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 September 30, 2012
Commission file number 000-51468
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to ________
MWI VETERINARY SUPPLY, INC.
(Exact name of registrant as specified in its Charter)
 
Delaware
 
02-0620757
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
3041 W Pasadena Dr
   
Boise, ID
 
83705
(Address of Principal Executive Offices)
 
(Zip Code)

 
 
(208) 955-8930
 
(Registrant’s telephone number, including area code)

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT OF 1934:
 
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value
The Nasdaq Stock Market, LLC

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x  No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No  x
 
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, as amended (the “Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer    x
Accelerated Filer   o
Non-Accelerated Filer   o
Smaller Reporting Company   o
     
(Do not check if a smaller reporting  company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o  No  x
 
As of March 31, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $1,050,000,000.  Shares of common stock held by each executive officer and director and by each person who owns 10% or more of our outstanding common stock have been excluded since such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of November 16, 2012 was 12,794,312.
 
Documents Incorporated by Reference
 
Listed hereunder are the documents, any portions of which are incorporated by reference and the Parts of this Form 10-K into which such portions are incorporated:
 
1.
The registrant’s definitive proxy statement for use in connection with the Annual Meeting of Stockholders to be held on or about February 5, 2013 to be filed within 120 days after the registrant’s fiscal year ended September 30, 2012, portions of which are incorporated by reference into Part III of this Form 10-K.
 
 
 
 
 
MWI VETERINARY SUPPLY, INC.
 
FORM 10-K
 
TABLE OF CONTENTS
 
Item
       
     
 
 
1.
   
 
 
1A.
   
 
 
1B.
   
 
 
2.
   
 
 
3.
   
 
 
4.
   
 
 
5.
   
 
 
6.
   
 
 
7.
   
 
 
7A.
   
 
 
8.
   
 
 
9.
   
 
 
9A.
   
 
 
9B.
   
 
 
10.
   
 
 
11.
   
 
 
12.
   
 
 
13.
   
 
 
14.
   
 
 
15.
   
 
 
 
 
 

 
 
PART I
 
 
Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995
 
This annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement our strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity.
 
Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve known and unknown risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following:
 
·  
the impact of vendor consolidation on our business;
 
·  
changes in or availability of vendor contracts or rebate programs;
 
·  
exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors or margin reductions if we become a non-exclusive distributor;
 
·  
transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies;
 
·  
vendor rebates based upon attaining certain growth goals;
 
·  
changes in the way vendors introduce/deliver products to market;
 
·  
a disruption caused by adverse weather (i.e. drought) or other natural conditions or disasters;
 
·  
possible changes in the use of feed additives (antibiotics, growth promotants) used in the production animal markets due to trade restrictions, consumer concern and/or government regulations;
 
·  
seasonality;
 
·  
unforeseen litigation;
 
·  
risks associated with our international operations;
 
·  
financial risks associated with acquisitions and investments;
 
·  
the impact of general economic trends on our business;
 
·  
the recall of a significant product by one of our vendors;
 
·  
extended shortage or backorder of a significant product by one of our vendors;
 
·  
the timing and effectiveness of marketing programs or price changes offered by our vendors;
 
·  
the timing of the introduction of new products and services by our vendors;
 
·  
our intellectual property rights may be inadequate to protect our business;
 
·  
the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all;
 
·  
risks from potential increases in variable interest rates;
 
·  
the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers;
 
·  
inability to ship products to the customer as a result of technological or shipping disruptions; and
 
·  
competition.
 
Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”), we are under no obligation to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise. You should not place undue reliance on our forward-looking statements.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results or performance.
 
Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose any material non-public information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of MWI Veterinary Supply, Inc.
 

Business.
 
 
General
 
Our business commenced operations as part of a veterinary practice in 1976 and was incorporated as MWI Drug Supply, Inc., an Idaho corporation, in 1980. MWI Drug Supply, Inc. was acquired by Agri Beef Co. in 1981. MWI Veterinary Supply Co. was incorporated as an independent subsidiary of Agri Beef Co. in September 1994. Effective June 18, 2002, MWI Holdings, Inc. was formed by Bruckmann, Rosser, Sherrill & Co. II, L.P. (“BRS”) for the sole purpose of acquiring all of the outstanding stock of MWI Veterinary Supply Co. from Agri Beef Co. (“Agri Beef”). As a result of this transaction, MWI Veterinary Supply Co. (“MWI Co.”) became a wholly-owned subsidiary of MWI Holdings, Inc. On April 21, 2005, we changed our name from MWI Holdings, Inc. to MWI Veterinary Supply, Inc.  References in this report to “we,” “us,” “our,” and “MWI” refer to MWI Veterinary Supply, Inc. unless otherwise indicated.  Unless otherwise indicated, all statistical information provided about our business in this report is as of September 30, 2012.
 
We are a leading distributor of animal health products to veterinarians across the United States and United Kingdom. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions.  In fiscal year 2010, we acquired the outstanding share capital of Centaur Services Limited (“Centaur”).  Based in Castle Cary, England, Centaur is a supplier of animal health products to veterinarians in the United Kingdom.  On March 21, 2011, we acquired substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”).  Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States.   On October 31, 2011, we acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”).  Micro is a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies, and other animal health products.  Micro also is a leading innovator of proprietary, computerized management systems for the production animal market.
 
Products we sell include pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, supplies, specialty products, veterinary pet food, capital equipment and nutritional products. We market these products to veterinarians in both the companion animal and production animal markets. As of September 30, 2012, we had a sales force of 484 people covering the United States and a sales force of 22 people in the United Kingdom. We also offer our customers a variety of value-added services, including our e-commerce platform, technology management systems, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation, which we believe closely integrates us with our customers’ day-to-day operations and provides them with meaningful incentives to continue ordering from us.
 
We estimate that approximately 57% of our total revenues in the United States have been generated from sales to the companion animal market and 43% from sales to the production animal market.  Including the gross billings from agency commissions which are excluded from our total revenues in order to comply with generally accepted accounting principles, we estimate that in the United States approximately 63% of our total revenues have been generated from sales to the companion animal market and 37% from sales to the production animal market.  In the United Kingdom, we estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market.
 
 
Geographic Information
 
Revenues and long-lived assets by geographic region are as follows (in thousands):
 

 
 
 
 
2012
 
2011
 
2010
 
Revenues for the fiscal years ended September 30
 
 
 
 
 
 
 
 
 
 
United States
$
 1,776,414
 
$
 1,304,794
 
$
 1,074,226
 
 
International (United Kingdom)
 
 298,732
 
 
 260,546
 
 
 155,116
 
 
 
Total
$
 2,075,146
 
$
 1,565,340
 
$
 1,229,342
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets as of September 30
 
 
 
 
 
 
 
 
 
 
United States
$
 29,001
 
$
 18,953
 
$
 9,762
 
 
International (United Kingdom)
 
 6,783
 
 
 6,256
 
 
 5,476
 
 
 
Total
$
 35,784
 
$
 25,209
 
$
 15,238

 
Industry Overview
 
According to Sundale Research (“Sundale”), animal health product sales in the United States for calendar year 2011 were approximately $7.6 billion based on prices at the manufacturers’ level. The market for animal health products in the United States is a mix of products sold for companion and production animals. Companion animals include dogs, cats, horses and other pets, while production animals include cattle and other food-producing animals. Sundale estimates that companion animal products accounted for 56% of the total market for animal health products in the United States in calendar year 2011.  According to the GfK Vetrak UK market survey in October 2012 that compiles revenue statistics, animal health product sales in the United Kingdom for our fiscal year ended September 30, 2012 was approximately £ 770 million.
 
Historically, the growth in the companion animal market has been due to the increasing number of households with companion animals, an aging pet population, increased expenditures on animal health and preventative care, advancements in animal health products and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. Product sales in the production animal market are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and which products they are treated with.  We support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.  We believe that these growth factors have been mitigated by the downward influence of generic drugs on pricing.
 
Veterinarians are one of the primary purchasers of animal health products, particularly in the companion animal market. As of December 31, 2011, according to the American Veterinary Medical Association, or AVMA, there were more than 63,000 veterinarians in private practice nationwide. According to the statistics from the Royal College of Veterinary Surgeons, there are approximately 13,000 veterinarians in private practice in the United Kingdom, with a total of approximately 4,400 veterinary outlets.  We believe that distributors play a vital role for veterinary practices by providing access to a broad selection of products through a single channel and helping them efficiently manage their inventory levels. Distributors also offer vendors substantial value by providing cost-effective access to a highly fragmented and geographically diverse customer base.
 
 
Competitive Strengths
 
We believe that our strengths include:
 
 
·
Leading Distributor to Veterinarians.  While most of our products are available from several sources and our customers typically have relationships with several distributors, we have achieved this position primarily through internal growth. We believe that our broad product offering, competitive pricing, superior customer service, rapid product fulfillment and value-added services provide meaningful incentives for our customers to continue ordering from us.  Our value-added services include our e-commerce platform, technology and information systems and pharmacy fulfillment programs.  Our pharmacies provide an efficient way for our customers to order prescription products in a cost effective, efficient manner while ensuring that they adhere to the strict regulations for these products.
 
 
·
Leading Sales and Marketing Franchise.  Our sales representatives in the United States educate customers on new veterinary products, assist in product selection and purchasing, and offer inventory management solutions. We also publish detailed product catalogs and monthly magazines, which are often utilized by our customers as reference tools. While salespeople and printed materials are vital to our marketing strategy, we also provide on-line ordering, valuable business information and value-added services through our Internet sites, www.mwivet.com   and www.centaurweb.co.uk .
 
 
·
Strong, Established Relationships with Veterinarians and Vendors.  Our ability to serve as a single source for most of our customers’ animal health product needs has enabled us to develop strong and long-term customer relationships. For more than sixteen years we have maintained distribution arrangements with Banfield, The Pet Hospital (“Banfield”), the nation’s largest private veterinary practice, and with our non-controlled affiliate, Feeders’ Advantage, L.L.C. (“Feeders’ Advantage”), a related party and a buying group composed of several of the largest cattle feeders in the United States. Since we currently do not manufacture the vast majority of the products we sell, we are dependent on our vendors for the supply of our products. While our vendors often have relationships with multiple distributors, we have long-term relationships with many of our key vendors including Boehringer Ingelheim, Elanco, IDEXX Laboratories, Merck, Merial, Pfizer and Vedco.
 
 
·
Recurring Revenue Product Base.  Over 97% of our product sales were from consumable medicines and supplies commonly required by veterinarians in their practice. Historically, this aspect of our business has resulted in a recurring stream of revenues.
 
 
·
Sophisticated Technology and Information Systems.  We continue to invest in our technology and information systems, which we believe has created a competitive advantage when delivering quality service to our customers.  Our e-commerce platform offers enhanced online ordering capabilities for veterinarians.  This platform provides many features for our customers with enhanced security.  Our advanced computerized technology management systems offer our production animal customers the ability to more efficiently and effectively manage their animals and their operations.  This includes comprehensive information collection and management decision making in the areas of health, nutrition, information and animal management. These precision management tools help implement traceability and food safety regimens while optimizing performance and the use of the consumable products we distribute.
 
 
·
Experienced Management Team.  We have a strong and experienced senior management team with substantial animal health industry expertise. The members of our senior management team have been with us for an average of over seventeen years, and each member has demonstrated a commitment and capability to deliver growth in revenues and profitability.
 
 
Business Strategy
 
Our mission is to be the best resource to the veterinary profession by delivering superior value, efficiency and innovation. Our strategy to achieve our mission is outlined below.
 
Increase Sales to Existing Customers.   We believe that veterinary practices typically purchase animal health products from multiple distributors in the United States. For our fiscal year ended September 30, 2012, our average annual product sales per veterinary practice served in the United States was approximately $48,000.  We intend to increase our share of these purchases by utilizing our proprietary customer database to focus our marketing efforts, expanding our sales force, selectively adding products to our portfolio and increasing and expanding the value-added services we provide to our customers. By increasing the dollar value of purchases made by each customer as well as their average order size, we intend to increase our profitability. Competition for hiring sales representatives who have existing customer relationships is intense and we focus on retaining valued members of our staff who have demonstrated the skills needed to successfully market our products and services. If we fail to hire or retain a sufficient number of qualified sales professionals, it could adversely impact our business.  Veterinary practices typically purchase the majority of their animal health products from one wholesaler in the United Kingdom.
 
Expand Business Assistance Services for Veterinarians.   We intend to enhance our customer relationships by expanding our business assistance services for veterinarians. These value-added services include among others our e-commerce platform, technology management systems, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, educational seminars and pet cremation.
 
Increase the Total Number of Customers.   We intend to add new customers by increasing the number and productivity of our sales representatives, selectively acquiring other animal health distributors and expanding distribution centers. We believe the greatest opportunities to add new customers are in the Northeastern, Midwestern and Southeastern regions of the United States and abroad, areas where we do not hold the leading market position.
 
Continuously Seek to Improve Operations.   We continuously evaluate opportunities to increase sales, lower costs and realize operating efficiencies. Current initiatives include investments in our technology and distribution center infrastructure. We also plan to pursue alternative product sourcing strategies and have a private label program on selected products to reduce our procurement costs and increase our profitability, while maintaining strong relationships with key vendors.
 
Make Selective Acquisitions.   The United States market for animal health products distribution is highly fragmented, with numerous national, regional and local distributors. Many of these companies are small, privately-held businesses, some of which may represent attractive acquisition candidates.  We also believe there are acquisition opportunities outside of the United States and we intend to seek out those companies that would be a strategic fit for us.
 
 
Products
 
During fiscal year 2012 in the United States, we sold more than 38,000 products, of which over 17,000 are stocked in our distribution centers, sourced from nearly 700 vendors. During fiscal year 2012 in the United Kingdom, we sold approximately 22,000 products, of which nearly 12,000 are stocked in our distribution center, sourced from approximately 500 vendors.  For our fiscal year ended September 30, 2012, our product revenues in the United States were comprised of approximately 38% pharmaceutical products, 15% vaccine products, 12% parasiticide products, 8% micro feed ingredients, 6% diagnostic products, 2% capital equipment products and 19% of other supplies. In addition, we sell approximately 800 products in the United States under agency agreements with our vendors. Under an agency agreement, we typically solicit orders and provide customer service for a commission, while the vendor stocks and ships the products.  Including gross billings from agency contracts for our fiscal year ended September 30, 2012, our product revenues in the United States were comprised of approximately 34% pharmaceutical products, 14% vaccine products, 20% parasiticide products, 7% micro feed ingredients, 5% diagnostic products, 2% capital equipment products and 16% of other supplies. We also have available on special order approximately 18,000 products in the United States that we do not normally stock in our warehouses. We continually seek to update and improve the range of products we offer to address our customer requirements.  For our fiscal year ended September 30, 2012, our product revenues in the United Kingdom were comprised of approximately 75% pharmaceuticals (which include vaccines and parasiticides), 15% pet foods and 10% of other consumable supplies.
 
 
Pharmaceuticals, Vaccines, Parasiticides and Micro Feed Ingredients
 
We offer our customers a variety of pharmaceuticals, vaccines, parasiticides and micro feed ingredients. Our pharmaceutical products typically include anesthetics, analgesics, antibiotics, ophthalmics and hormones. Our vaccine products are primarily comprised of small animal, equine and production animal biologicals. Our parasiticides are used for control of fleas, ticks, flies, mosquitoes and internal parasites.  Micro feed ingredients are feed grade products such as pharmaceuticals, vitamins, minerals and other nutritional products that are used to optimize the health and performance of production animals.
 
 
Diagnostics, Capital Equipment and Supplies
 
We offer a wide range of diagnostics, capital equipment and supplies to veterinarians. Diagnostic sales typically include consumable in-clinic tests for detecting heartworm, lyme, feline leukemia and parvovirus, as well as consumable products for measuring blood chemistry, electrolyte balance and cell counts. Our capital equipment sales include anesthesia machines, surgical monitors, diagnostic equipment, dental machines, cages, lights and x-ray machines. We employ a team of capital equipment specialists to analyze the latest technologies and recommend equipment that meets our customers’ specific needs. Our sales of supplies include syringes, instruments, bandages, IV products, surgical consumables, grooming materials and other small equipment items used by veterinary practices.
 
 
Veterinary Pet Food and Nutritional Products
 
We offer our customers a broad selection of veterinary pet foods and nutritional products. We consider veterinary pet food to consist of two categories: foods for specialty diets and premium pet foods. Specialty diets are recommended by veterinarians to address specific medical and nutritional needs. Premium pet foods are recommended by veterinarians to promote optimal nutrition in healthy animals. Pet foods are typically sold under agency agreements. Nutritional products include dietary supplements, vitamins, dental chews and specialty treats which either help address specific medical conditions or are compatible with recommended nutritional guidelines.
 
 
Value-Added Services
 
We offer our customers a variety of value-added services, which we believe closely integrate us with our customers’ day-to-day operations and provide them with meaningful incentives to continue ordering from us. These services include the following:
 
Service
     
Description
E-commerce platform
 
On-line ordering system that provides information to veterinary practices on products, vendor programs and purchasing history
Pharmacy fulfillment
 
Shipment of prescription production and companion animal health products to end-users in the United States on behalf of veterinarians from our seven licensed pharmacies located in Amarillo, Texas; Edwardsville, Kansas; Grand Prairie, Texas; Harrisburg, Pennsylvania; Whitestown, Indiana; Nampa, Idaho; and Sioux Falls, South Dakota and a licensed veterinary food-animal drug retailer in Visalia, California
Inventory management system
 
Flexible system that facilitates counting, maintaining and ordering inventory in veterinary practices
Technology management systems
 
Comprehensive feed, health, information and production management systems including micro ingredient machines, health management systems and age and source verification.
Equipment procurement consultation
 
Consultation and demonstrations provided by our dedicated capital equipment specialists in the United States
Special order fulfillment
 
Procurement and shipment of approximately 18,000 unique products in the United States that we do not normally stock in our warehouses
Educational seminars
 
Seminars for our customers covering business and medical topics, frequently sponsored in conjunction with our vendors
Pet cremation
 
Business unit presently operating with facility in Idaho that serves veterinary practices and their clients by providing cremation services

 
 
Customers
 
As of September 30, 2012, we served a vast majority of the veterinary practices and producers located throughout the United States and approximately one-third of the veterinary practices in the United Kingdom. These veterinary practices are typically small, privately-held businesses that we believe place at least one order per week to avoid storing and managing large volumes of supplies. We believe that these veterinary practices usually purchase animal health products from multiple distributors. We seek to be the principal provider of animal health products to our customer base.
 
We maintain a diverse and stable customer base. Independent veterinary practices have historically accounted for approximately 85% of our product sales. Also, for more than sixteen years, we have maintained distribution arrangements with Banfield, the nation’s largest private veterinary practice with over 800 veterinary hospitals, and our non-controlled affiliate, Feeders’ Advantage, a buying group composed of several of the largest cattle feeders in the United States. We typically do not enter into long-term contracts with our independent veterinary customers.
 
We are a party to three written agreements with Banfield, a First Amendment to the Agreement for Product Purchases, a First Amendment to the Agreement for Logistics Services and an Agreement for Home Delivery Logistics Services.   These contracts are effective from July 1, 2009 through June 30, 2012, and can be terminated by either party with or without cause upon 150 days prior written notice.  These contracts provide that we will be the supplier of logistics to Banfield, and these agreements govern the pricing, shipping and other terms and conditions under which we sell our products and provide logistics to Banfield. Under the Agreement for Product Purchases, as amended, we provide a limited warranty with respect to all goods sold by us and paid for by Banfield that good title to the products is conveyed, that the products are delivered free of any security interest, that the products will conform to the description, grade and condition of the products invoiced and that all products will be free of any defects arising while the products are either in our possession or control or in the control of any carrier transporting the goods from us to Banfield.  The term of our existing contracts with Banfield expired on June 30, 2012, however we are continuing to operate under the terms of those contracts.  We are in current negotiations with Banfield regarding new agreements and currently expect to have those new agreements executed by the end of calendar year 2012.
 
 
Sales and Marketing
 
Our sales and marketing strategies are designed to establish and maintain strong customer relationships through personal visits by field sales representatives, frequent telesales contact and direct marketing, emphasizing our broad product lines, competitive pricing, efficient ordering capabilities, high levels of customer support and service and other value-added services. The key elements of our sales and marketing strategy are:
 
 
·
Field Sales Representatives:  Our sales force in the United States is a key component of our value-added approach.  Due to the fragmented nature of the animal health products market, we believe that a large sales force is vital to effectively support existing customers and target potential customers. As of September 30, 2012, we had 316 field sales personnel throughout the United States. Our field sales representatives educate customers on new veterinary products, assist in product selection and purchasing and offer inventory management solutions. Once a field sales representative has established a relationship with a customer, the field sales representative encourages the customer to use our telesales representatives and online ordering capabilities for day-to-day customer needs. Field sales representatives work under the supervision of regional sales managers within an assigned sales territory to ensure effective communication and timely sales calls with customers. Our field sales representatives complement our telesales and direct marketing efforts and enable us to better market, service and support the sale of our products and services. Our field sales representatives are employees of our Company and are compensated with a combination of salaries and commissions.  The sales staff for Centaur does not actively promote products to the veterinarians, but rather sells products and maximizes the logistics services that Centaur provides.
 
 
·
Telesales:   We support our field sales representatives and direct marketing efforts with telesales representatives in nine call centers covering the United States. As of September 30, 2012, we had 168 telesales representatives in the United States. Telesales representatives work as partners with our field sales representatives, providing a dual coverage approach for individual customers. Telesales representatives process orders and generate new sales through frequent and direct contact with customers. Telesales representatives are responsible for assisting customers with ordering, purchasing decisions and general questions. Telesales representatives utilize our customized order entry system to process customer orders, access pricing, availability and promotional information about products, and research customer preferences and order history. Our nine call centers are connected by our telecommunications system which enables them to operate as one virtual call center.
 
 
·
Direct Marketing:   We market to existing and potential customers by distributing product catalogs and monthly magazines. We publish a small animal catalog, livestock catalog and an equine catalog. These catalogs include detailed descriptions and specifications of our products and are often used as a reference tool by our customers and sales force. We also promote our products and services in our monthly magazine, the Messenger , which our field sales representatives use as a tool to educate customers on product and vendor programs. Additional marketing tools that we utilize include specialty catalogs, customer loyalty programs, specific product and vendor programs, flyers, faxes, emails and other promotional materials. For the fiscal year ended September 30, 2012, we distributed nearly 800,000 pieces of direct marketing materials to existing and potential customers.  We also participate in international, national and regional trade shows to extend our customer reach and enhance customer interaction.
 
 
·
E-Commerce Platform:   We provide on-line ordering, valuable business information and value-added services to veterinarians via our primary Internet site in the United States, www.mwivet.com , our Internet site in the United Kingdom, www.centaurweb.co.uk , and customized Internet sites that we maintain for two of our largest customers, Banfield and Feeders’ Advantage. Customers can use our Internet sites to order products, learn more about products and vendor programs, print forms needed for their veterinary practice, review their historical purchases and manage their inventory.  For our fiscal years ended September 30, 2012, 2011 and 2010, approximately 39%, 36% and 34%, respectively, of our product sales in the United States, excluding revenues related to Micro, were generated through orders placed over the Internet.  In the United Kingdom, over 90% of our orders are placed electronically.
 
 
Product Sourcing
 
We currently do not manufacture the vast majority of our products and are dependent on vendors for our supply of products. We believe that effective purchasing is a key factor in maintaining our position as a leading provider of animal health care products. We regularly assess our purchasing needs and our vendors’ product offerings and prices to obtain products at favorable prices. While we purchase products from many vendors and there is generally more than one vendor for most animal health product categories, our concentration of aggregate purchases with key vendors is significant. In the United States, our ten largest vendors accounted for approximately 71% of our revenues for the each of the fiscal years ended September 30, 2012, 2011 and 2010. Pfizer supplied products that accounted for approximately 20%, 24% and 25% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.  Of the Pfizer supplied products, production animal products under a livestock products agreement accounted for approximately 11%, 13% and 12% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. Merck (formerly known as Intervet/Schering-Plough), supplied products that accounted for approximately 15%, 11% and 10% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.  Merial Limited (“Merial”), a subsidiary of Sanofi-Aventis, supplies the majority of their products to us under an agency relationship.  Commission revenue generated from Merial products accounted for approximately 52%, 47% and 49% of total commission revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.
 
There are two major types of transactions that can affect the flow of our products from our vendors, through us, to our customers. The method of selling products to veterinarians is dictated by our vendors. Traditional “buy/sell” transactions, which account for the vast majority of our business, involve the direct purchase of products by us from vendors, which we manage and typically store in our warehouses. A customer then places an order with us, and the order is then picked, packed, shipped and invoiced by us to our customer, followed by payment from our customer to us.
 
We also sell certain product lines to our customers under agency agreements with some of our vendors. Under this model, when we receive orders for products from the customer, we transmit the order to the vendor who then picks, packs and ships the products direct to our customers. In some cases our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer. We receive a commission payment for soliciting the order and for providing other customer service activities. Our operating expenses associated with agency sales transactions are lower than in traditional “buy/sell” transactions.
 
We have written agreements with approximately 50 of our vendors. Our livestock products agreement with Pfizer provides that we shall supply selected customers in the livestock field with Pfizer products. In return, we are entitled to a fee for logistics. We are not entitled to any rebates under this contract.  We are required to maintain sufficient inventory to meet our anticipated demand on a monthly basis and to store the Pfizer products in accordance with their respective label instructions. Pfizer also reserves the right to sell directly to our customers or any other party. The livestock products agreement has a one-year term that expires on December 31, 2012 and can be terminated by either party with or without cause upon 30 days written notice.  The livestock products agreement is a non-exclusive “buy-sell” contract.
 
Our equine products marketing agreement with Pfizer provides that we shall distribute certain products to customers in the equine field.  In return, we are entitled to receive certain service incentives and rebates.  We are required to maintain sufficient staffing levels of sales representatives and store and handle inventory under appropriate conditions that will maintain the quality and integrity of the products.  The agreement expires on December 31, 2012 and can be terminated by either party with or without cause upon 30 days prior written notice.  The equine products marketing agreement is a non-exclusive “buy-sell” contract.
 
Animal health product vendors may implement sales promotions or price changes for products distributed to veterinarians that can affect the period in which we recognize revenues. In addition, at the time we negotiate vendor agreements for the upcoming year, our vendors typically establish sales growth goals for us to meet in order to receive performance rebates or may reduce or eliminate rebate opportunities. These growth goals may be based on quarterly, semi-annual or annual targets.
 
Product returns from our customers and to our vendors occur in the ordinary course of business. We extend our customers the same return of goods policies as are extended to us by our vendors. We do not believe that our operations will be adversely impacted due to the return of products.
 
 
Distribution
 
As of September 30, 2012, we distributed our products from fourteen strategically located distribution centers throughout the United States and one in the United Kingdom.  During our fiscal year 2012, we completed the move of our distribution center near Harrisburg, Pennsylvania to a larger facility.  During our fiscal year 2011, we completed the move of our distribution center in Visalia, California to a larger facility.
 
We maintain inventory levels in our warehouses appropriate to satisfy customer demand for prompt delivery and fulfillment of their product orders. Inventory levels are managed on a daily basis through our information systems. In order to meet the rapid delivery requirements of our customers, we offer next-day delivery service on most of the products we stock in our warehouses. We estimate that during the fiscal year ended September 30, 2012, we shipped same day from our warehouses approximately 98% of the dollar value of orders placed by our customers. We currently ship the majority of our orders in the United States through United Parcel Service, Inc. (“UPS”) with the balance of our orders being shipped by our own delivery trucks, local carriers, regional carriers and other national carriers.  Products shipped out of the Centaur and Micro facilities are primarily shipped by our own delivery trucks.
 
 
Competition
 
The distribution and manufacture of animal health products is highly competitive. We compete with numerous vendors and distributors based on customer relationships, service and delivery, product selection, price and e-commerce capabilities. Most of our products are available from several sources, including other distributors and vendors, and our customers tend to have relationships with several distributors. In addition, our competitors could obtain exclusive rights to distribute certain products, eliminating our ability to distribute those products. Consolidation in the veterinary distribution business could result in existing competitors increasing their market share, which could give them greater pricing power, decrease our revenues and profitability, and increase the competition for customers. Our primary competitors in the United States, excluding vendors, include the following:
 
 
·
Animal Health International, Inc.;
 
 
·
Butler Schein Animal Health;
 
 
·
IVESCO;
 
 
·
Midwest Veterinary Supply;
 
 
·
Webster Veterinary Supply, a division of Patterson Companies, Inc.; and
 
 
·
other national, regional, local and specialty distributors.
 
The role of the animal health product distributor has changed dramatically during the last decade. Successful distributors are increasingly providing value-added services in addition to the products they have traditionally provided. We believe that to remain competitive we must continue to add value to the distribution channel, while removing unnecessary costs associated with product movement.
 
 
Seasonality in Operating Results
 
Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. The sales of production animal products can vary due to changes in commodity prices and weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) which may also affect seasonality.  Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by vendors’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made. See “Risk Factors — Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.” Additionally, while we accrue rebates as they are earned, our rebates have historically been highest during the quarter ended December 31, since some of our vendors’ rebate programs were designed to include targets to be achieved near the end of the calendar year. This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates.
 
 
Intellectual Property
 
We have registered with the United States Patent and Trademark Office the marks “MWI,” “MWI Design,” “MWIVET.com,” “VETONE,” “PROXYRx” and “ANIMAL Rx PHARMACY,” among others.  We believe that the MWI mark is well recognized in the animal health products industry and by veterinarians and is therefore a valuable asset of ours.
 
Our success depends in part on our ability to protect our intellectual property rights. There are always risks that third parties may claim we are infringing upon their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation or licensing expenses as a result of these claims. See “Risk Factors – If third parties claim that we infringe upon their intellectual property rights, our financial results could be adversely affected.” In addition, third parties may infringe upon or design around our intellectual property rights, and we may expend significant resources enforcing our rights or suffer competitive injury with adverse effects on our business and results of operations. See “Risk Factors – Our intellectual property rights may be inadequate to protect our business.”
 
 
Employees
 
As of September 30, 2012, we had 1,413 employees across the United States and 216 employees in the United Kingdom. We have not experienced a shortage of qualified personnel in the past, and believe that we will be able to attract such employees in the future. None of our employees are a party to a collective bargaining agreement, and we consider our relations with our employees to be good.
 
 
Website
 
Our website address is www.mwivet.com and can be used to access free of charge, through the investor relations category, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC.  The information on our website is not incorporated as a part of this annual report.  The public can also obtain copies of these reports by visiting the SEC’s Public Reference Room at 100 F Street NE, Washington DC 20549, or by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at www.sec.gov .
 
 
Governmental Regulation
 
Certain of our businesses involve the distribution of pharmaceuticals, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals.  Our vendors of pharmaceuticals, vaccines, parasiticides and certain controlled substances are typically regulated by federal agencies, such as the Food and Drug Administration (“FDA”), the United States Department of Agriculture (“USDA”), the Environmental Protection Agency (“EPA”), and the Drug Enforcement Agency (“DEA”), as well as most similar state agencies. Therefore, we are subject, either directly or indirectly, to regulation by the same agencies. Most states and the DEA require us to be registered or otherwise keep a current permit or license to handle controlled substances. Manufacturers of vaccines are required by the USDA to comply with various storage and shipping criteria and requirements for vaccines. To the extent we distribute such products, we must comply with the same requirements, including, without limitation, the storage and shipping requirements for vaccines.
 
Most state boards of pharmacy require us to be licensed in their respective states for the sale of pharmaceutical products and medical devices within their jurisdictions. As a distributor of prescription pharmaceutical products, we are subject to the Prescription Drug Marketing Act (“PDMA”). The PDMA provides governance and authority to the states to provide minimum standards, terms and conditions for the licensing by state licensing authorities of persons who “engage” in wholesale distribution (as defined by each state regulatory agency) in interstate commerce of prescription drugs. With this authority, states require site-specific registrations for the parties that engage in the selling and/or physical distribution of pharmaceutical products into their state in the form of out-of-state registrations. The federal pedigree regulations of the FDA under the PDMA require tracking human labeled prescription products through the entire distribution chain and are applicable to distributors that do not have a written agreement with the manufacturer granting the wholesale distributor status as an “Authorized Distributor of Record.” Selling and/or distributing products without the appropriate registrations may subject us to fines, penalties, misdemeanor or felony convictions, and/or seizure of the products involved. We have a Manager of Regulatory Compliance and have engaged outside consultants as needed to assist us in meeting and complying with the various state and federal licensure requirements to which we are subject.
 
In order to supply pharmaceutical products in the United Kingdom, we must comply with the requirements of the applicable regulatory bodies. The Veterinary Medicines Directorate regulates the use of veterinary products and the Medicines Healthcare Products Regulatory Authority regulates the use of human medicinal products within the United Kingdom.
 
Our pet cremation business is subject to state and local zoning laws, and we are required to maintain permits for the construction and operation of an animal incineration device. We are also required to have an air pollution permit in connection with the operation of our pet cremation business.
 
Some states (as well as certain cities and counties) require us to collect sales taxes/use taxes on certain types of animal products. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. In addition, we are subject to additional regulations regarding our hiring practices because several federal, state and local governmental agencies are our customers.
 
 
Environmental Considerations
 
We do not currently manufacture or alter in any way the composition of the vast majority of the products that we distribute. All products are distributed in compliance with the relevant rules and regulations as approved by various state and federal agencies.
 
 
Executive Officers of the Registrant
 
The following table sets forth the names, ages and titles, as well as a brief account of the business experience, of each person who was an executive officer of the Company as of the date of the filing:
 
Name
     
Age
 
Title
James F. Cleary, Jr.
 
49
 
Board Director, President and Chief Executive Officer
Mary Patricia B. Thompson
 
49
 
Senior Vice President of Finance and Administration, Chief Financial Officer
Jeffrey J. Danielson
 
52
 
Vice President of Sales
John J. Francis
 
59
 
Vice President and General Manager of the Specialty Resources Group
Bryan P. Mooney
 
44
 
Vice President of Operations
Kevin W. Price
 
44
 
Vice President of Inventory Management
John R. Ryan
Alden J. Sutherland
 
43
49
 
Vice President of Marketing
Vice President and Chief Information Officer
         
James F. Cleary, Jr. has served as President since March 2000 and Chief Executive Officer since June 2002. Mr. Cleary has also been a member of the board of directors since June 2002. He joined MWI in January 1998 as Director of National Accounts and was promoted to Vice President of Demand Generation in 1999. Mr. Cleary was Vice President of Agri Beef Co., MWI’s former parent, from 1996 to 1998. From 1990 to 1996, Mr. Cleary was employed in management positions with Morrison Knudsen Corporation and its affiliate MK Rail Corporation. Mr. Cleary graduated from Dartmouth College in 1985 with a Bachelor of Arts in Economics and received his Masters of Business Administration from Harvard Business School in 1990. Mr. Cleary is also a manager of Feeders’ Advantage, L.L.C. Mr. Cleary is the brother-in-law of Mr. Robert Rebholtz, a member of our board of directors.
 
Mary Patricia B. Thompson, CPA has served as Senior Vice President of Finance and Administration, Chief Financial Officer since August 2006, with oversight of finance, regulatory compliance, inventory management, information technology, and human resources.  Prior to August 2006, Ms. Thompson had been the Vice President, Secretary and Chief Financial Officer since June 2002. Ms. Thompson joined Agri Beef Co. in 1989 as the Feedlot and Commodity Division Controller. In September 1991, Ms. Thompson was promoted to Controller of MWI Veterinary Supply Co., then a wholly-owned subsidiary of Agri Beef Co. Prior to joining Agri Beef Co., Ms. Thompson worked for Arthur Andersen LLP from 1985 to 1989, where she provided auditing and accounting services. Ms. Thompson graduated from the University of Idaho in 1985, summa cum laude, with a Bachelor of Science in Accounting. Ms. Thompson is a licensed Certified Public Accountant in the state of Idaho. Ms. Thompson is a member of the board of directors and past-president of the American Veterinary Distributors Association.  Ms. Thompson is also a member of the University of Idaho College of Business and Economics Advisory Board.
 
Jeffrey J. Danielson has served as Vice President of Sales since 2001. Mr. Danielson joined MWI in 1985 as an Outside Sales Representative, serving the state of Washington. From 1989 to 1991, Mr. Danielson served as Assistant Sales Manager and from 1991 to 2001 served as National Sales Manager. Mr. Danielson graduated from Colorado State University in 1983 with a Bachelor of Science in Agricultural Business.
 
John J. Francis has served as Vice President and General Manager of the Specialty Resources Group since September 2006.  Prior to joining MWI, Mr. Francis worked for Webster Veterinary Supply as the Vice President of Sales from April 2004 to September 2006.  Mr. Francis was the Key Account Manager of Excel, a division of Cargill, Inc., from June 2002 to April 2004 and was the Vice President of Sales for Future Beef based in Parker, Colorado, from May 2000 to May 2002. From 1990 until 2000, Mr. Francis served as General Manager and then President of MWI Veterinary Supply Co. Mr. Francis graduated from Michigan State University in 1975 with a Bachelor of Science in Animal Husbandry and holds a Master of Science in Animal Science obtained in 1977 from the University of Illinois.  Mr. Francis is a member of the board of directors and president of Vedco, Inc.
 
Bryan P. Mooney has served as Vice President of Operations since May 2005. Mr. Mooney joined MWI in January 1994 as the Operations Manager of our Denver, Colorado distribution operation and served in that capacity until May 1998. From May 1998 until February 2005, Mr. Mooney served as Manager of Transportation and Logistics and from January 2005 until May 2005 as the Western Regional Operations Manager. Mr. Mooney graduated from the University of Wyoming in 1991 with a Bachelor of Science in Agricultural Business.
 
Kevin W. Price has served as Vice President of Inventory Management since October 1, 2011. From 2003 to 2011, Mr. Price served as Purchasing Manager.  In 1998, Mr. Price was promoted to Food Animal Product Manager.  Mr. Price joined MWI in April 1989 in our Nampa distribution center. Mr. Price graduated from Northwest Nazarene University in 2010 with a Bachelor of Science in Business Administration.  In 2007, Mr. Price filed for bankruptcy under Chapter 13 of the United States Bankruptcy Code, and Mr. Price has informed the Company that he is performing his obligations in full under the plan.  Mr. Price has also informed the Company that he intends to make additional payments outside of the plan so that his legitimate creditors will be paid in full when all payments are completed.
 
John R. Ryan has served as Vice President of Marketing since 2000. Mr. Ryan joined MWI in June 1995 as an Outside Sales Representative and served in such capacity until June 2000. Prior to joining MWI, Mr. Ryan worked for the Virbac Corporation (a companion animal pharmaceutical company) as a Territory Manager from 1993 to 1995. Mr. Ryan graduated from the University of California, Davis in 1993 with a Bachelor of Science in Animal Physiology.
 
Alden J. Sutherland joined MWI in January 2012 and has served as Vice President and Chief Information Officer since April 1, 2012.  Prior to joining MWI, he served as President of Exploridor since January 2011.  Prior to Exploridor, he served as President of Pristine Pools and Spas from 2010 to 2011.  He served as Chief Information Officer at Jostens, Inc. in Minneapolis, Minnesota from 2006 to 2010.  From 2000 to 2006, he served as Chief Information Officer at Entegris, Inc.  From 1987 to 2000, he held various leadership and I.T. positions for Novartis in its former Seed and Crop Protection Divisions, including Director of I.T. in the United States, Head of I.T., Finance and Planning for the Asia Pacific Region, Head of Finance, I.T. and Operations for the Eastern Europe and Former Soviet Union Region and Controller for Europe and Latin America.  Mr. Sutherland graduated from Boise State University in 1988 with a Bachelor of Business Administration.
 
Risk Factors.
 
In addition to the factors discussed elsewhere in this Form 10-K, the following are important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.
 
Our operating results may fluctuate due to factors outside of management’s control.
 
Our future revenues and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management’s control. The most notable of these factors include:
 
·  
the impact of vendor consolidation on our business;
 
·  
changes in or availability of vendor contracts or rebate programs;
 
·  
exclusivity requirements with certain vendors that may prohibit us from distributing competing products manufactured by other vendors or margin reductions if we become a non-exclusive distributor;
 
·  
transitional challenges associated with acquisitions, including the failure to achieve anticipated synergies;
 
·  
vendor rebates based upon attaining certain growth goals;
 
·  
changes in the way vendors introduce/deliver products to market;
 
·  
a disruption caused by adverse weather (i.e. drought) or other natural conditions or disasters;
 
·  
possible changes in the use of feed additives (antibiotics, growth promotants) used in the production animal markets due to trade restrictions, consumer concern and/or government regulations;
 
·  
seasonality;
 
·  
unforeseen litigation;
 
·  
risks associated with our international operations;
 
·  
financial risks associated with acquisitions and investments;
 
·  
the impact of general economic trends on our business;
 
·  
the recall of a significant product by one of our vendors;
 
·  
extended shortage or backorder of a significant product by one of our vendors;
 
·  
the timing and effectiveness of marketing programs or price changes offered by our vendors;
 
·  
the timing of the introduction of new products and services by our vendors;
 
·  
our intellectual property rights may be inadequate to protect our business;
 
·  
the ability to borrow on our revolving credit facility, extend the terms of our revolving credit facility or obtain alternative financing on favorable terms or at all;
 
·  
risks from potential increases in variable interest rates;
 
·  
the impact of tightening credit standards and/or access to credit on behalf of our customers and suppliers;
 
·  
inability to ship products to the customer as a result of technological or shipping disruptions; and
 
·  
competition.
 
These factors could adversely impact our results of operations and financial condition. We may be unable to reduce operating expenses quickly enough to offset any unexpected shortfall in revenues or gross profit. If we have a shortfall in revenues or gross profit without a corresponding reduction to expenses, operating results may suffer. Our operating results for any particular fiscal year or quarter may not be indicative of future operating results. You should not rely on year-to-year or quarter-to-quarter comparisons of results of operations as an indication of our future performance.
 
Consolidation among our vendors could be harmful to our business.
 
In the recent past, there have been two large acquisitions affecting our largest vendors.  In October 2009, Pfizer completed its acquisition of Wyeth.  Pfizer and Fort Dodge, a division of Wyeth, were our two largest vendors as measured by our revenues at the time of that acquisition.  In November 2009, Merck and Schering-Plough completed their merger under which Merck acquired all of the outstanding stock of Schering-Plough. These were two of our largest vendors at the time of the merger.  Additionally, on July 7, 2011, Pfizer, who is our largest vendor as measured by our revenues, issued a press release stating that they were considering a spin-off, sale or other transaction of their animal health business.
 
The surviving companies from these types of transactions could end up with higher market shares with respect to certain animal health products, and they could use their increased leverage in the channel to negotiate terms with distributors that are materially worse to the distributor than the terms that we have been able to negotiate with the companies individually while they were competing with each other. There is also a possibility of product disruption as these companies integrate their operations which could adversely impact our financial results.  Further consolidation could result in our vendors further increasing their market share, which could give vendors greater pricing power and make it easier for such vendors to sell their products directly to animal health customers, both of which could decrease our net sales and profitability.
 
Our business, financial condition and results of operations depend upon maintaining our relationships with vendors.
 
We currently do not manufacture the vast majority of our products and are dependent on our vendors for our supply of products. Our ten largest vendors supplied products that accounted for approximately 71% of our revenues for each of the fiscal years ended September 30, 2012, 2011 and 2010, respectively. Pfizer supplied products that accounted for approximately 20%, 24% and 25 % of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010 , respectively. Of the Pfizer supplied products, production animal products under a livestock agreement accounted for approximately 11%, 13% and 12% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.  Merck, formerly known as Intervet/Schering-Plough, supplied products that accounted for approximately 15%, 11% and 10% of our revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.  Merial, a subsidiary of Sanofi-Aventis, supplies the majority of their products under an agency relationship.  Commission revenue generated from Merial products accounted for approximately 52%, 47% and 49% of total commission revenues for our fiscal years ended September 30, 2012, 2011 and 2010, respectively.
 
Our ability to sustain our gross profits has been, and will continue to be, dependent in part upon our ability to obtain favorable terms and access to new and existing products from our vendors. These terms may be subject to changes from time to time by vendors, such as changing from a “buy/sell” to an agency relationship, or from an agency to a “buy/sell” relationship which could adversely affect our revenues and operating income. The loss of one or more of our large vendors, a material reduction in their supply of products to us or material changes in the terms we obtain from them could have a material adverse effect on our business, financial condition and results of operations.
 
Vendors may also choose to change the method in which products are taken to market.  For example, a vendor may change our relationship from a complete distribution provider, including logistics and sales support, to only a logistics provider or only a sales support provider.  Only doing one of these services would reduce our margin on any sale.  A change in the method in which products are taken to market caused by any vendor could have a material adverse effect on our business.
 
Some of our current and future vendors may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These vendors could sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these vendors.  As an example of this type of event, we were a sales agent for a pet food line for most of fiscal year 2011 that we did not represent in fiscal year 2012 because that manufacturer chose to sell their products direct and not through sales agents.  Increased competition from any vendor of animal health products could significantly reduce our market share and adversely impact our financial results.
 
An adverse change in vendor rebates could negatively affect our business.
 
The terms on which we purchase or sell products from many vendors of animal health products may entitle us to receive a rebate based on the attainment of certain growth goals. Vendors may adversely change the terms of or eliminate some or all of these rebate programs at any time without notice. Because the amount of rebates we earn is directly related to the attainment of pre-determined sales growth goals, and because the nature of the rebate programs and the amount of rebates available are determined by the vendors, there can be no assurance as to the amount of rebates that we will earn in any given year. Changes to or elimination of any rebate program initiated by our vendors may have a material effect on our gross profit and our operating results in any given quarter or year. Vendors may reduce or eliminate rebates offered under their programs, interpret the terms of their rebate programs in a way that is adverse to us   or increase the growth goals or other conditions we must meet to earn rebates to levels that we cannot achieve. Additionally, factors outside of our control, such as customer preferences or vendor supply issues, can have a material impact on our ability to achieve the growth goals established by our vendors, which may reduce the amount of rebates we receive. The occurrence of any of these events could have an adverse impact on our results of operations.
 
Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.
 
Our quarterly revenues and operating results have varied significantly in the past, and may continue to do so in the future. While we accrue rebates from vendors as they are earned, our rebates have historically been highest during the quarter ended December 31, since most of our vendors’ rebate programs were designed to include targets to be achieved during the calendar year.  Historically, our revenues have been seasonal, with peak sales in the spring and fall months. The seasonal nature of our business is directly tied to the buying patterns of veterinarians for production animal health products used for certain medical procedures performed on production animals during the spring and fall months. These buying patterns can also be affected by vendors’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase production animal health products earlier than those products are used. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made. Additionally, the production animal market can be affected by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the timing of when animals are treated and to what extent they are treated.  This shift in treatment may have a significant impact on the timing of purchases.  While companion animal products tend to have a different product use cycle than production animal health products, and approximately 57% of our revenues in the United States have been generated from sales to the companion animal market, we cannot assure you that our revenues and operating results will not continue to fluctuate on a quarter-to-quarter basis. We believe period-to-period comparisons of our results of operations are not necessarily meaningful as our future revenue and results of operations may vary substantially. It is also possible that in future quarters our results of operations will be below the expectations of securities analysts and investors. In either case, the price of our common stock could decline, possibly materially.
 
Our business may be directly and indirectly affected by the current drought that could reduce demand for the products we distribute.  
 
Poor or unusual weather conditions, in particular the current drought in the Midwestern United States, can significantly affect the purchasing decisions of the Company’s customers, particularly customers in the production animal market.  The timing and quantity of rainfall are two of the most important factors in agricultural production. Drought can affect the availability and price of feed for livestock.  Faced with a reduction in readily available feed or an increase in costs for such feed, our customers may decide to reduce herd size, which would ultimately decrease the demand for the products we distribute, including micro feed ingredients, animal health products, dairy sanitation solutions, as well as the development and implementation of proprietary computerized systems for feed, health, information and production animal management.
 
Our market is highly competitive. Failure to compete successfully could have a material adverse effect on our business, financial condition and results of operations.
 
The market for veterinary distribution services is highly competitive, continually evolving and subject to technological change. We compete with numerous vendors and distributors based on customer relationships, service and delivery, product selection, price and e-commerce capabilities.  Our primary competitors in the United States, excluding vendors, include the following:
 
 
·
Animal Health International, Inc;
 
 
·
Butler Schein Animal Health;
 
 
·
IVESCO;
 
 
·
Midwest Veterinary Supply;
 
 
·
Webster Veterinary Supply, a division of Patterson Companies, Inc.; and
 
 
·
other national, regional, local and specialty distributors.
 
Some of our competitors may have more customers, stronger brand recognition or greater financial, technological and other resources than we do. Most of our products are available from several sources, including other distributors and vendors, and our customers typically have relationships with several distributors and vendors. Many of our competitors have comparable product lines, technical expertise or distribution strategies that directly compete with us and some of our competitors own practice management software, which they can offer to customers . Our competitors could obtain exclusive rights to distribute certain products, eliminating our ability to distribute those products. The entry of new or additional distributors in the industry could also have a material adverse effect on our ability to compete. Additionally, some of our vendors may decide to compete with us by selling their products directly to our customers. If we do not compete successfully against these organizations, it could have a material and adverse effect on our business, financial condition and results of operations.
 
Consolidation in the veterinary distribution business and veterinary practices may decrease our revenues and profitability.
 
Consolidation in the veterinary distribution business could result in existing competitors increasing their market share, which could give them greater pricing power, decrease our revenues and profitability, and increase the competition for customers. Consolidation of the many small, privately-held veterinary practices would result in an increasing number of larger veterinary practices, which could have increased purchasing leverage and the ability to negotiate lower product costs. This could reduce our operating margins and negatively impact our revenues and profitability. Any of these developments could result in increased marketing expenses and have a material adverse effect on our business, financial condition and results of operations.
 
Exclusivity requirements and failures to continue relationships with vendors may cause us to lose access to certain products and erode our market share.
 
We may not be able to establish or maintain relationships with key vendors in the animal health industry if we have established relationships with competitors of these key vendors. We have written agreements with approximately 50 of our vendors. Some of our agreements with vendors are for one-year periods. Upon expiration, we may not be able to renew our existing agreements on favorable terms, or at all.
 
In addition, vendors may require us to distribute their products on an exclusive basis, which would cause us to forego distributing competing products that may also be profitable , including generic products that may gain increased market share .  In this situation we are often forced to project future sales of competing products so that we can elect to distribute the product that we believe will be more profitable.  Our projections may not be correct, and we may be contractually prohibited from distributing products that gain market share , including generic products, at the expense of the products that we distribute.  Competitors of ours could also obtain exclusive rights to market particular products, which we would be unable to market. If we lose the right to distribute products under such agreements, or are required to exclusively distribute certain products at the expense of others that may be more profitable, we may lose access to certain products and lose a competitive advantage. Potential competitors could sell products from vendors that we fail to continue with and erode our market share.  Additionally, if we have a reduction in our gross margin as a result of switching from an exclusive distributor to a non-exclusive distributor, the gross margin generated from the additional products that we are able to sell may not be enough to offset the decrease.
 
Increases in over-the-counter sales of animal health products or sales of products from non-veterinarian sources could adversely affect our business.
 
We rely, and will continue to rely, on animal owners who purchase their animal health products directly from veterinarians, which we refer to as the ethical channel.  Animal health products are increasingly becoming available from sources other than the ethical channel, including human or Internet pharmacies and other over-the-counter channels such as Walmart, Target and Costco.  As the availability of animal health products from alternative sources increases, there can be no assurance that animal owners will continue to use the ethical channel, and will not purchase animal health products from sources other than veterinarians.  Increased competition from any distributor of animal health products making use of an over-the-counter channel or the passage of legislation such as the proposed Fairness to Pet Owners Act of 2011 (“HR 1406”), which seeks to require veterinarians to issue prescriptions to clients, further enabling pet owners to purchase animal health products from sources other than a veterinarian, could lead to increased competition from distributors of animal health products making use of non-veterinarian channels to distribute their products.  Any such increased competition from non-ethical channels could significantly reduce our market share and adversely impact our financial results.
 
An economic downturn could materially adversely affect our business.
 
Our business may be materially adversely affected by negative trends in the general economy that could reduce consumer discretionary spending on animal health products and reduce or eliminate sources of credit available to our customers. Levels of consumer spending deteriorated during the economic recession in the United States and may not increase for the foreseeable future.  Some of the factors that could influence the levels of consumer spending include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, unemployment levels, healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior.  In addition, volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze) and changes in the general economy may adversely impact the amount spent by animal owners in the production animal market.  Such volatility and/or tightening of credit available to our customers could further deteriorate the financial condition of our customers, and may ultimately lead our customers to reduce their working capital available to purchase our products.
 
Our business ultimately depends on the ability and willingness of animal owners to pay for our products. This dependence could make us more vulnerable to any reduction in consumer confidence or disposable income than companies in other industries that are less reliant on consumer spending, such as the human health care industry, in which a large portion of payments are made by insurance programs.  Additionally, any cost-cutting measures taken to offset the effects of an economic downturn could materially impact our ability to generate future revenue growth.  For all of these reasons, an economic downturn could materially affect our business.
 
Demand from customers in the production animal market may be affected by a decrease in the sale and consumption of protein products due to increased consumer concern, loss of export markets, international trade restrictions and/or governmental regulations.
 
Recently, there has been consumer concern and consumer activism with respect to the use of antibiotics and growth promotants in animal feed as well as the consumption of protein (defined as beef, dairy, swine or poultry although MWI revenues come primarily from only beef, dairy and swine) products generally.  A sustained campaign of negative press resulting from media or consumer advocacy groups, industry litigation, loss of export markets or other factors could adversely affect the public’s perception of the industry as a whole, lead to reluctance by customers to buy protein or other products.  The resulting negative impact on the production animal market can strongly affect demand for the products we distribute.  In addition, heightened consumer concern over the use of antibiotics and growth promotants in animal feed could result in increased government regulation in response to that concern.  Any such negative press or increased governmental regulation may affect the growth of the production animal market and lead to a decrease in the sales of the products we distribute which could have a material adverse effect on our business, financial condition and results of operations.
 
Any inability of our customers to pay us for our products and services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition.
 
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk.  For example, milk price declines in the dairy market could have a significant impact on dairy farmers, which would create cash-flow challenges for these farmers and, in turn, impact the time it takes for us to collect on outstanding accounts receivable from these customers.  If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. The financial difficulties of a customer could cause us to curtail business with that customer or the customer to reduce its business with us and cancel orders.  Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition.
 
Difficulties with the integration of acquisitions or the improvement of the performance of acquired companies may impose substantial costs and delays and cause other unanticipated problems for us.
 
Acquisitions involve a number of risks relating to our ability to integrate an acquired business into our existing operations. The process of integrating or improving the performance o f the operations of an acquired business, particularly its personnel, could cause interruptions to our business. Some of the risks we face include:
 
 
·
the need to spend substantial operational, financial and management resources in integrating new businesses, technologies and products, and difficulties management may encounter in integrating or improving the performance of the operations, personnel or systems of the acquired business;
 
 
·
retention of key personnel, customers and vendors of the acquired business;
 
 
·
the occurrence of a material adverse effect on our existing business relationships with customers or vendors, or both, resulting from future acquisitions or business combinations could lead to a termination of or otherwise affect our relationships with such customers or vendors;
 
 
·
impairments of goodwill and other intangible assets; and
 
 
·
contingent and latent risks associated with the past operations of, and other unanticipated costs and problems arising in, an acquired business.
 
If we are unable to successfully integrate the operations of an acquired business into our operations, we could be required to undertake unanticipated changes. These changes could have a material adverse effect on our business.
 
In addition, it may be difficult to manage rapid growth from our acquired companies in the future, and the future success of our acquisitions depends on our ability to implement and/or maintain:
 
 
·
sales and marketing programs;
 
 
·
customer service levels;
 
 
·
current and new product and service lines and vendor relationships;
 
 
·
technological support which equals or exceeds our competitors;
 
 
·
recruitment and training of new personnel; and
 
 
·
operational and financial control systems.
 
If we are not able to manage our rapid growth from our acquisitions , there is a risk our customer service quality could deteriorate which may in turn lead to decreased sales or profitability. Also, due to acquisitions the cost of our operations could increase faster than growth in our revenues, negatively impacting our profitability.
 
Risks associated with our international operations.
 
On February 8, 2010, we acquired the outstanding share capital of Centaur.  Centaur is based in the United Kingdom and uses the British pound as its functional currency.  Prior to this acquisition, we had very limited exposure to international risks. International operations are subject to risks that may materially adversely affect our business, results of operations and financial condition.  The risks that our international operations are subject to include, among other things:
 
·  
difficulties and costs relating to staffing and managing foreign operations;
 
·  
difficulties in establishing channels of distribution;
 
·  
fluctuations in the value of foreign currencies;
 
·  
repatriation of cash from our foreign operations to the United States;
 
·  
regulatory requirements;
 
·  
foreign countries may impose additional withholding taxes or otherwise tax our foreign income;
 
·  
separate operating and financial systems;
 
·  
disaster recovery;
 
·  
unexpected difficulties in importing or exporting our products;
 
·  
imposition of import/export duties, quotas, sanctions or penalties;
 
·  
liability related to the defined benefit plan; and
 
·  
unexpected regulatory, economic and political changes in foreign markets.
 
Our financial results could be adversely affected by foreign exchange fluctuations.
 
We operate in both the United States and the United Kingdom, but report revenues, costs and earnings in U.S. dollars. Exchange rates between the U.S. dollar and the British pound sterling are likely to fluctuate from period to period. Because our financial results are reported in U.S. dollars, we are subject to the risk of translation losses for reporting purposes. If we continue to expand our international operations, we will conduct more transactions in currencies other than the U.S. dollar. To the extent that foreign revenue and expense transactions are not denominated in the local currency, we are also subject to the risk of transaction losses. Given the volatility of exchange rates, there is no assurance that we will be able to effectively manage currency transaction and/or translation risks. We have not entered into derivative instruments to offset the impact of foreign exchange fluctuations. Fluctuations in foreign currency exchange rates could have a material adverse effect on our results of operations and financial condition.
 
We only have one distribution center in the United Kingdom and any catastrophic event could materially impact our results.
 
We conduct all of our fulfillment operations in the United Kingdom from our distribution center in Castle Cary, England. This facility contains all of our product inventory. A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, server or systems failure, terrorist attack, or other comparable event at this facility would cause interruptions or delays in our business and loss of inventory and could render us unable to process or fulfill customer orders in a timely manner, or at all. Further, we have a limited disaster recovery plan, and our business interruption insurance may not adequately compensate us for losses that may occur, including with respect to any lost profits for any period in which the business is not able to operate.  In the event that a significant part of this facility was destroyed or our operations were interrupted for any extended period of time, our business, financial condition, and operating results would be harmed.
 
We rely substantially on third-party vendors, and the loss of products or delays in product availability from one or more third-party vendors could substantially harm our business.
 
We must contract for the supply of current and future products of appropriate quantity, quality and cost. These products must be available on a timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our business.
 
We often purchase products from our vendors under agreements that typically have a term of one year and can be terminated on a periodic basis. There can be no assurance, however, that our vendors will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on vendors include:
 
·  
 
If an existing agreement expires or a certain product line is discontinued or recalled, then we would not be able to continue to offer our customers the same breadth of products and our sales and operating results would likely suffer unless we are able to find an alternate supply of a similar product.
 
·  
If market demand for our products increases suddenly, our current vendors might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements or find new sources of supply, and may result in substantial delays in meeting market demand. If we consistently generate more demand for a product than a given vendor is capable of handling, it could lead to large backorders and potentially lost sales to competitive products that are more readily available.
 
·  
We may not be able to control or adequately monitor the quality of products we receive from our vendors. Poor quality products could damage our reputation with our customers.
 
·  
Some of our third party vendors are subject to ongoing periodic unannounced inspection by regulatory authorities, including the FDA, the USDA, the EPA, the DEA and the PDMA, as well as other federal and state agencies for compliance with strictly enforced regulations. We do not have control over our vendors’ compliance with these regulations and standards. Violations could potentially lead to interruptions in supply that could lead to lost sales to competitive products that are more readily available.
 
·  
If a vendor is unable to obtain the necessary credit to manage their business, they may not be able to deliver their products to us.
 
Potential problems with vendors such as those discussed above could substantially decrease sales of our products, lead to higher costs and damage our reputation with our customers.
 
We rely upon third parties to ship products to our customers and interruptions in their operations could harm our business, financial condition and results of operations.
 
We use UPS as our primary delivery service for our air and ground domestic shipments of products to our customers. If there were any significant service interruptions, there can be no assurance that we could engage alternative service providers to deliver these products in either a timely or cost-efficient manner, particularly in rural areas where many of our customers are located. Any labor disputes, slowdowns, transportation disruptions or other adverse conditions in the transportation industry experienced by UPS could impair or disrupt our ability to deliver our products to our customers on a timely basis, and could have a material adverse effect upon our customer relationships, business, financial condition and results of operations. In addition, rising fuel costs may result in continued increases in shipping costs charged by UPS, or other delivery service providers, and could have an adverse effect on our financial condition and results of operations.
 
The loss of one or more significant customers could adversely affect our profitability.
 
Our two largest customers, Banfield and Feeders’ Advantage (a related party), accounted for approximately 6% and 3%, respectively, of our product sales for our fiscal year ended September 30, 2012, 6% and 4%, respectively, of our product sales for our fiscal years ended September 30, 2011 and 9% and 4%, respectively, of our product sales for our fiscal years ended September 30, 2010. Our ten largest customers, excluding Banfield and Feeders’ Advantage, accounted for approximately 6%, 3% and 5% of our product sales for our fiscal years ended September 30, 2012, 2011 and 2010, respectively. Our business and results of operations could be adversely affected if the business of these customers was lost. We cannot guarantee that we will maintain or improve our relationships with these customers or that we will continue to supply these customers at current levels. Banfield, Feeders’ Advantage and other customers may seek to purchase some of the products that we currently sell directly from the vendors or from one or more of our competitors. Furthermore, our customers are not required to purchase any minimum amount of products from us. The loss of Banfield or Feeders’ Advantage or deterioration in our relations with either of them could significantly affect our financial condition and results of operations. Additionally, deterioration in the financial condition of one or more of our customers could have a material adverse effect on our results of operations.
 
If we fail to comply with or become subject to more onerous government regulations, our business could be adversely affected.
 
The veterinary distribution industry is subject to changing political and regulatory influences. Both state and federal government agencies regulate the distribution of certain animal health products and we are subject to regulation, either directly or indirectly, by the FDA, the USDA, the EPA, the DEA and comparable state agencies. As a distributor of prescription pharmaceutical products, we are also subject to the PDMA, which provides for minimum standards, terms and conditions to be maintained for licensing as a distributor.  The regulatory stance these agencies take could change. Our vendors are subject to regulation by the FDA, the USDA, the EPA, the DEA, and the PDMA, as well as other federal and state agencies, and material changes to the applicable regulations could affect our vendors’ ability to manufacture certain products, which could adversely impact our product supply. In addition, some of our customers may rely, in part, on farm and agricultural subsidy programs. Changes in the regulatory positions that impact the availability of funding for such programs could have an adverse impact on our customers’ financial positions, which could lead to decreased sales.
 
We strive to maintain compliance with these and all other applicable laws and regulations. We retain a Manager of Regulatory Compliance and have engaged outside consultants as needed to assist us in meeting and complying with the various state licensure requirements to which we are subject. If we are unable to maintain or achieve compliance with these laws and regulations, however, we could be subject to substantial fines or other restrictions on our ability to provide competitive distribution services, which could have an adverse impact on our financial condition.
 
We cannot assure you that existing laws and regulations will not be revised or that new, more restrictive laws will not be adopted or become applicable to us or the products that we distribute or dispense. The federal pedigree regulations of the FDA under the PDMA require tracking human labeled prescription products through the entire distribution chain and are enforceable for distributors that do not have a written agreement with the manufacturer granting the wholesale distributor status as an “Authorized Distributor of Record.”  We cannot assure you that the vendors of products that may become subject to more stringent laws will not try to recover any or all increased costs of compliance from us by increasing the prices at which we purchase products from them, or, that we will be able to recover any such increased prices from our customers. We also cannot assure you that our business and financial condition will not be materially and adversely affected by future changes in applicable laws and regulations.
 
Loss of key management or sales representatives could harm our business.
 
Our future success depends to a significant extent on the skills, experience and efforts of management, including our President and Chief Executive Officer, Mr. James F. Cleary, Jr. While we have not experienced problems in the past attracting and maintaining members of our management team, the loss of any or all of these individuals could adversely impact our business. We do not carry key-man life insurance on any member of management. In addition we do not have employment agreements with key members of our senior management team. We must continue to develop and retain a core group of individuals if we are to realize our goal of continued expansion and growth. We cannot assure you that we will be able to do so in the future.
 
Also, due to the specialized nature of our products and services, generally only highly qualified and trained sales representatives have the necessary skills to market our products and provide our services. These individuals develop relationships with our customers that could be damaged if these employees are not retained. We face intense competition for the hiring of these professionals, and many professionals in the field that may otherwise be attractive candidates for us to hire may be bound by non-competition agreements with our competitors. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would damage our business. We do not generally enter into agreements that contain non-competition provisions with our employees, other than with members of our senior management team, former owners of acquired companies and certain other employees.
 
Failure of, or security problems with, our information systems could damage our business.
 
Our information systems are dependent on third party software, global communications providers, telephone systems and other aspects of technology and Internet infrastructure that are susceptible to failure. Though we have implemented security measures and some redundant systems, our customer satisfaction and our business could be harmed if we or our vendors experience any system delays, failures, loss of data, power outages, computer viruses, break-ins, unauthorized access by competitors or similar disruptions. Although we have safeguards for emergencies, including, without limitation, sophisticated back-up systems, the occurrence of a major catastrophic event or other system failure at any of our distribution facilities could interrupt data processing or result in the loss of stored data. This may result in the loss of customers or a reduction in demand for our services. Only some of our systems are fully redundant and although we do carry business interruption insurance, it may not be sufficient to compensate us for losses that may occur as a result of system failures. If a disruption occurs, our profitability and results of operations may suffer.
 
The outbreak of an infectious disease within either the production animal or companion animal population could have a significant adverse effect on our business and our results of operations.
 
An outbreak of disease affecting animals, such as foot-and-mouth disease, various forms of influenza or bovine spongiform encephalopathy, commonly referred to as “mad cow disease,” could result in the widespread destruction of affected animals and consequently result in a reduction in demand for animal health products. In addition, outbreaks of these or other diseases or concerns of such diseases could create adverse publicity that may have a material adverse effect on consumer demand for meat, dairy and poultry products, and, as a result, on our customers’ demand for the products we distribute. The outbreak of a disease among the companion animal population which could cause a reduction in the demand for companion animals could also adversely affect our business. Although we have not been adversely impacted by the outbreak of a disease in the past, there can be no assurance that a future outbreak of an infectious disease will not have an adverse effect on our business.
 
Our acquired technology or developed technology may not be successful in gaining new customers or the technology may fail to produce its intended results.

The process of acquiring or developing new technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in products or services that achieve customer acceptance and generate the revenues required to provide desired returns. If we fail to accurately anticipate and meet our customers’ needs through the development of new products and technologies and service offerings or if we fail to adequately protect our intellectual property rights or if our new products are not widely accepted or if our current or future products fail to meet applicable worldwide regulatory requirements, we could lose market share and customers to our competitors and that could materially adversely affect our results of operations and financial condition.  Additionally, if technology investments do not achieve the intended results we may write-off the investments, and we face the risk of claims from system users that the systems failed to produce the intended result and/or that the systems caused negative performance of the customer’s animals or overall operation of the customer’s business.  Any such claims, even those without merit, could be expensive and time consuming to defend, cause us to lose a customer and the associated revenue, divert management’s attention and resources or require us to pay damages.
 
If third parties claim that we infringe upon their intellectual property rights, our financial results could be adversely affected.  
 
We face the risk of claims that we have infringed third parties’ intellectual property rights, including trademarks, trade names, and patents. Third parties may claim that our proprietary branded products infringe their trademarks and/or trade names; that our consultative services infringe a patented machine, process, or business method; and/or that our products infringe such third parties’ patented animal health products.  We have not conducted an independent review of trademarks or patents issued to third parties. The large number of trademarks and patents, the rapid rate of new trademark and patent issuances, the complexities of the technology involved in patents and uncertainty of litigation increase the risk of business assets and management’s attention being diverted to intellectual property litigation.
 
Any claims of patent or other intellectual property infringement, even those without merit, could:
 
 
•
 
be expensive and time consuming to defend;
 
•
 
cause us to cease making, licensing or using products or services that incorporate the challenged intellectual property;
 
•
 
require us to redesign, reengineer, or rebrand our products or packaging, if feasible;
 
•
 
divert management’s attention and resources; or
 
•
 
require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
 
Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our financial results and harm our future prospects.
 
Our intellectual property rights may be inadequate to protect our business.  
 
We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.
 
           We rely on our trademarks, trade names, service marks and brand names to distinguish our proprietary branded products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks and servicemarks. We cannot assure you that our trademark and servicemark applications will be approved. Third parties may also oppose our trademark and servicemark applications, or otherwise challenge our use of the trademarks and servicemarks. In the event that our marks are successfully challenged, we could be forced to rebrand our proprietary branded products and services, which could result in loss of brand recognition, and could require us to devote resources to advertise and market new brands. Further, we cannot assure you that competitors will not infringe upon our marks, or that we will have adequate resources to enforce our marks.
 
         The pursuit and assertion of patent rights involve complex legal and factual determinations and, therefore, are characterized by some uncertainty.  In addition, the laws governing patentability and the scope of patent coverage continue to evolve.  As a result, we cannot assure you patents will be issued from any of our patent applications.  The scope of any of our patents, if issued, may not be sufficiently broad to offer meaningful protection. In addition, our patents, if they are issued, may be successfully challenged, invalidated, circumvented or rendered unenforceable so that our patent rights might not create an effective competitive barrier for certain of our niche products. Further, we cannot assure you that competitors will not infringe upon our patent, or that we will have adequate resources to enforce our patent.
 
We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.  Our inability to maintain the proprietary nature of our technologies for any reason could have a material adverse effect on our business.
 
If our proprietary branded products infringe on the intellectual property rights of others, we may be required to indemnify our customers for any damages they suffer.  
 
Third parties may assert infringement claims against our customers. These claims may require us to initiate or defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products.

 
We may be subject to product liability and other claims in the ordinary course of business.
 
Our business involves a risk of product liability and other claims in the ordinary course of business, for example arising from shipping mislabeled or outdated product, product recalls or disputes among competing vendors. We maintain general liability insurance with policy limits of $1.0 million per incident and $2.0 million in the aggregate, and in many cases we have indemnification rights against such claims from the manufacturers of the products we distribute. We do not maintain a separate product liability insurance policy because we do not currently manufacture the vast majority of the products that we sell. Our ability to recover under insurance or indemnification arrangements is subject to the financial viability of the insurers and manufacturers. We cannot assure you that our insurance coverage or the manufacturers’ indemnity will be available or sufficient in any future cases brought against us.
 
We may not be able to raise needed capital in the future on favorable terms or at all.
 
We expect that our existing sources of cash, together with any funds generated from operations, will be sufficient to meet our anticipated capital needs for at least the next twelve months. However, we may require additional capital to finance our growth strategies or other activities in the future. Our capital requirements will depend on many factors, including the costs associated with our growth and expansion. Additional financing may not be available when needed and, if such financing is available, it may not be available on terms favorable to us. Our failure to raise capital when needed could have an adverse effect on our business, financial condition and results of operations.
 
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
 
Any borrowings on the revolving credit facility will be at variable rates of interest and expose us to interest rate risk based on market rates. If interest rates increase, our debt service obligations on any future variable rate indebtedness that we may incur on our revolving credit facility would increase even if the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease. Our variable rate debt as of September 30, 2012 was $48.1 million (comprised of revolving credit facilities). Our interest expense for fiscal year 2012 was approximately $0.9 million and was approximately $0.7 million for fiscal year 2011. A 1% increase in the average interest rate would not have a material impact on our operations assuming our current level of debt.  However, if we had to borrow additional funds to operate our business, the change in interest rates could affect our operations.   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
Our lenders may have suffered losses related to the weakening economy and may not be able to fund our borrowings.
 
Our lenders, including the lenders participating in our revolving credit facilities, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the national economy and increased financial instability of many borrowers.  As a result, lenders may become insolvent or tighten their lending standards, which could make it more difficult for us to borrow under our revolving credit facility or to obtain other financing on favorable terms or at all.  Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our revolving credit facility because of a lender default or to obtain other cost-effective financing.
 
Unresolved Staff Comments.
 
None.
 
Properties.
 
The table below provides a summary of the Company’s principal facilities as of September 30, 2012:
 
Location
 
Total Square Feet
(1)
Own or Lease
 
Principal Function (5)
Boise, Idaho
 
 62,000
 
Own
 
Headquarters and call center
Edwardsville, Kansas
 
 135,000
 
Lease
 
Distribution center and pharmacy
Elizabethtown, Pennsylvania
 
 111,000
 
Lease
 
Distribution center and pharmacy
Castle Cary, England
 
 84,000
 
Own
 
Centaur office, call center and distribution center
Visalia, California
 
 81,000
 
Lease
 
Distribution center and veterinary food-animal drug retailer
Denver, Colorado
 
 75,000
 
Lease
 
Distribution center and call center
Grand Prairie, Texas
 
 70,000
 
Lease
 
Distribution center, call center and pharmacy
Amarillo, Texas
 
 40,000
 
Own
 
Distribution center
Atlanta, Georgia
 
 41,000
 
Lease
 
Distribution center
Whitestown, Indiana
 
 40,000
(2)
Lease
 
Distribution center and pharmacy
Nampa, Idaho
 
 36,000
 
Lease
 
Distribution center and pharmacy
Fife, Washington
 
 30,000
 
Lease
 
Distribution center
Orlando, Florida
 
 30,000
(3)
Lease
 
Distribution center
Amarillo, Texas
 
 26,000
 
Lease
 
Micro office
Clear Lake, Wisconsin
 
 25,000
(4)
Lease
 
Distribution center and call center
Sioux Falls, South Dakota
 
 23,000
(4)
Own
 
Distribution center, call center and pharmacy
Glendale, Arizona
 
 20,000
 
Lease
 
Distribution center
Sturbridge, Massachusetts
 
 15,000
 
Lease
 
Securos office and call center
Holland, Michigan
 
 5,000
 
Lease
 
Call center
Omaha, Nebraska
 
 4,000
 
Lease
 
Call center
Sioux City, Iowa
 
 3,000
 
Lease
 
Call center
 
 
 
 
 
 
 
(1)  Rounded to the nearest thousand square feet.
 
(2)  In November 2012, we expanded the space in our Whitestown, Indiana distribution center to 70,000 square feet.
(3)  We have entered into a new lease agreement that will expand the size of our distribution center to 42,000 in January 2013.
(4)  We are in the process of opening a new distribution center in Shakopee, Minnesota with 125,000 square feet, consolidating our operations in Clear Lake, Wisconsin and Sioux Falls, South Dakota.  We expect to complete the opening in December 2012.    
(5)  We also operate out of a number of shipping depots in the United States and United Kingdom but maintain little to no inventory at these locations.

Legal Proceedings.
 
MWI is party to a lawsuit with Harold and Darroll Wotton in the United States District Court for the District of Idaho which was originally removed to federal court by the Wottons on February 7, 2012.   MWI brought suit alleging breach by the Wottons of the Asset Purchase Agreements pursuant to which MWI purchased the Securos business, breach of the respective employment agreements of Harold and Darroll Wotton, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, tortious interference with contract, intentional interference with prospective economic advantage, civil conspiracy, conversion and usurping corporate opportunities.  MWI’s complaint seeks an injunction to enforce the non-competition covenants contained in the Asset Purchase Agreements and employment agreements as well as unspecified money damages.   The Wottons have brought a counterclaim against MWI alleging, among other things, fraud in the inducement when MWI purchased the Securos business from the Wottons in 2007, breach of contract, breach of duty of good faith and fair dealing, unjust enrichment, defamation and unfair and deceptive business practices and requested a declaratory judgment regarding the restrictive covenants in Harold Wotton’s and Darroll Wotton’s respective employment agreements.   The counterclaim seeks damages in excess of $12 million.  On September 14, 2012, in response to a motion for preliminary injunction filed by MWI, the Court issued an order enjoining the Wottons as well as their officers, agents, employees, attorneys, and all persons who are in active concert or participation with them from selling any veterinary orthopedic equipment, including (1) one-time consumables like sutures and bandages, (2) non-reusable items like implants and bone screws, or (3) reusable tools such as surgical scissors, scalpel blades or forceps in the United States, Canada, Germany and Dubai.  The Court’s injunction will last until on or about January 23, 2014.  The Wottons have appealed this decision to the Court of Appeals for the Ninth Circuit, and that appeal is pending.
 
MWI is also a party to a legal action brought before the Commercial Court in Antwerp, Belgium that was filed on September 25, 2012 by NV Viyo International (“VIYO”).  VIYO is a manufacturer of nutritional products for cats and dogs.  MWI and VIYO are parties to a Distribution Agreement dated October 22, 2010 (the “Distribution Agreement”).  In the legal action, VIYO has alleged that in acting as a distributor for VIYO that MWI breached the commitments that it had made to VIYO in the Distribution Agreement or otherwise, although VIYO has not specifically articulated which contractual commitment in the Distribution Agreement MWI has violated.  As a result, VIYO is seeking from MWI damages in an amount preliminarily claimed to be $21.9 million.  Of this amount, VIYO alleges that at least $16.8 million is due to their lost profits, notwithstanding that recovery for lost profits is prohibited by the terms of the Distribution Agreement.  MWI has reviewed the matter thoroughly and believes that it has fulfilled its contractual commitments to VIYO.
 
MWI believes that both the counterclaim in the Wotton matter and VIYO's claims are wholly without merit and intends to continue to vigorously defend against both actions. MWI also believes that the likelihood of MWI incurring material losses in connection with either matter is remote, and therefore has not accrued any amount relating to either matter in the Company’s financial statements. Because the nature of litigation is inherently uncertain, MWI cannot predict the outcome of these matters at this time.
 
Mine Safety Disclosures
 
None.
 

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock has been quoted on the Nasdaq under the symbol “MWIV” since August 3, 2005. Prior to that date there was no public market for our common stock. The following table sets forth, for the two most recent fiscal years, the high and low sales prices of our common stock, reported by the Nasdaq Global Select Market.
 
 
 
 
 
Common Stock Price
 
 
 
 
 
High
 
Low
 
 
Fiscal Year Ended September 30, 2011
 
 
 
 
 
 
 
 
 
First Quarter
 
$
 65.84
 
$
 54.61
 
 
 
Second Quarter
 
$
 80.86
 
$
 59.95
 
 
 
Third Quarter
 
$
 86.99
 
$
 76.82
 
 
 
Fourth Quarter
 
$
 90.24
 
$
 65.31
 
 
Fiscal Year Ended September 30, 2012
 
 
 
 
 
 
 
 
 
First Quarter
 
$
 77.39
 
$
 61.01
 
 
 
Second Quarter
 
$
 91.38
 
$
 64.08
 
 
 
Third Quarter
 
$
 103.50
 
$
 84.00
 
 
 
Fourth Quarter
 
$
 109.99
 
$
 86.09
 

At the close of business on November 16, 2012, we had 12,794,312 shares of common stock issued and outstanding.  As of that date, there were 613 registered holders of record.  This does not reflect beneficial stockholders who hold their stock in nominee or “street” name through brokerage firms.
 
We have not paid or declared any dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future. We intend to retain future earnings to finance the ongoing operations and growth of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on conditions at that time, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.  The information contained under the heading “Equity Compensation Plan Information” in Item 12 of this Form 10-K is incorporated herein by reference.
 
The table below provides information concerning our repurchase of shares of our common stock during the fourth quarter ended September 30, 2012.
 

Issuer Purchases of Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Number of
 
Maximum Number (or
 
 
Total
 
 
 
 
 Shares Purchased
 
 Approximate Dollar
 
 
Number
 
Average
 
 as Part of Publicly
 
 Value) of Shares that May
 
 
 of Shares
 
Price Paid
 
 Announced Plans
 
 Yet Be Purchased Under
Period
 
 Purchased
 
per Share
 
 or Programs
 
the Plans or Programs
July 1 to July 31, 2012
 
38
 (1)
$
90.30
 
—
 
—
August 1 to August 31, 2012
 
359
 (1)
$
92.09
 
—
 
—
September 1 to September 30, 2012
 
11,795
 (1)
$
106.44
 
—
 
—
Total
 
12,192
 
$
105.97
 
—
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) These shares were withheld upon the vesting of employee stock grants in connection with payment
      of required withholding taxes.

The graph below compares the cumulative total stockholder return on $100 invested at the market close on September 30, 2007 through and including September 30, 2012, the last trading day before the end of our most recently completed fiscal year, with the cumulative total return of the same time period on the same amount invested in the Russell 2000 Index, the Standard and Poor’s SmallCap 600 Index and a Peer Group Index, consisting of 9 companies that compete or operate in a comparable industry as the Company. The chart below the graph sets forth the actual numbers depicted on the graph.
   
9/30/2007
 
9/30/2008
 
9/30/2009
 
9/30/2010
 
9/30/2011
 
9/30/2012
MWI Veterinary Supply, Inc.
 
$100.00
 
$104.08
 
$105.83
 
$152.90
 
$180.72
 
$282.60
S&P SmallCap 600 Index
 
  100.00
 
85.18
 
74.97
 
84.68
 
83.93
 
110.53
Russell 2000 Index
 
  100.00
 
84.37
 
75.02
 
83.95
 
79.98
 
103.97
Peer Group (1)  
 
  100.00
 
95.67
 
101.70
 
107.64
 
111.85
 
151.98
 
(1)
Peer Group consists of Abaxis, Inc. (ABAX), Henry Schein Inc. (HSIC), IDEXX Laboratories Inc. (IDXX), Owens & Minor Inc. (OMI), Patterson Companies Inc. (PDCO), PetMed Express Inc. (PETS), PSS World Medical Inc. (PSSI), Tractor Supply Company (TSCO) and VCA Antech Inc. (WOOF).
 
Selected Financial Data.
 
The selected consolidated financial data below represent portions of our financial statements and are not complete. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to these statements included in this annual report. Historical results are not necessarily indicative of future performance.
 

 
 
 
Year Ended September 30,
 
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In  thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
 1,996,294
 
$
 1,489,500
 
$
 1,169,545
 
$
 880,703
 
$
 778,953
 
Product sales to related party
 
 61,873
 
 
 55,185
 
 
 43,017
 
 
 46,406
 
 
 39,452
 
Commissions
 
 16,979
 
 
 20,655
 
 
 16,780
 
 
 14,223
 
 
 12,959
 
 
Total revenues
 
 2,075,146
 
 
 1,565,340
 
 
 1,229,342
 
 
 941,332
 
 
 831,364
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 
 1,808,230
 
 
 1,359,755
 
 
 1,064,339
 
 
 806,677
 
 
 711,812
 
Gross profit
 
 266,916
 
 
 205,585
 
 
 165,003
 
 
 134,655
 
 
 119,552
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 172,104
 
 
 130,656
 
 
 105,793
 
 
 90,827
 
 
 84,123
Depreciation and amortization
 
 9,045
 
 
 6,263
 
 
 4,992
 
 
 3,365
 
 
 3,078
 
Operating income
 
 85,767
 
 
 68,666
 
 
 54,218
 
 
 40,463
 
 
 32,351
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 (926)
 
 
 (741)
 
 
 (539)
 
 
 (242)
 
 
 (265)
 
Earnings of equity method investees
 
 318
 
 
 268
 
 
 220
 
 
 230
 
 
 179
 
Other
 
 781
 
 
 507
 
 
 427
 
 
 540
 
 
 642
 
 
Total other income (expense)
 
 173
 
 
 34
 
 
 108
 
 
 528
 
 
 556
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
 85,940
 
 
 68,700
 
 
 54,326
 
 
 40,991
 
 
 32,907
Income tax expense
 
 (32,463)
 
 
 (26,120)
 
 
 (20,886)
 
 
 (16,086)
 
 
 (12,990)
Net income
$
 53,477
 
$
 42,580
 
$
 33,440
 
$
 24,905
 
$
 19,917
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
 4.24
 
$
 3.42
 
$
 2.73
 
$
 2.06
 
$
 1.65
 
Diluted
$
 4.23
 
$
 3.40
 
$
 2.70
 
$
 2.02
 
$
 1.62
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 12,616
 
 
 12,464
 
 
 12,241
 
 
 12,088
 
 
 12,053
 
Diluted
 
 12,647
 
 
 12,513
 
 
 12,395
 
 
 12,306
 
 
 12,301

 
As of September 30,
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
$
 514
 
$
 606
 
$
 911
 
$
 14,302
 
$
 3,419
Total assets
 
 696,383
 
 
 504,219
 
 
 467,932
 
 
 337,919
 
 
 314,805
Total debt
 
 48,522
 
 
 4,170
 
 
 14,724
 
 
 97
 
 
 194
Total stockholders’ equity
 
 359,302
 
 
 292,810
 
 
 246,787
 
 
 207,927
 
 
 181,003
 
Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
All dollar and sterling pound amounts are presented in thousands, except for per share amounts.
 
Overview
 
We are a leading distributor of animal health products to veterinarians in the United States and the United Kingdom. We sell our products to veterinarians in both the companion and production animal markets. Our growth has primarily been from internal growth initiatives and, to a lesser extent, selective acquisitions.
 
As a result of the acquisition of Micro, we estimate that in the United States approximately 57% of our total revenues have been generated from sales to the companion animal market and 43% from sales to the production animal market.  Including the gross billings from agency commissions which are excluded from our total revenues in order to comply with generally accepted accounting principles, we estimate that in the United States approximately 63% of our total revenues have been generated from sales to the companion animal market and 37% from sales to the production animal market.  We estimate that approximately two-thirds of our total revenues have been generated from sales to the companion animal market and one-third from sales to the production animal market in the United Kingdom. The state of the overall economy in both the United States and United Kingdom and consumer spending have impacted both the companion animal and production animal markets, with tightening credit markets, volatile commodity prices in milk, grain, corn and feeder cattle, and changes in weather patterns (e.g. droughts or seasons of higher precipitation) also affecting demand in the production animal market.  Both the companion animal and production animal markets have been integral to our financial results and we intend to continue supporting both markets.
 
We believe that the companion animal market in both the United States and United Kingdom has slowed as a result of a decrease in consumer spending but has shown signs of a recovery in 2012.  Historically, growth in the companion animal market has been due to the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in pharmaceuticals and diagnostic testing and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies. While the average order size for companion animal health products is often smaller than production animal health products, companion animal health products typically have higher margins. We intend to continue to penetrate this market through internal growth initiatives and selective acquisitions.  We believe that some of our customers in this market have experienced liquidity issues as a result of the tightening credit markets.
 
Product sales in the production animal market in both the United States and United Kingdom are impacted by volatility in commodity prices such as milk, corn, grain and feeder cattle, changes in weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) or a change in the general economy, which can shift the number of animals treated, the timing of when animals are treated, to what extent they are treated and which products they are treated with.  This could also create cash-flow challenges for these customers and in turn, could impact the time it takes for us to collect our outstanding accounts receivable from these customers as well as affect the overall collectability of these accounts.  However, we still believe that it is important to our business to service this market and we intend to continue to support production animal veterinarians with a broad range of products and value-added services. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity, weight gain and disease prevention, as well as a growing focus on food safety.
 
 We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk.  If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us.   We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.
 
We sell products that we source from our vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from our vendors. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We record sales from “buy/sell” transactions, which account for the vast majority of our business, as revenues in conformity with generally accepted accounting principles in the United States. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. When we receive an order from our customer, we transmit the order to our vendor, who picks, packs and ships the order to our customer. In some cases, our vendor invoices and collects payment from our customer, while in other cases we invoice and collect payment from our customer on behalf of our vendor. We receive a commission payment for soliciting the order from our customer and for providing other customer service activities. The aggregate revenues we receive in agency transactions constitute the “commissions” line item on our consolidated statements of income and are recorded in conformity with accounting principles generally accepted in the United States. Our vendors determine the method we use to sell our products. Historically, vendors have occasionally switched between the “buy/sell” and agency models for particular products in response to market conditions related to that particular product. A switch between models can impact our revenues and our operating income. We cannot know in advance when a vendor will switch between the “buy/sell” and agency models or what impact, if any, such a change may have. A switch can occur even with vendors with whom we have written agreements, because most of our agreements with vendors have relatively short terms and are terminable with or without cause on short notice, normally 30 to 90 days. The impact of any individual change from a “buy/sell” to an agency model depends on the costs and expenses associated with a particular product, and can have either a positive or a negative effect on our profitability.
 
We typically renegotiate vendor contracts annually.  These vendor contracts may include terms defining margins, rebates, commissions, exclusivity requirements and the manner in which we go to market.  For example, vendors could require us to distribute their products on an exclusive basis, which could cause us to forego distributing competing products which may also be profitable.  Conversely, competitors could obtain exclusive rights to market particular products, which we would be unable to market.  If we lose the right to distribute products under such exclusive agreements, we may lose access to certain products and lose a competitive advantage.  Exclusivity agreements could allow potential competitors to sell products that we cannot offer and erode our market share.  In addition, vendors have the ability to expand the distributors that they use which could have a material adverse effect on our business.
 
Some of our current and future vendors may decide to compete with us in the future by pursuing or increasing their efforts in direct marketing and sales of their products. These vendors could sell their products at lower prices and maintain a higher gross margin on their product sales than we can. In this event, veterinarians or animal owners may elect to purchase animal health products directly from these vendors.  As an example of this type of event, we were a sales agent for a pet food line for most of fiscal year 2011 that we did not represent in fiscal year 2012 because that manufacturer chose to sell their products direct and not through sales agents.
 
Many of our vendors’ rebate programs are based on a calendar year.  Historically, the three months ended December 31 has been our most significant quarter for recognition of rebates.  Vendor rebates based on sales are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.
 
Total Revenues.   Our total revenues increased from $831,364 for our fiscal year ended September 30, 2008 to $2,075,146 for our fiscal year ended September 30, 2012. Our revenue growth has been driven primarily from internal growth and, to a lesser extent, selective acquisitions and our ability to offer a broad product selection at competitive prices with high levels of customer service and support and an expansion in the number of veterinary practices to which we distribute products. We have continually added new vendor relationships to expand our product offering and field sales representatives to increase our customer reach, principally in the Southeast, Northeast and Midwest regions of the United States.
 
Operating Expenses.   Our selling, general and administrative expenses increased from $84,123 for our fiscal year ended September 30, 2008 to $172,104 for our fiscal year ended September 30, 2012. Selling, general and administrative expenses consist mainly of compensation and benefits, warehouse operating supplies, occupancy and location expenses and other general corporate expenses. Our selling, general and administrative expenses as a percentage of total revenues were 10.1% for our fiscal year ended September 30, 2008, compared to 8.3% for the same period in 2012.
 
Acquisitions.   In February 2010, we acquired all of the share capital of Centaur.  Based in Castle Cary, England, Centaur is a distributor of animal health products to veterinarians in the United Kingdom.
 
In March 2011, we acquired substantially all of the assets of Nelson.  Nelson was a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States.  This acquisition allows us to better serve our customers in this region of the United States. 
 
On October 31, 2011, we acquired substantially all of the assets of Micro.  Micro is a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies and other animal health products.  Micro also is a leading innovator of proprietary, computerized management systems for the production animal market.
 
The assets acquired and the certain liabilities assumed relate to (a) the development and implementation of proprietary computerized systems for feed, health, information and production animal management which include individual animal identification and management, food safety assurance, trace back and process verification systems, (b) ongoing research and development of such systems, and (c) the distribution and sale of micro feed ingredients, animal health products and dairy sanitation solutions.
 
Fair values of the assets acquired and liabilities assumed as a result of these acquisitions are discussed in Note 3 “Business Acquisitions” to the consolidated financial statements.
 
 
Results of Operations
 
The following tables summarize our historical results of operations for our fiscal years ended September 30, 2012, 2011 and 2010.

 
 
 
Year Ended September 30,
 
 
 
 
2012
 
%
 
 
2011
 
%
 
 
2010
 
%
 
 
 
 
(In  thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
 1,996,294
 
96.2%
 
$
 1,489,500
 
95.2%
 
$
 1,169,545
 
95.1%
 
Product sales to related party
 
 61,873
 
3.0%
 
 
 55,185
 
3.5%
 
 
 43,017
 
3.5%
 
Commissions
 
 16,979
 
0.8%
 
 
 20,655
 
1.3%
 
 
 16,780
 
1.4%
 
 
Total revenues
 
 2,075,146
 
100.0%
 
 
 1,565,340
 
100.0%
 
 
 1,229,342
 
100.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 
 1,808,230
 
87.1%
 
 
 1,359,755
 
86.9%
 
 
 1,064,339
 
86.6%
Gross profit
 
 266,916
 
12.9%
 
 
 205,585
 
13.1%
 
 
 165,003
 
13.4%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
 172,104
 
8.3%
 
 
 130,656
 
8.3%
 
 
 105,793
 
8.6%
Depreciation and amortization
 
 9,045
 
0.4%
 
 
 6,263
 
0.4%
 
 
 4,992
 
0.4%
Operating income
 
 85,767
 
4.2%
 
 
 68,666
 
4.4%
 
 
 54,218
 
4.4%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 (926)
 
0.0%
 
 
 (741)
 
0.0%
 
 
 (539)
 
0.0%
 
Earnings of equity method investees
 
 318
 
0.0%
 
 
 268
 
0.0%
 
 
 220
 
0.0%
 
Other
 
 781
 
0.0%
 
 
 507
 
0.0%
 
 
 427
 
0.0%
 
 
Total other income (expense)
 
 173
 
0.0%
 
 
 34
 
0.0%
 
 
 108
 
0.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before taxes
 
 85,940
 
4.2%
 
 
 68,700
 
4.4%
 
 
 54,326
 
4.4%
Income tax expense
 
 (32,463)
 
-1.6%
 
 
 (26,120)
 
-1.7%
 
 
 (20,886)
 
-1.7%
Net income
$
 53,477
 
2.6%
 
$
 42,580
 
2.7%
 
$
 33,440
 
2.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
 4.24
 
 
 
$
 3.42
 
 
 
$
 2.73
 
 
 
Diluted
$
 4.23
 
 
 
$
 3.40
 
 
 
$
 2.70
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 12,616
 
 
 
 
 12,464
 
 
 
 
 12,241
 
 
 
Diluted
 
 12,647
 
 
 
 
 12,513
 
 
 
 
 12,395
 
 

 
Fiscal 2012 Compared to Fiscal 2011
 
Total Revenues.   Total revenues increased $509,806, or 32.6%, to $2,075,146 for the fiscal year ended September 30, 2012 from $1,565,340 for the fiscal year ended September 30, 2011. Excluding the impact of the acquisition of Micro, revenue growth in the United States was 17.3% for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011.  Revenues from the acquisition of Micro, which was acquired on October 31, 2011, were $246.6 million for the fiscal year ended September 30, 2012.  Revenue growth in the United Kingdom was 14.7% for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011, consisting of 16.8% organic growth and a decline of 2.1% related to foreign currency exchange.  Excluding the impact of Micro, t he growth in revenues in the United States came primarily from increased business as a result of the growth from our e-commerce platform, the addition of new flea, tick and heartworm products, the addition of sales representatives over the past twelve months and the acquisition of Nelson. Excluding the impact of Micro, revenues in the United States attributable to new customers represented approximately 36% of the growth in total revenues during the fiscal year ended September 30, 2012. Excluding the impact of Micro, revenues in the United States attributable to existing customers represented approximately 64% of the growth in total revenues during the fiscal year ended September 30, 2012. For the purpose of calculating growth rates of new and existing customer revenue, we have defined a new customer as a customer that did not purchase product from us in the corresponding fiscal quarter of the prior year, with the remaining customer base being considered an existing customer.  Revenues from new customers for each fiscal quarter are summed to arrive at the estimated year-to-date revenue for new customers.
 
Commission revenues decreased $3,676, or 17.8%, to $16,979 for the fiscal year ended September 30, 2012 from $20,655 for the fiscal year ended September 30, 2011.  The decrease of commission revenues was due to the loss of a pet food line that we represented for most of fiscal year 2011 that we did not represent in fiscal year 2012 and a shift in commissions to buy-sell revenues for certain parasiticides.  Gross agency billings decreased by $38,681, or 10.4%, to $332,343 for the fiscal year ended September 30, 2012 from $371,024 for the fiscal year ended September 30, 2011.  Additionally, the decrease in commissions was due to an incentive that we earned from one of our vendors during fiscal year 2011 that was earned at a substantially lower level in the fiscal year ended September 30, 2012.
 
Gross Profit.   Gross profit increased $61,331, or 29.8%, to $266,916 for the fiscal year ended September 30, 2012 from $205,585 for the fiscal year ended September 30, 2011. The change in gross profit is primarily a result of increased total revenues as discussed above.  Gross profit as a percentage of total revenues was 12.9% and 13.1% for the fiscal years ended September 30, 2012 and 2011, respectively.   Gross profit as a percentage of total revenues decreased due to the reduction in commissions, lower product margins and lower vendor rebates as a percentage of revenues, partially offset by improved freight as a percentage of total revenues.   Vendor rebates increased by $1,330 for the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011.  This increase in vendor rebates was primarily due to revenue growth achieved during the fiscal year.
 
Selling, General and Administrative Expenses (“SG&A”).   SG&A increased $41,448, or 31.7%, to $172,104 for the fiscal year ended September 30, 2012 from $130,656 for the fiscal year ended September 30, 2011. SG&A as a percentage of revenue was 8.3% for the each of the fiscal years ended September 30, 2012 and 2011.  The increase in SG&A expenses was primarily due to the addition of Micro and the added support for our revenue growth.  Additionally, stock based compensation expense increased $2,182, of which $1,278 was related to accelerated vesting on restricted stock awards granted during the quarter ended September 30, 2012 that did not occur in the same period of the prior fiscal year.
 
Depreciation and Amortization.   Depreciation and amortization expense increased $2,782, or 44.4%, to $9,045 for the fiscal year ended September 30, 2012 from $6,263 for the fiscal year ended September 30, 2011. The increase was primarily due to the increase in fixed assets and intangibles as a result of the acquisition of Micro.
 
Fiscal 2011 Compared to Fiscal 2010
 
Total Revenues.   Total revenues increased $335,998, or 27.3%, to $1,565,340 for the fiscal year ended September 30, 2011 from $1,229,342 for the fiscal year ended September 30, 2010. Revenue growth in the United States was 21.5% as compared to the fiscal year ended September 30, 2010.  Revenue growth in the United Kingdom was 68.0% as we owned Centaur for the full fiscal year compared to approximately eight months in the same period in the prior fiscal year.   The growth in organic revenues in the United States came primarily from increased business as a result of the bankruptcy and liquidation of a competitor that is no longer in business, growth from our e-commerce platform, the addition of new flea, tick and heartworm products, the acquisition of Nelson and the addition of sales representatives over the past twelve months. Organic revenues in the United States attributable to new customers represented approximately 53% of the growth in total revenues during the fiscal year ended September 30, 2011. Organic revenues in the United States attributable to existing customers represented approximately 47% of the growth in total revenues during the fiscal year ended September 30, 2011.
 
Commission revenues increased $3,875, or 23.1%, to $20,655 for the fiscal year ended September 30, 2011 from $16,780 for the fiscal year ended September 30, 2010.  The increase of commission revenues was due to the increase in gross agency billings of $42,971, or 13.1%, to $371,024 for the fiscal year ended September 30, 2011 from $328,053 for the fiscal year ended September 30, 2010.  Additionally, the growth in commissions included the achievement of an incentive from one of our vendors during the fiscal year ended September 30, 2011, which was not achieved in fiscal year ended September 30, 2010.
 
Gross Profit.   Gross profit increased $40,582, or 24.6%, to $205,585 for the fiscal year ended September 30, 2011 from $165,003 for the fiscal year ended September 30, 2010. The change in gross profit is primarily a result of increased total revenues as discussed above including the additional gross profit from Centaur for the full fiscal year as compared to approximately eight months in the prior fiscal year.  Gross profit as a percentage of total revenues was 13.1% and 13.4% for the fiscal years ended September 30, 2011 and 2010, respectively.   Gross profit as a percentage of total revenues decreased partially due to the addition of Centaur as well as a slight decrease in the gross margin in the United States.  The gross margin is impacted by the addition of Centaur because Centaur's gross profit as a percentage of total revenues is generally lower than MWI's, which serves to reduce the overall gross margin of the consolidated Company when compared to our results for the same period in the prior year.   Vendor rebates increased by $2,362 for the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010.  This increase in vendor rebates was primarily due to revenue growth achieved during the fiscal year.
 
Selling, General and Administrative Expenses (“SG&A”).   SG&A increased $24,863, or 23.5%, to $130,656 for the fiscal year ended September 30, 2011 from $105,793 for the fiscal year ended September 30, 2010. This increase was primarily due to the addition of Centaur’s operating expenses for the full fiscal year compared to approximately eight months in the prior fiscal year, increased compensation and benefits costs and increased bank service fees.  Also included in the increase in SG&A expenses are the direct acquisition-related expenses of $861 incurred in connection with acquisitions.  SG&A as a percentage of revenue was 8.3% for the fiscal year ended September 30, 2011 and 8.6% for the fiscal year ended September 30, 2010.   SG&A expenses as a percentage of total revenues decreased due, in part, to the addition of Centaur because Centaur’s SG&A expenses as a percentage of total revenues are generally lower than MWI’s, which serves to reduce the overall SG&A expenses as a percentage of total revenues when compared to our results for the same period in the prior year.
 
Depreciation and Amortization.   Depreciation and amortization expense increased $1,271, or 25.5%, to $6,263 for the fiscal year ended September 30, 2011 from $4,992 for the fiscal year ended September 30, 2010. The increase was primarily due to the acquisition of Centaur plus capital expenditures during the year including an office building purchased in Boise, Idaho for our headquarters, equipment for our new distribution center in Visalia, California and other distribution center technology.
 
Income Tax Expense.  Our effective tax rate was 38.0% for the fiscal year ended September 30, 2011 and 38.4% for the fiscal year ended September 30, 2010.  This decrease was primarily due to the impact of the Centaur acquisition that contributed additional earnings at a lower effective tax rate.  Additionally, there was a lower international enacted tax rate change during the quarter ended September 30, 2011.
 
 
Seasonality in Operating Results
 
Our quarterly sales and operating results have varied significantly in the past, and will likely continue to do so in the future. Historically, our total revenues have typically been higher during the spring and fall months due to increased sales of production animal products. The sales of production animal products can vary due to changes in commodity prices and weather patterns (e.g. droughts or seasons of higher precipitation that determine how long cattle will graze and consequently the number of days an animal is on feed during a finishing phase) which may also affect seasonality.  Product use cycles for production animal products are directly related to medical procedures performed by veterinarians on production animals during the spring and fall months. These buying patterns can also be affected by vendors’ and distributors’ marketing programs or price increase announcements, which can cause veterinarians to purchase production animal health products earlier than those products are needed. This kind of early purchasing may reduce our sales in the months these purchases would have otherwise been made. See “Risk Factors — Our quarterly operating results may fluctuate significantly, and these fluctuations may cause our stock price to fall.” Additionally, while we accrue rebates as they are earned, our rebates have historically been highest during the quarter ended December 31, since some of our vendors’ rebate programs were designed to include targets to be achieved near the end of the calendar year.  This trend has slowed some in recent years due to certain changes in vendor contracts but it still remains our largest quarter for vendor rebates.
 
Our companion animal products tend to have a different product use cycle that minimally overlaps with that of production animal products. In the companion animal market, sales of flea, tick and mosquito products are highest during the spring and summer months. The differing product use cycles of companion animal products partially offsets the seasonality we typically experience due to our sales of production animal products.
 
For the reasons and factors discussed above our quarterly operating results may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and our sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. If this occurs, the price of our stock would likely decrease.
 
 
Liquidity and Capital Resources
 
Our principal sources of liquidity are cash flows generated from operations and borrowings on our credit facilities. We use capital primarily to fund day-to-day operations and to maintain sufficient inventory levels in order to promptly fulfill customer orders and to expand our operations and sales growth. We believe our capital resources, including our ability to borrow funds from our credit facilities, will be sufficient to meet our anticipated cash needs for at least the next twelve months.
 
We generally extend some level of credit to our customers without requiring collateral, which exposes us to credit risk. If customers’ cash flow or operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain other sources of credit, they may not be able to pay or may delay payment to us, or in some cases may return products to us. Any inability of current and/or potential customers to pay us for our products and/or services due to their deteriorating financial condition or otherwise may adversely affect our results of operations and financial condition. Volatility in commodity prices, such as milk, corn, grain and feeder cattle, and deteriorating economic conditions can have a significant impact on the financial results of our customers. We continually assess our customers’ ability to pay us and adjust our allowance for doubtful accounts, as necessary.
 
Capital Resources.   On November 1, 2011, MWI Veterinary Supply Co. (“MWI Co”) as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”, or “revolving credit facility”) with MWI Veterinary Supply, Inc. and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the  “Credit Agreement”).  The Third Amendment allows for an aggregate revolving commitment of the Lenders under the Credit Agreement of $150,000 and a maturity date of November 1, 2016.  Under the Third Amendment, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Third Amendment ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.  The facility contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA calculation.  We were in compliance with all of the covenants as of September 30, 2012 and 2011.   Our outstanding balance on the revolving credit facility at September 30, 2012 was $39,500, and the interest rate was 1.10% as of September 30, 2012.
 
On November 5, 2010, Centaur entered into a £12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”).  The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable 1-month, 2-month or 3-month interest period.  Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%.  The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000.  As of September 30, 2012 and 2011, Centaur was in compliance with the covenant. Our outstanding balance on the sterling revolving credit facility at September 30, 2012 was £5,308, or $8,580 using the exchange rate on September 30, 2012.  The interest rate for the sterling revolving credit facility was 1.57% as of September 30, 2012.
 
Operating Activities.   For fiscal year ended September 30, 2012, cash provided by operating activities was $14,238, and was primarily attributable to net income of $53,477 and an increase in accounts payable of 50,018.  This amount was partially offset by an increase in receivables of $48,879 and an increase in inventories of $52,831.  The increase in net income is a result of the factors discussed above in “Results of Operations.”  The increase in receivables was primarily due to the revenue growth during the fiscal year.  The increases in inventories and accounts payable were primarily due to strategic inventory purchases  made during the fiscal year ended September 30, 2012 to accommodate our revenue growth and the redistribution of products from our distribution center in Kansas City to the rest of our distribution centers.
 
For fiscal year ended September 30, 2011, cash provided by operating activities was $32,428, and was primarily attributable to net income of $42,580 and a decrease in inventory of $8,553.  This amount was partially offset by an increase in receivables of $23,021 and a decrease in accounts payable of $5,150.  The increase in net income is a result of the factors discussed above in “Results of Operations.”  The increase in receivables was primarily due to the revenue growth during the fiscal year.  The decreases in inventories and accounts payable were primarily due to the a decrease during the fiscal year ended September 30, 2011 to a more normalized level after we had made large purchases near the end of the fiscal year ended September 30, 2010 to accommodate the additional orders from new customers when their primary supplier was no longer able to meet their needs.
 
For fiscal year ended September 30, 2010, cash provided by operating activities was $16,866, and was primarily attributable to net income of $33,440 and an increase in accounts payable of $39,781.  This amount was partially offset by an increase in receivables of $14,154 and an increase in inventory of $41,106.  The increase in net income is a result of the factors discussed above in “Results of Operations.”  The increase in receivables was primarily due to the addition of the Centaur balances from the acquisition.  The increases in inventories and accounts payable were primarily due to the inventory purchased during the quarter to accommodate the growth from our customers who placed additional orders with us when their primary supplier was no longer able to meet their needs.
 
Investing Activities.     For fiscal year ended September 30, 2012, net cash used in investing activities was $59,865.  We paid $51,718 for the acquisition of Micro, which closed on October 31, 2011.  We paid for capital expenditures of $7,597 which primarily related to information technology and our new distribution center in Harrisburg, Pennsylvania.
 
For fiscal year ended September 30, 2011, net cash used in investing activities was $25,509.  We paid $7,000 for the acquisition of Nelson.  We paid for capital expenditures of $12,516 which primarily related to an office building purchased in Boise, Idaho for our headquarters, equipment for our new distribution centers in Visalia, California and Harrisburg, Pennsylvania to accommodate the growth needs in those regions and other distribution center technology.  Additionally, we made an investment in Cubex LLC, a technology based inventory management business, of $4,000.
 
For fiscal year ended September 30, 2010, net cash used in investing activities was $44,090.  Significant transactions impacting cash used in investing activities include the acquisition of Centaur of $39,645, capital expenditures of $4,388 primarily related to the equipment purchased in preparation for the move to a larger distribution center in Visalia, California as well as other facility and technology infrastructure improvements.
 
Financing Activities.   For fiscal year ended September 30, 2012, net cash provided by financing activities was $45,399, and was primarily attributable to the net borrowings on our credit facilities of $44,885.  Our revolving credit facilities are used to fund strategic acquisitions, make capital purchases and meet our working capital requirements.
 
For fiscal year ended September 30, 2011, net cash used in financing activities was $7,291, and was primarily attributable to the net payments on our credit facilities of $7,188.  Our revolving credit facilities are used to fund strategic acquisitions, make capital purchases and meet our working capital requirements.  Additionally, we paid $3,327 in debt payments for the note payable related to the Centaur acquisition, the term note for Centaur and capital lease obligations.  This was largely offset by the excess tax benefit of exercise of common stock options of $2,714.
 
For fiscal year ended September 30, 2010, net cash provided by financing activities was $13,785, and was primarily attributable to the net borrowings on our credit facilities of $10,116 and the tax benefit of $3,611 from the exercise of common stock options.
 
Off Balance Sheet Arrangements. At September 30, 2012, we had no significant investments that were accounted for under the equity method in accordance with accounting principles generally accepted in the United States except for Feeders Advantage. Feeders Advantage has no liabilities associated with it that were guaranteed by or that would be considered material to us. Accordingly, we do not have any off balance sheet arrangements.
 
 
Contractual Obligations
 
Contractual Obligations. Our contractual obligations at September 30, 2012 mature as follows (in thousands):
 
   
Payments Due by Period
 
   
Total
 
1 Year or less
 
2-3 Years
 
4-5 Years
 
More than 5 Years
 
Revolving credit facilities (1)
 
$48,080
   
$         —
     
$ 8,580
     
$39,500
     
$         —
   
Operating lease commitments
 
35,245
   
4,663
     
8,033
     
7,437
     
15,112
   
Capital lease commitments
 
441
   
337
     
104
     
—
     
—
   
Interest on revolving credit facilities (2)
 
2,597
   
735
     
1,212
     
650
     
—
   
Other long-term obligations (3)
 
18,285
   
15,601
     
739
     
46
     
1,899
   
Total contractual
obligations
 
$104,648
   
$  21,336
     
$18,668
     
$47,633
     
$ 17,011
   
 
 (1)
For the purposes of the Contractual Obligations table above the revolving credit facilities is assumed to be paid at the respective credit facility’s termination date.  For financial statement purposes the revolving credit facilities are classified as a current liability.
 
(2)
For debt instruments with variable interest rates and unused commitment fees, interest has been calculated for all future periods using the rates in effect at September 30, 2012.
 
(3)
Other long-term obligations include contracts primarily related to inventory purchase commitments of $15,000, information technology services and telecommunications .  Also included is the pension liability of $1,899 which was assumed to be paid out beyond year five.
 
Guarantees. We provide guarantees, indemnifications and assurances to others in the ordinary course of our business. We have evaluated our agreements that contain guarantees and indemnification clauses in accordance with the guidance of financial accounting rules.
 
We enter into a wide range of indemnification arrangements in the ordinary course of business. These include tort indemnities, tax indemnities, indemnities against third party claims arising out of arrangements to provide services to us, indemnities in merger and acquisition agreements and indemnities in agreements related to the sale of our securities. Also, our governance documents and the governance documents of all of our subsidiaries provide for the indemnification of individuals made party to any suit or proceeding by reason of the fact that the individual was acting as an officer, director or agent of the relevant company or as a fiduciary of a company-sponsored welfare benefit plan. We also provide guarantees and indemnifications for the benefit of our wholly-owned subsidiaries for the satisfaction of performance obligations, including certain lease obligations. We are not aware of any material liabilities arising from these indemnification arrangements.
 
 
Inflation
 
Most of our operating expenses are inflation-sensitive, with inflation generally producing increased costs of operations.  During the past three years, the most significant effects of inflation have been on employee wages, costs of products and fuel-intensive costs including freight, packing supplies and travel.  We manage the effects of inflation by controlling increases in compensation expense, renegotiating freight carrier contracts and utilizing a central source for warehouse shipping supplies.
 
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to sales returns, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, impairment of long-lived assets, depreciation and amortization, employee benefits and contingencies. We base our estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We, based on our ongoing review, will make adjustments to our judgments and estimates where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
 
We believe the following critical accounting policies are important to understand our financial condition and results of operations and require 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.
 
 
Revenue Recognition
 
We sell products that we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase and take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate sales returns based on historical experience, and returns are recognized as a reduction of product sales. Product returns have not been significant to our financial statements. In an agency relationship, we generally do not purchase and take inventory of products from our vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete.
 
 
Vendor Rebates
 
Vendor rebates are recorded based on the terms of the contracts with each vendor . We may receive quarterly, semi-annual and annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in our accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are a reduction of inventory until the product is sold. When the inventory is sold, purchase rebates are recognized as a reduction to cost of product sales.
 
Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.
 
 
Customer Incentives
 
Customer incentives are accrued based on the terms of the contracts with each customer . These incentive programs provide that the customer receives an incentive based on their product purchases or attainment of performance goals. Incentives are estimated based on the specific terms in each agreement, historical experience and product growth rates.  The incentives are recognized as a reduction of product sales.
 
 
Goodwill and Intangible Assets
 
We assess the potential impairment of goodwill and non-amortizing intangible assets annually and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that we consider important and may trigger an interim impairment review include:
 
 
·
significant underperformance relative to expected historical or projected future operating results;
 
 
·
significant changes in the manner of our use of acquired assets or the strategy of our overall business; and
 
 
·
significant negative industry or economic trends.
 
If we determine through the impairment review process that goodwill or non-amortizing intangible assets are impaired, an impairment charge is recognized in our consolidated statement of income.
 
Goodwill and non-amortizing intangible assets were evaluated for impairment in our fourth quarter of 2012 and we determined that the recorded amount was not impaired. The fair value calculations used for these tests require us to make assumptions about items that are inherently uncertain. Assumptions related to future market demand, market prices and product costs could vary from actual results, and the impact of such variations could be material. Factors that could affect the assumptions include changes in economic conditions, changes in government regulations, success in marketing products and competitive conditions in our industry. The factors that most significantly affect the fair value calculation are market multiples and estimates of future cash flows. Fair value was determined using the discounted cash flow method.
 
 
Recently Issued and New Accounting Pronouncements
 
In June 2011, the FASB issued guidance on the presentation of comprehensive income in an entity's financial statements. The guidance requires that comprehensive income be presented either in one continuous statement or in two separate but consecutive statements presenting the components of net income and its total, the components of other comprehensive income and its total, and total comprehensive income. The guidance also requires that reclassification adjustments from other comprehensive income to net income be presented in both the components of net income and the components of other comprehensive income. The guidance is effective for our fiscal year beginning October 1, 2012.  We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
 
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”) permitting the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the traditional two-step impairment test. Under ASU 2011-08, entities testing goodwill for impairment now have the option to perform a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing two-step quantitative impairment test is required. Otherwise, no further impairment testing is required. This update is effective for us on October 1, 2012. We do not believe that the adoption of this provision will have a material impact on our consolidated financial statements.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
 
We are exposed to market risks primarily from changes in interest rates, in particular, the Daily LIBOR Floating Rate, and foreign currency translation risk. We do not engage in financial transactions for trading or speculative purposes.  We do not hedge the translation of foreign currency profits into U.S. dollars.  We continually evaluate our foreign currency exchange rate risk and the different options available for managing such risk.
 
We are exposed to foreign currency risk due to our U.K. subsidiary Centaur.  A hypothetical 10% change in the value of the U.S. dollar in relation to the British Pound, which is the Company’s most significant foreign currency exposure, would have changed fiscal 2012 net sales by approximately $30,000. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses.
 
The interest payable on our revolving credit facilities is based on variable interest rates and is affected by changes in market interest rates. The outstanding balance on the revolving credit facility in the United States as of September 30, 2012 was $39,500.  The outstanding balance on the revolving credit facility in the United Kingdom as of September 30, 2012 was $8,580   If there had been a combined balance on the revolving credit facilities of $170,000, which is the approximate maximum available amount on the facilities based on the foreign currency rates as of September 30, 2012, a change of 10% from the interest rates as of September 30, 2012 would have changed interest by $197 for fiscal year 2012.
 
Financial Statements and Supplementary Data.
 
MWI Veterinary Supply, Inc.
 
Index to Consolidated Financial Statements
 
   
Page
Number
Report of Independent Registered Public Accounting Firm
 
43
Consolidated Statements of Income for the years ended September 30, 2012, 2011 and 2010
 
44
Consolidated Balance Sheets as of September 30, 2012 and 2011
 
45
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2012, 2011 and 2010
 
46
Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010
 
47
Notes to Consolidated Financial Statements
 
48
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
MWI Veterinary Supply, Inc.
Boise, Idaho

We have audited the accompanying consolidated balance sheets of MWI Veterinary Supply, Inc. and subsidiaries (the “Company”) as of September 30, 2012 and 2011, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2012.  Our audits also included the consolidated financial statement schedule listed in the Index at Item 15(a)2.  These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 27, 2012, expressed an unqualified opinion on the Company's internal control over financial reporting.
 

/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
November 27, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
MWI VETERINARY SUPPLY, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 2012, 2011 and 2010
Dollars and shares in thousands, except per share amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
 
 
Product sales
$
 1,996,294
 
$
 1,489,500
 
$
 1,169,545
 
Product sales to related party
 
 61,873
 
 
 55,185
 
 
 43,017
 
Commissions
 
 16,979
 
 
 20,655
 
 
 16,780
 
 
Total revenues
 
 2,075,146
 
 
 1,565,340
 
 
 1,229,342
Cost of product sales
 
 1,808,230
 
 
 1,359,755
 
 
 1,064,339
Gross profit
 
 266,916
 
 
 205,585
 
 
 165,003
Selling, general and administrative expenses
 
 172,104
 
 
 130,656
 
 
 105,793
Depreciation and amortization
 
 9,045
 
 
 6,263
 
 
 4,992
Operating income
 
 85,767
 
 
 68,666
 
 
 54,218
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
 
 (926)
 
 
 (741)
 
 
 (539)
 
Earnings of equity method investees
 
 318
 
 
 268
 
 
 220
 
Other
 
 781
 
 
 507
 
 
 427
 
 
Total other income (expense), net
 
 173
 
 
 34
 
 
 108
Income before taxes
 
 85,940
 
 
 68,700
 
 
 54,326
Income tax expense
 
 (32,463)
 
 
 (26,120)
 
 
 (20,886)
Net income
$
 53,477
 
$
 42,580
 
$
 33,440
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
Basic
$
 4.24
 
$
 3.42
 
$
 2.73
 
Diluted
$
 4.23
 
$
 3.40
 
$
 2.70
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
 
 12,616
 
 
 12,464
 
 
 12,241
 
Diluted
 
 12,647
 
 
 12,513
 
 
 12,395
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
MWI VETERINARY SUPPLY, INC.
CONSOLIDATED BALANCE SHEETS
As of September 30, 2012 and 2011
Dollars and shares in thousands, except per share amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
$
 514
 
$
 606
 
Receivables, net
 
 288,922
 
 
 215,861
 
Inventories
 
 251,375
 
 
 170,065
 
Prepaid expenses and other current assets
 
 10,094
 
 
 10,079
 
Deferred income taxes
 
 1,580
 
 
 1,672
 
 
Total current assets
 
 552,485
 
 
 398,283
 
 
 
 
 
 
 
 
Property and equipment, net
 
 35,784
 
 
 25,209
Goodwill
 
 61,841
 
 
 49,041
Intangibles, net
 
 38,706
 
 
 24,894
Other assets, net
 
 7,567
 
 
 6,792
Total assets
$
 696,383
 
$
 504,219
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Credit facilities
$
 48,080
 
$
 2,907
 
Accounts payable
 
 258,741
 
 
 182,594
 
Accrued expenses and other current liabilities
 
 19,952
 
 
 16,385
 
Current portion of capital lease obligations
 
 337
 
 
 909
 
 
Total current liabilities
 
 327,110
 
 
 202,795
 
 
 
 
 
 
 
 
Deferred income taxes
 
 7,180
 
 
 5,989
 
 
 
 
 
 
 
 
Long-term portion of capital lease obligations
 
 104
 
 
 354
 
 
 
 
 
 
 
 
Other long-term liabilities
 
 2,687
 
 
 2,271
 
 
 
 
 
 
 
 
Commitments and contingencies (See Note 12)
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Common stock $0.01 par value, 40,000 authorized; 12,792 and
 
 
 
 
 
 
12,618 shares issued and outstanding, respectively
 
 128
 
 
 126
Additional paid in capital
 
 144,667
 
 
 133,759
Retained earnings
 
 212,965
 
 
 159,488
Accumulated other comprehensive income
 
 1,542
 
 
 (563)
 
Total stockholders’ equity
 
 359,302
 
 
 292,810
Total liabilities and stockholders’ equity
$
 696,383
 
$
 504,219
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
MWI VETERINARY SUPPLY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended September 30, 2012, 2011 and 2010
Dollars and shares in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of
 
 
 
 
Additional
 
Accum.
 
 
 
 
 
 
 
 
Common
 
Common
 
Paid In
 
Other Comp.
 
Retained
 
 
 
 
 
Stock
 
Stock
 
Capital
 
Inc/(Loss)
 
Earnings
 
Total
Balance at October 1, 2009
12,196
 
$
122
 
$
124,337
 
$
—
 
$
83,468
 
$
207,927
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—
 
 
—
 
 
—
 
 
—
 
 
33,440
 
 
33,440
Issuance of common stock
6
 
 
—
 
 
248
 
 
—
 
 
—
 
 
 248
Exercises of common stock options
199
 
 
2
 
 
401
 
 
—
 
 
—
 
 
 403
Tax benefit of common stock exercises
—
 
 
—
 
 
 3,611
 
 
—
 
 
—
 
 
 3,611
Issuance of stock awards, net of forfeitures
56
 
 
1
 
 
 1,078
 
 
—
 
 
—
 
 
 1,079
Foreign currency translation
—
 
 
—
 
 
—
 
 
536
 
 
—
 
 
 536
Other
—
 
 
—
 
 
—
 
 
 (457)
 
 
—
 
 
 (457)
Balance at September 30, 2010
12,457
 
 
125
 
 
129,675
 
 
79
 
 
116,908
 
 
246,787
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—
 
 
—
 
 
—
 
 
—
 
 
 42,580
 
 
42,580
Issuance of common stock
6
 
 
—
 
 
412
 
 
—
 
 
—
 
 
412
Exercises of common stock options
102
 
 
1
 
 
 97
 
 
—
 
 
—
 
 
98
Tax benefit of common stock exercises
—
 
 
—
 
 
 2,714
 
 
—
 
 
—
 
 
2,714
Issuance of stock awards, net of forfeitures
53
 
 
—
 
 
861
 
 
—
 
 
—
 
 
861
Foreign currency translation
—
 
 
—
 
 
—
 
 
 (663)
 
 
—
 
 
 (663)
Other
—
 
 
—
 
 
—
 
 
 21
 
 
—
 
 
 21
Balance at September 30, 2011
12,618
 
 
126
 
 
133,759
 
 
 (563)
 
 
159,488
 
 
292,810
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—
 
 
—
 
 
—
 
 
—
 
 
 53,477
 
 
53,477
Issuance of common stock
7
 
 
—
 
 
562
 
 
—
 
 
—
 
 
562
Issuance of common stock for purchase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
of Micro
94
 
 
1
 
 
 7,158
 
 
 
 
 
 
 
 
7,159
Exercises of common stock options
15
 
 
—
 
 
 154
 
 
—
 
 
—
 
 
154
Tax benefit of common stock exercises
—
 
 
—
 
 
 895
 
 
—
 
 
—
 
 
895
Issuance of stock awards, net of forfeitures
58
 
 
1
 
 
2,139
 
 
—
 
 
—
 
 
2,140
Foreign currency translation
—
 
 
—
 
 
—
 
 
 1,877
 
 
—
 
 
 1,877
Other
—
 
 
—
 
 
—
 
 
228
 
 
—
 
 
 228
Balance at September 30, 2012
12,792
 
$
128
 
$
144,667
 
$
 1,542
 
$
212,965
 
$
359,302
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
 
MWI VETERINARY SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2012, 2011 and 2010
Dollars in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
Net income
$
 53,477
 
$
 42,580
 
$
 33,440
 
Adjustments to reconcile net income to net cash provided by operating
 
 
 
 
 
 
 
 
 
activities:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 9,062
 
 
 6,284
 
 
 5,004
 
 
Amortization of debt issuance costs
 
 41
 
 
 65
 
 
 58
 
 
Stock-based compensation
 
 2,157
 
 
 831
 
 
 1,088
 
 
Deferred income taxes
 
 1,182
 
 
 597
 
 
 249
 
 
Earnings of equity method investees
 
 (318)
 
 
 (268)
 
 
 (220)
 
 
Excess tax benefit of exercise of common stock options
 
 (895)
 
 
 (2,714)
 
 
 (3,611)
 
 
Loss/(gain) on disposal of property and equipment
 
 32
 
 
 - 
 
 
 (11)
 
 
Pension payment
 
 - 
 
 
 - 
 
 
 (2,047)
 
 
Other
 
 (206)
 
 
 (76)
 
 
 97
 
 
Changes in operating assets and liabilities (net of effects of business acquisitions):
 
 
 
 
 
 
 
 
 
 
Receivables
 
 (48,879)
 
 
 (23,021)
 
 
 (14,154)
 
 
 
Inventories
 
 (52,831)
 
 
 8,553
 
 
 (41,106)
 
 
 
Prepaid expenses and other current assets
 
 (1,118)
 
 
 3,398
 
 
 (2,419)
 
 
 
Accounts payable
 
 50,018
 
 
 (5,150)
 
 
 39,781
 
 
 
Accrued expenses
 
 2,516
 
 
 1,349
 
 
 717
 
 
 
 
Net cash provided by operating activities
 
 14,238
 
 
 32,428
 
 
 16,866
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
Business acquisitions, net of cash acquired
 
 (51,718)
 
 
 (9,000)
 
 
 (39,645)
 
 
Purchases of property and equipment
 
 (7,597)
 
 
 (12,516)
 
 
 (4,388)
 
 
Proceeds from sales of property and equipment
 
 96
 
 
 - 
 
 
 - 
 
 
Other
 
 (646)
 
 
 (3,993)
 
 
 (57)
 
 
 
 
Net cash used in investing activities
 
 (59,865)
 
 
 (25,509)
 
 
 (44,090)
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
Borrowings on line-of-credit
 
 539,071
 
 
 249,978
 
 
 151,616
 
 
Payments on line-of-credit
 
 (494,186)
 
 
 (257,166)
 
 
 (141,500)
 
 
Proceeds from issuance of common stock
 
 562
 
 
 412
 
 
 248
 
 
Proceeds from exercise of common stock options
 
 154
 
 
 98
 
 
 403
 
 
Excess tax benefit of exercise of common stock options
 
 895
 
 
 2,714
 
 
 3,611
 
 
Payment of debt issuance costs
 
 (111)
 
 
 - 
 
 
 (116)
 
 
Payment on long-term debt and capital lease obligations
 
 (986)
 
 
 (3,327)
 
 
 (477)
 
 
 
 
Net cash provided by/(used in) financing activities
 
 45,399
 
 
 (7,291)
 
 
 13,785
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate on Cash and Cash Equivalents
 
 136
 
 
 67
 
 
 48
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Decrease in Cash and Cash Equivalents
 
 (92)
 
 
 (305)
 
 
 (13,391)
Cash and Cash Equivalents at Beginning of Period
 
 606
 
 
 911
 
 
 14,302
Cash and Cash Equivalents at End of Period
$
 514
 
$
 606
 
$
 911
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements
 
 
MWI VETERINARY SUPPLY, INC.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
Dollars and sterling pounds in thousands, except share and per share data
 
 
1.   Business Description and Basis of Presentation
 
MWI Veterinary Supply, Inc. is a leading distributor of animal health products to veterinarians in the United States and United Kingdom. We sell our products to veterinarians in both the companion and production animal markets. We operate fourteen distribution centers located across the United States and one distribution center in the United Kingdom.

 
2.   Summary of Significant Accounting Policies
 
Principles of Consolidation — The accompanying consolidated financial statements consist of MWI Veterinary Supply, Inc. and its wholly-owned subsidiaries, collectively referred to herein as “MWI” or the “Company.” All intercompany transactions have been eliminated.  We use the equity method of accounting for our investments in entities in which we have significant influence; generally this represents an ownership interest between 20% and 50%. Our share of income or loss from these investments is reported as increases or decreases in the respective investment with a corresponding amount reported as other income.
 
Basis of Accounting and Use of Estimates — The accompanying consolidated financial statements have been prepared on the accrual basis of accounting using accounting principles generally accepted in the United States. In preparing financial information, we use certain estimates and assumptions that may affect the reported amounts and disclosures. Some of these estimates require difficult, subjective and complex judgments about matters that are inherently uncertain. As a result, actual results could differ from these estimates. Estimates are used when accounting for sales returns, allowance for doubtful accounts, customer incentives, vendor rebates, inventories, goodwill and intangible assets, income taxes, impairment of long-lived assets, depreciation and amortization, employee benefits, and contingencies. The estimates of fair value of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and reported amounts of revenue and expenses for the periods are based on assumptions that we believe to be reasonable.
 
Segment Information — We are a distributor of animal health products to veterinarians. Our financial results are disclosed as one reportable segment.  We identified two operating segments based on geographic areas but aggregate based on applicable accounting standards.  We determined that the two operating segments have similar operating margins and are expected to maintain this similarity into the future.  Additionally, our products, customers, operations, delivery to market and regulatory environments are all similar in nature.
 
Foreign Currency Translation — For our international operations, local currencies have been determined to be the functional currencies.  We translate functional currency assets and liabilities to their U.S. dollar equivalents at rates in effect at the balance sheet date and record these translation adjustments in Stockholders’ equity – Accumulated other comprehensive income/(loss).  We translate functional currency statement of income amounts to their U.S. dollar equivalents at average rates for the period.
 
Other Comprehensive Income — Comprehensive income includes cumulative foreign currency translation adjustments and actuarial adjustments on pension valuation. Comprehensive income has been reflected in the consolidated statements of stockholders’ equity and in Note 15 – Other Comprehensive Income.
 
Revenue Recognition — We sell products we source from vendors to our customers through either a “buy/sell” transaction or an agency relationship with our vendors. In a “buy/sell” transaction, we purchase or take inventory of products from the vendor. When a customer places an order with us, we pick, pack, ship and invoice the customer for the order. We recognize revenue from “buy/sell” transactions as product sales when the product is delivered to the customer. We accept product returns from our customers. We estimate returns based on historical experience and recognize these estimated returns as a reduction of product sales. Product returns have not been significant to our financial statements. We record revenues net of sales tax.  In an agency relationship, we generally do not purchase and take inventory of products from vendors. We receive an order from a customer, then transmit the order to the vendor, who picks, packs and ships the order to the customer. In some cases, the vendor invoices and collects payment from the customer, while in other cases we invoice and collect payment from the customer on behalf of the vendor. We receive a commission payment for soliciting the order from the customer and for providing other customer service activities. Commissions are recognized when the services upon which the commissions are based are complete. Gross billings from agency contracts were $332,343, $371,024 and $ 328,053 for the years ended September 30, 2012, 2011 and 2010, respectively, and generated commission revenue of $16,979, $20,655 and $16,780 for the years ended September 30, 2012, 2011 and 2010, respectively.
 
Cost of Product Sales and Vendor Rebates — Cost of product sales consist of our inventory product cost, including shipping costs to and from our distribution centers. Costs of fulfillment are included in selling, general and administrative costs. Vendor rebates are recorded based on the terms of the contracts or programs with each vendor. We receive quarterly, semi-annual and annual performance-based rebates from third-party vendors based upon attainment of certain sales and/or purchase goals. Sales rebates are classified in the accompanying consolidated statements of income as a reduction to cost of product sales at the time the sales performance measures are achieved. Purchase rebates are measured against inventory purchases from the vendors and are classified as a reduction of inventory until the product is sold. When the inventory is sold and purchase measures are achieved, purchase rebates are recognized as a reduction to cost of product sales.
 
Historically, actual results have not significantly deviated from those determined using the estimates described above. We expect that our estimates in the future will continue to be reasonable as our rebates are based on specific vendor program goals and are principally recorded upon achievement of sales or purchase performance measures. Vendors may change or eliminate rebate programs from year to year.
 
Customer Incentives — Customer incentives are accrued based on the terms of the contracts with each customer . These incentive programs provide that the customer receive an incentive based on their product purchases or attainment of performance goals. Incentives are estimated based on the specific terms in each agreement, historical experience and product growth rates.  Incentives are recognized as a reduction to product sales.
 
Cash and Cash Equivalents  — Cash equivalents consist of highly liquid investments with a maturity of three months or less from the date of purchase. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment.
 
Inventories — Inventories, consisting of pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, capital equipment and technology, supplies and nutritional products, are stated at the lower of cost (on a moving-average basis) or market.
 
Property and Equipment — Property and equipment are stated at cost and depreciation is computed using the straight-line method over the estimated useful lives, which include the shorter of useful life or lease term for leasehold improvements, of the related assets as follows:
 
Buildings                                                                                 25 to 35 years
Machinery, furniture and equipment                                                   3 to 15 years
Computer equipment                                                                                3 to 7 years
Leasehold improvements                                                                       1 to 10 years

 
The cost and accumulated depreciation of items sold or retired are removed from the property accounts and any resulting gain or loss is reflected in net income. Repairs and maintenance are expensed as incurred and improvements are capitalized.
 
We periodically review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairments were identified during the fiscal years ended September 30, 2012, 2011 and 2010.
 
Goodwill and Intangible Assets — We recognize the excess purchase price over the fair value of net assets acquired and liabilities assumed in a business combination as goodwill on the consolidated balance sheet. We perform an annual impairment test on goodwill as of September 30 th each year.  We calculate the fair value of each reporting unit using a discounted cash flow analysis and compare the fair value to its book value.  We have concluded that there was no impairment during the fiscal years ended September 30, 2012, 2011 and 2010. Impairment tests will continue to be performed at least annually and more frequently if circumstances indicate a possible impairment.
 
Identifiable intangible assets primarily include customer relationships, trademarks and patents, technology and covenants not to compete and are amortized, as necessary, over their useful lives or contractual term which range from 1- 20 years.  We review identifiable intangible assets at least annually for impairment or when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  No impairments were identified during the fiscal years ended September 30, 2012, 2011 and 2010.
 
Other Assets — Included in other assets are our equity method investments and investments in entities accounted for under the cost method of accounting, which includes an investment in Cubex of $4,000. We periodically evaluate these investments for other-than-temporary impairment using both qualitative and quantitative criteria, or when indicators of impairment are noted. In the event an investment is deemed to be other-than-temporarily impaired, we would recognize the loss component in the consolidated statements of income.  Other assets also consist of debt issuance costs that are being amortized over the term of the related debt.
 
Earnings Per Common Share — Basic earnings per common share is calculated based on the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per common share is based on the weighted-average number of outstanding common shares plus the weighted-average number of potential outstanding common shares. Potential common shares that would increase earnings per share amounts are antidilutive and are, therefore, excluded from the earnings per common share computations. Earnings per common share is computed separately for each period presented.
 
Income Taxes — Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized to provide for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are measured using enacted tax rates in effect during the years in which the temporary differences are expected to reverse.
 
Concentrations of Risk — Our financial instruments that are exposed to concentrations of credit risk consist primarily of our receivables. Our customers are geographically dispersed throughout the United States and United Kingdom. We routinely assess the financial strength of our customers and review their credit history before extending credit. In addition, we establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
 
Product sales to Banfield were approximately 6% of our total product sales in fiscal years 2012 and 2011, and 9% in fiscal year 2010. Product sales to Feeders’ Advantage, a related party (See Note 13), were approximately 3% of our total product sales in fiscal year 2012, and 4% of our total product sales in fiscal years 2011 and 2010.
 
Advertising — Advertising costs are expensed when incurred and are included as part of selling, general and administrative expenses. Advertising costs were $1,203, $723 and $ 717 in fiscal years 2012, 2011 and 2010, respectively.
 
Recently Issued and New Accounting Pronouncements  — In June 2011, the FASB issued guidance on the presentation of comprehensive income in an entity's financial statements. The guidance requires that comprehensive income be presented either in one continuous statement or in two separate but consecutive statements presenting the components of net income and its total, the components of other comprehensive income and its total, and total comprehensive income. The guidance also requires that reclassification adjustments from other comprehensive income to net income be presented in both the components of net income and the components of other comprehensive income. The guidance is effective for our fiscal year beginning October 1, 2012.  We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
 
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”) permitting the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the traditional two-step impairment test. Under ASU 2011-08, entities testing goodwill for impairment now have the option to perform a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing two-step quantitative impairment test is required. Otherwise, no further impairment testing is required. This update is effective for us on October 1, 2012. We do not believe that the adoption of this provision will have a material impact on our consolidated financial statements.

 
3.   Business Acquisitions
 
On February 8, 2010, MWI Veterinary Supply Co. (“MWI Co.”) purchased all of the outstanding share capital of Centaur Services Limited (“Centaur”), based in the United Kingdom for a purchase price of $ 44,053, consisting of $42,053 in cash and $ 2,000 in a note payable due in one year.  Subsequent to the acquisition of Centaur, we funded $2,047 to the pension plan as required by the terms of the share purchase agreement.  The purchase price was reduced subsequent to the acquisition date by $ 1,868 as a result of a post-closing working capital and debt adjustment.  Centaur is a supplier of animal health products to veterinarians in the United Kingdom.  Centaur sells products to both the companion animal market and production animal market.  The acquisition of Centaur has allowed us to expand into the international markets.  We incurred $ 1,100 of direct acquisition-related expenses.  The intangible assets acquired in the acquisition have estimated useful lives between 1 and 20 years, which include customer relationships, trade names and other intangible assets.  The amount recorded in goodwill is not deductible for tax purposes.
 
On March 21, 2011, MWI Co. purchased substantially all of the assets of Nelson Laboratories Limited Partnership (“Nelson”) for $ 7,000 in cash. Nelson is a distributor of animal health products to over 1,100 veterinary practices, primarily in the Midwestern United States. This acquisition allows us to better serve our customers in this region of the United States. An intangible asset representing customer relationships acquired in the acquisition has an estimated useful life of 10 years. The amount recorded in goodwill is deductible for tax purposes over 15 years.
 
On October 31, 2011, MWI Co. purchased substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”) for $60,878, including $53,400 in cash and 94,359 shares of common stock valued at $7,158, which is the fair value of the common stock as of the date of acquisition and a working capital adjustment of $320. The $53,400 paid in cash as consideration of Micro was funded with borrowings under our Credit Agreement (as defined in Note 7) as then in effect. Micro is a value-added distributor to the production animal market, including the distribution of micro feed ingredients, pharmaceuticals, vaccines, parasiticides, supplies and other animal health products. Micro also is a leading innovator of proprietary, computerized management systems for the production animal market. We incurred $1,104 of direct acquisition-related and integration expenses.  The intangible assets acquired in the acquisition include technology, customer relationships, trade name and covenant not to compete. The useful life of the amortizing intangible assets ranges from 5 years to 17 years. Trade name is a non-amortizing intangible asset. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded as part of the acquisition of Micro includes the expected synergies that we believed would result from this acquisition.  The amount recorded in goodwill is deductible for tax purposes over 15 years. The fair values assigned to the tangible and intangible assets acquired and liabilities assumed are based on management's estimates and assumptions as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.
 
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of each acquisition, which may be adjusted during the measurement period as defined in Accounting Standards Codification (“ASC”) 805. These purchase price allocations are based on a combination of valuations and analyses.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
 
2010
 
Cash
$
 1
 
$
 - 
 
$
 674
 
Receivables
 
 22,374
 
 
 4,041
 
 
 32,371
 
Inventories
 
 27,701
 
 
 3,594
 
 
 17,830
 
Other current assets
 
 105
 
 
 - 
 
 
 480
 
Property and equipment
 
 8,882
 
 
 1,900
 
 
 5,275
 
Investments
 
 199
 
 
 - 
 
 
 - 
 
Goodwill
 
 12,473
 
 
 1,823
 
 
 9,483
 
Intangibles
 
 15,760
 
 
 140
 
 
 17,658
 
Total assets acquired
 
 87,495
 
 
 11,498
 
 
 83,771
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
 25,026
 
 
 4,498
 
 
 25,811
 
Accrued expenses
 
 1,591
 
 
 - 
 
 
 5,299
 
Other liabilities
 
 - 
 
 
 - 
 
 
 10,476
 
Total liabilities assumed
 
 26,617
 
 
 4,498
 
 
 41,586
 
 
 
 
 
 
 
 
 
 
 
Net assets acquired
$
 60,878
 
$
 7,000
 
$
 42,185
 
 
 
 
 
 
 
 
 
 

 
The following table presents information for Micro that is included in our consolidated statements of income from the acquisition date of October 31, 2011 through the fiscal year ended September 30, 2012:
 

 
 
 
 
 
 
 
 
 
Micro's operations included in MWI's results
 
 
 
 
 
Fiscal year ended September 30, 2012
 
 
Revenues
 
$
 246,624
 
 
Net Income
 
$
 4,089
 
 
 
 
 
 

The following table presents supplemental pro forma information for the Company as if the acquisition of Micro had occurred on October 1, 2011 for the period ended September 30, 2012, on October 1, 2010 for the period ended September 30, 2011 and on October 1, 2009 for the period ended September 30, 2010 (unaudited):
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Pro Forma Consolidated Results
 
 
 
Fiscal year ended September 30,
 
 
 
2012
 
 
2011
 
 
2010
 
Revenues
$
 2,097,076
 
$
 1,793,672
 
$
 1,408,302
 
Net Income
$
 53,571
 
$
 45,769
 
$
 35,190
 
 
 
 
 
 
 
 
 
 

The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition on October 1, 2011, October 1, 2010 and on October 1, 2009.  Additionally, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company.
 

 
4.   Receivables
 
Receivables consist of the following at September 30:
 

 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
Trade
$
 271,199
 
$
 203,038
 
Vendor rebates and programs
 
 20,469
 
 
 15,404
 
 
 
 291,668
 
 
 218,442
 
Allowance for doubtful accounts
 
 (2,746)
 
 
 (2,581)
 
 
$
 288,922
 
$
 215,861
 
 
 
 
 
 
 

Approximately 7% and 8% of our trade receivables resulted from transactions with a single customer as of September 30, 2012 and 2011, respectfully.
 

 
5.   Property and Equipment
 
Property and equipment consists of the following at September 30:
 

 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
Land
$
 1,952
 
$
 1,723
 
Building and leasehold improvements
 
 14,420
 
 
 13,427
 
Machinery, furniture and equipment
 
 33,075
 
 
 20,979
 
Computer equipment
 
 8,276
 
 
 5,864
 
Construction in progress
 
 1,773
 
 
 2,203
 
 
 
 59,496
 
 
 44,196
 
Accumulated depreciation and amortization
 
 (23,712)
 
 
 (18,987)
 
 
$
 35,784
 
$
 25,209
 
 
 
 
 
 
 

We recorded depreciation expense of $6,210, $ 4,501 and $3,692 for the years ended September 30, 2012, 2011 and 2010, respectively.
 

 
6.   Goodwill and Intangibles
 
The changes in the carrying value of goodwill for the fiscal years ended September 30, 2012 and 2011 are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
Goodwill - Beginning of year
 
$
 49,041
 
$
 47,330
 
Acquisition activity
 
 
 12,473
 
 
 1,823
 
Foreign exchange
 
 
 327
 
 
 (112)
 
Goodwill - End of year
 
$
 61,841
 
$
 49,041
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets consist of the following as of September 30:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Useful Lives
 
2012
 
2011
 
Amortizing:
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
9-20 years
 
$
 31,045
 
$
 24,981
 
 
Covenants not to compete
 
1-5 years
 
 
 710
 
 
 808
 
 
Technology
 
11 years
 
 
 5,830
 
 
 - 
 
 
Other
 
3-5 years
 
 
 1,084
 
 
 455
 
 
 
 
 
 
 
 38,669
 
 
 26,244
 
Accumulated amortization
 
 
 
 
 (7,640)
 
 
 (5,109)
 
 
 
 
 
 
 
 31,029
 
 
 21,135
 
Non-Amortizing:
 
 
 
 
 
 
 
 
 
 
Trade names and patents
 
 
 
 
 7,677
 
 
 3,759
 
 
 
 
 
 
$
 38,706
 
$
 24,894
 
 
 
 
 
 
 
 
 
 
 

We recorded amortization expense of $2,852, $1,783 and $1,312 for the years ended September 30, 2012, 2011 and 2010, respectively.  Estimated amortization expense related to intangible assets as of September 30, 2012 is as follows:
 

 
 
 
 
 
 
Amount
 
2013
$
2,737
 
2014
 
2,601
 
2015
 
2,295
 
2016
 
2,192
 
2017
 
2,119
 
 Thereafter
 
19,085
 
 
$
31,029
 
 
 
 

 
7.   Debt
 
Outstanding debt consists of the following as of September 30:
 

 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
Revolving credit facility, 1.10% as of September 30, 2012
$
 39,500
 
$
 - 
 
Sterling revolving credit facility, 1.57% as of September 30, 2012
 
 8,580
 
 
 2,907
 
Capital lease obligations (1)
 
 441
 
 
 1,263
 
Total debt and capital lease obligations
 
 48,521
 
 
 4,170
 
 
Less: Long-term portion of capital lease obligations
 
 (104)
 
 
 (354)
 
Total debt and capital lease obligations included in current liabilities
$
 48,417
 
$
 3,816
 
 
 
 
 
 
 
 
 
(1) The capital lease obligations have varying maturity dates.
 
 
 
 
 
 
 
 

Revolving Credit Facility  — On November 1, 2011, MWI Co. as borrower, entered into a Third Amendment to Credit Agreement (the “Third Amendment”) with MWI Veterinary Supply, Inc. and Memorial Pet Care, Inc., as guarantors, and Bank of America, N.A. and Wells Fargo Bank, N.A. as lenders (collectively, the “Lenders”), amending the Credit Agreement dated December 13, 2006, and as amended from time to time, by and among MWI Co., MWI Veterinary Supply, Inc., Memorial Pet Care, Inc. and the Lenders (the  “Credit Agreement”).  As discussed in Note 3 – Business Acquisitions, MWI Co.’s purchase of the assets of Micro was completed on October 31, 2011, using borrowing capacity that existed prior to the effectiveness of the Third Amendment.   The Third Amendment allows for an aggregate revolving commitment of the Lenders under the Credit Agreement of $150,000 and a maturity date of November 1, 2016.  Under the Third Amendment, the margin on variable interest rate borrowings ranges from 0.95% to 1.50%.  The commitment fee under the Third Amendment ranges from 0.15% to 0.25% depending on the funded debt to EBITDA ratio.  The variable interest rate is equal to the Daily LIBOR Floating Rate or the LIBOR 1-month, 2-month, 3-month or 6-month fixed rate (at MWI Co.’s option) plus the margin.   The Credit Agreement contains financial covenants, including a fixed charge ratio and a funded debt to EBITDA ratio.   We were in compliance with all of the covenants as of September 30, 2012 and 2011.
 
Sterling Revolving Credit Facility — On November 5, 2010, Centaur entered into a £ 12,500 unsecured revolving line of credit facility (the “sterling revolving credit facility”) with Wells Fargo Bank, N.A. London Branch (“Wells Fargo”).  The sterling revolving credit facility is for a three year term with interest paid at the end of the applicable 1-month, 2-month or 3-month interest period.  Interest is based on LIBOR for the applicable interest period plus an applicable margin of 1.05% to 1.90%.  The facility contains financial covenants requiring Centaur to maintain a minimum tangible net worth of £3,000.  As of September 30, 2012 and 2011, Centaur was in compliance with the covenant.
 

 
8.   Common Stock and Stock-Based Awards
 
 
2002 Stock Plan
 
We had a 2002 Stock Plan (the “2002 Plan”) to provide our directors, executives and other key employees with additional incentives by allowing them to acquire an ownership interest in us and, as a result, encouraging them to contribute to our success. All options that were granted under this plan have been exercised and there are no additional shares available for issuance under the 2002 Plan.
 
 
2005 Stock Plan
 
We have a 2005 Stock-Based Award and Incentive Compensation Plan (the “2005 Plan”), under which we may offer restricted shares of our common stock and grant options to purchase shares of our common stock to selected employees and non-employee directors. The purpose of the 2005 Plan is to promote our long-term financial success by attracting, retaining and rewarding eligible participants. At September 30, 2012 and 2011 we had 865,917 and 932,438 shares, respectively, of our common stock available for issuance under the 2005 Plan.
 
The 2005 Plan permits us to grant stock options (both incentive stock options and non-qualified stock options), restricted stock and deferred stock. The compensation committee will determine the number and type of stock-based awards to each participant, the exercise price of each award, the duration of the award ( not to exceed ten years), vesting provisions and all other terms and conditions of such award in individual award agreements. The 2005 Plan provides that upon termination of employment with us, unless determined otherwise by the compensation committee at the time options are granted, the exercise period for vested awards will generally be limited, provided that vested awards will be canceled immediately upon a termination for cause or voluntary termination. The 2005 Plan provides for the cancellation of all unvested awards upon termination of employment with us, unless determined otherwise by the compensation committee at the time awards are granted.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A summary of common stock options activity under the 2002 and 2005 Plans are as follows:
 
 
 
 
2012
 
2011
 
2010
 
 
 
 
Weighted
 
 
Weighted
 
 
Weighted
 
 
Number
 
average
 
Number
average
 
Number
average
 
 
of
 
exercise
 
of
exercise
 
of
exercise
 
 
Shares
 
price
 
Shares
price
 
Shares
price
Outstanding at beginning of year
 
37,385
 
$
14.73
 
 
 
139,550
 
$
4.65
 
 
 
339,404
 
$
3.11
 
Exercised
 
 (14,769)
 
 
10.44
 
 
 
 (102,128)
 
 
0.96
 
 
 
 (199,670)
 
 
2.02
 
Cancelled or expired
 
 (256)
 
 
17.00
 
 
 
 (37)
 
 
17.00
 
 
 
 (184)
 
 
17.00
 
Outstanding at end of year
 
22,360
 
$
17.53
 
 
 
37,385
 
$
14.73
 
 
 
139,550
 
$
4.65
 
Exercisable at end of year
 
22,360
 
$
17.53
 
 
 
37,385
 
$
14.73
 
 
 
139,550
 
$
4.65
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding and exercisable options
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
 
 
average
 
 
 
 
 
 
 
 
 
 
remaining
 
Weighted
 
 
 
 
 
 
contractual
 
average
 
 
 
 
Number of
 
life
 
exercise
 
Range of exercise prices
 
Shares
 
(in years)
 
price
 
$17.00 - $19.99
 
19,990
 
 
2.8
 
 
$
17.00
 
 
$20.00 - $22.60
 
2,370
 
 
3.0
 
 
$
22.04
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The intrinsic value of the shares outstanding and exercisable was $ 1,993 as of September 30, 2012 and $2,022 as of September 30, 2011.
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A summary of restricted stock awards activity under the 2005 Plan are as follows:
 
 
 
 
2012
 
2011
 
2010
 
 
 
 
Weighted
 
 
Weighted
 
 
Weighted
 
 
Number
 
average
 
Number
average
 
Number
average
 
 
of
 
grant date
 
of
grant date
 
of
grant date
 
 
Shares
 
fair value
 
Shares
fair value
 
Shares
fair value
Nonvested at beginning of year
 
105,540
 
$
61.69
 
 
 
70,584
 
$
49.33
 
 
 
38,388
 
$
38.33
 
Granted
 
 74,848
 
 
 101.97
 
 
 
 63,900
 
 
 71.14
 
 
 
 58,350
 
 
 55.05
 
Vested
 
 (48,072)
 
 
102.09
 
 
 
 (25,934)
 
 
52.46
 
 
 
 (25,994)
 
 
45.99
 
Forfeitures
 
 (2,920)
 
 
63.49
 
 
 
 (3,010)
 
 
51.92
 
 
 
 (160)
 
 
39.27
 
Nonvested at end of year
 
129,396
 
$
69.94
 
 
 
105,540
 
$
61.69
 
 
 
70,584
 
$
49.33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As of September 30, 2012, total unrecognized stock based compensation expense related to nonvested awards was approximately $ 10,272 before income taxes, which is expected to be recognized over the remaining term of the awards which range from 1 to 5 years.  During the fiscal years ended September 30, 2012 and 2011, we recognized $ 3,569 and $1,387, respectively, in compensation expense related to common stock awards.
 
 
2008 Employee Stock Purchase Plan
 
The 2008 Employee Stock Purchase Plan (the “ESPP”) allows substantially all employees to purchase shares of our common stock at 95% of the fair market value on the date of purchase.  The purchase date is the last trading date of the purchase period, which begins in March, June, September and December.  Employees accumulate amounts through payroll deductions during the purchase period of between 1% and 10% but no more than $20 annually.  An employee is allowed to purchase a maximum of 200 shares per purchase period.  We issued 6,859 and 6,058 shares of our common stock under the ESPP during fiscal years ended September 30, 2012 and 2011, respectively.
 

9.  Computation Of Earnings Per Common Share (In thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
 
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Net income
$
 53,477
 
$
 53,477
 
$
 42,580
 
$
 42,580
 
$
 33,440
 
$
 33,440
 
Weighted average common
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
shares outstanding
 
 12,616
 
 
 12,616
 
 
 12,464
 
 
 12,464
 
 
 12,241
 
 
 12,241
 
Effect of diluted securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options and restricted stock
 
 
 
 
 31
 
 
 
 
 
 49
 
 
 
 
 
 154
 
Weighted average shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
outstanding
 
 
 
 
 12,647
 
 
 
 
 
 12,513
 
 
 
 
 
 12,395
 
Earnings per share
$
 4.24
 
$
 4.23
 
$
 3.42
 
$
 3.40
 
$
 2.73
 
$
 2.70
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
There was no impact from anti-dilutive shares in fiscal years ended September 30, 2012, 2011 or 2010.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10. Income Taxes
 
Income before taxes is as follows:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Income before taxes
 
 
 
 
 
 
 
 
 
 
United States
$
81,482
 
$
65,271
 
$
52,110
 
 
Foreign
 
4,458
 
 
3,429
 
 
2,216
 
Total income before taxes
$
85,940
 
$
68,700
 
$
54,326
 
 
 
 
 
 
 
 
 
 
 
 

The components of income tax expense consist of the following:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
United States
 
 
 
 
 
 
 
 
 
 
Current payable
 
 
 
 
 
 
 
 
 
 
 
Federal
$
25,535
 
$
20,741
 
$
17,060
 
 
 
State
 
4,494
 
 
3,696
 
 
2,751
 
 
Deferred
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 1,308
 
 
 628
 
 
 538
 
 
 
State
 
 220
 
 
 120
 
 
 95
 
Total U.S. tax expense
 
31,557
 
 
25,185
 
 
20,444
 
International
 
 
 
 
 
 
 
 
 
 
Current payable
 
 1,252
 
 
 1,109
 
 
 826
 
 
Deferred
 
 (346)
 
 
 (174)
 
 
 (384)
 
Total international tax expense
 
 906
 
 
 935
 
 
 442
 
Total income tax expense
$
 32,463
 
$
 26,120
 
$
 20,886
 
 
 
 
 
 
 
 
 
 
 
 

Our deferred tax assets and liabilities consist of the following at September 30:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
Deferred tax assets:
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
 
$
958
 
$
 1,005
 
 
Inventories
 
 
521
 
 
363
 
 
Lease expense
 
 
394
 
 
282
 
 
Employee benefits
 
 
 439
 
 
740
 
 
Other
 
 
368
 
 
325
 
Total deferred tax assets
 
 
2,680
 
 
2,715
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Property and equipment
 
 
 (7,684)
 
 
 (6,534)
 
 
Prepaid expenses
 
 
 (395)
 
 
 (316)
 
 
Other
 
 
 (201)
 
 
 (182)
 
Total deferred tax liabilities
 
 
 (8,280)
 
 
 (7,032)
 
Net deferred liabilities
 
$
(5,600)
 
$
(4,317)
 
 
 
 
 
 
 
 
 

Other deferred tax assets totaling $770 and $758 as of September 30, 2012 and 2011, respectively, arising from the Company’s foreign subsidiary, are subject to full valuation allowance.
 
Income tax expense differed from income taxes at the U.S. federal statutory tax rate for all periods presented as follows:
 

 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Taxes computed at statutory rate
 
35.0%
 
 
35.0%
 
 
35.0%
 
State income taxes (net of federal income tax benefit)
 
 3.6
 
 
3.7
 
 
3.5
 
Foreign
 
 (1.1)
 
 
(0.9)
 
 
 (1.1)
 
Other
 
 0.3
 
 
0.2
 
 
1.0
 
 
 
37.8%
 
 
38.0%
 
 
38.4%
 
 
 
 
 
 
 
 
 
 

In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations.  As of September 30, 2012, the Company has not made a provision for U.S. income or additional foreign withholding taxes on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration.  Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances.  It is not practicable to estimate the amount of deferred tax liability related to investments in foreign subsidiaries because of the complexities of the hypothetical calculation.
 
A reconciliation of the unrecognized tax benefits is as follows:
 

 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Unrecognized tax benefits – Beginning of year
$
 23
 
$
198
 
$
223
 
Gross decreases related to prior period tax positions
 
 (8)
 
 
 (175)
 
 
 - 
 
Gross increases related to current period tax positions
 
 - 
 
 
 - 
 
 
 175
 
Settlements
 
 (15)
 
 
 - 
 
 
 (200)
 
Unrecognized tax benefits – End of year
$
-
 
$
23
 
$
198
 
 
 
 
 
 
 
 
 
 

For the fiscal years ended September 30, 2012, 2011 and 2010, the amount included in our income tax expense for tax-related interest and penalties was not significant.  Of the $23 unrecognized tax benefits as of September 30, 2011, $15 would have impacted our effective rate, if recognized.  Of the $198 unrecognized tax benefits as of September 30, 2010, $15 would have impacted our effective rate, if recognized.  We expect no material changes to our unrecognized tax benefits during the next fiscal year.  Our policy for classifying interest and penalties associated with unrecognized tax benefits is to include such items in income tax expense.
 
We filed Form 3115 Application of Change in Accounting Method with the Internal Revenue Service (“IRS”) during the fiscal year ended September 30, 2008.  We filed an advance consent request for a non-automatic account method change for tax purposes for which we received approval during fiscal year 2011.  Resolution decreased the liability for unrecognized tax benefits by approximately $175.
 
We are under examination by the IRS for the fiscal years ended September 30, 2010 and 2009.  This examination may lead to ordinary course adjustments or proposed adjustments to our taxes.
 
With few exceptions, we are no longer subject to income tax examination for years before 2007 in the U.S. and significant state and local jurisdictions.  We are no longer subject to income tax examinations for years before 2010 in significant foreign jurisdictions.

 
 
11.   Statements of Cash Flows — Supplemental and Noncash Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Supplemental Disclosures
 
 
 
 
 
 
 
 
 
Cash paid for interest
$
 788
 
$
 505
 
$
 340
 
Cash paid for income taxes
 
 31,025
 
 
 21,302
 
 
 19,850
 
Noncash Investing and Financing Activities
 
 
 
 
 
 
 
 
 
Issuance of restricted common stock for asset acquisition
 
 7,158
 
 
 - 
 
 
 - 
 
Capital lease asset additions and related obligations
 
 165
 
 
 455
 
 
 - 
 
Equipment acquisitions financed with accounts payable
 
 192
 
 
 124
 
 
 23
 
 
 
 
 
 
 
 
 
 

 
12.   Commitments and Contingencies
 
We are a party to legal proceedings arising out of the ordinary course of our business.  In our opinion, pending matters will not have a material adverse effect on our financial condition or results of operations.
 
We have operating leases for office and distribution center space and equipment for varying periods. We also lease some of our vehicles in the United Kingdom under capital leases.  Certain leases have renewal options and require contingent payments for increases, including executory costs, property taxes, insurance and certain other costs in excess of a base year amount. Total rent expense for the years ended September 30, 2012, 2011 and 2010 were $5,382, $4,259 and $4,051, respectively.
 
The aggregate future noncancelable minimum rental payments on operating leases and capital leases at September 30, 2012 are as follows:
 

 
 
 
 
 
 
 
 
 
 
 
Lease Obligations
 
Fiscal Year
 
Operating Leases
 
Capital Leases
 
2013
 
$
 4,663
 
$
 337
 
2014
 
 
 4,164
 
 
 88
 
2015
 
 
 3,869
 
 
 16
 
2016
 
 
 3,768
 
 
 - 
 
2017
 
 
 3,669
 
 
 - 
 
Thereafter
 
 
 15,112
 
 
 - 
 
Total future minimum obligations
 
$
 35,245
 
$
 441
 
 
 
 
 
 
 
 

 
13.   Related Party Transactions
 
MWI Co., our subsidiary, holds a 50% membership interest in Feeders’ Advantage that is accounted for as an investment using the equity method. Sales of products to Feeders’ Advantage, which are at our cost, were $61,873, $ 55,185 and $43,017 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. MWI Co. charged Feeders’ Advantage for certain operating and administrative services of $1,008, $919 and $794 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. Our President and Chief Executive Officer and a member of our Board of Directors are each members of the board of managers of Feeders’ Advantage.
 
MWI Co. allows Feeders’ Advantage to use its cash management system to finance its day-to-day operations. At any given time, the outstanding position used in the cash management system may be a receivable or payable depending on the cash activity.  A receivable balance bears interest at the prime rate. The interest due on the outstanding receivable is calculated and charged to Feeders’ Advantage on the last day of each month. Conversely, to the extent MWI Co. has a payable balance due to Feeders’ Advantage, the payable balance accrues interest in favor of Feeders’ Advantage at the average federal funds rates in effect for that month.  As of September 30, 2012 and 2011, MWI Co. had a receivable balance from Feeders’ Advantage of $62 and $756, respectively.
 

 
14.   Employee Benefit Plans
 
We have a multi-employer defined contribution profit sharing plan with a 401(k) arrangement for employees in the United States.  To become eligible for the profit sharing portion of the plan, an employee must complete two years of service and attain the age of twenty-one. Participation is automatic beginning the following January or July. To become eligible for the 401(k) portion of the plan, the employee must complete three-months of service and attain the age of twenty-one.
 
Both portions of the plan allow for employer contributions. We are required to match 50% of the employee’s contribution to the 401(k) portion of the plan up to 6% of the employee’s salary. Our matching contributions for the 401(k) portion of the plan were $1,871, $ 1,464 and $1,108 for the fiscal years ended September 30, 2012, 2011 and 2010, respectively. Employee’s contributions are fully vested immediately while employer contributions vest over a five-year period.
 
Contributions to the profit sharing portion of the Plans are discretionary, ranging from 0% to 3%, and are approved by our Board of Directors. Total profit sharing expense for the fiscal years ended September 30, 2012, 2011 and 2010 were $1,847, $ 1,516 and $1,244, respectively. Employer contributions are fully vested immediately.
 
Centaur sponsors a defined contribution plan for all other staff not participating in the defined benefit plan described below. The contributions made by the employer over the period are detailed below. Contributions are currently payable at a minimum of 3% up to a maximum of 6% of eligible pay if matched by employee.  The matching contribution for the plan was $250, $269 and $ 207 for the fiscal years ended September 30, 2012, 2011 and 2010 , respectively.
 
Centaur operates a defined benefit pension plan which provides benefits based on pensionable pay and is closed to future benefit accrual.
 
The fair value of plan assets, benefit obligation and funded status of the defined benefit plan as of September 30 is as follows:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Fair value of plan assets
 
$
 5,329
 
$
 4,760
 
$
 4,771
 
Benefit obligation
 
 
 (7,228)
 
 
 (7,031)
 
 
 (7,160)
 
Unfunded pension liability
 
$
 (1,899)
 
$
 (2,271)
 
$
 (2,389)
 
 
 
 
 
 
 
 
 
 
 

The unfunded pension liability is recognized as other long-term liabilities in the Consolidated Balance Sheets.  Net periodic benefit expense for the fiscal year ended September 30 consisted of the following:
 

 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
Interest cost
$
 219
 
$
 255
 
$
 159
Expected return on plan assets
 
 (249)
 
 
 (205)
 
 
 (139)
Net periodic (benefit)/cost
 
 (30)
 
 
 50
 
 
 20
 
 
 
 
 
 
 
 
 
 
Other changes recognized in other comprehensive income
 
 
 
 
 
 
 
 
 
Actuarial (gain)/loss
 
 (373)
 
 
 (88)
 
 
 591
Total recognized in net periodic benefit costs and
 
 
 
 
 
 
 
 
 
other comprehensive income
$
 (403)
 
$
 (38)
 
$
 611
 
 
 
 
 
 
 
 
 
 
Total (gain)/loss recognized in other comprehensive income, net of tax
$
 (228)
 
$
 (21)
 
$
 457
 
 
 
 
 
 
 
 
 
 

The estimated net actuarial loss that will be amortized from accumulated other comprehensive losses into net periodic benefit costs during fiscal year 2012 is not significant.  The following table provides the weighted-average actuarial assumptions:
 

 
 
 
 
 
 
 
 
 
2012
 
Assumptions used to determine benefit obligations
 
 
 
 
Discount rate
 
3.0%
 
 
Rate of compensation increase (1)
 
N/A
 
 
 
 
 
 
Assumptions used to determine net periodic benefit cost
 
 
 
 
Discount rate
 
3.1%
 
 
Expected return on plan assets
 
5.2%
 
 
Rate of compensation increase (1)
 
N/A
 
 
 
 
 
 
(1) There is no assumed rate of compensation increase as there have been no current active members since April 2006.
 
 
 
 
 

The assets of the plan are invested as follows as of September 30:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
 
 
 
Market
 
Asset
 
Fair Value
 
Market
 
Asset
 
Fair Value
 
Asset Class
 
Value
 
Allocation
 
Level
 
Value
 
Allocation
 
Level
 
Equities
 
$
 1,793
 
34%
 
 2
 
$
 1,752
 
36%
 
 2
 
Corporate bonds
 
 
 1,275
 
24%
 
 2
 
 
 977
 
21%
 
 2
 
UK Government bonds
 
 
 485
 
9%
 
 2
 
 
 445
 
9%
 
 2
 
Cash
 
 
 218
 
4%
 
 1
 
 
 26
 
1%
 
 1
 
Other assets
 
 
 1,558
 
29%
 
 2
 
 
 1,560
 
33%
 
 2
 
 
Total
 
$
 5,329
 
100%
 
 
 
$
 4,760
 
100%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
15. Other Comprehensive Income
 
The components of comprehensive income (loss) were as follows:
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
2011
 
 
2010
 
Net income
$
 53,477
 
$
 42,580
 
$
 33,440
 
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
 1,877
 
 
 (663)
 
 
 536
 
 
Actuarial gain/(loss) on pension valuation, net of deferred taxes
 
 228
 
 
 21
 
 
 (457)
 
 
 
Total comprehensive income
$
 55,582
 
$
 41,938
 
$
 33,519
 
 
 
 
 
 
 
 
 
 
 
 

 
16.   Fair Value of Financial Instruments
 
Current fair value accounting guidance includes a hierarchy that is intended to increase consistency and comparability in fair value measurements and disclosures.  This hierarchy prioritizes inputs to valuation techniques based on observable and unobservable data.  The guidance categorizes these inputs used in measuring fair value into three levels which include the following:
 
·  
Level 1 – observable inputs such as quoted prices in active markets;
·  
Level 2 – inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
·  
Level 3 – unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
As of September 30, 2012 and 2011, financial instruments include cash and cash equivalents, receivables and accounts payable, and the fair values approximate book values due to their short maturities.
 
Our revolving credit facility in the United States and in the United Kingdom were amended in the recent past and are based on market conditions such as LIBOR.  Because these credit facilities include interest rates based on current market conditions, we believe that the estimated fair value of our debt was materially the same as our carrying value.
 

 
17.   Geographic Information
 
Revenues and long-lived assets by geographic region are as follows:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
2011
 
2010
 
Revenues for the fiscal years ended September 30
 
 
 
 
 
 
 
 
 
 
United States
$
 1,776,414
 
$
 1,304,794
 
$
 1,074,226
 
 
International
 
 298,732
 
 
 260,546
 
 
 155,116
 
 
 
Total
$
 2,075,146
 
$
 1,565,340
 
$
 1,229,342
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-lived assets as of September 30
 
 
 
 
 
 
 
 
 
 
United States
$
 29,001
 
$
 18,953
 
$
 9,762
 
 
International
 
 6,783
 
 
 6,256
 
 
 5,476
 
 
 
Total
$
 35,784
 
$
 25,209
 
$
 15,238
 
 
 
 
 
 
 
 
 
 
 
 

 
18.   Quarterly Financial Data (Unaudited)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three-Months Ended
 
 
 
 
 
Dec. 31,
 
Mar. 31,
 
June 30,
 
Sept. 30,
 
Year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Dollars and shares in thousands, except per share data) (1)
Fiscal Year 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
461,901
 
$
507,170
 
$
554,669
 
$
551,406
 
$
2,075,146
Gross profit
 
62,514
 
 
66,618
 
 
69,519
 
 
68,265
 
 
266,916
Operating income
 
21,415
 
 
21,411
 
 
23,287
 
 
19,654
 
 
85,767
Net income
 
13,196
 
 
13,178
 
 
14,503
 
 
12,600
 
 
53,477
Earnings per common share — basic
$
1.05
 
$
1.04
 
$
1.15
 
$
0.99
 
$
4.24
Earnings per common share — diluted
$
1.05
 
$
1.04
 
$
1.15
 
$
0.99
 
$
4.23
Weighted average common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
12,581
 
 
12,619
 
 
12,628
 
 
12,636
 
 
12,616
 
Diluted
 
12,605
 
 
12,648
 
 
12,662
 
 
12,672
 
 
12,647
Fiscal Year 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
366,174
 
$
367,112
 
$
410,736
 
$
421,318
 
$
1,565,340
Gross profit
 
50,072
 
 
50,986
 
 
54,087
 
 
50,440
 
 
205,585
Operating income
 
17,536
 
 
16,869
 
 
18,701
 
 
15,560
 
 
68,666
Net income
 
10,828
 
 
10,332
 
 
11,390
 
 
10,030
 
 
42,580
Earnings per common share — basic
$
0.87
 
$
0.83
 
$
0.91
 
$
0.80
 
$
3.42
Earnings per common share — diluted
$
0.87
 
$
0.83
 
$
0.91
 
$
0.80
 
$
3.40
Weighted average common shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
12,415
 
 
12,462
 
 
12,484
 
 
12,497
 
 
12,464
 
Diluted
 
12,483
 
 
12,511
 
 
12,526
 
 
12,531
 
 
12,513
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The sums of the quarterly net income and earnings per share amounts may not agree to the year-to-date
earnings per common share amount as a result of rounding.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9.                      Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None.

Item 9A.
  Controls and Procedures.
 
Our management, including the Chief Executive Officer and the Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of September 30, 2012. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our Company’s disclosure controls and procedures, including the accumulation and communication of disclosures to the Company’s Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure, are effective to provide reasonable assurance that information required to be disclosed by the us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission‘s rules and forms.
 
Management’s annual report on internal control over financial reporting and the attestation report of our independent registered public accounting firm are set forth below on this Annual Report on Form 10-K.
 
There were no changes in our internal controls over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
 
The management of MWI Veterinary Supply, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f)).
 
 
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
 
 
In October 2011, the Company acquired substantially all of the assets of Micro Beef Technologies, Ltd. (“Micro”), a value-added distributor to the production animal market. For purposes of determining the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2012, and any change in our internal control over financial reporting for the fiscal fourth quarter of 2012, management has excluded the internal control over financial reporting of Micro from its evaluation of these matters. Our consolidated financial statements as of and for the year ended September 30, 2012, include approximately $79 million of assets (including intangibles and goodwill) or 11% of our total assets, and approximately $247 million of revenue or 12% of our total revenues, associated with Micro.
 
 
Management assessed the effectiveness of the Company’s internal control over financial reporting excluding the recently completed acquisition of Micro as of September 30, 2012. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of September 30, 2012, internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.
 
 
The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Their report is included herein.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
 
MWI Veterinary Supply, Inc.
 
Boise, Idaho
 
We have audited the internal control over financial reporting of MWI Veterinary Supply, Inc. and subsidiaries (the "Company") as of September 30, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Micro Beef Technologies, Ltd. (“Micro”), which was acquired in October 2011 and whose financial statements constitute 11% total assets and 12% of net revenues of the consolidated financial statement amounts as of and for the year ended September 30, 2012. Accordingly, our audit did not include the internal control over financial reporting at Micro. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended September 30, 2012, of the Company, and our report dated November 27, 2012 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.
 
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
November 27, 2012
 
Item 9B.
Other Information.
 
None.

PART III
 
Item 10.
Directors , Executive Officers and Corporate Governance of the Registrant.
 
The information regarding directors and nominees for directors of the Company, including identification of the audit committee and audit committee financial expert, is presented under the headings “Corporate Governance—Committees of the Board of Directors,” and “Election of Directors—Nominees For Directors” in the Company’s definitive proxy statement for use in connection with the 2012 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed within 120 days after the end of the Company’s fiscal year ended September 30, 2012. The information contained under these headings is incorporated herein by reference. Information regarding the executive officers of the Company is included in this Annual Report on Form 10-K under Item 1 of Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
 
The Company has adopted a code of conduct that applies to its Chief Executive Officer and Chief Financial Officer. This code of conduct is available on the Company’s Web site at www.mwivet.com . If the Company makes any amendments to this code other than technical, administrative or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of this code to the Company’s Chief Executive Officer or Chief Financial Officer, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies in a report on Form 8-K filed with the SEC.
 

Item 11.
Executive Compensation.
 
Information concerning executive compensation is presented under the headings “Executive Compensation” and “Compensation Committee Report” in the Proxy Statement.  The information contained under these headings is incorporated herein by reference.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Information with respect to security ownership of certain beneficial owners and management is set forth under the heading “Security Ownership of Certain Beneficial Owners and Directors and Officers” in the Proxy Statement. The information contained under these headings is incorporated herein by reference.
 
 
Equity Compensation Plan Information
 
The following table provides information as of September 30, 2012 about the common stock that may be issued under all of our existing equity compensation plans, including the 2002 Stock Plan and 2005 Stock-Based Incentive Compensation Plans. Both of these plans have been approved by our stockholders.
 
   
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
 
Weighted-average exercise
price of outstanding options,
warrants and rights
(b)
 
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected in
column (a))
(c)
 
Equity compensation plans approved by security holders
   
22,360
     
$17.53
     
865,917
   
Equity compensation plans not approved by security holders
   
—
     
—
     
—
   
Total
   
22,360
     
$17.53
     
865,917
   


Item 13.
Certain Relationships, Related Transactions and Director Independence.
 
Information concerning related transactions and director independence is presented under the heading “Certain Relationships, Related Transactions and Director Independence” in the Proxy Statement. The information contained under this heading is incorporated herein by reference.

Item 14.
Principal Accountant Fees and Services.
 
Information concerning principal accountant fees and services is presented under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement. The information contained under this heading is incorporated herein by reference.

PART IV
 
Item 15.
Exhibits and Financial Statement Schedules.
 
(a)
The following documents are filed as part of this report:
 
 
1)
Consolidated Financial Statements: See Index to Consolidated Financial Statements at Item 8 on page 42 of this report.
 
 
2)
Financial Statement Schedule: Schedule II—Consolidated Valuation and Qualifying Accounts
 
 
3)
Exhibits are incorporated herein by reference or are filed with this report as set forth in the Index to Exhibits on pages 70 through 73 hereof
 
MWI VETERINARY SUPPLY, INC.
 
SCHEDULE II—CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
 
(Amounts in thousands)
 
   
Balance at
Beginning
of Period
 
Charged
(Credited) to
Costs and
Expenses
 
Deductions/
Write-offs
 
Balance at
End of Period
 
Allowance for Doubtful Accounts
                                 
Year ended September 30, 2010
   
$   3,006
     
$(134
)
   
$(302
)
   
$    2,570
   
Year ended September 30, 2011
   
2,570
     
437
     
(428
)
   
2,579
   
Year ended September 30, 2012
   
2,579
     
661
     
(494
)
   
2,746
   

Signatures
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
MWI Veterinary Supply, Inc.
 
By: /s/ Mary Patricia B. Thompson
 
Mary Patricia B. Thompson
 
(Senior Vice President of Finance and Administration, Chief Financial Officer)
Date: November 27, 2012
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of November 27, 2012.
 
/s/ James F. Cleary ,  Jr .
 
/s/ Mary Patricia B. Thompson
James F. Cleary, Jr.
Director, President and
Chief Executive Officer
(Principal Executive Officer)
 
Mary Patricia B. Thompson
Senior Vice President of Finance and Administration,
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Keith E. Alessi
 
/s/ Bruce C. Bruckmann
Keith E. Alessi (Director)
 
Bruce C. Bruckmann (Director)
/s/ John F. McNamara
 
/s/ A. Craig Olson
John F. McNamara (Director)
 
A. Craig Olson (Director)
/s/ Robert N. Rebholtz
 
/s/ William J. Robison
Robert N. Rebholtz (Director)
 
William J. Robison (Director)
 
Index to Exhibits
 
Filed with the Annual Report
 
on Form 10-K for the
 
Year Ended September 30, 2012
 
Number
     
Description
2.1
 
Asset Purchase Agreement dated September 20, 2011 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Micro Beef Technologies, Ltd., incorporated herein by reference to Exhibit 2.2 of the Company’s Annual Report on Form 10-K, filed November 28, 2011.
3.1
 
Form of Amended and Restated Certificate of Incorporation of MWI Veterinary Supply, Inc., incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q, filed August 1, 2007.
3.2
 
Form of Amended and Restated Bylaws of MWI Veterinary Supply, Inc., incorporated herein by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q, filed August 1, 2007.
4.1
 
Form of MWI Veterinary Supply, Inc. common stock certificate, incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).
4.2
 
Registration Rights Agreement dated as of June 18, 2002 by and between MWI Holdings, Inc., Bruckmann, Rosser, Sherrill & Co. II, L.P., Agri Beef Co. and the other parties thereto, incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).
4.3
 
Executive Stock Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply Co., MWI Holdings, Inc. and James Cleary, incorporated herein by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.4
 
Executive Stock Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply Co., MWI Holdings, Inc. and Jeff Danielson, incorporated herein by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.5
 
Executive Stock Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply Co., MWI Holdings, Inc. and James Hay, incorporated herein by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.6
 
Executive Stock Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply Co., MWI Holdings, Inc. and Mary Pat Thompson, incorporated herein by reference to Exhibit 4.8 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.7
 
First Amendment to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and James F. Cleary, Jr., incorporated herein by reference to Exhibit 4.9 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.8
 
First Amendment to Executive Stock Agreement dated as of May 5, 2005 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Jeffrey J. Danielson, incorporated herein by reference to Exhibit 4.10 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
4.9
 
First Amendment to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and James S. Hay, incorporated herein by reference to Exhibit 4.11 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
 
4.10
 
First Amendment to Executive Stock Agreement dated as of May 6, 2005 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Mary Patricia B. Thompson, incorporated herein by reference to Exhibit 4.13 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
10.1
 
2002 Stock Option Plan, incorporated herein by reference to Exhibit 10.11 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*
10.2
 
MWI Veterinary Supply, Inc. 2005 Stock-Based Incentive Compensation Plan, adopted July 27, 2005, as Amended and Restated, effective July 24, 2006, incorporated herein by reference to Exhibit 10.21 of the Company’s Current Report on Form 8-K, filed February 8, 2007.*
10.3
 
Form of Option Letter, incorporated herein by reference to Exhibit 10.22 of the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).
10.4
 
Second Amendment to 2010-2011 Merial Independent Sales Agent Agreement between MWI Veterinary Supply Co. and Merial Limited effective as of February 20, 2011, incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed July 29, 2011.†
10.5
 
First Amendment to the Agreement for Product Purchases effective as of July 1, 2009 by and between MWI Veterinary Supply Co. and Medical Management International, Inc., dba Banfield, The Pet Hospital®, incorporated herein by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10K, filed November 20, 2009.†
10.6
 
First Amendment to the Agreement for Logistics Services effective as of July 1, 2009 by and between MWI Veterinary Supply Co. and Medical Management International, Inc., dba Banfield, The Pet Hospital®, incorporated herein by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10K, filed November 20, 2009.†
10.7
 
Agreement for Home Delivery Logistics Services effective as of July 1, 2009 by and between MWI Veterinary Supply Co. and Medical Management International, Inc., dba Banfield, the Pet Hospital®, incorporated herein by reference to Exhibit 10.9 of the Company’s Annual Report on Form 10K, filed November 20, 2009.†
10.8
 
Credit Agreement dated as of December 13, 2006 by and between MWI Veterinary Supply Co., as Borrower, MWI Veterinary Supply, Inc. and Memorial Pet Care, Inc. as Guarantors, Bank of America, N.A. and Wells Fargo Bank, N.A., as Lenders, incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q, filed February 5, 2007.
10.9
 
2012 Livestock Products Distribution Agreement between MWI Veterinary Supply, Inc. and Pfizer, Inc. effective as of January 1, 2012, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed May 3, 2012. †
10.10
 
2012 Pfizer Premier Equine Products Distribution Agreement between MWI Veterinary Supply, Inc. and Pfizer, Inc. effective as of January 1, 2012, incorporated herein by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q, filed May 3, 2012. †
10.11
 
MWI Veterinary Supply, Inc. 2008 Employee Stock Purchase Plan, incorporated herein by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q, filed May 1, 2008.
10.12
 
License Agreement dated and effective July 1, 2008 between MWI Veterinary Supply Co. and American Animal Hospital Association, incorporated herein by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K, filed November 24, 2008. †
10.13
 
Sponsorship Letter Agreement dated June 30, 2008 between American Animal Hospital Association and MWI Veterinary Supply Co, incorporated herein by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K, filed November 24, 2008.
10.14
 
First Amendment to Credit Agreement dated February 8, 2010 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co., Memorial Pet Care, Inc., Bank of America, N.A. and Wells Fargo Bank, N.A., incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 12, 2010.
 
10.15
 
Second Amendment to Credit Agreement dated August 10, 2010 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co., Memorial Pet Care, Inc., Bank of America, N.A. and Wells Fargo Bank, N.A., incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed August 13, 2010.
10.16
 
Third Amendment to Credit Agreement dated November 1, 2011 by and among MWI Veterinary Supply, Inc., MWI Veterinary Supply Co., Memorial Pet Care, Inc., Bank of America, N.A. and Wells Fargo Bank, N.A., incorporated herein by reference to Exhibit 10.17 of the Company’s Annual Report on Form 10-K, filed November 28, 2011.
10.17
 
Non-competition and Confidential Information Agreement dated September 20, 2011, by and between MWI Veterinary Supply Co. and William C. Pratt, incorporated herein by reference to Exhibit 10.18 of the Company’s Annual Report on Form 10-K, filed November 28, 2011.
10.18
 
Non-competition and Confidential Information Agreement dated September 20, 2011, by and between MWI Veterinary Supply Co. and Mark Shaw, incorporated herein by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K, filed November 28, 2011.
10.19
 
Sterling Revolving Credit Facility dated November 5, 2010 by and among Centaur Services Limited and Wells Fargo Bank, N.A., incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed November 10, 2010.
10.20
 
Continuing Guaranty of MWI Veterinary Supply Co. dated November 5, 2010, incorporated herein by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed November 10, 2010.
10.21
 
Distributor Agreement between MWI Veterinary Supply Co. and Intervet Inc., dba as Intervet/Schering Plough Animal Health effective as of December 1, 2009, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed May 6, 2010. †
10.22
 
Non-Disclosure and Non-Competition Agreement dated as of September 10, 2006 by and among MWI Veterinary Supply Co. and John Francis, incorporated herein by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10Q, filed May 6, 2010.*
10.23
 
Non-Disclosure and Non-Competition Agreement dated as of August 26, 2011 by and among MWI Veterinary Supply Co. and Kevin W. Price, incorporated herein by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K, filed November 28, 2011. *
10.24
 
2010 Livestock Products Distribution Agreement between MWI Veterinary Supply, Inc. and Pfizer, Inc. effective as of January 1, 2010, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed May 5, 2011. †
10.25
 
2010 Pfizer Equine Products Marketing Agreement between MWI Veterinary Supply Co. and Pfizer Inc. effective as of January 1, 2010, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed May 5, 2011. †
10.26
 
2010 Strategic Brands Distribution Agreement between MWI Veterinary Supply, Inc. and Pfizer Inc. effective as of January 1, 2010, incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q, filed May 5, 2011. †
10.27
 
Non-Exclusive Distributor Agreement by and between MWI Veterinary Supply Co. and ABAXIS, Inc. effective as of January 1, 2013.
10.28
 
Letter Agreement by and between MWI Veterinary Supply Co. and ABAXIS, Inc. dated as of September 28, 2012. †
10.29
 
IDEXX Distribution Agreement by and between IDEXX Distribution, Inc. on behalf of itself, IDEXX Laboratories, Inc., and entities controlled by or under common control with IDEXX Laboratories, Inc. and MWI Veterinary Supply Co. effective as of January 1, 2013. †
10.30
 
Non-Disclosure and Non-Competition Agreement dated as of September 12, 2011 by and among MWI Veterinary Supply Co. and Alden J. Sutherland.*
21.1
 
Subsidiaries of MWI Veterinary Supply, Inc.
23
 
Consent of Deloitte & Touche LLP
 
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase
 
*
Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.
 
†
Certain portions of the exhibit have been omitted pursuant to a confidential treatment request submitted to and approved by the SEC.
 

 
73
 
EXHIBIT 10.27
 

 

 
CONFIDENTIAL (MWI)


 
NON-EXCLUSIVE DISTRIBUTOR AGREEMENT
 




This Non-Exclusive Distributor Agreement (“Agreement”) is effective the 1st day of January 2013 (the “Effective Date”), by and between MWI Veterinary Supply Co., with its principal office at 3041 Pasadena Dr., Boise, ID 83705 (hereinafter called “Distributor”), and ABAXIS, Inc.,  a California corporation  with  its  principal  office  at  3240  Whipple Road,  Union  City, California 94587 (hereinafter called “ABAXIS”).

WHEREAS,  ABAXIS  is  a  manufacturer  of  products  for  the  in  vitro  analysis  of  various components in body fluids and whereas ABAXIS desires to further the sale of its products to customers, including veterinarians’ offices, clinics, hospitals;
 

WHEREAS, Distributor conducts a business which sells medical products to such veterinarian sites as those mentioned above and has the capability and resources to help further the sales of ABAXIS products to those customers; and

WHEREAS, ABAXIS desires to appoint Distributor, and Distributor desires to accept from ABAXIS, the right to market, sell, and distribute ABAXIS products, all on the terms and subject to the conditions stated herein.

NOW, THEREFORE, the parties hereto agree as follows:

1.            D e finit i ons
 

 
As used in this Agreement, the terms defined below shall have the following meanings;

 
A.
“Distribute’’,  “Distributed”  or  “Distribution”  shall  mean  to  sell,  distribute, market,  promote, stimulate interest in, solicit orders for and provide services in connection with those activities.

 
B.
“Distributor Price” shall mean the current ABAXIS provided distributor price list or price on the  date of the Order for the applicable Products, unless otherwise agreed to in writing by the parties.

C.           “End-User” shall mean any provider of veterinarian medical care that actually uses the Products.
 
 
D.
“Order” shall mean a written purchase order that describes Products, including quantities, being purchased by Distributor and the requested delivery date(s).

 
E.
“Order Terms” shall mean, notwithstanding any conflicting terms set forth on an Order,  the   terms  and  conditions  contained  in  this  Agreement,  and  in  any modifications thereto as may be agreed in writing by the parties.


 

 
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F.
“Person” shall mean any individual, partnership, joint venture, limited liability company,   corporation,  firm,  trust,  association,  unincorporated  organization, governmental  authority  or  agency,  or  any  other  entity  not  specifically  listed herein.

 
G.
“Professional Use” shall mean use of Products in connection with care of non- human  animals,  which  use  is  conducted  or  supervised  by  trained  veterinary personnel who have the authority under applicable laws, regulations or statutes to use such Products for such purpose.   For clarity, Professional Use excludes any and all use in human medical care under any circumstances.

 
H.
“Products” shall mean the ABAXIS products listed in the ABAXIS distributor price  list  current  as  of  the  date  of  the  Agreement,  subject  to  any additions, removals, or other changes as ABAXIS may from time to time communicate to Distributor in writing.
 

I.           “Instrument” shall mean the analyzer, which is an electromechanical device. J. “Reagent Rotor” shall mean the plastic disk containing chemical reagents.
 
 
K.
“Sell-Through Period” shall mean (1) in the event that Distributor terminates this Agreement  or  elects  not  to  renew  the  term  of  this  Agreement,  the  period beginning on the date of the termination of this Agreement and ending on the six month anniversary of such date, or (2) in the event that ABAXIS terminates this Agreement  or  elects  not  to  renew  the  term  of  this  Agreement,  the  period beginning on the date of the termination of this Agreement and ending on the one year anniversary of such date.

 
L.
“Territory” shall mean the geographical area consisting of those areas in United States  serviced  by field  sales  representatives  or called  on  by inside telesales representatives.

 
M.
“Trademarks”, “Trade Names” and “Copyrights” shall mean the trademarks, trade names and  copyrights, respectively, owned or controlled by ABAXIS, whether registered or arising by applicable law, and used in connection with the Products.

2.            Appoin t ment; R e tain e d Ri g hts
 

 
ABAXIS hereby grants to Distributor the non-exclusive right to Distribute Products to End-Users for  Professional Use in the Territory. Distributor is not authorized to sell Products to resellers, other than to a leasing company which leases the Product to End- Users.   Distributor is hereby granted the limited, revocable, non-exclusive right to use ABAXIS’ Trade Names,  Trademarks and Copyrights solely to Distribute Products to End-Users for Professional Use in the  Territory in accordance with this Agreement. Distributor may not appoint any Person as a sub-distributor or to exercise any right under this Agreement in the Territory without prior written consent of ABAXIS, such consent to be given in its sole discretion.  By entering into this Agreement, Distributor agrees to
 

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assist ABAXIS by facilitating the availability of the Products and the availability of proper training and support to the End-Users of the Products.

Nothing in this Agreement prevents ABAXIS or its affiliates from using the Products or the  intellectual  property  therein  to  make,  have  made,  develop,  sell,  license,  and/or Distribute the Products. Except  for the limited Distribution rights expressly granted herein, no right, title or interest with respect to the Products or any intellectual property right of ABAXIS is granted by ABAXIS to Distributor hereunder.

3.            Obli g a t i ons of D is t ribut o r ; R i g hts of A B A X I S
 

 
Distributor’s  obligations  under  this  Agreement  shall,  without  limitation,  include  the
following:
 

 
A.
Distributor shall use commercially reasonable efforts to Distribute Products for veterinary use only in the Territory.  No Product shall knowingly be sold for use in human medical care or for use outside of the Territory.

 
B.
Distributor shall maintain adequate written procedures for warehouse control and Distribution  of  Products.  Distributor  shall  store  and  handle  all  Products  in accordance  with the applicable requirements as set forth in App e ndix   A and in compliance  with  all  applicable  laws,  rules  and  regulations.To  the  extent applicable, Distributor shall not sell any Product with an expired shelf life and shall dispose of any such Product with an expired shelf life in the matter required by ABAXIS and in accordance  with all applicable laws, rules and regulations. Such disposal of expired Products shall be at Distributor’s sole expense.

 
C.
Distributor shall maintain accurate and complete books and records of the storage, sale, Distribution and shipment of Products to End-Users for at least two (2) years from the date of sale, or to the end of the useful life of the Products, whichever is longer, and all in accordance with generally-accepted accounting principles or as required  by applicable  regulatory requirements  in  the Territory.The  written records shall be in such a form as to enable ABAXIS to trace the location of all Products.   ABAXIS shall have the right, during reasonable business hours and with reasonable prior  notice, to inspect (i) such books and records, and (ii) the facilities   of  Distributor   which   are   used   or   provided   in   connection   with Distribution of Products for regulatory affairs reasons.

 
D.
Distributor shall ensure that any Products which may be returned directly to Distributor shall not be cleaned or otherwise refurbished and re-sold or re-used by Distributor or others, without  ABAXIS’ prior written consent, and Distributor shall maintain adequate written procedures  designed to prevent such prohibited activities.  Distributor further agrees to contact ABAXIS’ Customer Service prior to accepting any return from any End-User for any Instrument.  In the case of a used Instrument (i.e., when the packing seal has been broken), ABAXIS will provide a quotation for refurbishing such Instrument for Distributor to sell as a factory refurbished Instrument.  If the packing seal for an Instrument has not been broken, ABAXIS may inspect as it deems necessary and will adjust Distributor and ABAXIS  installed base records to reflect the return.   For the avoidance of doubt, ABAXIS will not  accept any returns of Product to ABAXIS except as provided in Section 7.
 
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E.
Distributor shall submit all advertising and promotional materials for Products to ABAXIS at least ten (10) days prior to use or distribution of such materials, for ABAXIS’ review and approval, such approval not to be unreasonably withheld or delayed.  In the event that ABAXIS  provides comments or suggests changes within the ten (10) days of the receipt of such materials, Distributor will revise the materials accordingly.

 
F.
Distributor shall comply with all relevant governmental rules and regulations, and shall obtain all  licenses and approvals necessary to Distribute Products in the Territory.   Distributor agrees, in  its performance of this Agreement, to comply with all applicable laws and shall promptly notify ABAXIS if it becomes aware of any material violations of such applicable laws by Distributor in connection with its performance of this Agreement.
 
G.           Distributor  shall  make  no  representations  or  warranties  with  respect  to  the Products other than those specifically authorized in writing by ABAXIS.

 
H.
Distributor  agrees  to  on-going  training  and  sales  meetings  as  required  by ABAXIS so as to be able to adequately describe, demonstrate and sell Products. Without limiting the generality of the foregoing, Distributor agrees to semi-annual meetings held at mutually agreed upon sites and on mutually agreed upon dates. Distributor training and sales meetings shall also be subject to mutual agreement by both parties regarding responsibility for meeting expenses.

 
I.
Distributor will stock and/or assist End-Users in obtaining proper blood transfer devices. A  list  of  approved  devices  is  described  in  the  ABAXIS  Product Operators’  Manual.   Other  non-approved  devices  may interfere  with  Product performance and Distributor shall not  recommend to End-Users or assist End- Users with the use of such other devices, or otherwise facilitate End-Users’ use of such other devices, without the written consent of ABAXIS.
 

J.           Distributor agrees to maintain a minimum of thirty (30)-days inventory of Product at Distributor’s warehouse, unless otherwise agreed to in writing by the parties.
 
 
K.
Under no circumstances will Distributor in any way alter original manufacturers packaging, sell  Product in quantities other than as originally packaged (break boxes) or deface, tamper with or change in any way the Product labeling.

 
L.
Distributor agrees not to sell or otherwise provide off label or other third party supplied reagents for use with any ABAXIS branded instrument.


 

 
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M.
Within five (5) business days of the close of each month, Distributor shall report to ABAXIS  electronically (unless otherwise agreed to by ABAXIS), the then current  inventory  levels  of  all  Products  by  SKU  and  description,  for  all  of Distributor’s warehouse locations.

 
N.
Within five (5) business days of the close of each month, Distributor shall report to ABAXIS or  the ABAXIS authorized IT agent, currently Focus Technology Group, in writing (unless otherwise agreed by ABAXIS), clinic level sales data including ship to and bill to information,  clinic or facility name, address, city, state, zip, quantities purchased, Product descriptions, Product numbers and other Product sales and marketing data as may be requested by ABAXIS from time to time.  The parties agree that the timeliness and accuracy of this data is critical, as it is an integral part of the field sales and sales management monthly performance review and compensation plan.  ABAXIS has the unrestricted right to use any or all  of  such  data  for  any   lawful  purpose,  including  in  targeted  marketing campaigns, for account retention analysis, customer satisfaction benchmarks and product utilization market analysis.

 
O.
ABAXIS shall have the sole discretion to make a decision for recalling Products in the Territory, and will notify Distributor in a timely manner in connection with any such action.  Distributor agrees to provide reasonable assistance to ABAXIS in the event of any recall of Products.  For any recall, ABAXIS shall directly pay or reimburse Distributor for all reasonable costs and expenses, if any, incurred by Distributor (including shipping, notification and the repurchase of  any recalled Products which are in Distributor’s possession).

 
P.
To the extent appropriate to cover its activities with respect to this Agreement, Distributor shall  obtain and maintain at its own cost and expense commercial general liability insurance  including, but not limited to bodily injury, property damage, premises liability and contractual liability insurance.

4.            Obli g a t i ons of A B A X I S
 

 
ABAXIS shall have the following obligations under this Agreement:
 
       A.           ABAXIS shall provide such marketing direction and guidance to Distributor, as ABAXIS deems desirable at ABAXIS’ discretion.

 
B.
ABAXIS  shall  maintain  product  liability  insurance  covering  the  Products  in amounts  that,  in  its  sole discretion,  ABAXIS  determines  to  be  commercially reasonable.
 
 
C.
ABAXIS  shall  provide  to  Distributor  such  literature,  brochures,  and  other materials  as  ABAXIS  deems  desirable  in  the  exercise  of  selling  ABAXIS Products.


 

 
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       D.           ABAXIS  shall  maintain  warranty  and  post-warranty  repair  services  for  the Products pursuant to its then applicable warranty policies for such Products.

 
E.
ABAXIS shall use commercially reasonable efforts to ship Product within thirty (30) days after receiving and accepting a faxed or mailed Order from Distributor, or by such later date as requested by Distributor and accepted by ABAXIS.

 
F.
Notwithstanding anything to the contrary herein, ABAXIS shall not be required to supply any Products to the extent that it would require ABAXIS or its affiliates to violate any applicable laws, rules or regulations, or would result in the breach of any agreement or other applicable contractual obligation.

5.            O r d e rs
 
 
A.
Orders for Products by Distributor shall be placed with ABAXIS by mail or facsimile (or by  phone with explicit approval from ABAXIS) at the following address and telephone numbers:

ABAXIS, Inc.
3240 Whipple Road
Union City, CA 94587
Tel: 800-822-2947
Fax: 510-675-6500
 
         B.           Orders shall be subject to acceptance by ABAXIS.

 
C.
ABAXIS reserves the right to reject any Order or to cancel any Order previously accepted if, in  ABAXIS’ discretion, ABAXIS determines that it is reasonably likely that such Order will not be paid for in accordance with the Order Terms or that  the  Products  will  not  be  Distributed  in  accordance  with  the  terms  and conditions set forth in  this Agreement.Upon a  determination that ABAXIS intends to cancel a previously accepted Order, ABAXIS shall  give  Distributor prompt written notice of such cancellation and ABAXIS will be under no further obligation  to  deliver  Products  under  that  Order,  but  ABAXIS  may  at  its discretion,   if   Distributor   provides   adequate   assurances   to   ABAXIS   that Distributor will comply fully with Distributor’s obligations under this Agreement, accept further Orders placed by Distributor.

6.            P ri c e a nd P a y ment T e rms
 
 
A.
The price payable by Distributor to ABAXIS for any Product shall be the current Distributor  Price. ABAXIS shall be responsible for all taxes, duties and fees, however  designated,  that  are  applicable  to  the  Products  prior  to  the  sale  to Distributor  under  this  Agreement,  including  without  limitation  all  taxes  on ABAXIS’s income, import and export duties,  excise  fees, license fees, permit fees, transfer fees, privilege fees, value added taxes, and  federal, state, local or other taxes or fees.  Distributor shall be responsible for all taxes, duties and fees, however designated, that are applicable to the purchase of Product by Distributor as well as any subsequent distribution or sale by Distributor.
 

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B.
All Orders shall be paid within thirty (30) days of the date of invoice.  If payment is not received by ABAXIS within said thirty (30) days, the payment shall bear a late payment charge equal to  one and one-half percent (1.5%) per month (or partial month) that the payment is delayed.  Payments shall be made in U.S. Dollars and without any deduction, including for taxes, duties, foreign exchange or other conversions.When ABAXIS has the legal  obligation to collect any taxes,  the  appropriate  amount  shall  be  invoiced  to  Distributor  and  paid  by Distributor.

 
C.
All Products sold and all prices quoted by ABAXIS are EXW (Incoterms 2010) Union City, California or other ABAXIS distribution locations.  Distributor shall be responsible for selecting  the carrier responsible for transporting Products to Distributor’s warehouse and to Distributor’s  customers in accordance with the storage and transportation guidelines set forth in Appendix  A.ABAXIS will reasonably work with Distributor to minimize transportation and associated costs.
 
 
D.
Distributor shall pay for all transportation costs and all costs for insuring the Product while the Product is in transit, and while the Product is in Distributor’s control.

 
E.
Title and risk of loss for the Product shall shift from ABAXIS to Distributor when the  Product  is  delivered  to  the  common  carrier  transportation  company  for shipment to Distributor.

7.            W a r ra n t y   a nd S e rvi c e   P ol ic y
 
A.           Instruments

ABAXIS warrants each Instrument to be free from defects in performance for its intended use for a period of one (1) year (the “Warranty Period”) from its initial sale  by  Distributor  to  the  original  End-User. In  the  event  of  failure  of  an Instrument during the Warranty Period, ABAXIS will, at its option, repair or replace such failed Instrument free of charge, except in the circumstances as listed below.

 
(1)
Any  Instrument  which  has  been  subject  to  abuse,  accident,  alteration, modification, tampering, negligence or misuse;
 
 
(2)
Any  Instrument  which  has  been  repaired  or  serviced  by  anyone  not authorized by ABAXIS to render such service;

 
(3)
Any Instrument whose model or serial number has been altered, tampered with, defaced or removed; or

 

 
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(4)           Any instrument sold outside the Territory or outside of Professional Use.
 
        B.      Reagent Rotors
 
ABAXIS will replace the product or credit the End-User for any Reagent Rotor which  the  Instrument’s  detection  system  has  found  to  have  a  manufacturing defect.  In the event that the Distributor’s customer finds any Reagent Rotor to be defective (i.e., as determined by the  Instrument’s detection system), such End- User  must  call  ABAXIS’  Technical  Service  immediately  to  report  pertinent information, including the lot number of the defective  Reagent  Rotor, and for authorization for credit or replacement of the Reagent Rotor.  ABAXIS will not be  responsible  for  Reagent  Rotors  that  are  mishandled,  altered,  or  stored  or shipped improperly.
 
             Additionally,  ABAXIS  will  not  be  responsible  for  non-performing  Reagent Rotors due to operator error or sample integrity issues.

8.            T e rmin a t i on
 
 
A.
Distributor’s authorization to Distribute Products shall remain in full force and effect for one (1) year from the Effective Date, and such authorization shall renew automatically for one (1) year  successive terms; provided, however, that at any time  during  the  initial  term  or  any  renewal  term,  this  Agreement  may  be terminated as follows:

(1)           During any renewal term,  by either party without cause, after thirty (30)
days written notice of termination;

 
(2)
By ABAXIS, upon giving written notice that Distributor is in breach of its obligations  under this Agreement, if Distributor fails to cure the breach within ten (10) days after receipt of such notice; or

(3)           By ABAXIS with written notice, upon a change of control or ownership of
Distributor as specified in Section 9 below.

 
B.
Upon the effective date of termination of this Agreement for whatever reason, the right of  Distributor to Distribute Products and to use ABAXIS’ Trade Names, Trademarks  and   Copyrights  shall  cease,  and  Distributor  shall  immediately discontinue  all  use  of  ABAXIS’  Trade  Names,  Trademarks  and  Copyrights. Distributor  shall  promptly  return  to  ABAXIS  all  price  lists,  catalogs,  sales literature,  operating  and  service manuals,  advertising literature,  operating and other materials relating to the Products.Upon termination of this Agreement, ABAXIS may purchase, but shall not be obligated to purchase, all or part of the Products, that  are not obsolete, damaged or expired, remaining in Distributor’s inventory at the ABAXIS selling price to Distributor.  Products repurchased from Distributor by ABAXIS pursuant to this Section 8 shall be shipped promptly by Distributor to a location specified by ABAXIS.  The Products so delivered shall
 

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be subject to inspection by ABAXIS and payment therefore shall be made within forty-five  (45)  days  of  final  acceptance  by  ABAXIS  of  such  Products. If ABAXIS does not repurchase Distributor’s entire inventory, Distributor will have the right for the applicable Sell-Through Period  to sell any Products remaining in Distributor’s  inventory to  End-Users  for Professional  Use in  the Territory in accordance  with  this  Agreement,  and  to  continue  to  use  the  sales  literature, manuals and other materials necessary for selling the  remaining inventory of Products.

 
C.
Termination of this Agreement for any reason shall be without prejudice to any rights that shall have accrued to the benefit of any party prior to such termination, including the payment obligations hereunder and any and all damages or remedies arising from any breach hereunder.  Upon any termination of this Agreement, the provisions in Sections 1, 7, 8B, 10, 11, 12, 14, 15, 16, 18 and 19-23 shall remain in effect as necessary to carry out the purpose of those Sections after termination. Additionally,  to  the  extent  that  Distributor  is  allowed  to  retain  and  sell  its remaining inventory of the Products pursuant to Section 8B, all provisions of this Agreement  shall remain in effect as applicable for said sales of the remaining inventory.

9.            Assi g nment
 
 
A.
Distributor may not assign this Agreement or any of its rights or obligations under this Agreement without the prior written consent of ABAXIS, which consent may be withheld at the discretion of ABAXIS.

 
B.
Immediately following (i) any consolidation or merger of Distributor with or into any other Person, or any other corporate reorganization, in which the capital stock of Distributor immediately prior to such consolidation, merger or reorganization, represents  less  than  seventy-five  percent  (75%)  of  the  voting  power  of  the surviving entity (or, if the surviving  entity is a wholly owned subsidiary, its parent) immediately after such consolidation, merger or reorganization; or (ii) any transaction or series of related transactions to which Distributor is a  party in which  more  than  twenty-five  percent  (25%)  of  Distributor’s  voting  power  is transferred  to  a  third  party;  or  (iii)  the  consummation  of  a  sale  of  all  or substantially all of the assets of Distributor in any transaction or series of related transactions, other than a sale of all or substantially all of the assets of Distributor to  an  entity,  the  voting  securities  of  which  are  owned  by  shareholders  of Distributor in substantially the same proportions as their ownership of Distributor immediately prior to such sale,  in any of the  foregoing cases  ABAXIS may terminate this Agreement upon written notice to Distributor.

10.            No Da m a g e s   A r is i ng F r o m T e rmin a t i on
 
Distributor acknowledges and agrees that ABAXIS shall be under no obligation to renew or extend this  Agreement notwithstanding any Orders placed by Distributor or other actions taken by the parties prior to termination of this Agreement.  Upon termination of
 
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the Agreement, neither party shall be liable to the other for any damages (whether direct, consequential,  or incidental and including expenditures, loss of profits or prospective profits of any kind) sustained or ensuring out of, or alleged to have been sustained or to have arisen out of, such termination.  The foregoing shall not limit either party’s rights or remedies with respect to a breach of this Agreement by the other party.

11.            W a r ra n t y   Dis c laimer
 
Except for the express  warranty concerning Products  contained  in Section 7 herein, ABAXIS makes  no representation or warranty, express or implied (including implied warranties  of  merchantability  and  fitness  for  a  particular  purpose)  concerning  any Product or otherwise concerning matters  contemplated by this Agreement.   Distributor acknowledges and agrees that ABAXIS’ sole responsibility in the case of any breach of warranty shall be for ABAXIS to comply with ABAXIS’ policy as set forth in Section 7 above.  In no event shall either party be liable for loss of profits, loss of use, or incidental, consequential or special damages of any kind.

12.            L e g a l R e lationship;   I n d e mn i t y
 
 
A.
The  relationship  between  ABAXIS  and  Distributor  is  that  of  supplier  and purchaser.  Distributor  is  an  independent  contractor  and  is  not  the  legal representative, agent, joint  venture, partner, or employee of ABAXIS for any purpose whatsoever.  Distributor has no right or authority to assume or create any obligations of any kind or to make any  representations or warranties, whether express or implied, on behalf of ABAXIS, or to bind  ABAXIS in any respect whatsoever.

 
B.
A party shall indemnify and hold harmless the other party from any third party claims, injuries, and damages, including all reasonable costs and expenses (such as  attorneys’  fees)   (“Claims”),  that  directly  or  indirectly  result  from  the negligence,  or  willful  misconduct  of  such  indemnifying  party or  its  officers, employees or agents.  In addition, Distributor shall indemnify and hold harmless ABAXIS, its affiliates and their respective officers, directors and employees from any Claims that result or arise from Distributor’s breach of this Agreement.

 
C.
Each of the Parties represents and warrants to the other that this Agreement is duly authorized and delivered and that the Agreement does not conflict with or result in a breach of any other contractual or other obligations of such Party.
 

13.            Use   of A B A X I S   T r a d e m a rks a nd Co p y r i g hted M a te r ial
 
 
Distributor may use materials furnished by ABAXIS which contain Trademarks, Trade Names and Copyrights only with respect to Distribution of the Products, in accordance with the terms of this Agreement.  Any other use by Distributor of Trademarks, Trade Names and Copyrights shall require specific written authorization from ABAXIS, on a case by case basis.  Any such use shall be on a non-transferable, non sublicenceable and non-exclusive basis.

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14.            P rop r iet a r y   Ri g hts
 
ABAXIS will retain and own all of the rights, title and interest in and to all Copyrights, Trademarks,  Trade  Names,  trade  secrets,  patents,  and  all  other  intellectual  property embodied in or covering the  Products.   Except as otherwise expressly provided in this Agreement, Distributor has no right, title or  interest in or to the intellectual property embodied in or covering the Products.

15.            P a tent M a rking
 
Distributor agrees to include on the Products and on all labels, packaging and sales materials such patent marking as is reasonably requested by ABAXIS.
 

16.            Confid e nt i a l   I n fo r mation
 
Except as shall be necessary to comply with applicable laws, court orders and regulations including any public filing requirements, and except as otherwise agreed to by ABAXIS in writing, Distributor shall not  use for any purpose other than as permitted herein, or disclose to third parties, any communications from ABAXIS made under this Agreement (whether in written, verbal, electronic, or other form) that are designated, or which should reasonably  be  regarded  in  the  normal  commercial  view,  as  constituting  confidential information, business secrets or proprietary information of ABAXIS (including the terms of this Agreement, it being understood that the Parties may disclose publicly that it has entered into this  Agreement) (collectively, the “Confidential Information”).ABAXIS hereby  consents  to  the  use  of  the  Confidential  Information  and  disclosure  of  the Confidential Information to the employees of Distributor under confidentiality and non- use terms substantially equivalent to  those set  forth herein, in  each  case  only as  is reasonably necessary in order to allow Distributor to perform under this Agreement.  In the event that a Distributor must file this Agreement or otherwise  disclose any of its terms  pursuant  to  public  filing  requirements,  the  Distributor  shall  seek  confidential treatment of those portions of the Agreement as the parties shall mutually agree upon. Prior to the initial public announcement by the Distributor, ABAXIS shall approve the text  (including  any   Form  8-K)  relating  to  the  transactions  contemplated  by  this Agreement.Any  subsequent  public  announcements  or  non-confidential  disclosures regarding the terms of this Agreement shall also be approved by ABAXIS in writing prior to any release thereof.In the event that  Distributor must disclose any Confidential Information  to  comply  with  applicable  laws  or  court  orders,  Distributor  shall  give reasonable advance notice to ABAXIS of such disclosure requirement to enable ABAXIS to seek a protective order or other remedy to protect such Confidential Information, and Distributor  shall  reasonably  assist  ABAXIS  in  such  efforts.This  confidentiality provision shall survive termination of this Agreement.

17.            F orce   M a jeu r e
 
Except  as  to  the  timely  payment  by  Distributor  of  the  purchase  price  of  Products purchased by it under this Agreement, no failure or omission to carry out or observe any of the terms, provisions, or conditions of this Agreement will give rise to any claim by
 
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one party against the other, or be a breach of this Agreement, if the same is caused by or arises out of one or more of the following force majeure conditions: acts of God; actions of,  or  changes  to  regulations  or  laws  of,  any  government;  war;  civil  commotion; destruction of facilities  or materials  by fire,  earthquake or storm; labor disturbance; epidemic; failure of public utilities or of suppliers; or any other  event, matter or thing wherever occurring and whether or not of the same class or kind as those set forth above, which is not reasonably within the control of the affected party.  However, the affected party shall promptly notify the other party of such conditions and will endeavor to avoid, remove, or cure all such conditions as soon as is reasonably feasible.

18.            Choice   of   L a w; V e nue
 
This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to its rules for conflict of laws.  In the event of any action to enforce or construe this Agreement, or any of the provisions contained herein, whether initiated by ABAXIS or by Distributor, such action shall be heard only by a court of competent jurisdiction located in the State of Delaware.
 

19.            Comp l e te A g r ee men t ; A mendm e nts
 
This Agreement constitutes the entire contract between ABAXIS and Distributor.   All prior or  contemporaneous agreements, proposals, understandings and communications between or involving  ABAXIS and Distributor are replaced in their entirety by this Agreement,  except  that  this  Agreement  shall  not  relieve  either  party  from  making payments which may be due and owing under any agreements or contract made prior to the date hereof.  This Agreement may be amended only by a written instrument executed by authorized representatives of ABAXIS and Distributor.

20.            S e v e r a bi li ty
 
If  any  provision  of  this  Agreement  is  held  to  be  invalid  by  a  court  of  competent jurisdiction, then  the remaining provisions shall remain, nevertheless, in full force and effect.   The parties agree to  renegotiate in good faith any term held invalid and to be bound by the agreed substitute provision in  order to give the most approximate effect intended by the parties.

21.            H ea di n g s
 
The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  Any article, section, appendix, schedule or party  references are to this Agreement unless otherwise stated. Neither party nor their counsel shall be deemed to be the drafter of this Agreement for purposes of construing the provisions hereof, and all provisions of this Agreement shall be construed in accordance with their fair meaning, and not strictly for or against any party.
 
22.           Waiver
 

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No waiver of any term or condition of this Agreement shall be valid or binding on either party unless  agreed in writing by the party to be charged. The failure of a party to enforce at any time any of the provisions of the Agreement, or the failure to require at any time performance by the other party of any of the provisions of this Agreement, shall in no way be construed to be a present or future waiver of such provisions, nor in any way affect the validity of such party to enforce each and every such provision thereafter.

23.            Counte r p a rts
 
This Agreement is signed in two identical counterpart originals each of which is to be considered the original.

[Signatures are on next page.]
 















































 
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in duplicate by their duly authorized representatives as of the date set forth below.

 
 
MWI Veterinary Supply Co.
 

By: Mary Pat Thompson
 
         Signature: /s/ Mary Pat Thompson

Title: Chief Financial Officer

Date: September 28, 2012
 
 
 
         ABAXIS, Inc.
 
         By: Martin Mulroy 
 
         Signature: /s/ Martin Mulroy

         Title: Chief Commercial Officer                                                           

         Date: September 28, 2012                                                          







































 

 
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Appendix A

Storage and Transportation Guidelines for Products

VetScan Reagents
VS2 Rotors, VSpro Cartridges and i-STAT Cartridges



 
  1.0           Reagents must be stored refrigerated at 2-8° C.

 
2.0          
Reagents must be shipped in insulated shipping containers with frozen gel ice packs Cold shipper is to be placed in corrugated shipping box.
 
Insulated containers may be ice chest type, or any other type Styrofoam configuration, designed to   m ai n tain   c old   te m p er atu r e s   f or   a   m i n i m u m   of   24   h o u r s .   Walls of the Styrofoam containers must  be  a minimum of 7/8” wall thick, and be enclosed in a corrugated shipping box.

Gel ice packs must be a minimum 1 1/2 lb.  in weight.  (Generally, smaller sizes will not remain frozen adequately during shipment.)
 
  3.0            Corrugated shipping boxes are to be clearly marked with temperature requirements - “Refrigerate at 2-8° C” - and are to be clearly labeled “Refrigerate Upon Arrival.”

 
4.0
Any carrier who provides next day delivery services may be used so long as the shipment arrives at its destination within twenty-four (24) hours.
 

 
5.0
When the shipment arrives, the product should feel cold to the touch, and the gel packs should be frozen or partially frozen.

 
6.0
Cautio n : Under no circumstances are the reagents to be shipped unprotected, either in a corrugated box  without Styrofoam, without gel packs, or via any shipping method that takes longer than twenty-four (24) hours.

















 

 
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EXHIBIT 10.28

 
 
**-CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
 
28 September 2012

ABAXIS, Inc.
3240 Whipple Road
Union City, CA  94587
Attn:           Martin Mulroy
Chief Commercial Officer
North American Animal Health Business

Re:  Initial Purchase Order Commitment

Dear Mr. Mulroy:

This letter confirms our commitment to ABAXIS to submit purchase orders totaling not less than $15 million for purchase of Products pursuant to that certain Non-Exclusive Distribution Agreement (the “Agreement”) between MWI and ABAXIS executed and delivered as of the date of this letter agreement.  Capitalized terms not defined in this letter have the meaning in the Agreement.

Specifically, MWI’s initial commitment as part of the Agreement shall be for a minimum of two non-cancellable purchase orders (the “Committed Orders”) for Products consisting of equipment, consumable reagents and rapid tests pursuant to the Agreement as follows:  (a) not less than $6 million of Product Orders by November 15, 2012 with shipment dates not later than December 20, 2012; and (b) not less than an additional $9 million of Product Orders by March 1, 2013 (for which MWI will provide ABAXIS with a non-binding forecast by February 15, 2013) with shipment dates not later than March 20, 2013.  The Committed Orders will provide that payment for the Products shall be made by MWI in three installments, with one-third (1/3) due 30 days after the date of shipment, one-third (1/3) due 60 days after the date of shipment and one-third (1/3) due 75 days after the date of shipment.   Notwithstanding anything to the contrary contained in the Agreement, /**/ on all consumable reagents and rapid tests purchased in the Committed Orders as well as any orders for consumable reagents and rapid tests shipped by ABAXIS prior to March 31, 2013.  If ABAXIS is unable to ship the Committed Orders by the applicable dates, the parties agree that /**/ consumable reagents and rapid tests /**/ such Committed Orders whenever shipped by ABAXIS.

This letter constitutes the entire understanding with respect to the Committed Orders and shall otherwise be governed by the terms of Sections 16 – 23 of the Agreement.

If you are in agreement with the understanding, please countersign where indicated below.  MWI is very pleased to begin a new relationship and looks forward to a successful relationship.



MWI VETERINARY SUPPLY CO.
 
/s/ Mary Pat Thompson
Name: Mary Pat Thompson
Title: CFO

  Accepted and Agreed:

ABAXIS, Inc.
 
/s/ Martin Mulroy

Martin Mulroy
Chief Commercial Officer
EXHIBIT 10.29
 
 
**-CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
 

 
IDEXX Laboratories, Inc. One IDEXX Drive, Westbrook, Maine 04092  USA Telephone 207-856-0300
 
 
Facsimile 207-856-0925 www.idexx.com
 

IDEXX DISTRIBUTION AGREEMENT
 

THIS AGREEMENT is effective as of January 1, 2013 (the “ E f f e c t i v e Dat e ”), by and between IDEXX Distribution, Inc., a Delaware corporation having its principal place of business at One IDEXX Drive, Westbrook, Maine 04092, on behalf of itself, IDEXX Laboratories, Inc., and entities controlled by or under common control with IDEXX Laboratories, Inc. (collectively, “ I D E X X ”), and MWI Veterinary Supply Co., an Idaho corporation having its principal place of business at 3041 W. Pasadena Drive, Boise, Idaho 83705, on behalf of itself and any entities controlling, controlled by or under common control with it (collectively, “ D i s t r i bu t o r ”).
 

1.           AGREEMENT
 

IDEXX agrees to sell, and Distributor shall have the right to purchase for resale to end-user veterinary customers, Products on the terms set forth in this Agreement.
 

2.           PRODUCTS AND PRICES
 

 
A.
This Agreement entitles Distributor to purchase from IDEXX all current and future companion animal diagnostic products sold by IDEXX through distributors in the Territory (the “ Pr o du c ts ”), during the Initial Term and any Renewal Terms.  During the term of this Agreement, unless otherwise mutually agreed in writing, Distributor’s purchase of any Products or other items from IDEXX shall be deemed to be made under the terms and conditions of this Agreement.
 

 
B.
IDEXX may change Product prices from time to time during the term of this Agreement, effective immediately by notification to Distributor.  IDEXX's prices to Distributor will be its standard list prices, less a margin discount of ten percent (10%) for all Products other than the Products listed on Ex h i b i t   A ; provided, however, that the margin discount may not be more than five percent (5%) less than the margin discount provided by IDEXX to its other U.S. distributors of such Products. The margin earned on Products listed on Exhibit A will be the same margin earned by other distributors for the same Products.  If at any time during the term of this Agreement IDEXX maintains a distribution arrangement, including any buy/sell or agency arrangement, that results in IDEXX selling any of the Products to another distributor in the Territory which is also offering any product that is competitive to a specific Product sold by that distributor, /**/ that specific Product that is /**/ as may be applicable due to any /**/ as may be applicable due to any /**/ reflecting /**/ other distributor concurrently offering that specific Product and any competitive products to such Product in the Territory.  Margin for Products launched after the Effective Date will be negotiated in good faith consistent with the framework described above.
 

C.           Distributor will have the unilateral right to determine its resale price to end customers.

 
 
 


 
3.           TERRITORY; OTHER COVENANTS
 

 
A.
Distributor agrees to resell the Products only to end-user veterinary customers within the United States of America, excluding Guam, Hawaii and Puerto Rico (the “ T e r r it o r y ”), provided, however, that for purposes of sales of Products to Medical Management International, Inc., a Delaware corporation doing business as Banfield, The Pet Hospital (“ B a n f i e l d ”), the Territory shall include Puerto Rico. Distributor may not appoint sub-distributors, sub-resellers or sales agents, except with IDEXX’s prior written approval.
 

 
B.
Distributor’s right to resell the Products within the Territory is non-exclusive.  Distributor shall not be restricted from promoting, marketing, selling or distributing the products of any other manufacturer, including any products that compete with the Products.  Subject to the terms of this Agreement, IDEXX reserves the right to enter into any other plan of distribution in the Territory, as IDEXX may deem appropriate from time to time.
 

 
C.
Distributor agrees to use commercially reasonable efforts to market and promote the sale of the Products within the Territory.  Distributor agrees to employ, train and maintain competent and experienced sales personnel to enable Distributor to represent the Products in a professional manner.  Distributor agrees to cooperate reasonably with IDEXX on customer education, service and satisfaction matters.  Distributor agrees to cooperate reasonably with IDEXX on the implementation of IDEXX promotional programs.
 

 
D.
Distributor agrees to provide IDEXX with sales transaction data daily, and inventory data weekly, in electronic media form acceptable to IDEXX. Distributor’s sales data shall be clinic-level information, including IDEXX sales by product.  Distributor shall use its commercially
reasonable best efforts to obtain clinic-level information from customer buying groups.
 

 
E.
Distributor agrees to prepare and distribute promotional, advertising and related materials featuring any of the Products only with the prior written approval of IDEXX.
 

 
F.
IDEXX may from time to time at its discretion fund incentive programs for services by Distributor’s employees, subject to Distributor's approval, which shall not be unreasonably withheld.  Distributor agrees to apply such funds as directed by IDEXX. Incentive program payments paid directly by Distributor will be subject to Distributor’s standard payroll load withholding rate (currently 16.7% and subject to change from time to time by Distributor).
 

 
G.
Distributor agrees to /**/ on sales of the Products /**/ that is /**/, excluding those Products listed on Exhibit A, the sales on which /**/.
 

4.           ORDERING, SHIPPING AND PAYMENT – MANUAL PROCESS
 

 
A.
From time to time during the term of this Agreement, Distributor will issue purchase orders to purchase Products.
 

 
B.
All shipments (including shipments of Products intended for resale to Banfield) will be made DAP (Incoterms 2010), to the destination(s) specified in the relevant purchase order. Title to and risk of loss for Products shall pass to Distributor on delivery to the destination specified in Distributor’s purchase order, as evidenced by proof of delivery provided by the carrier.
 

 
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Distributor shall cooperate promptly with IDEXX in the documentation and proof of loss claims presented by IDEXX to the appropriate carrier and/or insurer. Transportation charges will be paid by IDEXX or the Distributor, as the case may be, as more particularly set forth in IDEXX’s distribution policies.  If Distributor requests any special or unusual shipping arrangements, Distributor will reimburse IDEXX for any additional expenses IDEXX may incur. Distributor acknowledges receipt of IDEXX’s current distribution policies.  IDEXX may amend its distribution policies from time to time immediately by written notice to Distributor.
 

5.           ORDERING, SHIPPING AND PAYMENT – ELECTRONIC PROCESS
 

 
A.
IDEXX may from time to time specify Products for which Distributor shall place orders electronically for shipment by IDEXX directly to end-user customers (“ El e c t r o n i c   O r der Produ c ts ”).  IDEXX shall invoice Distributor or the end-user customer, as the case may be, for Electronic Order Products  Distributor shall cooperate with IDEXX in training Distributor’s employees in IDEXX’s electronic ordering procedures as in effect from time to time.
 

 
B.
With respect to Electronic Order Products, Distributor will issue purchase orders electronically to purchase Products in accordance with IDEXX procedures in effect at the time of order.  Such orders shall be deemed received in accordance with cut-off times set forth in IDEXX’s procedures.  Such orders shall include all information specified by IDEXX procedures, including customer ship-to information, Product quantity and Distributor sales representative information.
 

 
C.
IDEXX shall use its commercially reasonable best efforts to acknowledge receipt of such orders electronically, each business day, and to issue a ship notification report on the date of shipment or the next business day thereafter, containing such information as IDEXX procedures may specify.
 

 
D.
Shipments of Electronic Order Products (including shipments of Products intended for resale to Banfield) will be made DAP (Incoterms 2010), to the destination(s) specified in the relevant purchase order. Title to and risk of loss for Products shall pass to Distributor on delivery to the destination specified in Distributor’s purchase order, as evidenced by proof of delivery provided by the carrier. Distributor shall cooperate promptly with IDEXX in the documentation and proof of loss claims presented by IDEXX to the appropriate carrier and/or insurer.  Unless otherwise specified in such policies, IDEXX shall prepay shipping and handling charges for Electronic Order Products for Distributor’s account and add them to the invoice, or such charges shall be included in the price for a Product and paid by IDEXX, as the case may be, as provided in
 
IDEXX’s procedures for a particular Electronic Order Product.  If Distributor requests any special or unusual shipping arrangements, Distributor will reimburse IDEXX for any additional expenses
IDEXX may incur.
 

E.           IDEXX shall invoice Distributor or the end-user customer, as the case may be, in accordance with
IDEXX’s procedures in effect at the time of order for a particular Electronic Order Product.
 

6.           ORDERING, SHIPPING AND PAYMENT – GENERAL TERMS
 

 
A.
Subject to the terms of this Agreement, Distributor shall comply with IDEXX’s distribution policies.  IDEXX has provided Distributor with these policies as in effect on the date of this Agreement.  For the avoidance of doubt, IDEXX’s distribution policies referred to in this Agreement relate to ordering, shipping, receiving, returning, and paying for Products, and do not include the Competitive Products Policy (“CPP”) contained in the previous agreement between IDEXX and Distributor, or any policy similar in substance or intent to the CPP.  In no event may any purchase orders (manual, electronic or otherwise) contain any terms or conditions in conflict
 

 
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with or additional to, the terms and conditions expressed herein.  If, for whatever reason, a purchase order contains additional or conflicting terms, IDEXX shall nevertheless have the right to acknowledge acceptance of such purchase order and perform according to the terms of this Agreement; and the additional or conflicting terms of such purchase orders shall be of no effect, unless IDEXX specifically accepts them by an amendment to this Agreement.
 

 
B.
IDEXX extends trade credit to Distributor based on IDEXX’s determination as to Distributor’s credit worthiness.  IDEXX reserves the right to determine and alter the credit line available to Distributor from time to time, and to refuse orders based on IDEXX’s belief that Distributor should not receive trade credit. This action shall not terminate this Agreement, but Distributor may continue to place C.O.D. or prepaid orders with IDEXX.
 

C.           Unless specifically agreed otherwise in writing, IDEXX’s invoices to Distributor are payable in
cash, net thirty (30) days.  Late payments to IDEXX shall accrue interest at the rate of one and
 
one-half percent (1.5%) per month for each month or fraction thereof on the entire unpaid balance due IDEXX.
 

 
D.
If any check issued by Distributor is not paid upon the first presentment to Distributor’s drawee bank, Distributor shall pay a service charge of two percent (2%) of the face amount of the check or one hundred and fifty dollars ($150.00), whichever is smaller, to IDEXX.
 

 
E.
IDEXX shall have no obligation to continue any performance or obligation hereunder until and unless Distributor shall pay the full amounts due and owing to by it to IDEXX together with any accrued interest and/or any service charges due.
 

 
F.
If either party at any time institutes any legal action or proceedings of any nature against the other party for the enforcement of this Agreement or any of its terms, then the prevailing party shall be entitled to recover all related costs, including reasonable attorney’s fees.
 

7.           DISTRIBUTOR STORAGE AND SHIPPING; AUDITS
 

A.           Distributor shall store and ship the Products in accordance with IDEXX’s policies at all times.
 
Distributor acknowledges receipt of IDEXX’s current storage and shipping environment requirements as of the Effective Date.  IDEXX may amend its storage and shipping environment
requirements from time to time immediately by written notice to Distributor.
 

 
B.
IDEXX reserves the right to audit Distributor’s warehouse storage and shipping methods through unannounced visits.  If IDEXX finds a violation for any Product, Distributor shall not be entitled to receive return credit for such Product under Section 8.
 

8.           RETURN OF PRODUCT
 

IDEXX may in its sole discretion accept returns of unopened Products, and only when approved in advance in writing by IDEXX in each specific instance, as evidenced by IDEXX issuing a Return Authorization Number (RAN) to Distributor for such return.  Approved returns must be shipped at Distributor’s cost to IDEXX’s distribution facility in Memphis, Tennessee (unless otherwise directed by IDEXX in writing), with appropriate packaging and marking instructions as directed by IDEXX.  IDEXX will refuse any returns without a RAN.  IDEXX may in its sole discretion issue a credit for approved Product returns, when agreed to in writing in each specific instance, which Distributor may use against Distributor’s subsequent purchases of Products.  Under no circumstance shall any credits be paid in cash.

 

 
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9.           LIMITED WARRANTY AND DISCLAIMER OF LIABILITY
 

IDEXX warrants to Distributor that when stored and handled under appropriate conditions and in accordance with IDEXX’s instructions each Product will be free from defects in materials or workmanship under normal, proper and intended use, and will meet the specifications contained in the package insert for such Product, if any, until the expiration of its stated shelf life, or, if no expiration date is stated, until one (1) year after the date of delivery of the Product to Distributor’s customers, unless a shorter warranty period is specified in any limited warranty or on any packaging accompanying any such Product.  During the applicable warranty period IDEXX will repair or replace with an equivalent product,
 
in its discretion and at its expense, any Product which contains a defect in materials or workmanship or, if applicable, which fails to meet its package insert specifications.
 

EXCEPT AS AND TO THE EXTENT SET FORTH IN THE PRECEDING PARAGRAPH, (A) IDEXX MAKES NO WARRANTIES, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE PRODUCTS OR THEIR FITNESS FOR ANY PARTICULAR PURPOSE, AND (B) IN NO EVENT WILL IDEXX HAVE ANY LIABILITY FOR ANY DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO: (i) DAMAGES DUE TO DETERIORATION DURING PERIODS OF STORAGE BY DISTRIBUTOR OR THE CUSTOMERS; OR (ii) LOST PROFITS, LOSS OF GOODWILL OR ANY OTHER SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR EXEMPLARY DAMAGES.  DISTRIBUTOR SHALL INDEMNIFY IDEXX AGAINST ALL SUCH CLAIMS ASSERTED BY THIRD PARTIES AS A RESULT OF DISTRIBUTOR’S ACTS OR OMISSIONS.
 

Except as set forth in the immediately following paragraph, IDEXX’s liability for damages to Distributor for any cause, regardless of the form of action, shall not exceed the aggregate price paid for Products under this Agreement during the twelve (12) months preceding the date on which a claim arises. Distributor will immediately inform IDEXX as soon as Distributor becomes aware of liability claims by a third party against the Products.
 

Except as provided at the end of this paragraph, IDEXX shall defend and indemnify Distributor from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) arising out of any claim (a) that any Product purchased hereunder infringes a patent, copyright or trade secret of a third party or (b) for injuries or death to persons or animals or damage to or destruction of tangible property caused by or resulting from the acts or omissions of IDEXX, p r o v i d e d in either case that:
 
(i) Distributor shall have promptly provided IDEXX written notice thereof; (ii) IDEXX shall have sole control and authority with respect to the defense or settlement thereof; provided, however, that IDEXX shall not enter into any settlement that obligates Distributor to take any action or incur any expense without Distributor’s prior written consent, and further, provided that Distributor shall have the right to be represented separately by counsel of its own choosing, at its own expense, in connection with any such claim; and (iii) Distributor shall cooperate with IDEXX, at IDEXX’s expense, in a reasonable way to facilitate settlement or defense.  Should any Product become, or in IDEXX's opinion be likely to become, the subject of such an infringement claim, IDEXX may, at its option, either procure for Distributor the right to continue purchasing and using such Product, or replace or modify such Product so that it becomes non-infringing but performs in accordance with all applicable specifications.  In such event, IDEXX may temporarily withhold further shipments of infringing or potentially infringing Product.  IDEXX shall have no liability or obligation hereunder with respect to any infringement or claim thereof based upon
 
(y) compliance with designs provided by Distributor, where such compliance is the sole cause of such infringement or (z) the combination of the Product with other products not supplied by IDEXX, if the Product would not by itself be infringing.
 




 
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Distributor shall defend and indemnify IDEXX from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees and costs) arising out of any claim (a) that any Product purchased hereunder infringes a patent, copyright or trade secret of a third party based upon compliance with designs provided by Distributor where such compliance is the sole cause of such infringement, or the combination of the Product by Distributor with other products not supplied by IDEXX if the Product would not by itself be infringing or (b) for injuries or death to persons or animals or damage to or destruction of tangible property caused by or resulting from the acts or omissions of Distributor, p r o v i d ed in either case that:  (i) IDEXX shall have promptly provided Distributor written notice thereof;
(ii) Distributor shall have sole control and authority with respect to the defense or settlement thereof;
 
provided, however, that Distributor shall not enter into any settlement that obligates IDEXX to take any action or incur any expense without IDEXX’s prior written consent, and further, provided that IDEXX shall have the right to be represented separately by counsel of its own choosing, at its own expense, in connection with any such claim or suit; and (iii) IDEXX shall cooperate with Distributor, at Distributor’s expense, in a reasonable way to facilitate settlement or defense.
 

10.           FORCE MAJEURE
 

Neither party shall be liable or deemed to be in default for any delay or failure in performance under this Agreement (other than failure to pay) or interruption of service resulting directly or indirectly from acts of civil or military authority, acts of public enemy, war, accidents, fires, explosions, earthquakes, floods, the elements, epidemics, strikes, labor disputes, shortages of fuel, power, suitable parts, materials, labor or transportation, whether in its own enterprise or those of its suppliers, or any cause beyond such party’s reasonable control.  Without limiting the generality of Section 9, in no event shall IDEXX be liable to Distributor or any third party for any lost profits, loss of goodwill or any other special, incidental, consequential, indirect or exemplary damages for failure to deliver the goods required hereunder.
 

11.           TRADEMARK AND TRADE NAMES; PROMOTIONAL MATERIALS
 

 
A.
Distributor agrees properly to use, and to promote, IDEXX’s trademarks and trade names in the sale of the Products in the Territory.  Distributor shall not use IDEXX’s name or any other trademark or trade name used or claimed by IDEXX (“ Prop r i e t a r y   M a r k s ”) in connection with any business conducted by Distributor other than dealing with the Products.  Distributor agrees that its use of the Proprietary Marks shall not create in its favor any rights, title or interest therein and acknowledges IDEXX’s exclusive right, title and interest in the Proprietary Marks.
 

B.           Distributor agrees that it will not use, without IDEXX’s prior written consent, any mark which is
 
likely to be similar to or confused with the Proprietary Marks.
 

C.           Distributor may not place any trademark or trade name of IDEXX on any materials printed by
 
Distributor without IDEXX’s prior written consent.
 

D.           IDEXX shall provide reasonable quantities of marketing and promotional material at IDEXX’s
expense.  Distributor may use such marketing and promotional materials provided by IDEXX.
 

12.           TECHNICAL TRAINING AND ASSISTANCE
 

 
A.
Distributor shall send its service and sales personnel to IDEXX’s facilities, and shall permit IDEXX personnel to attend Distributor meetings, for such sales and technical training as the parties consider necessary to ensure adequate sales and technical service.  Such training shall be free of charge, provided that Distributor shall pay all travel and accommodation expenses for its personnel in connection with such training periods, unless modified by IDEXX in writing.
 

 
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B.
IDEXX may provide additional sales assistance in the form of sales leads, telemarketing, and joint sales calls as IDEXX, in its sole discretion, may deem appropriate.  Distributor will permit IDEXX representatives to ride with its sales representatives at reasonable times, at reasonable notice, and at IDEXX’s expense.
 

13.           PARTY RELATIONSHIP
 

It is the intent of IDEXX and Distributor that the relationship of the parties described herein will be strategic in nature. Notwithstanding the foregoing, Distributor is an independent contractor, and this Agreement shall not under any circumstances be construed to create a legal partnership or joint venture. Distributor agrees in all respects to represent the Products and IDEXX in a manner representing the highest ethical business conduct.
 

14.           TERM
 

 
A.
Subject to Section 14.B hereof, this Agreement shall remain in effect until December 31, 2014 (the “ I n iti a l   T e r m ”) and thereafter shall automatically renew for additional successive twelve (12) month periods (each such additional period, a “ R ene w al   T e r m ”) upon expiration of the Initial Term or any Renewal Term, as the case may be, without any further action by the parties hereto, unless either party shall provide written notice to the other, at least thirty (30) days before the end of the Initial Term or of any Renewal Term, as the case may be, of its intention to terminate this Agreement at the expiration of the Initial Term or such Renewal Term.
 

B.           This Agreement may be terminated (i) by either party upon thirty (30) days’ prior written notice
 
to the other if the other party materially breaches any of the terms of this Agreement and does not cure such breach within such thirty (30) day period, or (ii) by either party, effective immediately,
in the event of a failure of the other party to function in the ordinary cause of business, insolvency
 
of, or the filing by or against, the other party of a petition in bankruptcy, or (iii) by either party, effective immediately, upon the appointment by a court of a temporary or permanent receiver,
trustee or custodian for the business of the other party.
 

15.           CONFIDENTIALITY
 

A.           Use of Confidential Information
 

The parties agree that Confidential Information (as defined below) may be disclosed by one party (“Disclosing Party”) to the other party (“Receiving Party”).  During the Term of this Agreement and for a period of three (3) years from the date of termination or expiration of this Agreement, each party shall hold all Confidential Information in confidence and not disclose it to a third party without the prior written consent of the Disclosing Party.  The Receiving Party will take all commercially reasonable precautions to safeguard the confidential nature of such Information, which shall not in any event be less than the precautions that the Receiving Party uses to protect its own confidential and proprietary information.
 

Definition of Confidential Information
 

For purposes of this Agreement, “Confidential Information” includes any information furnished by the Disclosing Party to the Receiving Party that relates to the Disclosing Party’s financial results, forecasts, costs, customers, organizational structure, marketing plans, product pricing, new product development, product performance, manufacturing and supply.  Notwithstanding
 

 
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anything to the contrary contained herein, this Section 15A shall not prohibit Distributor from disclosing product descriptions, product pricing information, or customer product reference information to any customer in the ordinary course of business.
 

B.           Exclusions to Confidential Information
 

Receiving Party shall not be liable for use or disclosure of the Confidential Information of Disclosing Party if the Confidential Information: (i) is in the public domain at the time the Confidential Information is disclosed to Receiving Party or enters the public domain through no breach of this Agreement by Receiving Party; (ii) is known to Receiving Party at the time of disclosure to Receiving Party as demonstrated by written documentation or other competent evidence; (iii) is rightfully received by Receiving Party without a duty of confidentiality from a source other than Disclosing Party; or (iv) is expressly approved for unrestricted release by Disclosing Party.
 

C.           Rights to Confidential Information
 

This Agreement shall not be construed as granting the Receiving Party expressly, by implication, estoppel or otherwise, any right, title or interest to the Confidential Information received from the Disclosing Party, except for purposes of selling and distributing the Products.
 

D.           Return of Confidential Information
 

Promptly after any termination or expiration of this Agreement, Receiving Party shall, unless otherwise agreed in writing or this Agreement, deliver to Disclosing Party any Confidential Information received by Receiving Party from Disclosing Party.

 

16.           JURISDICTION
 

The terms of this Agreement and any dispute arising hereunder shall be governed by the laws of the State of Delaware, United States of America, without reference to its conflicts of law provisions.
 

17.           NOTICES
 

All notices that are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, or sent postage prepaid by registered air mail, or sent by national courier, facsimile (with confirmation of receipt) or email (with confirmation of delivery) to the following addresses, or to such other address as either party shall specify by written notice to the other.
If to IDEXX:                                Attention: General Counsel
 
IDEXX Laboratories, Inc. One IDEXX Drive Westbrook, Maine 04092
Facsimile No. (207) 556-4347
 

If to Distributor:                                Attention:  President
MWI Veterinary Supply Co.
 
3041 W. Pasadena Drive
Boise, Idaho 83705
 
Facsimile No. (208) 955-8921
 

 
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18.           ASSIGNMENT
 

Neither party may assign this Agreement, or any of the rights or obligations hereunder, or subcontract performance, whether by operation of law or otherwise, without the prior written consent of the other party.  Any change in ownership of a party, as a result of which those persons who control the party on the Effective Date no longer control the party, shall be considered an assignment.
 

19.           ENTIRE AGREEMENT
 

As of the Effective Date, this Agreement shall replace the Distribution Agreement between IDEXX and Distributor dated February 1, 2002, as amended to date; provided however, that nothing contained herein shall be deemed to modify or terminate Amendment No. 1 effective January 1, 2005 regarding sales to Banfield, which amendment shall remain in full force and effect, except that any confidentiality provisions set forth in such Amendment No. 1 shall be superseded by Section 15 hereof.  Further, the
 
Joint Marketing Agreement dated effective July 15, 2011; the Development and Support Agreement dated effective September 11, 2011; and the Distribution Agreement for Livestock, Poultry and Dairy products
dated effective April 1, 2011, as amended to date; all between IDEXX and MWI, shall continue in full
 
force and effect.  Except as specified in this Section 19, this Agreement constitutes the entire agreement between the parties with respect to its subject matter and revokes and supersedes all previous agreements
with respect thereto, whether written, oral or implied. This Agreement may not be modified except by
 
written agreement signed by both parties which refers to the amendment of this Agreement.
 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
 

IDEXX Distribution, Inc.                                                                           MWI Veterinary Supply Co.
 



By: /s/ George Fennell                                                    By: /s/ Mary Pat Thompson                                                                
 

 
Name: George Fennell                                                      Name: Mary Pat Thompson                                                                 
 

 
Title: Corporate Vice President/GM CAG CFO            Title: Chief Financial Office                                                                
 

 
Date:    September 28, 2012                                                             Date:  September 28, 2012
 




















 
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Exhi b i t   A
 

 
Products with varied margin discounts
 

 
IDEXX Part #
 
IDEXX DESCRIPTION
 
Margin Discount as of the Effective Date
98-21181-00
IDEXX VetTubes
/**/%
99-17099
SNAP® Bile Acid – both
/**/%
98-19201-00
VetStat Respiratory Cassettes
/**/%
87-13973-00
VetStat®, External Power Supply
/**/%
99-27797
Catalyst PHBR Slides & Wash
/**/%
98-12304-00
Catalyst PHBR Controls
/**/%
98-11082-01
Catalyst PHBR Slides
/**/%
99-14990-00
Catalyst Slide Wash
/**/%
99-13690
SNAP Total T4
/**/%
99-13691
SNAP Total T4
/**/%
99-17098
SNAP® Cortisol – both
/**/%
99-17591
SNAP® T4 - SR Only
/**/%
99-17592
SNAP® T4 - SR Only
/**/%
99-13265
VetLab UA Analyzer
/**/%
98-19200-00
VetStat Electrolyte 8+ Cassettes
/**/%
98-19203-00
VetStat Glucose Cassettes
/**/%
98-19202-00
VetStat Ionized Calcium Cassettes
/**/%
87-13971-00
VetStat® Assembly, Cartridge Peristaltic Pump
/**/%
98-13893-00
VetStat® Battery Pack
/**/%
98-13797-01
VetStat® Electrolyte 8 Plus Cassettes
/**/%
98-13796-00
VetStat® Electrolytes Cassettes
/**/%
98-13898-00
VetStat® Hemoglobin Calibration Cassette
/**/%
98-09839-00
VetStat® Lithium Heparin Syringes
/**/%
98-13966-00
VetStat® Opti-Check
/**/%
98-13895-00
VetStat® Standard Reference Cassette 1
/**/%
98-13896-00
VetStat® Standard Reference Cassette 2
/**/%
98-13897-00
VetStat® Standard Reference Cassette 3
/**/%
98-12129-00
Catalyst™ Whole Blood Separators
/**/%
98-13967-00
VetStat® Opti-Check Plus
/**/%
99-13697
IDEXX VetLab Station
/**/%
98-09834-00
VetStat® Lithium Heparin Capillary Tubes
/**/%
98-09288-04
StatSpin VT4 Centrifuge
/**/%
99-14181
SNAPshot Dx® Analyzer
/**/%
99-10613
IDEXX-DR™ 1417 Digital Imaging System
 
 
 
Margin discount varies with sales program for Digital Products
99-20174
IDEXX I-Vision CR® Digital Imaging System
99-27561
IDEXX I-Vision CR® with Capture
97-27823-00
IDEXX I-Vision Mobile™ application
98-27824-00
IDEXX I-Vision Mobile™ app and tablet
99-08711
IDEXX EquiView® Digital Imaging System

 

 
 
 

EXHIBIT 10.30
 
 
MWI VETERINARY SUPPLY CO.
 
NON-DISCLOSURE AND NON-COMPETITION AGREEMENT
 

 
WITH
 

 
ALDEN J. SUTHERLAND
 
Pursuant to the offer letter dated September 12, 2011, and the compensation stated therein, effective January 2, 2012, Alden Sutherland (“Employee”), and MWI Veterinary Supply Co., an Idaho corporation (the "Company"), as part of Employee’s employment with the Company  agree as follows:
 
ARTICLE 1
 
FAIR COMPETITION COVENANTS
 
1.1  
 Noncompetition Covenant
 
 Employee agrees that Employee will not, directly or indirectly, during the term of Employee’s employment with the Company and for one year following the termination (for any reason) of Employee’s employment with the Company (the “Noncompete Period”), compete, either directly or indirectly, with the Company in the sale, marketing, distribution, warehousing, manufacturing, fabrication or shipping of animal health products for the customers of the Company.  Competition includes owning an interest in or being employed by, acting as a consultant to, or otherwise participating, associating, rendering services to, or engaging in, a proprietorship, partnership, corporation, limited liability company, or other entity or organization, or a business unit, division, subsidiary, or other component of such an entity or organization in any business that the Company conducts or has specific plans to conduct as of the date the employment of Employee is terminated.  Nothing herein shall prohibit Employee from being a passive investor of not more than 5% of the outstanding stock of any class of capital stock of a corporation which is publicly traded, so long as Employee has no active participation in the business of such corporation.
 
1.2  
 Nonsolicitation Covenant
 
During the Noncompete Period, Employee shall not, directly or indirectly through another entity, (i) induce or attempt to induce any employee of the Company or any Affiliate to leave the employment of the Company or such Affiliate, or in any way interfere with the relationship between the Company or any Affiliate and any employee thereof, (ii) hire any person who was an employee of the Company or any Affiliate at any time during the Employee’s employment or (iii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any Affiliate to cease doing business with the Company or such Affiliate, or in any way interfere with the relationship between any such customer, supplier, licensee, licensor, franchisee or business relation and the Company or any Affiliate.
 
1.3  
Nondisparagement Covenant
 
Employee shall not make statements injurious to the business reputation or good will of the Company or any of the members of its board, its officers or employees.
 
1.4  
Breach of Covenants
 
If, at the time of enforcement of Sections 1.1, 1.2, and 1.3 of this Agreement, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area.  Because Employee’s services are unique and because Employee has access to Confidential Information and Work Product, the parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement.  Therefore, in the event of a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security).  In addition, in the event of an alleged breach or violation by Employee of Sections 1.1, 1.2, and 1.3, the Noncompete Period shall be tolled until such breach or violation has been duly cured.  Employee agrees that the restrictions contained in Sections 1.1, 1.2, and 1.3 are reasonable.
 
1.5  
Noncompetition Payment
 
  If Employee’s employment with the Company is terminated, other than by (i) the Company for Cause, or (ii) pursuant to a voluntary termination by Employee which is not within 90 days of a Good Reason Event, then the Company shall continue to pay Employee at a rate equal to Employee’s base salary at the time of such termination for the Noncompetition Period, provided that such payments shall be made pursuant to the Company’s normal payroll practices and shall be subject to any required or authorized withholding and declarations.  Notwithstanding the foregoing, the Company shall not be obligated to make such noncompetition payments if the Company gives Employee written notice, within 15 days after the date of the termination of employment, that the Company has elected to waive the provisions of Section 1.1 hereof and thus not pay the noncompetition payment described above.
 
1.6  
Definitions
 
1.6.1  
“Cause”
        means (i) the continued failure by Employee to perform duties as reasonably directed by the Employee’s supervisor of the Company which such failure continues for ten days after written notice of such failure provided to Employee, (ii) willful misconduct by Employee in the performance of Employee’s duties, (iii) gross negligence by Employee in the performance of Employee’s duties which materially harms the Company, (iv) Employee’s commission of a felony or other offense involving dishonesty toward the Company or its subsidiaries or moral turpitude, or (v) any breach by Employee of Employee’s obligations set forth in Sections 1.1, 1.2, and 1.3.
 
1.6.2  
“Confidential Information”
 
 includes, but is not limited to, any information relating to organizational structure, personnel data, marketing philosophy and objectives, project plans, business strategies, business initiatives, trade secrets, system design, methodologies, processes, competitive advantages and disadvantages, financial information and results, audit reports and materials related to same, marketing strategies, business plans, systems, operations, technology, existing or potential customer lists and addresses, product development, advertising or sales programs, and any other information which would give the Company or any Affiliate an opportunity to obtain an advantage over its competitors or which the Company or any Affiliate is ethically obligated to protect from unauthorized sources.  Confidential Information shall not include (i) such information that is otherwise available to the Employee from a source other than the Company, (ii) such information that becomes generally known to and available for use by the public other than as a result of Employee’s acts or omissions, or (iii) disclosure of such information is required by law.
 
1.6.3  
“Good Reason Event”
       means (i) relocation of Employee out of Idaho, or (ii) a material reduction by the Company of Employee’s employment responsibilities or compensation.
 
1.6.4  
“Work Product”
       means all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) which relate to the Company’s or any of its Affiliates’ actual or anticipated business, research and development of existing or future products or services and which are conceived, developed or made by Employee while employed by the Company and its Affiliates.
 
1.7  
Not An Employment Contract
 
Employee agrees that this Agreement is not an employment contract for any particular term and that Employee has the right to resign and the Company has the right to terminate Employee’s employment at will, at any time, for any or no reason, with or without cause.
 
1.8  
 Certification
 
       By signing below, Employee hereby certifies to the Company that he is not currently subject to any noncompetition or similar covenant with any previous employer or other third party that would prevent him for accepting employment with the company.

ARTICLE 2
 
Interpretation
 
2.1  
  Governing Law and Amendments
     
         The laws of the State of Idaho shall govern the interpretation and enforcement of this Agreement
 
This Agreement may be amended, and any term of this Agreement may be waived, only by a written agreement signed by Employee and the President of the Company.
 
2.2  
 Nonwaiver of Remedies
 
  The failure or neglect of a party to enforce any remedy available by reason of the failure of another party to observe or perform a term or condition set forth in this Agreement shall not constitute a waiver of the term or condition.  A waiver by a party (i) shall not affect any term or condition other than the ones specified in the waiver, (ii) shall waive a specified term or condition only for the time and in the manner specifically stated in the waiver, and (iii) shall waive a specified term or condition only for the parties expressly named in the waiver and no other parties.
 
2.3  
Entire Agreement
 
This Agreement constitutes the full and entire understanding and agreement between the parties regarding the subject matter of this Agreement.
 

EMPLOYEE
 
Dated:  September 12, 2011
  /s/ Alden J. Sutherland
 
 
Alden J. Sutherland, Vice President and CIO
 
MWI VETERINARY SUPPLY CO.
 
Dated:  September 12, 2011
  /s/ Mary Pat Thompson
                                                                                  By:
Mary Pat Thompson, Sr. Vice President of Finance
And Administration & Chief Financial Officer

EXHIBIT 21.1

MWI Veterinary Supply, Inc.
Subsidiaries of the Registrant


Name
Jurisdiction of Incorporation/Organization
MWI Veterinary Supply Co.
Idaho
Memorial Pet Care, Inc.
Idaho
Securos Europe, GmbH
Germany
Centaur Services Limited
United Kingdom
MWI Supply (UK Holdings) Limited
United Kingdom
MWI Supply (UK) Limited
United Kingdom
MWI Supply (UK Acquisition) Limited
United Kingdom
Labpak Limited
United Kingdom
Somervet Limited
United Kingdom
















 
EXHIBIT 23
 

 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-127879, 333-127880, and 333-149275 on Form S-8 of our reports dated November 27, 2012, relating to the consolidated financial statements and consolidated financial statement schedule of MWI Veterinary Supply, Inc. (the “Company”)  and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended September 30, 2012.

 
/s/ DELOITTE & TOUCHE LLP
Boise, Idaho
November 27, 2012



EXHIBIT 31.1

MWI VETERINARY SUPPLY, INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, James F. Cleary, Jr., certify that:

1.  
I have reviewed this annual report on Form 10-K of MWI Veterinary Supply, Inc.;

2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 27, 2012
  /s/ James F. Cleary, Jr.
 
James F. Cleary, Jr.
President and
Chief Executive Officer

EXHIBIT 31.2

MWI VETERINARY SUPPLY, INC.
CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

 
I, Mary Patricia B. Thompson, certify that:
 
1.  
I have reviewed this annual report on Form 10-K of MWI Veterinary Supply, Inc.;

2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 27, 2012
 /s/ Mary Patricia B. Thompson
 
Mary Patricia B. Thompson
Senior Vice President of Finance and Administration,
    and Chief Financial Officer

EXHIBIT 32



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on Form 10-K of MWI Veterinary Supply, Inc. (the “Company”) for the period ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, James F. Cleary, Jr., President and Chief Executive Officer of the Company, and Mary Patricia B. Thompson, Senior Vice President of Finance and Administration, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

(1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.



November 27, 2012




/s/ James F. Cleary, Jr.                                                                 
James F. Cleary, Jr.
President and Chief Executive Officer



/s/ Mary Patricia B. Thompson                                                  
Mary Patricia B. Thompson
Senior Vice President of Finance and Administration,
Chief Financial Officer