10-K405 1 d10k405.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended July 31, 2001; or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________ to ________. Commission file number: 000-26326 PROFESSIONAL VETERINARY PRODUCTS, LTD. (Exact name of Registrant as specified in its charter) Nebraska 5047 37-1119387 (State or other jurisdiction of Primary Standard Industrial (IRS Employer Incorporation or organization) Classification Code Number) Identification No.) 10077 South 134/th/ Street Omaha, Nebraska 68138 (402) 331-4440 (Address and telephone number of Registrant's principal executive offices) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 30, 2001, the aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the Registrant was $4,644,000. Shares of Common Stock held by each executive officer and director of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of September 30, 2001, 1,548 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's 2001 Annual Meeting of Stockholders to be filed within 120 days of the fiscal year ended July 31, 2001 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual Report on Form 10-K. PROFESSIONAL VETERINARY PRODUCTS, LTD. INDEX TO 10-K FOR THE ANNUAL PERIOD ENDED JULY 31, 2001 PART I ITEM 1. BUSINESS..................................................................... 1 ITEM 2. PROPERTIES .................................................................. 4 ITEM 3. LEGAL PROCEEDINGS ........................................................... 4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......................... 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....... 4 ITEM 6. SELECTED FINANCIAL DATA ..................................................... 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ................................................................... 6 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................. 9 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE ...... 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT .............................. 9 ITEM 11. EXECUTIVE COMPENSATION ...................................................... 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .............. 10 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............................. 10 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES ............................................... 10 EXHIBITS AND REPORTS ON FORM 8-K ............................................ II-1 SIGNATURES .............................................................................. II-2
PART I ------ ITEM 1. BUSINESS The Company is a leading wholesale distributor of animal health products to practicing veterinarians. The Company also offers a broad array of prescription, non-prescription and sundry items to assist veterinarians in their practice. The Company does not sell pet foods. A small quantity of feed additive type products are sold by the Company. The Company distributes approximately 18,000 different items including biologicals, pharmaceuticals, parasiticides, instruments and equipment. Routinely some 11,000 items are inventoried for immediate shipment. The balance of items are either drop-shipped from the manufacturer to the customer or are special order items. As of July 31, 2001, the Company had 1,534 shareholder veterinary clinics. These shareholders are principally located from the Rocky Mountains to the Atlantic Seaboard with some presence in the South. No shareholder/customer represented more than 1% of the Company's total revenues during the past fiscal year. Due to the geographical location of the majority of its shareholders, nearly 65% of the Company's gross sales are related to products used for the treatment and/or prevention of diseases in food animals. The balance of product sales are for the treatment and/or prevention of diseases in companion animals and equine. The Company primarily sells branded products as marketed by the major animal health manufacturers and suppliers. The Company does not currently private label any products, but would consider a private label product agreement if there was a decisive competitive advantage for doing such. The Company's business strategy is to be the leading supplier of animal health products to veterinary clinics by offering a complete assortment of items at competitive prices which are supported by superior levels of customer service. The Company believes that this strategy provides it with a competitive advantage by combining the broad product selection with everyday low prices and support from very efficient operations. The shareholder veterinary clinics are able to lower their product acquisition costs, which both increases profitability and gives them a competitive market advantage. The Company has heavily invested in electronic information systems to maximize efficiencies. All phases of the transactional process are electronically driven. The Company believes this advanced electronic technology will assist in earlier adoption of electronic commerce through the internet by both its customers and suppliers. The Company has two direct subsidiaries: Exact Logistics, LLC and ProConn, LLC. Exact Logistics, LLC was organized in the State of Nebraska on December 6, 2000. The limited liability company is a single member entity and is 100% owned by the Company. The purpose of Exact Logistics, LLC is to act as a contract logistics partner to warehouse and ship products. ProConn, LLC was organized in the State of Nebraska on December 6, 2000. The limited liability company is a single member entity and is 100% owned by the Company. The purpose of ProConn, LLC is to act as a supplier of animal health products to the producer and/or consumer. Value-Added Services The Company offers its customers and suppliers a comprehensive menu of value-added services. These services allow individual customers various selections based on their individual needs. The Company manages a database of all transactions so that its customers may maximize their 1 participation in promotions frequently offered by suppliers. The customer is periodically apprised, either by phone or mailings, of their level of participation in these promotions. This promotional tracking service gives the customer the option to maximize their participation in a promotion which can ultimately increase their profitability and allow them to more effectively compete in certain markets. The Company has developed a multi-day inventory management and purchasing techniques seminar for its customers. This seminar is held at the Company's headquarters. The customer is trained to better use the Company's resources and also be increasingly efficient in managing their product and inventory activities. The Company has Electronic Data Interchange (EDI) capability which provides the supplier with product sales and movement. The supplier is able to monitor sales activities, advertising effectiveness and market trends in an efficient manner. The Company also assists the manufacturer in the design of effective promotions. The historical transactional database and the promotional tracking service are unique tools to assist the manufacturer in tailoring effective promotions. Rebates to Shareholders The Company and its shareholders are in a contractual relationship evidenced in the Company's Articles of Incorporation which requires that all sales of Company products to Company shareholders be at no more than 5% over the cost of the Company as determined by the Company's certified public accountant. Based on this requirement, the Company's certified public accounting firm annually makes a determination of the Company's product costs. This valuation of product costs is then multiplied by 105% and compared to the Company's product sales. Amounts in excess of the 105% computation are overcharges which are then rebated back to shareholders by credit memo. Such rebates are made on a pro rata basis to shareholders, based on the aggregate amount of products purchased by each shareholder during the year for which the rebate is made. Rebates are included in the Company's financial statements and are netted against sales on the Company's income statement/balance sheet. The Animal Health Industry A national veterinary organization lists over 22,000 veterinary practices in the United States. There are some 45,000 veterinarians practicing in the various disciplines of veterinary medicine. This survey indicated nearly 71% of the veterinarians in private clinical practice predominately specialize in companion animal medicine. The U.S. animal health manufacturer sales of biologicals, pharmaceuticals, insecticides and other packaged goods was over $4.1 billion for 2000. This segment of business in which the Company participates is intended to meet the product and supply needs of the private clinical practice. Sundry items such as collars, leashes, cages, books, aquatic supplies and equine tack are primarily sold through retail pet supply outlets. These products typically are not purchased from veterinary practices. The Company makes a few of these items available; however, annual sales are very minimal. Consolidation is a primary force reshaping the animal health industry. Sales by the top ten animal health product manufacturers account for over 75% of the U.S. market. At this time, the top five U.S. animal health product companies have a market share that exceeds 50% of the total animal health business. Livestock production continues the consolidation spiral that started a number of years ago. Agribusiness integrators continue to build larger livestock raising facilities. Improved management systems coupled with new preventative products have resulted in an ongoing reduction in food animal product sales for the past several years. There also has been a loss of market share in several key 2 product groups due to generic competition. The generic products generally sell for lower prices which causes a pricing deflation in the market. The companion animal market is experiencing considerable growth. Several new therapeutic and preventative products have contributed to most of this increased sales volume. Nutraceuticals (nutritional pharmaceuticals) have an increasing presence in the companion animal market. During the past five years companion animal product sales have grown to nearly 50% of the total U.S. market. Competition Distribution of animal health products is characterized by either "ethical" or "OTC" channels of product movement. Ethical distribution is defined as those sales of goods to licensed veterinarians for use in their professional practice. Many of these products are prescription and must only be sold to a licensed professional. OTC (over-the-counter) distribution is the movement of non-prescription goods to the animal owner and the end user. Many of these products will also be purchased by the licensed veterinarian for professional use or for resale to their client. There are numerous ethical distribution companies operating in the same geographical regions as the Company and competition in this distribution industry is intense. Most of the competitors generally offer a similar range of products at prices often comparable to the Company's. The Company seeks to distinguish itself from its competitors by offering a higher level of customer service as well as having its principal customers also as its shareholders/owners. In addition to competition from other distributors, the Company also faces existing and potentially increased competition from manufacturers and suppliers who distribute some percentage of their products directly to veterinarians. Although the Company competes against direct sales by manufacturers and suppliers, it is often able to compete with such direct sales by adding new value-added services and pricing differentiation. The Company's customers, licensed practicing veterinarians, compete with the OTC distributors for the sale of products to the animal owner. Several large OTC distributors sell products directly to the large agribusiness integrator or the livestock owner. Pet food and supplies are sold by a highly fragmented industry which includes supermarkets, discount stores and other mass merchandisers, specialty pet stores, direct mail houses and veterinarians. The Company does not sell products directly to the animal owner and therefore does not compete with its customer for the sale of such product. The role of the animal health distributor has changed dramatically during the last decade. Successful distributors have shifted from a selling mentality to providing products and services in a consultative environment. Declining profit margins typify current financial trends. Currently there is an over capacity in the animal health distribution network, although there have been few animal health distributor mergers or acquisitions. The Company believes it must continue to add value to the distribution channel, and reduce the redundancies that exist, while removing unnecessary costs associated with product movement. Government Regulation Both state and federal government agencies regulate the distribution of certain animal health products. The Company is subject to regulation by the U.S. Department of Agriculture, the Food and Drug Administration and the Drug Enforcement Administration. Several State Boards of Pharmacy require the Company to be licensed in their state for the sale of animal health products within their jurisdiction. Each state (as well as certain cities and counties) requires the Company to collect sales taxes/use taxes on differing types of animal health products. The Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. 3 Environmental Considerations The Company does not manufacture, re-label or in any way alter the composition or packaging of products. All products are distributed in compliance with the relevant rules and regulations as approved by various State and Federal regulatory agencies. The Company's distribution business practices create no impact on the environment. Employees As of September 30, 2001 the Company had 204 employees. The Company is not subject to any collective bargaining agreements and has not experienced any work stoppages. The Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES The Company owns its building, which contains nearly 100,000 square feet of open warehouse space and 30,000 square feet of finished office area. The building is a facility the Company constructed and completed in late 1999 and is located on 9.6 acres of land in a newly developed industrial subdivision of Omaha, Nebraska. The latest in technology was incorporated into the design of the new facility to maximize distribution efficiencies. The building is subject to a first and second mortgage held by US Bank. ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended July 31, 2001. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's common stock. Ownership of the Company's stock is limited to licensed, practicing veterinarians (or businesses comprised of veterinarians such as a partnership or corporation). Each veterinarian shareholder is limited to ownership of one share of stock, which is purchased at the fixed price of $3,000. The share of stock may not be sold or transferred, except back to the Company at the same $3,000 price. On July 31, 2001, there were 1,534 record holders of the Company's common stock. The Company has never declared or paid any cash dividends on the common stock. The Company intends to retain any future earnings for funding growth of the Company's business and therefore does not currently anticipate paying cash dividends in the foreseeable future. 4 ITEM 6. SELECTED FINANCIAL DATA The historical selected financial data set forth below for the five years ended July 31, 2001 are derived from the Company's Financial Statements included elsewhere in this report and should be read in conjunction with those financial statements and notes thereto. The financial data for the period ended July 31, 2001 is consolidated and includes accounts of Exact Logistics, LLC and ProConn, LLC from December 6, 2000, the date the Company became the sole member of Exact Logistics, LLC and ProConn, LLC.
Fiscal Years Stated in Dollars 1997 1998 1999 2000 2001 Statement of Data Revenues .................................... $ 80,938,835 94,245,375 122,253,200 178,547,153 199,340,661 Cost of goods sold .......................... 73,701,533 85,261,574 111,875,873 161,934,175 181,660,419 Gross profit ................................ 7,237,302 8,983,801 10,377,327 16,612,978 17,680,242 Operating, general and administrative expenses ..................... 7,077,385 8,725,912 10,366,843 15,202,927 16,360,464 Operating income ............................ 159,917 257,889 10,484 1,410,051 1,319,778 Other income ................................ 125,256 161,205 486,355 372,795 504,436 Other expenses .............................. (208,407) (244,111) 263,198 905,880 1,008,638 Income before income taxes .................. 76,766 174,983 233,641 876,966 815,576 Income taxes ................................ 30,736 73,440 92,907 320,367 306,892 ------------ ------------ ------------ ------------ ------------ Net income .................................. $ 46,030 101,543 140,734 556,599 508,684 ============ ============ ============ ============ ============ Net income per share: Basic earnings per share .................... $ 47.65 96.89 118.46 403.04 331.61 ============ ============ ============ ============ ============ Basic common shares outstanding used in the calculation ................................. 966 1,048 1,188 1,381 1,534 Supplemental Operating Data Net cash provided by (used in) operating activities ........................ ($ 647,441) (2,115,978) 1,863,413 (5,691,783) 5,218,803 Net cash provided by (used in) investing activities ........................ (194,181) (442,604) (1,033,443) (6,676,998) (287,106) Net cash provided by (used in) financing activities ........................ 721,767 1,317,233 1,372,564 10,877,188 (3,875,962) Balance Sheet Data Working capital ............................. $ 2,456,944 2,698,906 1,052,710 1,975,467 2,776,630 Total Assets ................................ 14,175,862 20,007,753 28,358,152 59,700,070 50,982,051 Total long-term obligations ................. 1,301,609 1,225,089 0 6,013,631 5,565,035 **Total short-term borrowings ............... 1,062,985 3,285,273 4,413,238 8,216,400 4,293,713 Shareholder equity .......................... 3,542,947 3,891,490 4,453,224 5,588,823 6,556,507
5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. Actual events or results may differ materially from those indicated in such forward-looking statements. The following discussion of the financial conditions and results of operations should be read in conjunction with the Financial Statements and related notes thereto included elsewhere in this report. Overview The Company was chartered on August 2, 1982 as a Missouri corporation. Since January 1, 1983 the Company has operated from various facilities in Omaha, Nebraska. The Company shareholders approved Amended and Restated Articles of Incorporation at the Company's 1999 Annual Meeting to permit the Company to become a Nebraska corporation. The Company surrendered its Missouri charter and became a Nebraska corporation on September 22, 1999. The Company's fiscal year begins on August 1 and concludes on July 31 of the following year. The Company is one of the largest distributors of animal health products to veterinarians who practice food animal medicine in the United States. The Company was founded in 1982 by veterinarians whose primary interests were "food animal" related. The changing trends of veterinary medicine has resulted in a gradual shift toward the sale of more "companion animal" products. The Company's sales have increased from $62.6 million in fiscal year 1995 to $195.9 million in fiscal year 2001, and the Company expects this trend of increases in sales to continue. The Company will continue our strategy of supporting the food animal veterinarian with a broad range of products and value-added services. However, sales in the food animal sector are subject to very low margins. In view of the increasing maturity of the food animal market the Company must continue to look for future growth in the companion animal sector. Historically companion animal product related transactions have enjoyed higher margins than sales of food animal products. However, as competition increases in the companion animal sector it is likely that margins will begin to erode. The Company believes there is likely to be consolidation of the many small privately owned veterinary clinics, which will result in an increasing number of larger veterinary practice business units. As a result, the larger veterinary practices will have increased purchasing leverage and will negotiate for lower product costs which will reduce margins at the distribution level and impact Company revenue and net income. There are two major types of transactions that affect the flow of products to the Company's customers. Traditional "buy/sell" transactions account for approximately ninety percent of the Company's business. In this type of transaction the customer places an order with the Company, which is then picked, packed, shipped, invoiced to the customer, followed by payment from the customer to the Company. There are several product lines where the Company provides all transactional activities described above, except that the manufacturer retains title to the product. A second transaction model used by the Company is termed the "agency agreement". Under this approach, the Company receives orders for products from its customer. The Company transmits the order to the manufacturer who then picks, packs, ships, invoices and collects payment from the customer. The Company receives a commission payment for soliciting the order as well as other customer service activities. The Company's operating expenses associated with this type of sale may be lower than the traditional buy/sell transaction. Agency selling allows the manufacturer and the Company to immediately react to market conditions. This arrangement allows the manufacturer to establish and standardize price of its products in the market. This current information often is used by the Company and the various manufacturers to develop data based marketing programs. 6 The mode of selling products to veterinarians is dictated by the manufacturer. There has been a recent slight shift away from agency agreements returning to the traditional buy/sell transactional business model. Product returns from the Company's customers and to the Company's suppliers occur in the ordinary course of business. The Company extends to its customers the same return of goods policies as extended to the Company by the various manufacturers. The Company does not believe its operations will be adversely impacted due to the return of products. New Subsidiaries On December 6, 2000 the Company became the sole member of Exact Logistics, LLC, a Nebraska limited liability company, and ProConn, LLC, a Nebraska limited liability company. Both limited liability companies are single member entities and are 100% owned by the Company. The purpose of Exact Logistics, LLC is to act as a contract logistics partner to warehouse and ship products. The purpose of ProConn, LLC is to act as a supplier of animal health products to the producer and/or consumer. Results of Operations The following discussion is based upon the historical results of operation for fiscal 1999, 2000 and 2001. Fiscal 1999 Compared to Fiscal 1998: ----------------------------------- Net sales for the fiscal year ending July 31, 1999 increased by 31.0% or $28.1 million. Sales for the 1999 fiscal year totaled $118.7 million compared to $90.6 million for the previous fiscal year. The growth was attributable to increased sales to existing veterinary shareholders and also the addition of new shareholders. During the year 140 veterinary practices became shareholders of the Company. On July 31, 1999 there were 1,188 shareholders of the Company. Gross profit increased by $1.4 million to $10.4 million compared to $9.0 million for the previous fiscal year. Gross profit as a percentage of total revenues was 8.5% in fiscal 1999 compared to 9.5% in fiscal 1998. Operating, general and administrative expenses increased by $1.6 million to $10.3 million in fiscal year 1999 compared to $8.7 million for the previous year. Such operating, general and administrative expenses as a percentage of total revenues fiscal 1999 was 8.5% vs. 9.3% in fiscal 1998. Fiscal 2000 Compared to Fiscal 1999: ----------------------------------- Net sales for the fiscal year ending July 31, 2000 increased by 47.2% or $56.0 million. Sales for the 2000 fiscal year totaled $174.8 million compared to $118.8 million for the previous fiscal year. The growth was attributable to increased sales to existing veterinary shareholders and also the addition of new shareholders. During the year 193 veterinary practices became shareholders of the Company. On July 31, 2000 there were 1,381 shareholders of the Company. Gross profit increased by $6.2 million to $16.6 million compared to $10.4 million for the previous fiscal year. Gross profit as a percentage of total revenues was 9.3% in fiscal 2000 compared to 8.5% in fiscal 1999. Operating, general and administrative expenses increased by $4.8 million to $15.2 million in fiscal year 2000 compared to $10.4 million for the previous year. Such operating, general and administrative expenses as a percentage of total revenues fiscal 2000 was 8.5% vs. 8.5% in fiscal 1999. 7 Fiscal 2000 Compared to Fiscal 2001: ----------------------------------- Net revenues for the fiscal year ending July 31, 2001 increased by 11.6% or $20.8 million. Revenues for the 2001 fiscal year totaled $199.3 million compared to $178.5 million for the previous fiscal year. The growth was attributable to increased sales to existing veterinary shareholders and also the addition of new shareholders. During the year 153 veterinary practices became shareholders of the Company. On July 31, 2001 there were 1,534 shareholders of the Company. Gross profit increased by $1.1 million to $17.7 million compared to $16.6 million for the previous fiscal year. Gross profit as a percentage of total revenues was 8.9% in fiscal 2001 compared to 9.3% in fiscal 2000. Operating, general and administrative expenses increased by $1.2 million to $16.4 million in fiscal year 2001 compared to $15.2 million for the previous year. Such operating, general and administrative expenses as a percentage of total revenues fiscal 2001 was 8.2% vs. 8.5% in fiscal 2000. 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 late spring and early 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 late spring and early fall. In the last few years the Company has been selling more companion animal related products. These products tend to have a 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's capital requirements relate primarily to working capital, the expansion of our operations to accommodate sales growth. The Company maintains significant inventory levels to fulfill its operating commitment to its customers. Historically, the Company has financed our cash requirements primarily from short-term bank borrowings and cash from operations. Net cash used by operating activities of $2,115,978 in fiscal year ending July 1998 was primarily attributable to increases of $1,493,853 in accounts receivable and $4,473,791 in inventories. These were partially offset by an increase of $2,594,480 in accounts payable. Net cash provided by operating activities of $1,863,413 in fiscal year ending July 1999 was primarily attributable to an increase of $6,631,793 in accounts receivable. It was partially offset by increases of $418,081 in inventories and $7,736,556 in accounts payable. In the fiscal year ending July 2000, net cash used by operating activities of $5,691,783 was primarily attributable to increases of $10,430,441 in accounts receivable and $15,839,475 in inventories. These were partially offset by an increase of $19,058,909 in accounts payable. For the fiscal year ending July 2001, net cash used by operating activities of $5,218,803 was primarily attributable to decreases of $3,129,815 in accounts receivable and $6,084,384 in inventories. These were partially offset by a decrease of $4,751,004 in accounts payable. In the fiscal year ending July 1998, net cash used by investing activities of $442,604 was primarily attributable to investments in property and equipment. Net cash used by investing activities of $1,033,443 in fiscal year ending July 1999 was primarily attributable to investments in property and equipment. Net cash used by investing activities of $6,676,998 in fiscal year ending July 2000 was primarily attributable to investments in property and equipment. Net cash used by investing activities of 8 $287,106 in fiscal year ending July 2001 was primarily attributable to investments in property and equipment. Net cash provided by financing activities of $1,317,233 in fiscal year ending July 1998 was primarily attributable to increases of $1,035,913 in loan proceeds and $281,320 from net proceeds from issuance of common stock. Net cash provided by financing activities of $1,372,564 in fiscal year ending July 1999 was primarily attributable to increases of $1,012,731 in loan proceeds and $359,833 from net proceeds from issuance of common stock. In the fiscal year ending July 2000, net cash provided by financing activities of $10,877,188 was primarily attributable to increases of $10,236,396 in loan proceeds and $640,792 from net proceeds from issuance of common stock. In the fiscal year ending July 2001, net cash used by financing activities of $3,875,962 was primarily attributable to a decrease of $4,334,962 in loan proceeds and an increase of $459,000 from net proceeds from issuance of common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks primarily from changes in U.S. interest rates. The Company does not engage in financial transactions for trading or speculative purposes. The interest payable on the Company's revolving line of credit is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates on variable rate debt rose .650 percentage points (a 10% change from the interest rate as of July, 31, 2001), assuming no change in the Company's outstanding balance under the line of credit (approximately $4,293,713 as of July 31, 2001), the Company's annualized income before taxes and cash flows from operating activities would decline by approximately $27,909. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K" for the Company's Financial Statements, and the notes thereto, Supplementary Data, and the financial statement schedules filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no current report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III -------- Incorporated by reference in Items 10 to 13 below are certain sections of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after July 31, 2001. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Incorporated by reference in this Annual Report is the information required by this Item 10 contained in the sections entitled "Proposal: Election of Directors", "Information About Directors and Executive Officers" and "Section 16(b) Beneficial Ownership Reporting Compliance" of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after July 31, 2001. 9 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference in this Annual Report is the information required by this Item 11 contained in the section entitled "Information About Directors and Executive Officers --Executive Compensation", of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after July 31, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No stockholder of the Company is a beneficial owner of more than five percent of the Company's common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference in this Annual Report is the information required by this Item 13 contained in the section entitled the "Information About Directors and Executive Officers--Certain Transactions" of the Company's definitive proxy statement, to be filed pursuant to Regulation 14A with the SEC within 120 days after July 31, 2001. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following financial statements are filed as part of this report: Independent Auditor's Reports ........................................... F-1 Consolidating Balance Sheet at July 31, 2001 and Consolidated Balance Sheet at July 31, 2000 ................................... F-3 Consolidating Statements of Income at July 31, 2001, Consolidated Statements of Income at July 31, 2000 and Statements of Income at July 31, 1999 .......................................... F-4 Consolidating Statements of Retained Earnings at July 31, 2001, Consolidated Statements of Retained Earnings at July 31, 2000 Statements of Retained Earnings at July 31, 1999 ................. F-5 Consolidating Statements of Cash Flow at July 31, 2001, Consolidated Statements of Cash Flow at July 31, 2000 and Statements of Cash Flow and July 31, 1999 ...................................... F-6 Notes to Financial Statements ........................................... F-7 Schedule of Operating, General and Administrative Expenses ......................................................... F-14
10 MARVIN E. JEWELL & CO., P.C. Certified Public Accountants Letterhead Independent Auditor's Report ---------------------------- To the Board of Directors Professional Veterinary Products, Ltd. Omaha, Nebraska We have audited the accompanying consolidating balance sheets of Professional Veterinary Products, Ltd., a Nebraska corporation, and subsidiaries as of July 31, 2001, and the related consolidating statements of income, retained earnings, cash flows and accompanying schedule for the year then ended. We have also audited the consolidated balance sheet of Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2000, and the related consolidated statements of income, retained earnings, cash flows and accompanying schedule for the year then ended. These consolidating and consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the July 31, 2001 consolidating financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2001 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the July 31, 2000 consolidated financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of Professional Veterinary Products, Ltd. and subsidiaries as of July 31, 2000 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Marvin E. Jewell & Co., P.C. Lincoln, Nebraska September 5, 2001 F-1 MARVIN E. JEWELL & CO., P.C. Certified Public Accountants Letterhead Independent Auditor's Report ---------------------------- To the Board of Directors Professional Veterinary Products, Ltd. Omaha, Nebraska We have audited the accompanying balance sheets of Professional Veterinary Products, Ltd., a Nebraska corporation, as of July 31, 2000 and 1999, and the related statements of income, retained earnings, cash flows and accompanying schedule for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion of these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Professional Veterinary Products, Ltd. as of July 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Marvin E. Jewell & Co., P.C. Lincoln, Nebraska September 20, 2000 F-2 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Consolidating Balance Sheet - July 31, 2001 Consolidated Balance Sheet - July 31, 2000
2001 2000 ---- ---- Assets ------ Current assets: Cash .................................................. $ 656,821 $ - Accounts receivable, trade, less allowance for doubtful accounts (0) ........................... 23,140,929 26,749,894 Accounts receivable, rebate ........................... (4,867,670) (6,114,343) Accounts receivable, stock ............................ 114,876 77,709 Accounts receivable, other ............................ 128,427 933,116 Prepaid income taxes .................................. 121,433 - Inventory ............................................. 22,342,323 28,426,707 ------------ ------------ Total current assets ........................... 41,637,139 50,073,083 ------------ ------------ Property and equipment ................................... 8,916,402 8,640,410 Less accumulated depreciation ......................... 1,433,156 896,198 ------------ ------------ 7,483,246 7,744,212 ------------ ------------ Other assets: Organization expense less accumulated amortization $60,556 (2001), $45,444 (2000) .............. 166,242 181,354 Loan origination fee less accumulated amortization $4,833 (2001), $2,833 (2000) ............... 15,167 17,167 Trademark, less accumulated amortization $972 (2001), $639 (2000) .......... 4,028 4,361 Investments ......................................... 1,643,850 1,643,850 Cash value life insurance ........................... 32,379 30,077 Deferred income tax asset ........................... - 5,966 ------------ ------------ 1,861,666 1,882,775 ------------ ------------ $ 50,982,051 $ 59,700,070 ============ ============ Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Bank overdraft ....................................... - 398,914 Notes payable, bank .................................. 4,293,713 8,216,400 Current portion of long-term debt .................... 455,924 419,603 Accounts payable, trade .............................. 32,484,688 37,235,692 Accrued interest ..................................... 64,505 110,611 Accrued expenses ..................................... 585,224 525,505 Accrued wages ........................................ 541,289 611,097 Accrued profit-sharing ............................... 341,207 347,861 Accrued income taxes ................................. - 231,933 Deferred income tax liability ........................ 93,959 - ------------ ------------ Total current liabilities ...................... 38,860,509 48,097,616 ------------ ------------ Long-term debt ........................................... 5,565,035 6,013,631 ------------ ------------ Stockholders' equity: Common stock, $1 par value per share. Authorized 30,000 shares; issued and outstanding 1,534 shares (2001), 1,381 shares (2000) .............................. 1,534 1,381 Paid-in capital ....................................... 4,529,466 4,070,619 Retained earnings ..................................... 2,025,507 1,516,823 ------------ ------------ 6,556,507 5,588,823 ------------ ------------ $ 50,982,051 59,700,070 ============ ============
See accompanying notes to financial statements and independent auditor's report. F-3 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Consolidating Statements of Income - July 31, 2001 Consolidated Statements of Income - July 31, 2000 Statements of Income - July 31, 1999
Amount Percent ------ ------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Revenues: Gross sales ........................ $ 200,841,804 180,905,421 123,649,623 100.75 101.32 101.14 Less Rebate ........................ (4,867,670) (6,114,343) (4,889,037) (2.44) (3.42) (4.00) ------------- ------------- ------------- ------- ------- ------- Net Sales .......................... 195,974,134 174,791,078 118,760,595 98.31 97.90 97.14 Shipping ........................... 168,747 119,373 101,435 .08 .07 .08 Commissions ........................ 1,332,578 1,325,276 1,630,808 .67 .74 1.33 Sales promotion .................... 1,817,234 2,272,181 1,716,677 .91 1.27 1.41 Annual meeting reimbursement ....... - - 16,609 - - .02 Contracted services ................ 5,625 - - .01 - - Miscellaneous ...................... 42,343 39,245 27,076 .02 .02 .02 ------------- ------------- ------------- ------- ------- ------- 199,340,661 178,547,153 122,253,200 100.00 100.00 100.00 ------------- ------------- ------------- ------- ------- ------- Cost of sales: Net purchases ..................... 186,486,057 168,625,655 114,061,177 93.55 94.45 93.30 Freight out ....................... 4,739,125 3,627,670 2,451,266 2.38 2.03 2.00 Less vendor rebates ............... (9,564,763) (10,319,150) (4,636,570) (4.80) (5.78) (3.79) ------------- ------------- ------------- ------- ------- ------- 181,660,419 161,934,175 111,875,873 91.13 90.70 91.51 ------------- ------------- ------------- ------- ------- ------- Gross profit ............... 17,680,242 16,612,978 10,377,327 8.87 9.30 8.49 Operating, general and administrative expenses (Schedule) ............................ 16,360,464 15,202,927 10,366,843 8.21 8.51 8.48 ------------- ------------- ------------- ------- ------- ------- Operating income ........... 1,319,778 1,410,051 10,484 .66 .79 .01 ------------- ------------- ------------- ------- ------- ------- Other income (expense): Interest income ............... 504,436 372,795 249,143 .25 .21 .20 Interest expense .............. (1,006,078) (862,420) (263,198) (.50) (.49) (.22) Gain (loss) on sale of property and equipment ................. (2,560) (43,460) 237,212 - (.02) .20 ------------- ------------- ------------- ------- ------- ------- (504,202) (533,085) 223,157 (.25) (.30) .18 ------------- ------------- ------------- ------- ------- ------- Income before taxes ........... 815,576 876,966 233,641 .41 .49 .19 Income taxes .......................... 306,892 320,367 92,907 .15 .18 .08 ------------- ------------- ------------- ------- ------- ------- Net income .................. $ 508,684 556,599 140,734 .26 .31 .11 ============= ============= ============= ======= ======= =======
See accompanying notes to financial statements and independent auditor's report. F-4 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Consolidating Statements of Retained Earnings - July 31, 2001 Consolidated Statements of Retained Earnings - July 31, 2000 Statements of Retained Earnings - July 31, 1999
2001 2000 1999 ---- ---- ---- Balance at beginning of year........... $ 1,516,823 960,224 819,490 Net income............................. 508,684 556,599 140,734 ----------- ---------- -------- Balance at end of year................. $ 2,025,507 1,516,823 960,224 =========== ========== ========
See accompanying notes to financial statements and independent auditor's report. F-5 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Consolidating Statements of Cash Flows - July 31, 2001 Consolidated Statements of Cash Flows - July 31, 2000 Statements of Cash Flows - July 31, 1999
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income................................. $ 508,684 556,599 140,734 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization.......... $ 562,956 443,108 287,814 Gain (loss) on sale of property........ 2,560 43,460 (237,212) Adjustments for working capital changes: (Increases) decrease in: Receivables........................ 3,129,185 (10,430,441) (6,631,793) Inventories........................ 6,084,384 (15,839,475) 418,081 Cash value life insurance.......... (2,302) (30,077) - Deferred income tax................ 99,925 (5,966) - Increase (decrease) in: Accounts payable................... (4,751,004) 19,058,909 7,736,566 Accrued expenses................... (62,849) 298,074 173,766 Income taxes payable............... (353,366) 214,026 (24,533) ----------- ------------ ------------ Total adjustments.................. 4,710,119 (6,248,382) 1,722,679 ------------ ------------ ----------- Net cash provided (used) by operating activities........ 5,218,803 (5,691,783) 1,863,413 Cash flows from investing activities: Purchase of property and equipment......... (287,106) (5,292,415) (2,762,815) Purchase of trademark...................... - (5,000) Purchase of investments.................... - (1,500,000) (143,850) Proceeds from sale of property............. - 115,417 1,878,222 ----------- ------------ ------------ Net cash provided (used) by investing activities................ (287,106) (6,676,998) (1,033,433) Cash flows from financing activities: Net loan proceeds (reduction).............. (4,334,962) 10,236,396 1,012,731 Net proceeds from issuance of common stock............................ 459,000 640,792 359,833 ----------- ------------ ------------ Net cash provided (used) by financing activities.......... (3,875,962) 10,877,188 1,372,564 ------------ ------------ ----------- Net increase (decrease) in cash............ 1,055,735 (1,491,593) 2,202,534 Cash (deficit) at beginning of year........ (398,914) 1,092,679 (1,109,855) ------------ ------------ ----------- Cash (deficit) at end of year.............. $ 656,821 (398,914) 1,092,679 ============ ============ =========== Supplementary disclosures of cash flow information: Interest paid........................ $ 1,052,184 774,421 257,725 ============ ============ =========== Income taxes paid.................... $ 560,333 106,162 117,440 ============ ============ ===========
See accompanying notes to financial statements and independent auditor's report. F-6 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (1) Organization and summary of significant accounting policies: Organization: Professional Veterinary Products, Ltd. was incorporated in the State of Missouri in 1982. The corporation was domesticated in Nebraska on September 22, 1999. The corporation was formed to buy, sell and warehouse pharmaceuticals and other veterinary related items. The purpose of the corporation is to act as a wholesale distributor primarily to shareholders. Shareholders are limited to the ownership of one share of stock and must be a licensed veterinarian or business entity comprised of licensed veterinarians. Exact Logistics, LLC was organized in the State of Nebraska on December 6, 2000. The limited liability company is 100% owned by Professional Veterinary Products, Ltd. The purpose of the LLC is to act as a logistics partner to warehouse and ship products to other animal health distributors. ProConn, LLC was organized in the State of Nebraska on December 6, 2000. The limited liability company is 100% owned by Professional Veterinary Products, Ltd. The purpose of the LLC is to act as a supplier of animal health products to the producer or consumer. Professional Veterinary Products, Ltd., Exact Logistics, LLC and ProConn, LLC are presented as combined financial statements because they are related through common ownership and control. Their accounting policies follow generally accepted accounting principles and conform to the common practices of the industry in which they are engaged. Exact Logistics, LLC and ProConn, LLC are single member limited liability companies with Professional Veterinary Products, Ltd. as their only corporate member. They have elected to be treated as an unincorporated branch of the parent entity for financial and income tax purposes. All income taxes of the unincorporated branches are reflected and are the responsibility of the parent entity. Summary of significant accounting policies: (a) Basis of accounting: The corporation uses the accrual method of accounting for consolidating financial statement and income tax purposes. (b) Consolidation policy: These financial statements include the accounts of Professional Veterinary Products, Ltd. and its single-member limited liability companies Exact Logistics, LLC and ProConn, LLC. All material intercompany accounts and transactions have been eliminated. (c) Concentration of cash balances: The Company's cash funds are located in a single financial institution. The amount on deposit at July 31, 2001 and 2000 exceeded the $100,000 federally insured limit. (d) Accounts receivable: Management considers accounts receivable to be fully collectible, accordingly, no allowance for doubtful accounts is required. See independent auditor's report. F-7 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (1) Summary of significant accounting policies (continued): (e) Inventory: Inventory is valued at the lower of cost or market on the first-in, first-out basis. (f) Property and equipment depreciation: Property and equipment are stated at cost. Major additions are capitalized and depreciated over their estimated useful lives. For financial reporting purposes, the Company uses the straight-line method and for income tax purposes, the Company uses the accelerated depreciation method. (g) Cash and cash equivalents: The corporation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. (h) Amortization: Organizational costs are being amortized over sixty months on a straight-line basis. Financing costs are being amortized over the term of the note on a straight-line basis. This amortization is included in interest expense in the income statement. The intangible costs are being amortized over fifteen years on a straight-line basis. (i) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. (j) Income taxes: Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences related primarily to depreciable assets (use of difference depreciation methods and lives for financial statement and income tax purposes), and Uniform Capitalization Rules Code Sec. 263A (capitalization of direct and indirect costs associated with resale activities). The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits that are available to offset future taxable income. Exact Logistics, LLC and ProConn, LLC are single member limited liability companies with Professional Veterinary Products, Ltd. as their only corporate member. They have elected to be treated as an unincorporated branch of the parent entity for income tax purposes. All income taxes of the unincorporated branches are reflected and are the responsibility of the parent entity. See independent auditor's report. F-8 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (2) For the fiscal year ended July 31, the Company recognized liabilities for overcharges on sales in excess of an agreed to profit margin of 5% totaling $4,867,670 (2001), $6,114,343 (2000). (3) Property and equipment:
Book Value Accumulated ---------- Cost Depreciation 2001 2000 ---- ------------ ---- ---- Land ........... $ 953,780 - 953,780 953,780 Buildings ...... 4,715,527 196,064 4,519,463 4,637,352 Equipment ...... 3,247,095 1,237,092 2,010,003 2,153,080 --------- --------- --------- --------- $ 8,916,402 1,433,156 7,483,246 7,744,212 =========== ========= ========= =========
(4) Investments - Non Marketable: The Company has invested in AAHA Services Corp., of which they own 20%. The remaining 80% is owned by American Animal Hospital Association (AAHA). AAHA operates AAHA Services Corp. without regard to the views of Professional Veterinary Products, Ltd. The investment is, therefore, carried at cost. The Company has invested in Agri-Laboratories, Ltd., of which they own less than 5%. The investment is carried at cost.
2001 2000 ---- ---- Investment in AAHA Services Corp ......... $ 1,500,000 1,500,000 Investment in Agri-Laboratories, Ltd ..... 143,850 143,850 ----------- --------- $ 1,643,850 143,850 =========== =========
(5) Cash Surrender value of life insurance: The Company owns insurance policies on the Chief Executive Officer. The total face value of the policies on the life of the Chief Executive Officer was $ 375,000 at July 31, 2001. See independent auditor's report. F-9 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (6) Income taxes: The company's total noncurrent deferred tax asset and noncurrent deferred tax liabilities at July 31 are as follows (computed at the statutory rate 34%):
2001 2000 ---- ---- Noncurrent deferred tax asset - Inventory overhead costs capitalized for tax purposes ..................... $ 37,400 47,600 Noncurrent deferred tax liability - Accumulated depreciation .............................. (131,359) (41,634) --------- ------- Net noncurrent deferred tax asset per financials ........................................ (93,959) 5,966 Prior year deferred tax asset (liability) ............... 5,966 - --------- ------- Deferred tax expense .................................... 99,925 (5,966) Taxes currently payable ................................. 255,503 326,333 --------- ------- Income tax provision per financials ..................... $ 355,428 320,367 --------- -------
(7) Long-term debt:
2001 2000 ---- ---- Note payable, bank, 7.42% interest .............. $3,860,284 3,950,442 Note payable, bank, 9.10% interest .............. 1,115,150 1,192,534 Note payable, bank, 8.66% interest .............. 1,045,525 1,290,258 --------- --------- 6,020,959 6,433,234 Less current portion due within one year ........ (455,924) (419,603) --------- --------- $5,565,035 6,013,631 =========== =========
Note payable, bank, 7.42% interest: Monthly installments of principal and interest of $32,028 commencing January 1, 2000 with a final installment and entire unpaid principal balance due on June 1, 2009. Loan is collateralized by land and building. Note payable, bank, 9.10% interest: Monthly installments of principal and interest of $15,352 commencing July 1, 2000 with a final installment and entire unpaid principal balance due on May 1, 2010. Loan is collateralized by land and building. Note payable, bank, 8.66% interest: Monthly installments of principal and interest of $29,032 commencing February 1, 2000 with a final installment and entire unpaid principal balance due on January 1, 2005. Loan is collateralized by all business assets. See independent auditor's report. F-10 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (7) Long-term debt (continued): Total yearly payments of long-term debt are due as follows:
Note Payable Note Payable Note Payable bank, 7.42% bank, 9.10% bank, 8.66% Interest Interest Interest Total -------- -------- -------- ----- 2002........... $ 101,306 86,288 268,330 455,924 2003........... 109,084 94,477 292,512 496,073 2004........... 117,459 103,442 318,873 539,774 2005........... 126,477 113,258 165,810 405,545 2006........... 136,188 124,005 - 260,193 2007 - 2020.... 3,269,770 593,680 - 3,863,450 ---------- --------- --------- --------- $3,860,284 1,115,150 1,045,525 6,020,959 ========== ========= ========= =========
The maximum amount available on the revolving line of credit is $15,000,000. The balances due on this line of credit were $4,293,713 and $8,216,400 for 2001 and 2000 respectively. The interest rate as of July 31 was 6.50% (2001) and 9.25% (2000), or .25% under the Index. All the above loan agreements are with US Bank. These loans are collateralized by substantially all of the assets of the Company. These loans agreements contain certain covenants to related financial ratios. Covenants relating interest bearing debt to tangible net worth were waived by the bank for July 31, 2000. The covenants were met for July 31, 2001. (8) Commitments and contingent liabilities - leases: On February 18, 1998, the company entered into a lease with Nebraska Leasing Services, Inc. for the purpose of leasing a truck. The lease minimum rentals were $451 per month for a term of 36 months with a final rental installment of $12,000. The lease expired January 18, 2001. On July 28, 1997, the company entered into a lease with IBM Credit Corporation for the purpose of leasing related computer hardware. The lease minimum rentals are $6,541 per month. The lease expires July 30, 2002. On August 14, 1998, the company entered into a lease with IBM Credit Corporation for the purpose of leasing related computer hardware. The lease minimum rentals are $3,107 per month for a term of 48 months. The lease expires August 14, 2002. On August 31, 1999, the company entered into a lease with IOS Capital for the purpose of leasing four copiers. The lease minimum rentals are $1,216 per month for a term of 48 months. The lease expires August 31, 2003. On September 1, 1999, the company entered into a lease with US Bancorp for the purpose of leasing two forklifts. The lease minimum rentals are $1,189 per month for a term of 48 months. The lease expires August 1, 2003. See independent auditor's report. F-11 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (8) Commitments and contingent liabilities - leases: (continued) On October 7, 1999, the company entered into a lease with Neopost Leasing for the purpose of leasing a postage meter. The lease minimum rentals are $687 per quarter for a term of 5 years. The lease expires February 7, 2005. On October 10, 1999, the company entered into a lease with US Bancorp for the purpose of leasing 50 scanners. The lease minimum rentals are $6,225 per month for a term of 36 months. The lease expires September 10, 2002. On November 10, 1999, the company entered into a lease with U.S. Bancorp Leasing & Financial for the purpose of leasing a floor scrubber. The lease minimum rentals are $306 per month for a term of 48 months. The lease expires October 10, 2003. On November 30, 1999, the company entered into a lease with IBM Credit Corporation for the purpose of leasing IBM maintenance. The lease minimum lease payments are $1,675 per month for a term of 36 months. The lease expires November 30, 2002. On November 30, 1999, the company entered into a lease with IOS Capital for the purpose of leasing related copier parts. The lease minimum rentals are $164 per month for a term of 60 months. The lease expires November 30, 2004. On February 15, 2000, the company entered into a lease with Chrysler Financial Company, LLC for the purpose of leasing a van. The lease minimum lease payments are $416 per month for a term of 36 months. The lease expires February 15, 2003. On Marcy 6, 2000, the company entered into a lease with IBM Credit Corp for the purpose of leasing computer hardware. The lease minimum rentals are $6,193 per month for a term of 36 months. The lease expires February 6, 2003. On March 1, 2000, the company entered into a lease with P & L Capital Corp for the purpose of leasing 11 laptop computers. The lease minimum rentals are $1,627 per month for a term of 24 months. The lease expires February 1, 2002. On April 27, 2000, the company entered into a lease with Chrysler Financial Company, LLC for the purpose of leasing a vehicle. The lease minimum rentals are $669 per month for a term of 36 months. The lease expires April 27, 2003. On October 1, 2000, the company entered into a lease with US Bancorp Leasing for the purpose of leasing five forklifts. The lease minimum rentals are $2,572 per month for a term of 60 months. The lease expires September 1, 2005. On January 23, 2001, the company entered into a lease with P & L Capital Corp., Inc. for the purpose of leasing three Dell laptop computers. The lease minimum rentals are $394 per month for a term of 24 months. The lease expires January 1, 2003. On April 17, 2001, the company entered into a lease with P & L Capital Corp., Inc. for the purpose of leasing one Dell laptop computer. The lease minimum rentals are $129 per month for a term of 24 months. The lease expires April 17, 2003. See independent auditor's report. F-12 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Notes to Consolidating Financial Statements - July 31, 2001 and Consolidated Financial Statements - July 31, 2000 (continued) (8) Commitments and contingent liabilities - leases: (continued) Minimum future obligations on operating leases in effect on July 31, 2001 are: Period ended July 31, 2002 ........... $384,470 Period ended July 31, 2003 ........... 146,140 Period ended July 31, 2004 ........... 38,935 Period ended July 31, 2005 ........... 33,577 Period ended July 31, 2006 ........... 5,143 -------- $608,265 ======== (9) Transactions between Board of Directors, key employees and the company. Professional Veterinary Products, Ltd. had sales to the Board of Directors and key employees for the period ended July 31 as follows: 2001 2000 ---- ---- Members of the Board of Directors ..... $2,856,581 3,237,383 Key employees ......................... 2,505 9,172 ---------- --------- $2,859,086 3,246,555 ========== ========= (10) Profit-sharing and 401-K retirement plans: The Company provides a non-contributory profit-sharing plan covering all full-time employees who qualify as to age and length of service. It has been the Company's policy to make contributions to the plan as provided annually by the Board of Directors. The total provision for the contribution to the plan was $341,207 for 2001 and $347,861 for 2000. The Company also provides a contributory 401-K retirement plan covering all full-time employees who qualify as to age and length of service. It is the Company's policy to match a maximum 15% employee contribution with a 3% contribution. The total provision to the plan was $142,227 and $114,593 for the period ended July 31, 2001 and 2000, respectively. See independent auditor's report. F-13 PROFESSIONAL VETERINARY PRODUCTS, LTD. AND SUBSIDIARIES Consolidating Schedule of Operating, General and Administrative Expenses - July 31, 2001 Consolidated Schedule of Operating, General and Administrative Expenses - July 31, 2000 Schedule of Operating, General and Administrative Expenses - July 31, 1999
Amount Percent ------ ------- Years Ended July 31, Years Ended July 31, ------------------- ------------------- 2001 2000 1999 2001 2000 1999 ---- ---- ---- ---- ---- ---- Salaries ................... 7,416,707 6,646,651 4,745,347 3.72 3.72 3.88 Directors' fees ............ 53,375 47,750 34,250 .03 .03 .03 Annual meeting ............. - 13,980 44,940 - .01 .04 Convention and seminars..... 124,193 84,293 89,557 .06 .05 .07 Insurance .................. 753,353 554,694 393,077 .38 .31 .32 Life Insurance ............. 21,356 12,065 15,681 .01 .01 .01 Office supplies and expense.................. 597,630 835,752 325,345 .30 .47 .27 Operating supplies ......... 1,093,316 1,126,498 815,023 .55 .63 .67 Equipment rent ............. 387,699 356,213 234,983 .19 .20 .19 Telephone .................. 213,978 285,714 212,562 .11 .16 .17 Utilities .................. 105,964 91,524 50,988 .05 .05 .04 Accounting fees ............ 48,170 43,451 33,330 .02 .02 .03 Legal fees ................. 110,363 100,089 94,326 .06 .06 .08 Taxes, payroll ............. 540,211 437,242 316,736 .27 .24 .26 Taxes, general ............. 235,051 150,433 51,397 .12 .08 .04 Repairs and maintenance .... 143,369 373,436 252,345 .07 .21 .21 Depreciation ............... 545,509 425,653 269,760 .27 .24 .22 Amortization ............... 15,447 15,453 15,440 .01 .01 .01 Contract labor ............. 114,379 125,237 23,515 .06 .07 .02 Advertising ................ 9,414 9,050 5,754 - .01 .01 Postage .................... 96,660 71,671 71,671 .05 .04 .04 Travel and promotion ....... 498,346 393,054 347,062 .25 .22 .28 Dues and subscriptions...... 22,147 41,377 26,014 .01 .02 .02 Profit sharing and pension contribution ....... 483,434 462,454 330,887 .24 .26 .27 Sales promotion............. 1,374,787 1,522,922 993,836 .69 .85 .81 Bank fees .................. 909,248 587,184 402,980 .46 .33 .33 Equipment maintenance ...... 100,566 217,533 52,227 .05 .11 .04 Bad debts .................. 14,172 14,586 3,784 .01 .01 .01 Miscellaneous .............. 331,620 156,968 134,352 .17 .09 .11 ------------ ----------- ---------- ------ ------ ------ $ 16,360,464 15,202,927 10,366,843 8.21 8.51 8.48 ============ =========== ========== ====== ====== ======
See accompanying notes to financial statements and independent auditor's report. F-14 (a) (3) Exhibits Regulation S-K Document Exhibit Number 3.1 Articles of Incorporation of Professional Veterinary Products, Ltd. (1) 3.2 Bylaws of Professional Veterinary Products, Ltd. (1) 4.1 Certificate of Professional Veterinary Products, Ltd. (1) 4.2 Article V of the Articles of Incorporation of Professional Veterinary Products, Ltd., which defines the rights of holders of the securities being registered (1) 4.3 Article II of the Bylaws of Professional Veterinary Products, Ltd., which defines the rights of holders of the securities being registered (1) 5.1 Form of Opinion of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim (2) 10.1 Warranty Deed for real estate at 10100 J Street, Omaha, Nebraska from Professional Veterinary Products, Ltd. to Duane E. and Barbara G. Miller (1) 10.2 Warranty Deed for real estate at 10077 South 134/th/ Street, Omaha, Nebraska from Hilltop Industrial Park to Professional Veterinary Products, Ltd. (1). 10.3 Lease of building located at 10100 J Street, Omaha, Nebraska between Professional Veterinary Products, Ltd. and Duane E. and Barbara G. Miller (1). 10.4 Construction Agreement for building at 10077 South 134/th/ Street, Omaha, Nebraska between Professional Veterinary Products, Ltd. and Mudra Construction, Ltd. (1). 10.5 Sales Agency Agreement between Professional Veterinary Products, Ltd. and Bayer Corporation (1).* 10.6 Sales Agency Agreement between Professional Veterinary Products, Ltd. and Merial LLC (1).* 10.7 Select Distributors Marketing Agreement between Professional Veterinary Products, Ltd. and the Animal Health Group of Pfizer, Inc. (1).* 10.8 Supply and Distribution Agreement between Professional Veterinary Products, Ltd. and Schering-Plough Animal Health Corporation (1).* 10.9 Distributor Agreement between Professional Veterinary Products, Ltd. and The Upjohn Company (1).* 10.10 Distribution Agreement between Professional Veterinary Products, Ltd. and Fort Dodge Animal Health (1). 10.11 Purchase and Sale Agreement between Professional Veterinary Products, Ltd., AAHA Services Corporation and American Animal Hospital Association (3). 11.1 Statement re Computation of Per Share Earnings (4). 12.1 Statement re Computation of Ratios (4). 15.1 Letter re Unaudited Interim Financial Information (1). 21 Subsidiaries (4). 23.1 Consent of Marvin E. Jewell & Co., P.C. (4). 23.2 Form of consent of Baird, Holm, McEachen, Pedersen, Hamann & Strasheim (1). 24.1 Power of Attorney executed by Michael Whitehair (4). 24.2 Power of Attorney executed by Chester L. Rawson (4). 24.3 Power of Attorney executed by Amy Lynne Hinton (4). 24.4 Power of Attorney executed by Kenneth Liska (4). 24.5 Power of Attorney executed by Wayne Rychnovsky (4). II-1 24.6 Power of Attorney executed by Raymond Ebert II (4). 24.7 Power of Attorney executed by Mark Basinger (4). 24.8 Power of Attorney executed by Fred Garrison (4). 27.1 Financial Data Schedule (4). 99.1 No Action letter issued by Securities and Exchange Commission on July 12, 1996 (1). (1) Previously filed as exhibits to the Form S-1 Registration Statement filed on September 7, 1999. (2) Previously filed as exhibits to the Pre-Effective Amendment No. 1 to the Form S-1 Registration Statement filed on October 19, 1999. (3) Previously filed as exhibits to the Post-Effective Amendment No. 1 to the Form S-1 Registration Statement No. 333-86629 filed on November 3, 2000. (4) Filed herewith. (*) Portions of these exhibits have been redacted pursuant to a request for confidential treatment which was granted by the Securities and Exchange Commission. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. (b) Reports of Form 8-K ------------------- No reports on Form 8-K were filed during the fourth quarter. 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: October 29, 2001 PROFESSIONAL VETERINARY PRODUCTS, LTD. By: /s/ LIONEL L. REILLY ----------------------------------- Lionel L. Reilly Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Capacity /s/ LIONEL L. REILLY President ---------------------------------------- Lionel L. Reilly /s/ NEAL B. SODERQUIST Chief Financial Officer ---------------------------------------- II-2 Neal B. Soderquist * Director ------------------------------------------------ Mark A. Basinger * Director ------------------------------------------------ Raymond C. Ebert II * Director ------------------------------------------------ Fred G. Garrison * Director ------------------------------------------------ Kenneth R. Liska * Director ------------------------------------------------ Wayne E. Rychnovsky * Director ------------------------------------------------ Chester L. Rawson * Director ------------------------------------------------ Amy Lynne Hinton * Director ------------------------------------------------ Michael L. Whitehair *By: /s/ LIONEL L. REILLY ----------------------------------------- Lionel L. Reilly As: Attorney-in-fact II-3