equipment, instruments, investment property, deposit
accounts, documents, letter of credit rights, fixtures, all personal property
and general intangibles.
In December 1999, U.S. Bank loaned the Company $1,400,000 to finance
the Company's purchase of warehouse equipment and office furniture used to
furnish the Omaha facility. The loan is evidenced by a Promissory Note dated
December 15, 1999. The note matures January 1, 2005 and accrues interest at a
fixed rate of 8.66% per annum The payment terms provide that the Company pay the
loan in 60 monthly payments of $29,032.29. As of October 31, 2003, the Company
had $410,011 outstanding under this note.
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: An evaluation of
the Company's disclosure controls and procedures (as defined in Section
13(a)-14(c) 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 within the 90-day period preceding
the filing date of 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
19
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) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the Security and Exchange Commission's rules and forms.
(b) CHANGES IN INTERNAL CONTROLS: In the quarter ended October 31,
2003, the Company did not make any significant changes in, nor take any
corrective actions regarding, its internal controls or other factors that could
significantly affect these controls.
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company has not been informed of any legal matters that would have
a material adverse effect on its financial condition, results of operation or
cash flow.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds:
On October 19, 1999 the registration statement (Registration
No. 333-86629) for the initial public offering of our common stock became
effective. The Company registered 500 shares of common stock with an aggregate
offering price of $1,500,000 pursuant to this registration statement. On
November 8, 2001, the Company filed another registration statement (Registration
No. 333-72962) for the public offering of an additional 500 shares of common
stock, in addition to the 114 shares previously registered under Registration
No. 333-86629 that remain unsold. The Company's current combined offering is for
614 shares of common stock for an aggregate offering price of $1,842,000.
Through October 31, 2003, 363 shares of common stock have been sold for an
aggregate offering price of $1,089,000.
The amount of expenses incurred in connection with the issuance and
distribution of our common stock increased by approximately $91,000 to $217,792,
including the additional SEC registration fee, Blue Sky filing fees and
expenses, printing expenses, legal fees, and miscellaneous expenses. None of
these expenses represented a direct or indirect payment to directors, officers,
persons owning 10% or more of any class of our common stock.
The net offering proceeds to the Company after deducting the total
expenses are $871,208 as of October 31, 2003.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K
31 Certifications required by Rule 13a-15(e) and
15d-15(e).
32 Section 1350 Certifications.
(b) REPORTS ON FORM 8-K
The Company filed no current reports on Form 8-K during the
quarter ended October 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: December 10, 2003 /S/ DR. LIONEL L. REILLY
--------------------------------------------
Dr. Lionel L. Reilly, President and
Chief Executive Officer
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