UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

     For the quarterly period ended October 31, 2004

or

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

     For the transition period from          to          .

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 x No o

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

     Yes o No x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (November 30, 2004).

Common Stock, $1.00 par value, 1,955

PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED OCTOBER 31, 2004

ITEM 1: FINANCIAL STATEMENTS

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

INDEPENDENT ACCOUNTANT’S REPORT

     We have reviewed the accompanying consolidated balance sheet of Professional Veterinary Products, Ltd. (a Nebraska Corporation) and subsidiaries as of October 31, 2004, and the related statements of consolidated income for the three month periods ended October 31, 2004 and 2003 and the consolidated statements of cash flows for the three month periods ended October 31, 2004 and 2003. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Professional Veterinary Products, Ltd.

     A review of interim financial information consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

     The July 31, 2004 balance sheet included in these financial statements was audited by us. Our audit report dated October 7, 2004 expressed an unqualified opinion on that balance sheet.

/s/ Quick & McFarlin, P.C.

Quick & McFarlin, P.C.
Omaha, Nebraska
December 6, 2004

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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 three months ended October 31, 2004 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2005 or any other period. Certain amounts from prior periods have been reclassified to conform to the current period’s presentation.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

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

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data)

NOTE 3 – EARNINGS PER SHARE

     SFAS No. 128, Earnings per 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 1,234 and 1,176 at October 31, 2004 and 2003, respectively.

NOTE 4 – COMMON STOCK

     The Company is authorized to issue 30,000 shares of common stock with a par value of $1. Issued and outstanding shares amounted to 1,946 at October 31, 2004 and 1,952 at July 31, 2004. Holders of common stock are entitled to: a) one vote for each share held on matters submitted to a vote of stockholders, b) a ratable share of dividends declared and c) in the event of liquidation or dissolution, a ratable share of monies after liabilities. Shareholders are not permitted to dispose of their stock except by a sale back to the Company. The shareholder must give the Company written notice of the proposed sale and the Company must redeem for cash the share of stock within ninety days of receiving such notice, at the price the shareholder paid for the share. Shares held by single member limited liability companies and sole proprietorships are mandatorily redeemable upon death of the holder at the price the shareholder paid for the share. The amount to be paid upon death of these shareholders as of October 31, 2004 was $2,115. An analysis of common stock and shares subject to mandatory redemption for the three months ended October 31, 2004 is as follows:

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data)

NOTE 5 – POSTRETIREMENT BENEFITS

     On January 1, 2003, the Company adopted a Supplemental Executive Retirement Plan (SERP). The SERP is a nonqualified defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees’ years of service and compensation. For the three months ended October 31, 2004 and 2003, benefits accrued and expensed were $129 and $105, respectively. The plan is an unfunded supplemental retirement plan and is not subject to the minimum funding requirements of the Employee Retirement Income Security Act (ERISA). While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values of $875 and $659 at October 31, 2004 and July 31, 2004, respectively.

     In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers’ Disclosures About Pensions and Other Postretirement Benefits. The provisions of this statement do not change the measurement and recognition provisions of SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination 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 three months ended October 31, included the following components:

NOTE 6 – COMMITMENTS AND CONTINGENT LIABILITIES

     Stock Redemption — The Company is required by its Articles of Incorporation to repurchase stock within 90 days of receiving written notice from the shareholder requesting redemption of their stock. The redemption amount is the original purchase price of the stock paid by the shareholder. The Company was contingently liable for $5.8 million as of October 31, 2004.

     Other — The Company is subject to claims and other actions arising in the ordinary course of business. Some of these claims and actions have resulted in lawsuits where the Company is a defendant. Management believes that the ultimate obligations if any, which may result from unfavorable outcomes of such lawsuits, will not have a material adverse effect on the financial position, results of operations or cash flows of the Company and such obligations, if any, would be adequately covered by insurance.

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data)

NOTE 7 – SEGMENT INFORMATION

     The Company has three reportable segments: Wholesale Distribution, Logistics Services and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of pharmaceuticals and other veterinary related items. This segment distributes products primarily to Company shareholders, who are licensed veterinarians or business entities comprised of licensed veterinarians. The Logistics Services segment provides logistics and distribution service operations for vendors of animal health products. The Logistic Services segment serves its customers by consolidating, packaging and delivering animal health products closer to the final destination, resulting in reduced freight costs and improved delivery performance. The Direct Customer Services segment serves as a supplier of animal health products to the producer or consumer. Animal health products are shipped to locations closer to the final destination. The segment’s trucking operations transport the products directly to the producer or consumer.

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

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

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PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2004
(unaudited)
(in thousands, except per share data)

NOTE 8 – RECLASSIFICATIONS

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

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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;
	•		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 or loss of one or more of our major customers; surplus inventories; loss of one or more of our major vendors; recessionary economic cycles; strikes, work slow downs, or work stoppages at our vendors’ facilities; increases in interest rates; and increases in the prices paid for goods. Readers should review and consider these factors along with the various disclosures we make in public filings with the Securities and Exchange Commission.

Overview

     Professional Veterinary Products, Ltd. provides distribution services of animal health and companion animal products through three business segments, Wholesale Distribution, Logistics Services, and Direct Customer Services. The Wholesale Distribution segment is a wholesaler of pharmaceuticals and other veterinary related items. The Logistics Services segment provides logistics and distribution service

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operations for vendors of animal health products. The Direct Customer Services segment is a supplier of animal health products to the producer or consumer.

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

     For the three months ended October 31, 2004, total revenue increased $10.6 million, or 11.9%, to $99.0 million compared to $88.4 million in the same period last year. For the quarter, cost of sales increased to $90.0 million from $79.8 million, and as a percentage of net sales and other revenue, cost of sales increased to 90.9% from 90.2%. We believe that such an increase in cost of sales is due to reduced profit margins from the sales of products the Company receives from various manufacturers. Operating, general and administrative expenses increased 9.7%, or $713 thousand, to $8.0 million from $7.3 million in the same period last year. We believe that such an increase is proportionate to support the Company’s increase in net sales and other revenue. As a percentage of net sales and other revenue, operating, general and administrative expenses decreased to 8.1% from 8.3%. For the quarter like any quarter, our largest expenses are labor related, including wages, payroll taxes and medical insurance.

     During the quarter, interest expense also increased 35.6%, or $73 thousand, to $278 thousand from $205 thousand in the same period last year. We believe that the increase in interest expense resulted from increased interest rates and a higher average outstanding balance under our line of credit. All of the above factors resulted in a decrease of $280 thousand in net income to $498 thousand for first quarter of fiscal year 2005 from $778 thousand for the same period last year. Our operating results reflected a strong demand for our goods and services but reflected the impact of manufacturer pricing on our margins.

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

     Current Assets

     During the first quarter ending October 31, 2004 the Company’s current assets increased $20.7 million primarily due to increased accounts receivable and inventory. These increases are necessary to support the sales volume in food animal related products during the fall season. Likewise current liabilities also increased primarily due to an increase in accounts payable which is the result of increased product purchases from vendors.

     Results of Operations

     The following discussion is based on the historical results of operations for the three month periods ended October 31, 2004 and 2003.

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

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

     The Company’s reportable segments are strategic business units that serve different types of customers in the animal health industry. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Previously, the Company disclosed one reportable segment. For additional quantitative segment information, see Note 7 of the Company’s Condensed, Consolidated Financial Statements for the Three Month Period Ended October 31, 2004.

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