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 April 30, 2004; 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 (IRS Employer
Incorporation or organization) Industrial Identification No.)
Classification
Code Number)
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 May 31, 2004
----- ---------------------------
Common Stock, $1.00 par value 1916
PROFESSIONAL VETERINARY PRODUCTS, LTD.
INDEX TO 10-Q FOR THE QUARTERLY
PERIOD ENDED APRIL 30, 2004
PART I: FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting
Firm 1
Consolidated Balance Sheets as of April 30, 2004
and July 31, 2003 2
Consolidated Statements of Income for the three
months ended April 30, 2004 and 2003 and the
nine months ended April 30, 2004 and 2003 3
Consolidated Statements of Cash Flow for the
nine months ended April 30, 2004 and 2003 4
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES 24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 25
ITEM 1: FINANCIAL STATEMENTS
To the Audit Committee of Professional Veterinary Products, Ltd.
Omaha, Nebraska
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have reviewed the accompanying consolidated balance sheet of
Professional Veterinary Products, Ltd. as of April 30, 2004, and the related
statements of consolidated income for the three and nine month periods ended
April 30, 2004 and 2003 and the consolidated statements of cash flows for the
nine month periods ended April 30, 2004 and 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 for them to be in
conformity with U.S. 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
June 7, 2004
1
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2004 (UNAUDITED) AND JULY 31, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 30, JULY 31,
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 1,935 $ 4,346
Accounts receivable, trade - net of allowance
for doubtful accounts $864 and $760,
respectively 28,959 22,718
Accounts receivable, related parties 4,982 4,133
Inventory 51,771 38,817
Deferred tax asset 529 264
Prepaid income taxes 369 --
Other current assets 436 489
--------- ---------
Total current assets 88,981 70,767
--------- ---------
NET PROPERTY AND EQUIPMENT 10,401 10,298
--------- ---------
OTHER ASSETS
Intangible assets - net of accumulated
amortization $11 and $10, respectively 14 15
Intangible retirement asset 1,020 1,334
Investment in unconsolidated affiliates 1,583 1,583
Cash value life insurance 719 295
Deposits on property and equipment 257 31
--------- ---------
Total other assets 3,593 3,258
--------- ---------
TOTAL ASSETS $ 102,975 $ 84,323
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable, bank $ 17,356 $ 9,765
Current portion of long-term debt
and capital lease obligation 1,344 1,363
Accounts payable, trade 54,778 46,154
Accounts payable, related parties 2,540 1,022
Other current liabilities 3,769 4,897
--------- ---------
Total current liabilities 79,787 63,201
--------- ---------
LONG-TERM LIABILITIES
Long-term debt and capital lease
obligation, less current portion 6,986 7,972
Accrued retirement benefits, less current portion 1,021 1,334
Deferred tax liability 413 253
Shares subject to mandatory redemption, $1 par
value; issued and outstanding 693 shares and 0
shares, respectively 2,048 --
--------- ---------
Total long-term liabilities 10,468 9,559
--------- ---------
TOTAL LIABILITIES 90,255 72,760
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value; authorized 30,000
shares; issued and outstanding 1,211 shares
and 1,845 shares, respectively 1 2
Paid-in capital 3,558 5,344
Retained earnings 9,161 6,217
--------- ---------
Total stockholders' equity 12,720 11,563
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 102,975 $ 84,323
========= =========
See notes to the condensed, consolidated financial statements.
2
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTH PERIODS ENDED APRIL 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
NET SALES AND OTHER REVENUE $ 85,075 $ 74,624 $ 246,963 $ 217,886
COST OF SALES 76,648 65,737 220,450 194,168
----------------- ----------------- ----------------- -----------------
Gross profit 8,427 8,887 26,513 23,718
OPERATING, GENERAL, AND
ADMINISTRATIVE EXPENSES 7,362 6,286 21,323 19,086
----------------- ----------------- ----------------- -----------------
Operating income 1,065 2,601 5,190 4,632
----------------- ----------------- ----------------- -----------------
OTHER INCOME (EXPENSE)
Interest income 120 237 364 539
Interest expense (342) (265) (835) (791)
Other (24) -- (24) --
----------------- ----------------- ----------------- -----------------
Other expense - net (246) (28) (495) (252)
----------------- ----------------- ----------------- -----------------
Income before taxes 819 2,573 4,695 4,380
Income tax expense 316 850 1,752 1,579
----------------- ----------------- ----------------- -----------------
Net income $ 503 $ 1,723 $ 2,943 $ 2,801
================= ================= ================= =================
Net earnings per share of
common stock $ 417.94 $ 980.33 $ 2,479.97 $ 1,642.02
================= ================= ================= =================
Weighted average common
shares outstanding 1,202 1,757 1,187 1,706
================= ================= ================= =================
SUPPLEMENTAL INFORMATION
Net sales and other revenue - related parties $ 8,932 $ 7,400 $ 24,373 $ 17,992
Purchases - related parties $ 3,602 $ 3,860 $ 13,582 $ 12,477
See notes to the condensed, consolidated financial statements.
3
PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED APRIL 30, 2004 AND 2003
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
APRIL 30, APRIL 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,943 $ 2,801
--------- ---------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 826 866
Loss on sale of equipment 24 --
(Increase) decrease in:
Receivables (7,090) (13,512)
Inventory (12,954) (16,580)
Deferred tax asset (265) --
Other current assets (316) (188)
Cash value life insurance (424) (226)
Increase (decrease) in:
Accounts payable 10,143 18,114
Other current liabilities (1,128) 1,325
Deferred tax liability 160 (3)
--------- ---------
Total adjustments (11,024) (10,204)
--------- ---------
Net cash consumed by operating activities (8,081) (7,403)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (951) (2,526)
Deposits on property and equipment (226) (31)
--------- ---------
Net cash consumed by investing activities (1,177) (2,557)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowing 7,591 10,500
Proceeds from capital lease obligations -- 343
Payments of long-term debt and capital lease
obligation (1,005) (380)
Net payments for redemptions of shares subject to
mandatory redemption 56 --
Net proceeds from issuance of common stock 205 622
--------- ---------
Net cash provided by financing activities 6,847 11,085
--------- ---------
Net increase (decrease) in cash (2,411) 1,125
Cash at beginning of period 4,346 1,324
--------- ---------
Cash at end of period $ 1,935 $ 2,449
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 817 $ 744
========= =========
Income taxes paid $ 3,661 $ 742
========= =========
See notes to the condensed, consolidated financial statements.
4
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 nine months ended April
30, 2004 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 during the first quarter of the
current fiscal year. The Company's shares of common stock issued to single
member limited liability companies and sole proprietorships are subject to
mandatory redemption upon death of the shareholder at the price the shareholder
paid for the share. These shares are presented as liabilities under the
provision of SFAS No. 150 within the long-term liability section on the
Consolidated Balance Sheets. The adoption of SFAS No. 150 did not have a
material impact on the Company's consolidated results of operations. However,
the adoption of SFAS No. 150 did impact the Company's consolidated presentation
of financial position. Single member limited liability companies and sole
proprietorships comprised 693 shares at April 30, 2004. These shares, including
associated additional paid-in capital net of amounts receivable, were
reclassified to long-term liabilities in the amount of $2,048 (see Note 5).
5
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" to require additional
disclosures related to pensions and post retirement benefits. While retaining
the existing disclosure requirements for pensions and postretirement benefits,
additional disclosures are required related to pension plan assets, obligations,
contributions and net benefit costs, beginning with fiscal years ending after
December 15, 2003. Additional disclosures pertaining to benefit payments are
required for fiscal years ending after June 30, 2004. The SFAS No. 132 revisions
also include additional disclosure requirements for interim financial reports
beginning after December 15, 2003. Our disclosure in this note reflects the
revised requirements under SFAS No. 132 (revised). This standard does not effect
the Company's financial position, cash flows or results of operation.
In January 2003, the FASB issued FASB Interpretation Number 46,
"Consolidation of Variable Interest Entities and Interpretation of ARB No. 51,"
(FIN 46). A revision of FIN 46 was issued in December 2003. The revised FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the effective date for the provisions of FIN 46 has been
deferred to periods ending after March 15, 2004. Effective January 31, 2004, the
Company adopted FIN 46. This standard does not effect the Company's financial
position, cash flows or results of operation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company adopted SFAS No. 149 beginning in the first
quarter of fiscal 2004. This standard does not effect the Company's financial
position, cash flows or results of operation.
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 1,187 and
1,706 at April 30, 2004 and 2003, respectively.
6
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 1,904 at April 30,
2004 and 1,845 at July 31, 2003. Holders of common stock are entitled to: a) one
vote for each share held on matters submitted to a vote of stockholders, b) a
ratable share of dividends declared and c) in the event of liquidation or
dissolution, a ratable share of monies after liabilities. Shareholders are not
permitted to dispose of their stock except by a sale back to the Company. The
shareholder must give the Company written notice of the proposed sale and the
Company must redeem for cash the share of stock within ninety days of receiving
such notice, at the price the shareholder paid for the share. Shares held by
single member limited liability companies and sole proprietorships are
mandatorily redeemable upon death of the holder at the price the shareholder
paid for the share. The amount to be paid upon death of these shareholders as of
April 30, 2004 was $2,048. An analysis of common stock and shares subject to
mandatory redemption for the nine months ended April 30, 2004 is as follows:
Shares Subject to
Mandatory Redemption
Common Stock (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 58 34 92
Redemption of common stock (18) (15) (33)
----------- --------------- -----------
Number of shares - April 30, 2004 1,211 693 1,904
=========== =============== ===========
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 per FASB 150 (1,991) 1,992 1
Issuance of common stock 174 102 276
Redemption of common stock (52) (45) (97)
Change in amounts receivable 83 (1) 82
----------- --------------- -----------
Additional paid-in capital - April 30, 2004 $ 3,558 $ $ 2,048 $ 5,606
=========== =============== ===========
7
NOTE 6 - POSTRETIREMENT BENEFITS
On January 1, 2003, the Company adopted a Supplemental Executive
Retirement Plan (SERP). The SERP is a nonqualified defined benefit plan pursuant
to which the Company will pay supplemental pension benefits to certain key
employees upon retirement based upon the employees' years of service and
compensation. For the nine months ended April 30, 2004 and 2003, benefits
accrued and expensed were $314 and $133 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 $659 and $220 at April 30, 2004 and July 31, 2003,
respectively.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures About Pensions and Other Postretirement Benefits." The provisions of
this statement do not change the measurement and recognition provisions of SFAS
No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Disclosures in this note reflect
the revised requirements under SFAS No. 132 (revised).
Net periodic benefit costs for the Company's SERP for the nine months
ended April 30 included the following components:
2004 2003
---- ----
Service cost $ 114 $ 46
Interest cost 98 41
Amortization of unrecognized prior service cost 102 46
--- --
Net periodic benefit cost $ 314 $ 133
The weighted average discount rate and rate of increase in compensation
levels used to compute the actuarial present value of projected benefit
obligations were 6.25% and 4.00%, respectively, at July 31, 2003. The Company
expects to recognize $418 of net periodic benefit cost for this postretirement
plan in 2004.
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 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.
8
NOTE 7 - 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 April 30, 2004
Net sales and other revenue $ 84,495 $ 219 $ 6,320 $ (5,959) $ 85,075
Cost of sales 76,990 201 5,175 (5,718) 76,648
Operating, general and
administrative expenses 6,419 -- 943 -- 7,362
Operating income 1,085 18 202 (240) 1,065
Income before taxes 819 18 222 (240) 819
Three months ended April 30, 2003
Net sales and other revenue 74,107 275 5,406 (5,164) 74,624
Cost of sales 66,221 240 4,571 (5,295) 65,737
Operating, general and
administrative expenses 5,282 1 1,003 -- 6,286
Operating income 2,607 33 (169) 130 2,601
Income before taxes 2,574 33 (164) 130 2,573
Nine months ended April 30, 2004
Net sales and other revenue $ 245,584 $ 464 $ 24,638 $ (23,723) $ 246,963
Cost of sales 222,129 433 21,299 (23,411) 220,450
Operating, general and
administrative expenses 18,222 -- 3,101 -- 21,323
Operating income 5,233 31 237 (311) 5,190
Income before taxes 4,695 31 280 (311) 4,695
Nine months ended April 30, 2003
Net sales and other revenue 216,331 1,619 18,448 (18,512) 217,886
Cost of sales 195,232 1,521 15,869 (18,454) 194,168
Operating, general and
administrative expenses 16,473 1 2,612 -- 19,086
Operating income 4,628 96 (33) (59) 4,632
Income before taxes 4,381 96 (38) (59) 4,380
9
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.
10
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 April 30, 2004 and April 30, 2003 and the nine
month periods ended April 30, 2004 and April 30, 2003.
SUMMARY CONSOLIDATED RESULTS OF OPERATIONS TABLE
=============================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
(IN THOUSANDS) (IN THOUSANDS)
-----------------------------------------------------------------------------
2004 2003 2004 2003
Net sales and other revenue 85,075 74,624 246,963 217,886
Cost of sales 76,648 65,737 220,450 194,168
Gross profit 8,427 8,887 26,513 23,718
Operating, general and 7,362 6,286 21,323 19,086
administrative expenses
Operating income 1,065 2,601 5,190 4,632
Interest expense, net 342 265 835 791
Other income (expense) 96 237 364 539
Income before taxes 819 2,573 4,695 4,380
Income tax expense 316 850 1,752 1,579
Net income 503 1,723 2,943 2,801
=============================================================================
THREE MONTHS ENDED APRIL 30, 2004 AS COMPARED TO THREE MONTHS ENDED APRIL 30,
2003
Net sales and other revenue increased $10.5 million to $85.1 million
compared to $74.6 million for the same period the previous year.
Gross profit for the three months period ending April 30, 2004 decreased
$460 thousand to $8.4 million compared to $8.9 million for the same period the
previous year. This decrease is primarily attributable to the decrease in
product margin. Gross profit as a percentage of net sales and other revenue was
9.9% compared to 11.9% for the same period the previous year.
Operating, general and administrative expenses for the three month period
ending April 30, 2004 increased $1.1 million to $7.4 million compared to $6.3
million for the same period the previous year. This increase is primarily
attributable to support the increase in net sales and other revenue. These
expenses as a percentage of net sales and other revenue was 8.7% compared to
8.4% for the same period the previous year.
11
Operating income for the three month period ending April 30, 2004
decreased $1.5 million to $1.1 million compared to $2.6 million for the same
period the previous year. This decrease is primarily attributable to the
decrease in gross profit of $460 thousand and by the increase in operating,
general and administrative expenses of $1.1 million. The Company's other income
(expense) increased to $246 thousand (expense) from the $28 thousand (expense)
for the same period the previous year. Interest expense increased from $265
thousand to $342 thousand. The increase is principally related to a higher
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 APRIL 30
(IN THOUSANDS)
---------------------------------------------
2004 2003
---- ----
NET SALES
Wholesale Distribution 84,495 74,107
Logistics Services 219 275
Direct Customer Services 6,320 5,406
Eliminations (5,959) (5,164)
--------- ---------
CONSOLIDATED TOTAL 85,075 74,624
COST OF SALES
Wholesale Distribution 76,990 66,221
Logistics Services 201 240
Direct Customer Services 5,175 4,571
Eliminations (5,718) (5,295)
--------- ---------
CONSOLIDATED TOTAL 76,648 65,737
OPERATING, GENERAL AND
ADMINISTRATIVE EXPENSES
Wholesale Distribution 6,419 5,282
Logistics Services 0 1
Direct Customer Services 943 1,003
Eliminations 0 0
--------- ---------
CONSOLIDATED TOTAL 7,362 6,286
================================================================================
12
WHOLESALE DISTRIBUTION
Net sales and other revenue for the three-month period ending April 30,
2004 increased by 14% or $10.4 million. Net sales and other revenue for the
three month period ending April 30, 2004 totaled $84.5 million compared to $74.1
million for the same three month period in the prior fiscal year.
Gross profit decreased by $381 thousand to $7.5 million compared to $7.9
million for the same three month period in fiscal 2003. This decrease was
primarily due to lower product margins. Gross profit as a percentage of total
revenue was 8.9% for the three month period ending April 30, 2004 compared to
10.6% for the same three month period in fiscal 2003.
Operating, general and administrative expenses increased by $1.1 million
to $6.4 million for three-month period ending April 30, 2004 compared to $5.3
million for the previous year. This increase was primarily due to support the
increase in revenue. Such operating, general and administrative expenses as a
percentage of total revenue for the three-month period ending April 30, 2004 was
7.6% compared to 7.1% for the three month period ended April 30, 2003.
Operating income decreased by $1.5 million to $1.1 million for the
three-month period ending April 30, 2004 compared to $2.6 million for the
previous year. This decrease is primarily attributable to the decrease in gross
profit.
LOGISTICS SERVICES
Net sales and other revenue for the three-month period ending April 30,
2004 decreased by 20% or $56 thousand. Net sales and other revenue for the
three-month period ending April 30, 2004 totaled $219 thousand compared to $275
thousand for the same period in the previous fiscal year.
Gross profit decreased by $17 thousand to $18 thousand during the
three-month period ending April 30, 2004 compared to $35 thousand for the same
period during the previous fiscal year. Gross profit as a percentage of total
revenue was 8.2% for the three-month period ending April 30, 2004 compared to
12.7% for the three month period ended April 30, 2003.
Operating, general and administrative expenses did not change for the
three-month period ending April 30, 2004 compared to the previous year. Such
operating, general and administrative expenses as a percentage of total revenue
for the three-month period ending April 30, 2004 was less than .1% and was also
less than .1% during the same three month period ending April 30, 2003.
Operating income decreased by $15 thousand to $18 thousand for the
three-month period ending April 30, 2004 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 April 30,
2004 increased by 16.9% or $914 thousand. Net sales and other revenue for the
three-month period ending April 30, 2004 totaled $6.3 million compared to $5.4
million for the same period the previous year.
Gross profit increased by $310 thousand to $1.1 million in the three-month
period ending April 30, 2004 compared to $835 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 18.1% for the
three-month period ending April 30, 2004 compared to 15.4% for the three month
period ended April 30, 2003.
Operating, general and administrative expenses decreased by $60 thousand
to $943 thousand for the three-month period ending April 30, 2004 compared to
$1.0 million for the same period previous year. This decrease was primarily due
to better expense management. Such operating, general and administrative
expenses as a percentage of total revenue for the three-month period ending
April 30, 2004 was 14.9% compared to 18.5% for the three month period ended
April 30, 2003.
13
Operating income (loss) increased by $371 thousand (income) to $202
thousand (income) for the three-month period ending April 30, 2004 compared to
$169 thousand (loss) for the same period the previous year.
NINE MONTHS ENDED APRIL 30, 2004 AS COMPARED TO NINE MONTHS ENDED APRIL 30,
2003.
Net sales and other revenue for the nine months ending April 30, 2004
increased $29.1 million to $247 million compared to $217.9 million for the same
period the previous year. The 13% growth was principally attributable to
decreased sales to existing customers of $300 thousand and increased sales to
new customers of $29.4 million.
Gross profit for the nine months ending April 30, 2004 increased $2.8
million to $26.5 million compared to $23.7 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 10.7% compared to 10.9% for the same period the previous year.
Operating, general and administrative expenses for the nine months ending
April 30, 2004 increased $2.2 million to $21.3 million compared to $19.1 million
for the same period the previous year. This increase is primarily attributable
to support the increase in net sales and other revenue. These expenses as a
percentage of net sales and other revenue were 8.6% compared to 8.8% for the
same period the previous year.
Operating income for the nine months ending April 30, 2004 increased $558
thousand to $5.2 million compared to $4.6 million for the same period the
previous year. This increase is primarily attributable to the increase in gross
profit of $2.8 million which was partially offset by the increase in operating,
general and administrative expenses of $2.2 million. Interest expense increased
from $791 thousand to $835 thousand. The increase is principally related to a
higher average balance on the revolving line of credit.
OPERATING SEGMENTS
The following table summarizes the Company's operations by business
segment:
14
- --------------------------------------------------------------------------------
NINE MONTHS ENDED APRIL 30
(IN THOUSANDS)
---------------------------------------------
2004 2003
---- ----
NET SALES
Wholesale Distribution 245,584 216,331
Logistics Services 464 1,619
Direct Customer Services 24,638 18,448
Eliminations (23,723) (18,512)
---------- ----------
CONSOLIDATED TOTAL 246,963 217,886
COST OF SALES
Wholesale Distribution 222,129 195,232
Logistics Services 433 1,521
Direct Customer Services 21,299 15,869
Eliminations (23,411) (18,454)
---------- ----------
CONSOLIDATED TOTAL 220,450 194,168
OPERATING, GENERAL AND
ADMINISTRATIVE EXPENSES
Wholesale Distribution 18,222 16,473
Logistics Services 0 1
Direct Customer Services 3,101 2,612
Eliminations 0 0
---------- ----------
CONSOLIDATED TOTAL 21,323 19,086
- --------------------------------------------------------------------------------
WHOLESALE DISTRIBUTION
Net sales and other revenue for the nine month period ending April 30,
2004 increased by 14% or $29.3 million. Net sales and other revenue for the nine
month period ending April 30, 2004 totaled $245.6 million compared to $216.3
million for the same nine month period in the prior fiscal year.
Gross profit increased by $2.4 million to $23.5 million compared to $21.1
million for the same nine month period in fiscal 2003. This increase was
primarily due to the increase in revenue. Gross profit as a percentage of total
revenue was 9.6% for the nine month period ending April 30, 2004 compared to
9.8% for the same nine month period in fiscal 2003.
Operating, general and administrative expenses increased by $1.7 million
to $18.2 million for the nine month period ending April 30, 2004 compared to
$16.5 million for the previous year. This increase was primarily due to support
the increase in revenue. Such operating, general and administrative expenses as
a percentage of total revenue for the nine month period ending April 30, 2004
were 7.4% compared to 7.6% for the nine month period ended April 30, 2003.
Operating income increased by $605 thousand to $5.2 million for the nine
month period ending April 30, 2004 compared to $4.6 million for the previous
year. This increase is primarily attributable to the increase in gross profit.
LOGISTICS SERVICES
Net sales and other revenue for the nine month period ending April 30,
2004 decreased by $1.1 million. Net sales and other revenue for the nine month
period ending April 30, 2004 totaled $464 thousand compared to $1.6 million for
the same period in the previous fiscal year.
Gross profit decreased by $67 thousand to $31 thousand during the nine
month period ending April 30, 2004 compared to $98 thousand for the same period
during the previous fiscal year. Gross profit as a percentage of total revenue
was 6.7% for the nine month period ending April 30, 2004 compared to 6.1% for
the nine month period ended April 30, 2003.
Operating, general and administrative expenses did not change for the nine
month period ending April 30, 2004 compared to the previous year. Such
operating, general and administrative expenses as a percentage of total revenue
for the nine month period ending April 30, 2004 were less than .1% and were also
less than .1% during the same nine month period during fiscal 2003.
15
Operating income decreased by $65 thousand to $31 thousand for the nine
month period ending April 30, 2004 compared to $96 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 nine month period ending April 30,
2004 increased by 34% or $6.2 million. Net sales and other revenue for the nine
month period ending April 30, 2004 totaled $24.6 million compared to $18.4
million for the same period the previous year.
Gross profit increased by $760 thousand to $3.3 million in the nine month
period ending April 30, 2004 compared to $2.6 million for the same period the
previous fiscal year. This increase was primarily due to the increase in
revenue. Gross profit as a percentage of total revenue was 13.6% for the nine
month period ending April 30, 2004 compared to 14.0% for the nine month period
ended April 30, 2003.
Operating, general and administrative expenses increased by $489 thousand
to $3.1 million for the nine month period ending April 30, 2004 compared to $2.6
million for the same period the previous year. This increase was primarily due
to support the increase in revenue. Such operating, general and administrative
expenses as a percentage of total revenue for the nine month period ending April
30, 2004 were 12.6% compared to 14.2 for the nine month period ended April 30,
2003.
Operating income (loss) increased by $270 thousand to $237 thousand
(income) for the nine month period ending April 30, 2004 compared to $33
thousand (loss) for the same period the previous year.
SEASONALITY IN OPERATING RESULTS
The Company's quarterly sales and operating results have varied
significantly in the past and will likely continue to do so in the future.
Historically, the Company's sales are seasonal with peak sales in the spring and
fall. The cyclical nature is directly tied to the significant amount of business
the Company does in the livestock sector. Product use cycles are directly
related to certain medical procedures performed by veterinarians on livestock
during the spring and fall.
In the last few years the Company has been selling more companion animal
related products. These products tend to have a different seasonal nature which
minimally overlaps the livestock business cycles. The net result is a reduction
of the cyclical seasonal nature of the business. Minimizing the cyclical nature
of the Company's business has allowed for more efficient utilization of all
resources.
LIQUIDITY AND CAPITAL RESOURCES
The Company expends capital primarily to fund day-to-day operations and
expand those operations to accommodate sales growth. It is necessary for the
Company to expend necessary funds to maintain significant inventory levels in
order to fulfill its commitment to its customers. However between March 2002 and
June 2003, the Company expended significant funds on various capital
expenditures. On March 15, 2002, the Company signed a lease agreement in March
2002 with Kinsley Equities II Limited Partnership for 70,000 square feet of
warehouse space in York, Pennsylvania. The initial term of the lease is five
years. The Company uses this facility to ship products to its customers in that
geographical area of the United States. In June 2003, the Company exercised an
option to lease an 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,
16
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 April 30, 2004, there were no additional material
commitments for capital expenditures.
In May 2003, the Company and U.S. Bank mutually agreed to amend and
restate the Company's Revolving Credit Agreement with U.S. Bank dated December
1, 2001 in its entirety and to establish a revolving line of credit facility and
a term loan facility and to add the Company's subsidiaries, ProConn, LLC and
Exact Logistics, LLC as borrowers. As part of this amendment and restatement,
the Company, ProConn, Exact Logistics and U.S. 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 April 30,
2004, the Company had $3,426,508 outstanding on the Term Promissory Note.
On November 26, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into an Extension Agreement to extend the maturity of the revolving line
of credit by 60 days in order to negotiate an increase to such line of credit.
On December 29, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into a First Amendment to the Amended and Restated Loan Agreement
whereby U.S. Bank agreed to increase the Company's revolving line of credit to
$25,000,000 and the Company agreed to amend certain of its financial covenants
under the Amended and Restated Loan Agreement. The increased revolving line of
credit is evidenced by a Revolving Promissory Note dated December 29, 2003 for
$25,000,000 between U.S. Bank, the Company, ProConn and Exact Logistics. The
Company, ProConn and Exact Logistics are jointly and severally liable for the
obligations under the Revolving Promissory Note. The Revolving Promissory Note
matures on January 1, 2005. The maximum amount which can be borrowed thereunder
is $25,000,000. The actual principal amount outstanding varies as the Company
borrows and repays its obligations throughout the term of the loan. Advances
made under the Revolving Promissory Note accrue interest at a variable rate
equal to the U.S. Bank reference rate plus 2.70% (the LIBOR Rate). As of April
30, 2004, the variable interest rate at which the Revolving Promissory Note
accrued interest was 3.8% and the Company had $17,355,847 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. The Amended and Restated Loan Agreement, as amended by
the First Amendment, imposes a number of conditions which must be met by the
Company, ProConn and Exact Logistics on an on-going basis prior to the U.S.
Bank's disbursement of loan funds under the Revolving Promissory Note,
including, without limitation providing the Bank with annual audited financial
statements and monthly interim financial statements. Failure to comply with
these conditions will result in a default under the Amended and Restated Loan
Agreement, Revolving Promissory Note and Term Promissory Note which permits U.S.
Bank to accelerate the payment of the outstanding principal and accrued interest
under both notes.
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.
17
OPERATING ACTIVITIES. Net cash consumed by operating activities of $7.4
million for nine months ending April 30, 2003 was primarily attributable to an
increase of $13.5 million in receivables and an increase of $16.6 million in
inventories. These were partially offset by an increase of $18.1 million in
accounts payable. Net cash consumed by operating activities of $8.1 million for
the nine months ending April 30, 2004 was primarily attributable to an increase
of $7.1 million in receivables and $13.0 million in inventories. These were
partially offset by an increase of $10.1 million in accounts payable.
INVESTING ACTIVITIES. Net cash consumed by investing activities of $2.6
million and for the nine months ending April 30, 2003 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 $1.2 million for the nine months ending April 30, 2004
was primarily attributable to investments in equipment and furniture, including
the purchase of office furniture, computer software, warehouse and computer
equipment.
FINANCING ACTIVITIES. Net cash provided by financing activities of $11.1
million for period ending April 30, 2003 was primarily attributable to net loan
proceeds of $10.5 million. Net cash provided by financing activities of $6.8
million for period ending April 30, 2004 was primarily attributable to net loan
proceeds of $7.6 million.
OFF-BALANCE SHEET ARRANGEMENTS
At April 30, 2004, the Company did not have any off-balance sheet
arrangements.
RELATED PARTY TRANSACTIONS
In the normal course of business the Company sells to its affiliate, board
of directors and key employees under normal terms and conditions. See Note 9 to
the Company's consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10K for the year ended July 31, 2003 filed
with the SEC.
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 10K 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.
18
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 14% of
the Company's receivables at April 30, 2004. One customer comprised a
significant individual receivable consisting of 16% of the Company's receivables
at April 30, 2003. One vendor comprised 32% of all purchases the nine month
period ended April 30, 2004.
INCOME TAXES
The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the estimated future tax
effects attributable to temporary differences and carry-forwards that result
from events that have been recognized either in the financial statements or the
income tax returns, but not both. The measurement of current and deferred income
tax liabilities and assets is based on provisions of enacted laws. Valuation
allowances are recognized if, based on the weight of available evidence, it is
more likely than not that some portion of the deferred tax assets will not be
realized.
GOODWILL AND OTHER INTANGIBLE ASSETS
Annually, the Company subjects goodwill and other identifiable intangible
assets with indefinite lives to an impairment test, in accordance with
accounting procedures generally accepted in the United States. Other intangible
assets continue to be amortized over their useful lives
Other identifiable intangible assets consist of the Company trademark and
loan origination fees. Trademarks have an indefinite life and therefore are not
amortized. Loan origination fees constitute the Company's identifiable
intangible asset subject to amortization. Amortization of the loan origination
fees is computed on a straight-line basis over the term of the related note.
Amortization expense for the years ended July 31, 2003, 2002, and 2001, is
included in interest expense on the Consolidated Statements of Income.
19
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 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 693 shares at April 30, 2004. These shares, including
associated additional paid-in capital net of amounts receivable, were
reclassified to long-term liabilities in the amount of $2,048,375 (see Note 5 to
the Condensed, Consolidated Financial Statements).
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.
20
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
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.
21
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 processes 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.
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.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks primarily from changes in U.S.
interest rates. The Company does not engage in financial transactions for
trading or speculative purposes.
The interest payable on the Company's revolving line of credit is based on
variable interest rates and is therefore affected by changes in market interest
rates. If interest rates on variable rate debt increased by .38 percentage
points (a 10% change from the interest rate as of April 30, 2004), assuming no
change in the Company's outstanding balance under the line of credit
(approximately $17.4 million as of April 30, 2004), the Company's annualized
income before taxes and cash flows from operating activities would decline by
approximately $66 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 U.S. 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 April 30,
2004, the Company had $3,426,508 outstanding on the Term Promissory Note.
On November 26, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into an Extension Agreement to extend the maturity of the revolving line
of credit by 60 days in order to negotiate an increase to such line of credit.
On December 29, 2003, the Company, ProConn, Exact Logistics and U.S. Bank
entered into a First Amendment to the Amended and Restated Loan Agreement
whereby U.S. Bank agreed to increase the Company's revolving line of credit to
$25,000,000 and the Company agreed to amend certain of its financial covenants
under the Amended and Restated Loan Agreement. The increased revolving line of
credit is evidenced by a Revolving Promissory Note dated December 29, 2003 for
$25,000,000 between U.S. Bank, the Company, ProConn and Exact Logistics. The
Company, ProConn and Exact Logistics are jointly and severally liable for the
obligations under the Revolving Promissory Note. The Revolving Promissory Note
matures on January 1, 2005. The maximum amount which can be borrowed thereunder
is $25,000,000. The actual principal amount outstanding varies as the Company
borrows and repays its obligations throughout the term of the loan. Advances
made under the Revolving Promissory Note accrue interest at April 30, 2004, the
variable interest rate at which the Revolving Promissory Note accrued interest
was 3.8% and the Company had $17,355,846 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 April 30, 2004, the Company had
$250,985 outstanding under this note.
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ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
quarterly report on Form 10-Q (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls: Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
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
April 30, 2004, 429 shares of common stock have been sold for an aggregate
offering price of $1,287,000.
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 $1,069,208 as of April 30, 2004.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K
31.1 Certifications required by Rule 13a-15(e) and 15d-15(e)
32.1 Section 1350 Certifications.
(b) REPORTS ON FORM 8-K
The Company filed no current reports on Form 8-K during the quarter
ended April 30, 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: June 14, 2004 /s/ Dr. Lionel L. Reilly
--------------------------------------
Dr. Lionel L. Reilly,
President/Chief Executive Officer
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