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 June 30, 2008






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




Commission
File Number 1-33273





ANIMAL
HEALTH
INTERNATIONAL, INC.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            71-0982698(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      Number)7
      Village Circle, Suite 200
              Westlake,
      Texas
            
            76262(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code: (817) 859-3000





SECURITIES
REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:


Title
      of each class
            
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, $0.01 par value
            
            The
      NASDAQ Stock Market, LLC




SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE





Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.    Yes   o    No  x


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 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  o    No  
x




Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     x




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 the definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
(Check one)






Large Accelerated
      Filer o
            Accelerated
      Filer   x
            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 Exchange Act).     Yes   o    No  
x


The aggregate
market value of the common stock held by non-affiliates of the registrant as of
August 29, 2008 was approximately $181.5 million(based on the closing price for the registrant’s common stock on the
NASDAQ Global Market of$7.46 per
share).  At June 30, 2008, 24,329,670 shares of the
registrant’s common stock were outstanding.


Documents
Incorporated by Reference


The
registrant intends to file a proxy statement
pursuant to Regulation 14Awithin 120 days of the end of the fiscal year
ended June 30, 2008. Portions of such proxy statement are incorporated by
reference into Part III of this Annual Report on Form 10-K.







ANIMAL
HEALTH INTERNATIONAL


FORM 10-K


FOR
THE YEAR ENDED JUNE 30, 2008




TABLE OF CONTENTS




Item
            
            Description
            
            PagePART I1.
            
            Business
            
            11A.
            
            Risk Factors
            
            91B.
            
            Unresolved Staff Comments
            
            182.
            
            Properties
            
            183.
            
            Legal Proceedings
            
            184.
            
            Submission of Matters to a Vote of Security
      Holders
            
            18PART II5.
            
            Market for AHI’s Common Equity, Related Shareholder Matters
      and Issuer Purchases of Equity Securities
            
            196.
            
            Selected Financial Data
            
            217.
            
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            
            247A.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            
            278.
            
            Financial Statements and Supplementary
    Data
            
            319.
            
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            
            319A.
            
            Controls and Procedures
            
            329B.
            
            Other Information
            
            32PART III10.
            
            Directors, Executive Officers and Corporate
      Governance
            
            3211.
            
            Executive Compensation
            
            3312.
            
            Security Ownership of Certain Beneficial Owners and
      Management and Related Shareholder Matters
            
            3313.
            
            Certain Relationships, Related Transactions and Director
      Independence
            
            3314.
            
            Principal Accounting Fees and Services
            
            33PART IV15.
            
            Exhibits, Financial Statement Schedules
            
            33


Cautionary
Statementfor
Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform
Act of 1995
  Certain
statements in this Annual Report on Form 10-K are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve
a number of risks, uncertainties and other factors that could cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. Factors which could materially affect such
forward-looking statements can be found in the section entitled “Risk Factors”
in Part 1, Item 1A. in this Annual Report on Form 10-K. Investors
are urged to consider these factors carefully in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date hereof and we will undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or
circumstances.
 References
in this Annual Report on Form 10-K to “AHI,” the “Company,” “we,” “us” or “our”
are to Animal Health International, Inc., a Delaware corporation, and its
subsidiaries.


PART I


Item 1.
            Business.




General




We are a
leading distributor of animal health products in the United States and Canada.
We sell more than 40,000 products sourced from over 1,500 manufacturers to over
65,000 customers, as well as provide consultative services to our customers in
the highly fragmented animal health products industry. Products we distribute
include pharmaceuticals, vaccines, parasiticides, diagnostics, capital
equipment, sanitizers, devices and supplies. Our principal customers are
veterinarians, production animal operators and animal health product retailers.
We believe our customers purchase from us due to our longstanding relationships
with them, knowledge of their businesses, service and ability to assist them in
their operations. We have a 335 person sales force, including 242 field sales
representatives. We process daily shipments from our central replenishment and
distribution facility located in Memphis, Tennessee and 68 distribution
locations strategically located in the United States, Canada and Taiwan. Our
corporate headquarters is located in the Dallas/Fort Worth metropolitan
area.




Our
business commenced operations in 1954 as part of a family-owned drug store
business. Following a series of business combinations, we were renamed Walco
International, Inc. in 1972.  We were organized as a Delaware corporation
in 2005.  In September 2006, we changed our name to Animal Health
International, Inc. We completed our initial public offering on January 30,
2007.




Industry




According
to Sundale Research, an independent market research company, animal health
product sales in theUnited
Statesfor
2007 totaled approximately $6.0 billion, an increase from approximately $4.7
billion in 2003, representing a compounded annual growth rate of approximately
6.0%. Theanimal health products market is divided into two
markets: production animals and companion animals. The production animal market
primarily consists of beef and dairy cattle, poultry and swine, while the
companion animal market primarily consists of horses, dogs and cats. Sundale
Research estimates that in 2007 the market for production animal health products
was approximately $2.7 billion and the market for companion animal health
products was approximately $3.3 billion.




Distributors
are critical to the animal health products supply chain, by providing
manufacturers cost-effective access to geographically diverse customers.
Distributors also provide customers with access to a broad selection of products
through a single channel, thereby helping them efficiently manage inventory
levels.




Strategy




Our
mission is to become the leading worldwide provider of animal health products
and services in the production animal and companion animal health products
markets. Our strategy to achieve this mission is outlined below.




Continue to grow
our business organically.We intend to significantly
increase our share of animal health product purchases by optimizing our sales
efforts and expanding our consultative services. We will continue to sell
additional products needed by our customers, add distribution locations to
better serve our customer base, increase our focus on corporate accounts and
recruit and train sales representatives to successfully penetrate new
territories. We also believe that we can continue to extend our strong
manufacturer relationships from our production animal health products business
to our companion animal health products customers.




Expand sales of
proprietary products.We believe that the
quality of our proprietary branded products in conjunction with our competitive
pricing strategy has generated a loyal customer base that
is confident in our branded products. We also believe we can partner with
domestic and international manufacturers to continue to grow our proprietary
branded products business by marketing new specialty niche products. We
selectively target product areas to expand our proprietary branded products
portfolio while maintaining our strategic manufacturer relationships. A
significant number of products will be coming off patent in the next several
years, providing us with a pipeline of proprietary branded product
opportunities.




1


Continue to
improve operational efficiencies.We have made significant investments in
our distribution infrastructure and information technology platform over the
past several years. In order to maximize profitability and maintain a
competitive position in the marketplace, we will continue to focus on improving
our operations and distribution processes.




Make selective
acquisitions.The global market for
animal health products distribution is highly fragmented with many national,
regional and local
distributors. We actively screen, target, contact and evaluate potential
acquisitions. Our acquisition strategy is to target complementarybusinesses
in the animal health product market that provide, among other things, access to
additional product lines, sales representatives,customer
opportunities, manufacturer relationships, sales territories and value-added
services both in the United States and internationally. Webelieve
that our experienced and disciplined management team, together with our
organizational platform built on scalable information managementsystems
and processes, make us well positioned to participate in the consolidation of
the industry.


Products




We offer
a broad selection of over 40,000 animal health products, including a number of
proprietary branded products, which we source from over 1,500 manufacturers. We
also offer our customers additional products through special orders. Our
products are comprised of four major categories: pharmaceuticals, biologicals,
medicated additives and other products.




Pharmaceuticals.Pharmaceuticals include dosage form medicines employed in disease
prevention and treatment programs. Pharmaceuticals such as antibiotics,
anthelmintics, insecticides and implants include both over-the-counter products,
which can be sold directly to end-users, and ethical products, which are sold
to, or through, veterinarians.




•
            
            Antibiotics
      are administered for the treatment and prevention of diseases such as
      chronic respiratory disease and for growth promotion. Antibiotics include
      products such as tetracyclines, penicillins, erythromycins, cephalosporins
      and fluroquinolones. Antibiotics are available in injectable, bolus (i.e.
      pill), additive and drench (i.e. liquid)
forms.




•
            
            Anthelmintics
      are deworming agents administered on a routine basis to animals for the
      prevention and treatment of internal parasites and worms in production
      animals. Worms include gastrointestinal roundworms, stomach worms,
      intestinal worms and lungworms. Anthelmintics are available in injectable,
      bolus, drench, additive, pour-on and paste
  forms.




•
            
            Insecticides
      are used to control insect populations on animals and their premises, and
      are administered on a routine, preventative basis. Insecticides can be
      used to control flies, lice, ticks, mites and fleas, and are available in
      dust, liquid, spray and ear tag forms. Endectocides are active against
      both internal and external parasites and hence are both an anthelmintic
      and an insecticide.




•
            
            Implants
      are used for the promotion of growth in animals, to increase weight gain
      and improve yield in cattle.




Biologicals. Biologicals,
including bacterial and viral vaccines and antitoxins, stimulate immunity to
disease in both production and companion animals. Bacterial vaccines are
bacterial products that are used on a routine basis to prevent diseases such as
black leg, leptospirosis, red water and shipping fever. Viral vaccines are used
for the control of respiratory and gastrointestinal diseases. Antitoxins provide
short-term protection for certain soil borne and certain other infections such
as tetanus.




Medicated additives.
Medicated additives include highly regulated products such as antibiotics and
anti-bacterials, and are used at low levels to promote growth and improve
efficiency in production animals and, at high levels, for therapeutic
treatment.




Other products, including probiotics
(i.e. beneficial bacteria-based treatments), nutritionals, fluids, diagnostics,
capital equipment, medical devices and supplies, pet food, cleansers,
sanitizers, and dairy lagoon treatment systems.Other products
include disposable kits, replacement strips and reagents (excluding equipment
and devices) used in testing all animal species’ body fluids and tissue for
disease and/or conditions or in residue testing of animal products. While
heartworm diagnostics are at the core of this market, other products also
include a full range of blood tests for disorders such as ehrlichia, feline
leukemia, parvovirus, feline infectious peritonitis and feline immunodeficiency
virus. Chemicals include sanitizers, cleaning agents, disinfectants,
insecticides and rodenticides. Medical supplies are used in cleaning and
sanitizing equipment and facilities, as well as diagnostic and suture
components, and grooming products such as brushes and shampoos.




Proprietary branded products.
In addition to the four major categories of products discussed above, we
selectively target new product areas to expand our proprietary branded products
portfolio, while maintaining our strategic manufacturer relationships. We market
these products, such as vaccines, antibiotics, nutritionals and general
pharmaceuticals, under the RXV Products, AGRIpharm, First Companion, Mineral Max
and Ivermax brands. We believe that the quality of our proprietary branded
products in conjunction with our competitive pricing strategy has generated a
loyal customer base that is confident in our brands. In addition, we believe we
can partner with domestic and international manufacturers to continue to grow
our proprietary branded products business by (1) marketing new specialty
niche products and (2) developing proprietary branded products for products
coming off patent. Proprietary branded product manufacturing is done both by
third-party contract manufacturers as well as branded product companies that
have excess capacity. We believe that we are well-positioned to capitalize on
the trend towards increased private brands given our strong relationships with
manufacturers and strong market position in the distribution of animal health
products.




2


Consultative
services




In
addition to providing a broad selection of animal health products, we offer a
comprehensive set of consultative services, software and equipment that
differentiates us from our competition and further solidifies what we believe is
our leading market position.  We do not
generate revenue from consultative services, but do generate revenue from
certain software and equipment.These services, software and
equipment include:




Health and operations management
software. We offer user-friendly beef cattle computer management systems.
Our proprietary health management software allows producers to accurately
document the health history and treatment costs for each animal. Our accounting
software package enables producers to organize financial data for their
operations including information on employees, taxes, commodity costs and
transaction records.




Microingredient
machines. We install microingredient machines that (1) precisely
measure expensive feed additive ingredients used to complete balanced feeding
rations for cattle and (2) store and administer pharmaceuticals. These
machines are sold with discounts to customers purchasing large orders of feed
additives.




Herd health management. We
work with production animal veterinarians to design specific animal health
packages with vaccination and treatment protocols. We assist customers in the
implementation and administration of these packages and help veterinarians in
disease identification and vaccine management.




Dairy technicians. Our
dedicated technicians assist customers with the cleaning, maintenance and
replacement of dairy equipment and also provide various disinfectant supplies
used by customers to maintain sanitary facilities. Additionally, our technicians
interface with dairy cooperatives and help manage accounting and payment
processes.




Environmental services. Our
technicians analyze and treat dairy lagoons on behalf of customers to reduce
solid animal waste, promote better water quality, reduce odors and maintain
regulatory compliance.




Logistics services. We
provide contract logistics, warehousing and delivery services to both
manufacturers and customers. We also provide customers with microbacterial
monitoring, cleaning and disinfecting and litter management
services.




Merchandising services. Our
field sales representatives visit large dealers and provide shelf management and
organization, product information and monitoring services on a monthly
basis.




Electronic commerce platform.
Our user-friendly e-commerce application allows customers to review product
descriptions, access customer-specific product pricing, view current vendor
promotions, download detailed product usage history and place
orders.




Newsletters and publications.
We publish weekly newsletters customized by market. Our publications include:
Heads Up (targeted to the beef market), Dairy Health Update (targeted to the
dairy market) and DVM Resources Industry Update (targeted towards
veterinarians). These newsletters include information regarding recent product
introductions, health articles, advice columns and conferences and
seminars.




Value in purchasing. Our
Value In Purchasing (“VIP”) program is designed to reward our customers for
repeat business. For every purchase made from our VIP Premier Product Line,
customers earn points redeemable through our program catalog.




Promotional material development and
disbursement. Our marketing and graphic design professionals assist small
manufacturers in developing and producing promotional materials for their animal
health products.




Customers




We have a
diverse customer base with over 65,000 accounts consisting of veterinarians,
production animal operators and animal health product retailers. We believe our
good reputation for customer service, product selection and high quality
products has enabled us to establish and maintain this customer base. In fiscal
2008, no customer represented more than 1.5% of net sales and our 10 largest
accounts only comprised approximately 6% of net sales. We have
over 29,000 accounts served directly by our sales force and approximately 36,000
additional accounts that are served by Internet and catalog sales. Our customers
range in size from single-practitioner veterinarians to large, corporate cattle
feeding operations. Due to longstanding relationships between our sales force
and our customers, 90% of our top 500 customers that placed orders with us in
2002 still order from us today.




3


Beef customers.Our beef
customers are divided into three primary sub-groups: cow/calf, stocker and
feedlots. Cattle require animal health products during each stage to optimize
weight gain, shorten production cycles, prevent disease and maintain overall
health. Additionally, as transportation is physically taxing on cattle, animal
health products are administered each time cattle are transported between
stages. We have historically targeted stocker and feedlot customers, most of
whom have over 500 and 2,000 cattle, respectively. We sell directly to cow/calf
customers with over 200 cattle. We also employ a direct marketing strategy to
address smaller cow/calf customers, who are highly fragmented and purchase in
smaller volumes. These customers are also serviced via our sales to production
animal veterinarians, dealers and retail stores. Our e-commerce initiative
reaches small cow/calf producers which have herd sizes of 50-200 cattle. The key
products sold to these customers include endectocides, antibiotics, growth
promoting implants, vaccines, identification tags and nutritionals.




•
            
            Cow/Calf. According
      to the USDA, this sub-group is extremely fragmented with over 967,000
      cattle operations. However, approximately 601,000 operations have 49 or
      fewer cattle.Calves remain in the cow/calf stage from birth until
      reaching approximately 400 lbs (roughly seven months) at which point they
      are sold to buying agents and delivered to stocker locations.Per-cattle
      animal health product spending is approximately $17 during the cow/calf
      stage.


•
            
            Stocker. This market
      consists of operations holding large tracts of land predominantly in the
      central and western U.S. regions where cattle are moved to graze for four
      months prior to being sold to feedlots. During their stay, cattle increase
      in weight from 400 lbs to 600 lbs. Per-cattle
      spending is approximately $12 during the stocker
    stage.


•
            
            Feedlots. Feedlots
      are typically located in the central and westernU.S.regions
      and hold several thousand to 100,000 cattle in open pens. There are
      approximately 2,100 feedlots in theUnited
      Stateswith
      capacity greater than 1,000 cattle. Cattle undergo their final growth
      stage prior to processing and increase in weight from 600 lbs to 1,200
      lbs. Length of stay approximates 90 to 120 days and per-cattle spending
      during this stage is approximately $20.Feedlot animal
      health product requirements mainly consist of de-wormers, growth implants,
      preventive animal health products (substantially the same products
      required by cow/calf and stocker customers), acute/chronic disease
      treatments and medicated additives for growth
      promotion.




Dairy customers.We believe we
are a leader in the dairy market. We target dairy farms with a minimum size of
500 cattle, with our average dairy customer having 1,500 cattle. The dairy
market is undergoing significant consolidation resulting in a shift towards
larger operations.  According to USDA estimates, dairies with 500 or more
cattle currently account for 54% of the U.S. milk producing cow
population, an increase from 24% in 1997. Given our strong relationships with
larger dairies and our national footprint, we are seeking to continue to gain
share as dairy consolidation continues. The key products sold to these customers
include endectocides, antibiotics, reproductive products, vaccines,
identification tags, nutritionals and sanitation products.




Poultry and swine customers.We sell animal health products to major poultry and swine integrators.
Our field sales representatives typically visit customer locations at least once
every four weeks and facilitate product delivery on a weekly basis. We sell to
local production supervisors, centralized purchasing managers and production
animal veterinarians who provide herd management consulting services to the
major integrators. We believe we will increase our market share with major
integrators as we further develop customized national account management
programs. The key products sold to these customers include antibiotics,
vaccines, nutritionals, sanitation products and bio-security
products.




Companion animal customers.Our companion animal health products sales are made through the
veterinarian and over-the-counter channels, with the majority of sales made to
rural, mixed-practice veterinarians. Over the past three years, we have begun to
penetrate the urban and suburban veterinarian markets, visiting veterinarians in
these areas on a bi-weekly basis. We intend to leverage our centralized
procurement and inventory management model to develop a leading cost-to-serve
position in the companion animal health products market. By providing
competitive pricing and superior service, we seek to build on our strong
position in the companion animal health products distribution market. The key
products sold to these customers include flea and tick controls and preventative
products, antibiotics, vaccines, arthritis treatments and pharmaceuticals. By
leveraging our service platform, we intend to capture market share rapidly
within the fragmented companion animal veterinarian customer base of
approximately 45,000 veterinarians as of December 31, 2007, according to the
American Veterinary Medical Association.





Dealer retail.The dealer
retail division distributes animal health products to tack, feed and animal
health retailers that generally exist in rural areas with high animal
populations. These retailers then resell these animal health products to
individual animal owners and sub-scale production animal operators.




Manufacturers




We
distribute more than 40,000 products sourced from over 1,500 manufacturers. We
currently do not manufacture any of our products and are dependent on
manufacturers for our supply of products. We believe we have access to leading
brand name products in the product categories we serve. The manufacturers we
purchase from include many large multi-national and domestic manufacturers of
animal health products. While our manufacturers often have relationships with
multiple distributors, our 10 largest manufacturers have been working with us
for over 20 years.




4


We
believe that effective purchasing is a key to maintaining our position as a
leading provider of animal health care products. We regularly assess our
purchasing needs and our manufacturers’ product offerings to obtain products at
favorable prices. In addition, our ability to source products globally provides
us with a greater selection of products that can be purchased at favorable
prices. Smaller distributors often do not have the ability to access these
overseas manufacturers. While we purchase products from many manufacturers and
there are generally multiple manufacturers for most animal health product
categories, we do have a concentration of aggregate purchases with certain
manufacturers. For our fiscal year ended June 30, 2008, our top
manufacturer, Pfizer, supplied products that accounted for approximately 24% of
our net sales and represents the only manufacturer that accounted for more than
10% of our net sales during this period. Our 10 largest manufacturers accounted
for approximately 58% of our net sales for our fiscal year ended June 30,
2008.




There are
two major types of transactions associated with the flow of products from our
manufacturers, through us, to our customers. Traditional “buy/sell”
transactions, which account for more than 99% of our business in fiscal 2008,
involve the direct purchase of products by us from manufacturers, which we
manage and 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. On a limited basis, we also sell
products to our customers under agency agreements with some of our
manufacturers. Under this model, when we receive orders for products from the
customer, we transmit the order to the manufacturer who then picks, packs and
ships the products. 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 additional services.




Our livestock products agreement with Pfizer provides that we
supply selected customers in the cattle and swine fields with Pfizer products.
In return we are entitled to certain service fees and rebates. Pfizer is
required to indemnify us against any third-party claims for personal injury or
property damage arising out of the distribution or sale of Pfizer products,
except in certain circumstances, and any claims alleging that the Pfizer
products are defective, except in certain limited situations. 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, 2008 and may be terminated by either party with or without
cause upon 30 days prior written notice. In addition, Pfizer may terminate the
agreement upon 15 days prior written notice if we take any action that harms the
goodwill of Pfizer.




We
typically do not have long-term written agreements with our manufacturers. The
written agreements that we have with our manufacturers generally provide for
annual renewals, 30 to 90 day termination provisions and free on board
destination shipping.


We
collaboratively establish annual sales growth goals with a number of our
manufacturers. Attainment of these goals may affect annual rebates with several
of these manufacturers. Since many of our manufacturer rebates are based on a
calendar year, historically the quarter ended December 31 has been our most
significant quarter for recognition of rebates. We anticipate that this
trend with respect to manufacturers' rebate programs will continue, but do not
expect as strong an impact during the quarter ended December 31 as compared to
prior years due to manufacturers shifting growth goals from annual to quarterly
or trimester goals. Manufacturer
rebates are collaboratively established with many manufacturers and include
inventory purchase rebates and sales-related rebates. Rebates range from
one-time purchase opportunities to sales-related programs that last a month, a
quarter, a trimester or the entire calendar year. The programs can be
related to a specific product or product line, or related to the type of
customer or specific species of animal.




Product
returns from our customers and to our manufacturers occur in the ordinary course
of business. We extend our customers the same return of
goods policies as are extended to us by our manufacturers. We do not believe
that our operations will be adversely impacted due to the return of
products.




Sales
and marketing




Sales. Our sales organization
consists of group presidents for each of our five primary customer groups (i.e.
beef, dairy, poultry and swine, veterinarian and dealer), regional sales
managers, division/location managers and sales force employees. Our 69
distribution locations are organized along customer channels, each under the
direction of a customer group president. We have an experienced and loyal sales
force comprised of 335 employees (34 managers, 242 field sales representatives
and 59 inside sales representatives). Each of our distribution locations employs
one to 30 field sales representatives who service customers in their
surrounding geographical areas on a weekly basis. Many members of our sales
force have spent their entire careers in the animal health industry, providing
an extensive knowledge base that distinguishes us from our competitors. Our
sales force is specialized by customer market, and members of our sales force
have been with us for an average of nine years. Our
annual field sales representative turnover has historically been approximately
12.5%.




We are
focused on providing high-quality training for our sales force. Training entails
program selling, territory management, pricing management and sales technique
workshops. Additionally, our field sales representatives meet annually as a
group at our national sales meeting where fiscal year results are reviewed,
outlooks for the various markets and product categories are presented and best
practices shared. Bi-annual and quarterly sales meetings are also held for
markets (i.e. beef, dairy, poultry and swine) and individual locations,
respectively.




We use
various tools to evaluate and improve our performance. For example, our field
sales representatives receive customized monthly Territory Performance Reports,which track detailed product sales, gross margins, budget variances and
other marketing statistics. We also provide software applications and
performance tracking tools to our sales force, such as Sales Pro,which is a
proprietary, automated software package that allows our sales force to analyze
product and pricing trends. We share sales information throughout the
organization in the form of a scoreboard, which breaks down sales and gross
profit by market, region and location. In addition, we publish
monthly reports ranking various metrics and compiling best practices. Several
“clubs” such as the Presidents
Clubare used to distinguish field sales representatives that achieve
specific sales targets and maintain high organizational
standards.




5


Marketing. We have an
extensive marketing organization. We maintain a dedicated marketing department
consisting of 17 employees, including ten marketing professionals
who cover every animal health customer group (beef, dairy, poultry/swine,
veterinarian and dealer). These marketing professionals, together with our
business group presidents, develop customized marketing programs to increase
product sales and usage, manage loyalty programs, monitor supplier management
programs and support manufacturers’ new product launches. Our graphic artists
produce detailed product technical sheets, catalogs and promotional literature.
Our dedicated proprietary brand manager devises marketing plans for our
proprietary branded product lines. Finally, an e-commerce manager oversees the
development of Internet product ordering platforms and tracking
features.




E-Commerce.We have a
user-friendly e-commerce application that allows customers to review product
descriptions, access customer-specific product pricing, view current vendor
promotions, download detailed product usage history and place
orders.




Distribution
model




We use a
centralized procurement and distribution model whereby approximately 53% of the
dollar volume of our customer purchases flows through our central replenishment
and distribution facility located in Memphis, Tennessee. The majority of the
orders are delivered within one business day. From the Memphis facility, we then
deliver products on a weekly basis to our 68 distribution
locations.




Our
centralized procurement and inventory management model provides us with several
competitive advantages. We are able to effectively purchase large quantities of
products, allowing all divisions, independent of size, to receive the lowest
possible price. Furthermore, by having an organized purchasing strategy, versus
the non-coordinated regional strategy employed by many competitors, we manage
inventory more effectively and reduce working capital investment. We believe our
procurement disciplines provide us with a gross margin advantage relative to our
competitors. Our centralized model is highly scalable and allows us to increase
order flow through the Memphis facility without costly buildouts of additional
distribution facilities.




We expect
our model to become an area of differentiation and believe it provides a
competitive advantage. Our model enables overnight product delivery from our
Memphis inventory center using third-party common-carrier delivery services,
thereby satisfying customers' demands for rapid product delivery. As we expand
our operations, we expect to achieve significant purchasing economies and
working capital efficiencies relative to competitors given:




•
            
            our
      strong relationships with leading manufacturers of animal health
      products;


•
            
            our
      centralized procurement and distribution system that minimizes redundant
      purchases and inventories;


•
            
            our
      ability to leverage our fixed cost base;
  and


•
            
            our
      scalable infrastructure.




Information
technology




We use a
J.D. Edwards ERP information technology system. We have invested significant
management resources in customizing the system for use across all of our
divisions and have trained employees to utilize its functionality. Internally,
we use the system for inventory management and product tracking. Purchasing
managers can query the database to develop detailed product ordering and
shipping histories, track ordering status and monitor product requests from
field sales representatives. Managers and field sales representatives have access to real-time product data such as inventory
quantities (both at our central replenishment and distribution facility and at
individual distribution locations), upcoming shipments and timing of deliveries.
The system tracks inventory turns at specific distribution locations allowing us
to better manage the appropriate inventory level for each product at every
distribution location. This enables us to move inventory from one distribution
center to another as needed.




We also
provide manufacturers with critical data. Traditionally, manufacturers tended to
have difficulty tracking products after they had been shipped to distributors.
Therefore, it was cumbersome for manufacturers to accurately assess customer
demand and pricing thresholds. Using our information technology systems, we send
daily updates to key manufacturers regarding product shipments, extensively
detailing both end locations as well as product pricing. Understanding this
information allows us to partner with manufacturers to develop customized
supplier management programs that aid our manufacturers in effectively placing
various products.




We
believe our Internet platform is well-positioned to benefit from increased
electronic ordering by our customer base. Our Internet ordering system is a
user-friendly application that enables customers to review product descriptions,
access customer-specific product pricing, view current vendor promotions,
download detailed product usage history and place orders. While most customers
choose to receive products on a weekly basis, we offer customized inventory
programs that allow customers to easily maintain inventories for certain
products. We ensure availability and immediate delivery of these products.
Because of its accessibility and ease of use, we anticipate that veterinarians
will increasingly use this electronic platform for direct product ordering,
which we believe would increase the productivity of our sales
force.




International




In
October 2007, we acquired all of the outstanding stock of Kane Veterinary
Supplies, Ltd. (Kane), a companion and production animal health and pet food
distributor headquartered in Edmonton, Canada.  Kane Veterinary
Supplies, Ltd is a leading distributor of animal health products in
Canada. This acquisition enabled us to expand our market presence to
companion animal and pet food retailers in Canada.  For the year ended June
30, 2008, our Canadian operations generated 6.5% of our revenue.


6


Competition




The
distribution and manufacture of animal health products is highly competitive. We
compete directly with both geographically diverse and regional, broad-line
animal health products distributors, as well as companies that specialize in
distributing primarily ethical drug products to veterinarians. Additionally,
certain manufacturers compete through the direct marketing of products. We
compete based on customer relationships, service and delivery,
product selection, price and e-commerce capabilities. Some of our competitors,
particularly those in the companion animal products market with bigger market
share, have greater financial and other resources than we do. Most of our
products are available from several sources, including other distributors and
manufacturers, 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 animal health products industry 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. See “Risk factors—Risks related to our
business—Consolidation in the animal health products industry may decrease our
net sales and profitability.”




Our
primary competitors, excluding manufacturers, include the following and other
national, regional, local and specialty distributors:  Butler Animal Health
Supply, LLC, IVESCO, LLC (Iowa Veterinary Supply), Lextron, Inc., MWI
Veterinary Supply, Inc., Professional Veterinary Products, Ltd., and
Webster Veterinary Supply, a division of Patterson
Companies, Inc.




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 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.




Distribution
of animal health products is often characterized as “ethical” and
“over-the-counter,” commonly referred to as OTC, channels of product movement.
Ethical distribution is defined as those sales of goods to licensed
veterinarians for use in their professional practice. Many of these products are
prescription and must be sold or prescribed by a licensed professional. OTC
distribution is the movement of non-prescription goods to the animal owner and
the end-user. Many of these products are also purchased by the licensed
veterinarian for professional use or for resale to their client. There are
numerous ethical and OTC distribution companies operating throughout the United
States and competition in the animal health products industry is intense. See
“Risk factors—Risks related to our business—Our market is highly
competitive.” Failure to compete successfully could have a material adverse
effect on our business, financial condition and results of
operations.”


Trademarks
and other intellectual property


Our
success depends in part on our proprietary technology. We rely on our
trademarks, trade names and brand names to distinguish our proprietary branded
products and services from the products and services of our competitors. As of June 30, 2008,
we haveregistered 86and
applied to register 19 additional trademarks.We also rely on
unpatented proprietary technology. To protect our trade secrets and other
proprietary information, we require employees, consultants, advisors and
collaborators to enter into confidentiality agreements. As of June 30,
2008, we owned one U.S. patent. This patent will expire in approximately
seven years.




There are
always risks that third parties may claim that 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—Risks related to our business—If third parties
claim that we infringe upon their intellectual property rights, our operating
profits 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—Risks related to our business—Our intellectual property rights may be
inadequate to protect our business.”




Insurance
and risk management




We
purchase insurance to cover standard risks in our industry, including policies
to cover general products liability, workers compensation, auto liability and
other casualty and property risks. However, we do not carry business
interruption insurance due to the geographic diversity of our facilities
and redundancy in our information systems. Therefore, we will not be compensated
for certain losses that may occur as a result of a major disruption to our
facilities. Our insurance rates are dependent upon our safety record as well as
trends in the insurance industry. We utilize a paid loss self-insurance plan for
health, general liability and workers’ compensation coverage. Predetermined loss
limits have been arranged with insurance companies to limit our per occurrence
and annual aggregate cash outlay. Accrued expenses and other liabilities include
the estimated incurred but unreported costs to settle unpaid claims and
estimated future claims.




We face
an inherent risk of exposure to product liability claims in the event that,
among other things, the use of products sold by us result in injury, such as the
death of animals treated with our products. With respect to product liability
coverage, we carry insurance coverage typical of our industry and product lines.
Our coverage involves self-insured retentions with primary and excess liability
coverage above the retention amount. For our non-proprietary products, we have
the ability to refer claims to most of our manufacturers and their insurers to
pay the costs associated with any claims arising from such manufacturer’s
products. In most cases, our insurance covers such claims that are not
adequately covered by a manufacturer’s insurance and provides for excess
secondary coverage above the limits provided by our manufacturers.




7


We
self-insure auto physical damage exposure risk and certain property and casualty
risks due to our analysis of the risks, the frequency and severity of a loss and
the cost of insurance for the risks. We believe that the amount of
self-insurance is not significant and will not have an adverse impact on our
performance. In addition, we may from time to time self-insure liability with
respect to specific ingredients in products that we may sell.




Government
regulation




Our
manufacturers of pharmaceuticals, vaccines, parasiticides, insecticides and
pesticides and certain controlled substances are typically regulated by federal
agencies, such as Food and Drug Administration (FDA), United States Department
of Agriculture (USDA), Environmental Protection Agency (EPA) and 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 FDA 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. In addition, we are subject to
regulations by the Department of Transportation relating to the transportation
of our products.




State
boards of pharmacy require us to be licensed in their respective states for the
sale and distribution of pharmaceutical products and medical devices within
their jurisdictions. As a distributor of prescription pharmaceutical products,
we are subject to the regulatory requirements of the FDA and regulatory
requirements promulgated under the Prescription Drug Marketing Act (PDMA). The
PDMA and FDA provide 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
within and into their state in the form of out-of-state registrations. Selling
and/or distribution without the appropriate registrations may be subject to
fines, penalties, misdemeanor or felony convictions, and/or seizure of the
products involved.




Some
states (as well as certain cities and counties) require us to collect sales
taxes/use taxes on certain types of animal health 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.




We have
implemented internal procedures to help ensure that we are in compliance with
all statutes and regulations applicable to animal healthcare distribution, as
well as other general health and safety laws and regulations, and that we
possess all necessary permits and licenses required for the conduct of our
business. See “Risk factors—Risks related to our business—If we fail to comply
with or become subject to more onerous government regulations, our business
could be adversely affected.”




Environmental


We are
subject to environmental, health and safety laws and regulations concerning,
among other things, air and wastewater discharges, the generation, handling,
storage, transportation and disposal of pesticides, hazardous waste and toxic
substances. Pursuant to some of these laws and regulations, we are required to
obtain permits from governmental authorities for certain operations. We cannot
assure you that we have been or will be at all times in complete compliance with
such laws, regulations and permits. If we violate or fail to comply with these
laws, regulations or permits, we could be fined or otherwise sanctioned by
regulators.




We could
also be responsible for costs incurred relating to contamination at our third
party waste disposal sites or relating to damages incurred as a result of human
exposure to such substances or other environmental damage caused by our
operations or our disposal of waste. In addition, our past and present ownership
or operation of real property that is contaminated with hazardous or toxic
substances could also result in an obligation to perform or pay for a clean-up
or other damages, regardless of whether we knew of or were responsible for such
contamination. While we have incurred in the past, and expect to incur in the
future, capital and other expenditures related to environmental compliance and
remediation matters, we do not anticipate that such expenditures will have a
material adverse effect on our capital expenditures, earnings or competitive
position in the future. See “Risk factors—Risks related to our business—We are
subject to significant environmental regulation and environmental compliance
expenditures and liabilities.”




Employees




As of
June 30, 2008, we had 1,024 employees across the United States, Canada, and
Taiwan. 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 is a party to a collective bargaining agreement, and we
consider our relations with our employees to be good.




Website
  We
maintain a website on the World Wide Web at www.ahii.com.We make
available, free of charge through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits
thereto, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after the reports are electronically filed with, or furnished to the
Securities and Exchange Commission (SEC). Our reports that are filed with, or
furnished to, the SEC are also available at the SEC’s website at www.sec.gov.You may also
obtain copies of any of our reports filed with, or furnished to, the SEC, free
of charge, at the SEC’s public reference room at 100 F Street, N.E., Washington,
DC 20549.
 8


Seasonality
of operating results




Historically,
our quarterly sales and operating results have varied significantly, and will
likely continue to do so in the future. Seasonality has been caused by product
usage, climate changes, promotions, rebates and announced price increases.
Historically, our sales have been higher during the spring and fall months due
to increased sales of production animal health products. The transportation of
production animals during the spring and fall months drives seasonal product
usage. The transportation of production animals occurs during various times in
the animal’s life cycle. The cycle begins with the cow-calf stage where the calf
is born and raised to six to eight months of age. At that point the calf moves
to pasture for three to five months. The last movement occurs when the animal is
placed in the feedyard. Movement and climate changes cause stress upon the
animal, which increases the risk of disease. Thus, prior to each of these moves,
the animal is typically treated for disease prevention. These buying patterns
can also be affected by manufacturers’ and distributors’ marketing programs
launched during the summer months, particularly in June, which can cause
customers to purchase production animal health products in advance of actual
usage. This kind of early purchasing may reduce the sales in the months these
purchases would have typically been made. In the companion animal health
products market, sales of flea, tick and heartworm products drive sales during
the spring and summer months. See “Risk factors—Our quarterly operating results
may fluctuate due to factors outside of management’s control.” 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
manufacturers’ rebate programs are designed to include targets to be achieved on
calendar year sales. We anticipate that this trend with respect to
manufacturers’ rebate programs will continue, but do not expect as strong an
impact during the quarter ended December 31 as compared to prior years due to
manufacturers shifting growth goals from annual to quarterly or trimester
goals.




Item 1A.
            Risk
      Factors.




Our
operations and financial results are subject to various risks and uncertainties
that could materially adversely affect our business, financial condition,
results of operations and the trading price of our common stock.




Risks
Relating to Our Business




The
outbreak of an infectious disease within an animal population could have a
significant adverse effect on our business and results of
operations.




An
outbreak of disease affecting animals, such as foot-and-mouth disease, avian flu
and 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, such as our
pharmaceuticals, biologicals, and medicated additives, which represent a
significant portion of our fiscal 2008 net sales. In addition, outbreaks of or
concerns about these or other diseases could create unfavorable 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
could cause a reduction in the demand for companion animals, which, in turn,
could adversely affect our business.




Our
inability to maintain relationships with manufacturers could have a material
adverse effect on our business, financial condition and results of
operations.




We
distribute more than 40,000 products sourced from more than 1,500 manufacturers.
We currently do not manufacture any of our products and are dependent on
manufacturers for our supply of products. Our top 10 manufacturer-supplied
products accounted for approximately 58% of our purchases in fiscal 2008, and
one manufacturer, Pfizer, Inc., or Pfizer, accounted for approximately 24% of
our purchases.




Our
ability to sustain our gross margins 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 manufacturers. These terms may be subject to
changes from time to time by manufacturers. Any such changes could adversely
affect our net sales and operating results. We do not have long-term written
agreements with our manufacturers. Most of our agreements with manufacturers are
for one-year periods, and in some cases, we do not have any contract with our
manufacturers. Upon expiration, we may not be able to renew our existing
agreements on favorable terms, or at all. If we lose the right to distribute
products under such agreements, we may lose access to certain products and thus
lose a competitive advantage. Potential competitors could sell products from
manufacturers that we fail to continue with and erode our market share. The loss
of one or more of our large manufacturers, a material reduction in their supply
of products to us or material changes in the payment or pricing terms we obtain
from them could have a material adverse effect on our business, financial
condition and results of operations.




Some of
our manufacturers may decide to compete with us in the future by pursuing or
increasing their efforts in direct marketing and sales of their products. These
manufacturers 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
manufacturers. Increased competition from any manufacturer of animal health
products could significantly reduce our market share and adversely impact our
financial results.




In
addition, we may not be able to establish or maintain relationships with key
manufacturers in the animal health products industry if we have established
relationships with competitors of these key manufacturers. Our inability to
establish or maintain such relationships could have a material adverse effect on
our net sales or gross profit.




9


An adverse change in manufacturer rebates or our inability to
meet applicable rebate targets could materially and negatively affect our
business.




The terms
under which we purchase products from many manufacturers of animal health
products entitle us to receive a rebate based on the attainment of various
goals, including certain growth goals and sales targets. Rebates have a material
impact on our profitability. We cannot assure you as to the amount of rebates
that we will receive in any given year. Factors
outside of our control, such as customer preferences or manufacturer supply
issues, can have a material impact on our ability to achieve the growth goals
established by our manufacturers, which may reduce the amount of rebates we
receive.




Manufacturers
may adversely change the terms of some or all of these rebate programs. Changes
to any rebate program initiated by our manufacturers may have a material adverse
effect on our gross profit and operating results in any given quarter or year.
Manufacturers may reduce or eliminate the amount of rebates offered under their
programs, or increase the growth goals or other conditions we must meet to earn
rebates to levels that we are unable to achieve. The occurrence of any of these
events could have an adverse impact on our profitability.




Our quarterly operating results
may fluctuate due to factors outside of management’s
control.


Our quarterly
operating results may significantly fluctuate, and you should not rely on them
as an indication of our future results. Our future net sales and results of
operations may significantly fluctuate due to a combination of factors, many of
which are outside of management’s control. The most important of these factors
include:




•
            
            manufacturer
      rebates based upon attaining certain growth goals;•
            
            changes
      in the way manufacturers introduce products to market;•
            
            fluctuations
      in commodity prices;•
            
            seasonality;•
            
            the
      recall of a significant product by one of our
    manufacturers;•
            
            changes
      in customer demands;•
            
            changes
      in climate (e.g., droughts);•
            
            the
      impact of general economic trends on our business;•
            
            increases
      in reserves for bad debts; and•
            
            competition.




For
example, our rebates have historically been highest during the quarter ended
December 31, since most of the manufacturers’ rebate programs were designed
to include targets to be achieved during the calendar year.  In addition,
our net sales have historically been seasonal, with peak sales in our second and
fourth fiscal quarters.




We may be
unable to reduce operating expenses quickly enough to offset any unexpected
shortfall in net sales. If we have a shortfall in net sales without a
corresponding reduction to our expenses, operating results may suffer. Our
operating results for any particular quarter may not be indicative of future
operating results. You should not rely on quarter-to-quarter comparisons of
results of operations as an indication of our future performance.





Loss
of key personnel could adversely affect our operations.




We are
currently dependent to a significant degree upon the ability and experience of
our senior executives, including President and Chief Executive Officer James
Robison. We currently have employment agreements with these executives that
contain non-competition restrictions following termination of employment. The
loss of any of our senior executives could adversely affect our ability to
conduct our operations or to achieve growth through acquisitions.




In
addition, we are dependent upon group presidents and our sales representatives
to market and sell 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 representatives. Any failure on our part to hire, train and retain a
sufficient number of qualified sales representatives would damage our business.
We generally enter into agreements that contain confidentiality and
non-solicitation provisions with our employees.




10


The
loss of products or delays in product availability from one or more
manufacturers could substantially harm our business.




We
generally purchase products from our manufacturers through purchase orders
rather than through long-term supply agreements. There can be no assurance,
however, that our manufacturers will be able to meet their obligations under
these purchase orders or that we will be able to compel them to do so. We face
the following risks by relying on manufacturers:




•
            
            Some
      of our manufacturers are subject to ongoing periodic unannounced
      inspection by regulatory authorities, including the FDA, the USDA, the
      EPA, the DEA and other federal and state agencies for compliance with
      strictly enforced regulations. We do not have control over our
      manufacturers’ compliance with these regulations and standards. Violations
      by our manufacturers could potentially lead to interruptions in our supply
      that could lead to lost sales to competitive products that are more
      readily available.


•
            
            If
      a purchase order cannot be filled 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. Our sales and operating
      results would likely suffer unless we were able to find an alternate
      supply of a similar product.


•
            
            Agreements
      may commit us to certain minimum purchase levels or other spending
      obligations. It is possible we will not be able to meet such obligations,
      which would create an increased drain on our financial resources and
      liquidity.


•
            
            If
      market demand for our products increases suddenly, our current
      manufacturers might not be able to fulfill our commercial needs, which may
      result in substantial delays in meeting market demand. If we generate more
      demand for a product than one of our manufacturers is capable of handling,
      we could experience 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 manufacturers. Poor quality products could damage our
      reputation with our customers or subject us to potential legal liability
      to such customers.




Potential
problems with manufacturers such as those discussed above, could substantially
decrease sales of our products, lead to higher costs and
damage our reputation with our customers.


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 sale
and distribution of animal health products is highly competitive, continually
evolving and subject to technological change. We compete directly with both
geographically diverse and regional, broad-line animal health products
distributors, as well as companies that specialize in distributing primarily
ethical drug products to veterinarians and over-the-counter drugs directly to
animal owners and other end-users. Additionally, certain manufacturers currently
compete through the direct marketing of products, and other manufacturers may
decide to do so in the future. We compete with numerous manufacturers and
distributors based on customer relationships, service and delivery, product
selection, price and e-commerce capabilities. Some of our competitors may have
greater financial and other resources than we do. Many of our competitors have
comparable product lines or distribution strategies that directly compete with
ours. Our competitors could obtain exclusive rights to distribute certain
products, eliminating our ability to distribute those products. Most of our
products are available from several sources, including other distributors and
manufacturers, and our customers typically have relationships with several
distributors and manufacturers. Because we generally do not have long-term
contracts with our customers, our customers could buy products from our
competitors. If we do not compete successfully against these organizations, it
could have a material adverse effect on our business, financial condition and
results of operations. Our primary competitors, excluding manufacturers, include
the following and other national, regional, local and specialty distributors:
Butler Animal Health Supply, LLC, IVESCO, LLC (Iowa
Veterinary Supply), Lextron, Inc., MWI Veterinary Supply,
Inc., Professional Veterinary Products, Ltd. and Webster Veterinary Supply,
a division of Patterson Companies, Inc.




Changes
in consumer preferences could adversely affect our business.




The
demand for production animal health products is heavily dependent upon consumer
demand for beef, dairy, poultry and swine. The food industry in general is
subject to changing consumer trends, demands and preferences. Trends within the
food industry change often and our failure to anticipate, identify or react to
changes in these trends could lead to, among other things, reduced demand and
price reductions for our animal health products, and could have a material
adverse effect on our business. Moreover, even if we do anticipate and identify
these trends, we may be unable to react effectively. For example, changes in
consumer diets may negatively affect consumer demand for beef, dairy, poultry
and/or swine, and therefore reduce the demand for our production animal health
products. During previous downturns in these markets, we experienced prolonged
declines in sales and profitability.




Consolidation
in the animal health products industry may decrease our net sales and
profitability.




Consolidation
in the animal health products industry could result in existing competitors
increasing their market share, which could give them greater pricing power,
decrease our net sales and profitability and increase the competition for our
customers. Consolidation of the highly fragmented customer base in the animal
health products market could also make it easier for manufacturers to sell their
products directly to customers, which would decrease our net sales and
profitability. In addition, as individual customers grow in size through
consolidation, the loss of any one of them would have an increasingly adverse
effect on our net sales and profitability. Furthermore, as our current customers
consolidate, their management teams are more likely to change, which could
result in changes in purchase practices and potentially result in the loss of
such customers’ business.


11


Our
substantial indebtedness could adversely affect our financial condition and
ability to fulfill our debt obligations and otherwise adversely impact our
business and growth prospects.
  As of June
30, 2008, we had outstanding indebtedness under our credit agreements
of $138.4 million. Our substantial indebtedness could have important
consequences to you. For example, it could:
  •
              
              make
      it more difficult for us to satisfy our obligations with respect to our
      revolving credit facility, term loan indebtedness and other current and
      future indebtedness;
  •
              
              increase
      our vulnerability to adverse economic and industry
    conditions;
  •
              
              require
      us to dedicate a substantial portion of our cash flow from operations to
      the payment of our indebtedness, thereby reducing the availability of cash
      to fund working capital and capital expenditures and for other general
      corporate purposes;
  •
              
              restrict
      us from making strategic acquisitions and exploiting business
      opportunities;
  •
              
              place
      us at a disadvantage compared to our competitors that have less debt;
      and
  •
              
              limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate.
  Furthermore,
all of our indebtedness bears interest at floating rates. We currently hedge
exposure for $95.0 million of our indebtedness with interest rate swap
agreements that effectively convert our floating rate interest to fixed rates.
For the indebtedness that remains subject to floating rate interest, if these
rates were to increase significantly, our ability to borrow additional funds may
be reduced and the risks related to our substantial indebtedness would
intensify.
  Our ability
to make payments on and refinance our indebtedness, and to fund our operations,
working capital and capital expenditures, depends on our ability to generate
cash in the future. We cannot assure you that our business will generate
sufficient cash flow or that future borrowings will be available to us in an
amount sufficient to enable us to pay amounts due on our indebtedness or to fund
our other liquidity needs. If we do not generate sufficient cash flow, and
additional borrowings or refinancings or proceeds of asset sales are not
available to us, we may not have sufficient cash to enable us to meet all of our
obligations.
  In addition,
the agreements governing our indebtedness include certain covenants that, among
other things, restrict our ability to incur additional indebtedness, make
certain payments, sell assets, enter into certain transactions with affiliates
and create liens. Moreover, certain of these agreements require us to maintain
specified financial ratios. These and other covenants in our current and future
agreements may restrict our ability to fully pursue our business strategies and
adversely affect our growth prospects. Our ability to comply with such covenants
may be affected by changes in our operating and financial performance, changes
in general business and economic conditions, adverse regulatory developments or
other events beyond our control. The breach of any of these covenants could
result in a default under our indebtedness, which could cause those and other
obligations to become due and payable.


We
could face considerable business and financial risk in implementing our
acquisition strategy.




As part
of our growth strategy, from time to time we consider acquiring complementary
businesses. We regularly engage in discussions with respect to possible
acquisitions. We cannot assure you that we will be successful in consummating
future acquisitions on favorable terms or at all. Future acquisitions could
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities and an increase in amortization expenses related
to intangible assets, which could have a material adverse effect upon our
business.




Acquisitions
involve a number of risks relating to our ability to integrate an acquired
business into our existing operations. The process of integrating 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 the operations, personnel or
      systems of acquired businesses;


•
            
            retention
      of key personnel, customers and manufacturers of the acquired
      business;


•
            
            the
      occurrence of a material adverse effect on our existing business
      relationships with customers or manufacturers, or both, resulting from
      future acquisitions or business combinations could lead to a termination
      of or otherwise affect our relationships with such customers or
      manufacturers;


•
            
            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.




The risks
associated with acquisitions could have a material adverse effect upon our
business.


12


If
we fail to comply with or become subject to more onerous government regulations,
our business could be adversely affected.




The
animal health products 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, USDA, EPA, DEA, the Department of
Transportation and state boards of pharmacy as well as comparable state and
foreign agencies. The regulatory stance these agencies take could change. In
addition, our manufacturers are subject to regulation by the FDA, the USDA, the
EPA, the DEA as well as other federal and state agencies, and material changes
to the applicable regulations could affect our manufacturers’ 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 of our
products to them.




We strive
to maintain compliance with these laws and regulations. If we are unable to
maintain or achieve compliance with these laws and regulations, 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. We cannot assure you that the manufacturers 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.


We
may be subject to product liability and other claims in the ordinary course of
business.
  We distribute
products that are manufactured exclusively by third parties. As a result, we
have no control over the manufacturing process and face the risk of product
liability and other claims in the ordinary course of business. We maintain
insurance policies, and in many cases we have indemnification rights against
such claims from the manufacturers of the products we distribute. However, our
ability to
recoverunder insurance or indemnification arrangements is subject to the
terms of such arrangements and 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.




Failure
to manage growth could have a material adverse effect on our
business.




Over the
past seven years, our net sales have grown by an annual compound growth rate of
approximately 10.0% from $403.4 million in fiscal 2002 to $716.5 million in
fiscal 2008. During that same period we have significantly expanded our
operations in the United States and Canada. Our number of full-time employees
increased by approximately 345individuals, or
51%,during that period to 1024 employees at June 30,
2008.




Our
continued future success depends on, among other things, our ability to
implement and/or maintain:




•
            
            sales
      and marketing programs;


•
            
            customer
      service levels;


•
            
            current
      and new product and service lines;


•
            
            manufacturer
      relationships;


•
            
            technological
      support which equals or exceeds our
competitors;


•
            
            recruitment
      and training of new personnel; and


•
            
            operational
      and financial control systems.




Our
ability to successfully offer products and services and implement our business
plan requires an effective planning and management process. We expect that we
will need to continue to improve our financial and managerial controls,
reporting systems and procedures and to expand the training of our employees.
While we believe our current systems have sufficient capacity to meet our
projected needs, we may need to increase the capacity of our current systems to
meet additional or unforeseen demand. If we are not able to manage our growth,
our customer service quality could deteriorate, which could result in decreased
sales or profitability. Also, the cost of our operations could increase faster
than growth in our net sales, negatively impacting our
profitability.




13


Operational
problems at our central replenishment and distribution facility or any of our
distribution locations could have a material adverse effect on our business,
financial condition and results of operations.




Approximately
53% of the dollar volume of our product sales flow through our central
replenishment and distribution facility located in Memphis, Tennessee.
Unforeseen or recurring operational problems at this facility or any of our
other distribution facilities could impair or disrupt our ability to deliver our
products to our customers in a timely manner, and could have a material adverse
effect upon our customer relationships, business, financial condition and
results of operations. Although we do carry property insurance, which may
protect us in the event of certain inventory losses, we do not carry business
interruption insurance. Therefore, we will not be compensated for certain losses
that may occur as a result of a major disruption to our facilities. Disruptions
at any of our facilities could be caused by:




•
            
            maintenance
      outages;


•
            
            prolonged
      power failures or reductions;


•
            
            disruptions
      in the transportation infrastructure, including railroad tracks, bridges,
      tunnels or roads;


•
            
            fires,
      floods, earthquakes or other catastrophic
  disasters;


•
            
            labor
      difficulties; or


•
            
            other
      operational problems.




If
third parties claim that we infringe upon their intellectual property rights,
our operating profits 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 operating profits 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, 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. We cannot
assure you that our trademark applications will be approved. Third parties may
also oppose our trademark applications, or otherwise challenge our use of the
trademarks. In the event that our trademarks 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 trademarks, or that we will have adequate
resources to enforce our trademarks.




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.




If we are
unable to maintain the proprietary nature of our technologies, we could be
materially adversely affected.




The
patent we own could be challenged, invalidated or circumvented by others and may
not be of sufficient scope or strength to provide us with any meaningful
protection or commercial advantage. Further, we cannot assure you that
competitors will not infringe upon our patent, or that we will have adequate
resources to enforce our patent.




14


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
are subject to significant environmental regulation and environmental compliance
expenditures and liabilities.




We are
subject to environmental, health and safety laws and regulations concerning,
among other things, air and wastewater discharges, the generation, handling,
storage, transportation and disposal of pesticides, hazardous waste and toxic
substances. Pursuant to some of these laws and regulations, we are required to
obtain permits from governmental authorities for certain operations. We incur
costs to comply with such laws, regulations and permits, and we cannot assure
you that we have been or will be at all times in complete compliance with such
laws, regulations and permits. If we violate or fail to comply with these laws,
regulations or permits, we could be fined or otherwise sanctioned by regulators.
We could also be responsible for costs incurred relating to contamination at our
third party waste disposal sites or relating to damages incurred as a result of
human exposure to such substances or other environmental damage caused by our
operations or our disposal of waste. In addition, our past and present ownership
or operation of real property that is contaminated with hazardous or toxic
substances could also result in an obligation to perform or pay for a clean-up
or other damages, regardless of whether we knew of or were responsible for such
contamination.




Environmental,
health and safety laws and regulations are complex, change frequently and have
tended to become more stringent over time. We cannot assure you that our costs
and liabilities relating to these current and future laws will not adversely
affect our business or profitability.




Performance
problems with our information systems could damage our business.




We
currently process all customer transactions and data at our facilities located
in Westlake, Texas. Although we have safeguards for emergencies, including,
without limitation, 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 we do not carry business interruption
insurance. If a disruption occurs, our profitability and results of operations
could suffer. 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. While we
have implemented security measures and some redundant systems, our customer
satisfaction and our business could be harmed if we or our manufacturers
experience any system delays, failures, loss of data, outages, computer viruses,
break-ins or similar disruptions.




We
may be required to record a charge to earnings if our goodwill or other
intangible assets become impaired.




Our
balance sheet includes goodwill and other intangible assets. As of June 30,
2008, such amounts totaled $151.9 million. A significant decline in the
fair value of the Company could cause impairment of goodwill and other
intangible assets. Under generally accepted accounting principles in the United
States, if impairment of our goodwill or other intangible assets is determined,
we will be required to record a charge to earnings in the period of such
determination.




15


Risks
related to the common stock and our capital structure
 There
is a limited history of a trading market for our common stock, and the market
price of our common stock may be highly volatile or may decline regardless of
our operating performance. As a result, our stockholders could lose a
significant part of their investment.




There has
been a public market for our common stock only since the completion of our
initial public offering in January 2007. The trading market in our common stock
has been and may continue to be volatile.


Broad
market and industry conditions and trends may cause fluctuations in the market
price of our common stock, regardless of our actual operating performance. An
active trading market for shares of our common stock may not be sustained on a
consistent basis. The public trading price for our common stock will be affected
by a number of factors, including:




•
            
            depth
      and liquidity of the market for our common
  stock;




•
            
            investor
      perception of our business;




•
            
            profit
      margins in the animal health products industry
  generally;




•
            
            reported
      progress of our business, relative to investor
    expectations;




•
            
            changes
      in earnings estimates, investors’ perceptions, recommendations by
      securities analysts or our failure to achieve analysts’ earning
      estimates;




•
            
            quarterly
      variations in our or our competitors’ results of
    operations;




•
            
            general
      market conditions and other factors unrelated to our operating performance
      or the operating performance of our
competitors;




•
            
            future
      sales of our common stock;




•
            
            announcements
      by us, or our competitors, of acquisitions, significant contracts, or
      commercial relationships;




•
            
            commencement
      of, or involvement in, litigation;




•
            
            any
      major change in our board of directors or
  management;




•
            
            changes
      in governmental regulations or in the status of our regulatory
      approvals;




•
            
            a
      lack of, limited, or negative industry or security analyst
      coverage;




•
            
            general
      economic and market conditions; and




•
            
            the
      other factors described elsewhere in these “Risk
      Factors.”




As a
result of these factors, our stockholders may not be able to resell their shares
at, or above, their purchase price. In addition, the stock market in general,
and the NASDAQ Global Market in particular, have experienced substantial price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of particular companies affected. These broad market
and industry factors may materially harm the market price of our common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of certain companies’ securities, securities
class-action litigation has been instituted against these companies. Such
litigation, if instituted against us, could adversely affect our business and
results of operations.




Future
sales of our shares could adversely affect the market price of our common
stock.




We have
been a public company only since January 2007. For the quarterly period ended
June 30, 2008, the average daily trading volume of our common stock on the
NASDAQ Global Market has been less than 161,000 shares. Any future sale by us or
our current stockholders of our common stock in the public market, or the
perception that sales could occur, could adversely affect the prevailing market
price for our common stock.




Substantially
all of the holders of our common stock who acquired their shares prior to our
initial public offering have rights, subject to some limited conditions, to
demand that we file a registration statement on their behalf to register
their shares or that we include their shares in a registration statement that we
file on our behalf or on behalf of other stockholders. If such demand rights are
exercised pursuant to the terms and conditions of the registration rights
agreement and we are required to file an additional registration statement, we
will incur significant expenses in connection with the filing
of such registration statement. Additionally, the filing of an additional
registration statement at the request of the stockholders may divert the
attention of our senior management from our business
operations.


16


Our
directors and certain significant stockholders exercise significant control over
us.




Our
directors and significant stockholders, including investment funds affiliated
with Charlesbank Capital Partners LLC, or Charlesbank, Eagle Asset Management,
Inc., and investment funds associated with Waddell &
Reed, Inc., collectively control approximately 53%of our
outstanding common stock. As a result, these stockholders, if they act together,
are able to influence our management and affairs and all matters requiring
stockholder approval in ways that may not align with your interest as a
stockholder, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control of us even if beneficial to you as a
stockholder and might affect the market price of our common stock.




We
may require additional capital in the future, which may not be available to us.
Issuances of our equity securities to provide this capital may dilute your
ownership in us.
  We may
need to raise additional funds through public or private debt or equity
financings in order to:
  •
              
              take
      advantage of expansion opportunities;•
              
              acquire
      complementary businesses or technologies;•
              
              develop
      new services and products; or
 •
              
              respond
      to competitive pressures.
  Any
additional capital raised through the issuance of our equity securities may
dilute your percentage ownership interest in us. Furthermore, any additional
financing we may need may not be available on terms favorable to us or at all.
The unavailability of needed financing could adversely affect our ability to
execute our growth strategy.
  We
do not currently intend to pay dividends on our common stock, and therefore you
will likely not receive any return on your investment without selling your
shares.


We
currently intend to retain any future earnings for funding the growth of our
business and repayment of existing indebtedness, and therefore, we do not
currently anticipate declaring or paying cash dividends on our common stock. In
addition, our credit agreements restrict us from paying such
dividends.




Provisions
in our certificate of incorporation and by-laws may deter third parties from
acquiring us.




Our
certificate of incorporation and by-laws contain provisions that may make the
acquisition of us more difficult without the approval of our board of directors,
including the following:




•
            
            our
      board of directors is divided into three classes serving staggered
      three-year terms;




•
            
            only
      our board of directors may call special meetings of our
      stockholders;




•
            
            our
      stockholders may take action only at a meeting of our stockholders and not
      by written consent;




•
            
            we
      have authorized undesignated preferred stock, the terms of which may be
      established and shares of which may be issued without stockholder
      approval;




•
            
            stockholder
      approval of amendments of our certificate of incorporation or by-laws
      require a vote of 75% of our outstanding
shares;




•
            
            vacancies
      on the board of directors may be filled only by the
    directors;




•
            
            our
      directors may be removed only for cause by the affirmative vote of the
      holders of 75% of the votes that all stockholders would be entitled to
      cast in the election of directors;
and




•
            
            we
      require advance notice for stockholder
  proposals.




These
anti-takeover defenses could discourage, delay or prevent a transaction
involving a change in control of us. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to
elect directors of your choosing and cause us to take other corporate actions
that you desire.




17


Section 203
of the Delaware General Corporation Law may delay, defer or prevent a change in
control that our stockholders might consider to be in their best
interests.




We are
subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits “business combinations” between a
Delaware corporation and an “interested stockholder,” which is generally defined
as a stockholder who becomes a beneficial owner of 15% or more of a Delaware
corporation’s voting stock, for a three-year period following the date that such
stockholder became an interested stockholder absent prior approval of our board
of directors. Section 203 could have the effect of delaying, deferring or
preventing a change in control that our stockholders might consider to be in
their best interests.




Item 1B.
            Unresolved
      Staff Comments.




Not
Applicable.




Item 2.
            Properties.




We
conduct our operations out of 66 locations throughout the United States,
two affiliated locations in Canada, and one affiliated location in Taiwan.
Properties include distribution locations, retail locations, a central
replenishment and distribution center and our corporate headquarters. Our
distribution locations range in size from 1,000 to 69,000 square feet. Our
central replenishment and distribution facility located in Memphis, Tennessee,
is comprised of two buildings totaling 118,000
square feet under leases that expire in January 2012 and June 2014 respectively.
Our west coast replenishment and distribution facility is located in Visalia,
California, where we lease approximately 68,000 square feet under a lease that
expires in December 2016. Our corporate headquarters are located in the
Dallas/Fort Worth metropolitan area, where we lease approximately 153,000 square
feet of commercial space under a lease that expires in August 2013. We own 23
locations, with the remainder leased under varying lease terms, ranging in
maturities from one to ten years. Our facilities are in acceptable operating
condition and generally adequate for current needs. We do not anticipate
significant difficulty in obtaining lease renewals or alternate space as needed,
although obtaining renewals or alternate space on acceptable terms cannot be
assured.




Item 3.
            Legal
      Proceedings.




We are
involved in litigation from time to time in the ordinary course of our business.
We are not currently involved in any outstanding litigation that we believe,
individually or in the aggregate, will have a material adverse effect on our
business, results of operations or financial condition.




Item 4.
            Submission
      of Matters to a Vote of Security
Holders.




No
matters were submitted to a vote of our security holders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.




18


PART II




Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.




Performance
Graph




The
following graph compares the cumulative 17-month total return provided
shareholders on our common stock relative to the cumulative total returns of the
Dow Jones US Total Market Index, and a customized peer group of four companies
that includes: MWI Veterinary Supply, Owens & Minor, Patterson
Companies and Henry Schein. An investment of $100 (with reinvestment of all
dividends) is assumed to have been made in our common stock, in the peer group,
and the index on 1/31/2007 and its relative performance is tracked through
6/30/2008.
   performance graph


1/07
              2/07
              3/07
              4/07
              5/07
              6/07
              7/07
              8/07
              9/07
              10/07
              11/07
              12/07
              1/08
              2/08
              3/08
              4/08
              5/08
              6/08Animal
      Health International, Inc.
              100.00
              103.61
              97.11
              107.31
              100.00
              116.39
              90.44
              91.16
              89.40
              87.55
              96.39
              98.80
              96.39
              84.66
              87.87
              70.60
              54.54
              50.04Dow
      Jones US
              
              100.00
              98.37
              99.45
              103.56
              107.42
              105.62
              102.18
              103.61
              107.48
              109.44
              104.66
              104.01
              97.74
              94.74
              94.17
              98.96
              100.94
              92.75Peer
      Group
              
              100.00
              95.60
              102.08
              100.36
              103.41
              103.03
              103.15
              107.66
              111.33
              112.49
              103.10
              107.95
              102.52
              107.89
              106.17
              104.22
              105.48
              95.68
  The stock price
performance included in this graph is not necessarily indicative of future stock
price performance.
 19


Market
Information




As of
June 30, 2008, there were 115 holders of record of our common stock. We
completed our initial public offering in January 2007, prior to that time there
was no public market for our common stock. Our
common stock is listed and traded on the NASDAQ Global Market under the
symbol AHII.




The
following table sets forth the range of high and low sales prices of our common
stock since the closing of our initial public offering on February 5, 2007,
as reported by the NASDAQ Global Market, for the period from
January 30, 2007 to August 29, 2008. The quotations represent
interdealer quotations, without adjustments for retail mark ups, mark downs, or
commissions, and may not necessarily represent actual transactions.


High
              
              
              LowFISCAL 2007Third Quarter
      (commencing January 30, 2007)
              
              $
              13.38
              
              
              $
              11.41Fourth
      Quarter
              
              $
              14.88
              
              
              $
              11.58FISCAL 2008First
      Quarter
              
              $
              15.74
              
              
              $
              8.78Second
      Quarter
              
              $
              13.57
              
              
              $
              10.02Third
      Quarter
              
              $
              13.67
              
              
              $
              9.87Fourth
      Quarter
              
              $
              11.40
              
              
              $
              5.58FISCAL 2009First Quarter
      (through August 29, 2008)
              
              $
              7.79
              
              
              $
              4.72


Dividends




Our board
of directors has discretion in determining whether to declare or pay dividends,
which will depend upon our financial condition, results of operations, capital
requirements and such other factors as the board of directors deems relevant. We
currently anticipate that we will retain future earnings for the development,
operation and expansion of our business. Moreover, our credit agreements
relating to our revolving credit facility and first lien term loan impose
restrictions on our ability to declare and pay dividends. See “Risk
factors—Risks related to the common stock, the offering and our capital
structure—We do not currently intend to pay dividends on our common stock, and
therefore you will likely not receive any return on your investment without
selling your shares.”




In
September 2006, we paid an aggregate dividend of $53.3 million to the
holders of shares of our preferred stock and an aggregate dividend of $1.2
million to the holders of shares of our common stock. A portion of the dividend
on the preferred stock reduced the aggregate liquidation amount that was due to
holders of preferred stock upon the liquidation, dissolution or winding up of
the Company, or, at the election of at least a majority of the shares of
preferred stock, upon the closing of an extraordinary transaction. These
dividends to our stockholders were special dividends and we do not currently
anticipate that we will declare any dividends on our common stock in the
future.


20
 Securities
Authorized For Issuance Under Equity Compensation Plans
  The
following table sets forth information regarding securities authorized for
issuance under our equity compensation plans as of June 30,
2008.


Number
      of securities to beissued
      upon exercise ofoutstanding
      options,warrants
      and rights
                
                Weighted
      averageexercise
      price ofoutstanding
      options,
                  warrants
      and rights
                
                Number
      of securitiesremaining
      available for
                  future
      issuance underequity
      compensation plans(excluding
      securitiesreflected
      in column (a))(a)
                
                (b)
                
                (c)Equity
      compensation plans approved
                  by
      security holders(1)
                1,409,550
                
                $
                11.27
                
                1,090,450
                (2)Equity
      compensation plans not
                  approved
      by security holders(3)
                —
                
                
                —
                
                —Total
                1,409,550
                
                $
                11.27
                
                1,090,450
 
 (1)
                Includes
      our 2007 Stock Option and Incentive Plan.(2)
                Includes
      shares remaining available for future issuance under our 2007 Stock Option
      and Incentive Plan.(3)
                There
      are no equity compensation plans in place not approved by
      shareholders.
  Recent
Sales of Unregistered Securities




We did
not sell any unregistered securities during the fiscal year ended June 30,
2008.




Use
of Proceeds from Registered Securities




None.




Issuer
Purchases of Equity Securities




None.




Item 6.
            Selected
      Financial Data.




All
references to “Predecessor” refer to Walco Holdings, Inc. and its subsidiaries
for all periods prior to the June 30, 2005 acquisition of Walco Holdings, Inc.,
which operated under a different ownership and capital structure.




The
following selected consolidated financial data should be read in conjunction
with, and is qualified by reference to, our consolidated financial statements
and notes to those consolidated financial statements, and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
included elsewhere in this annual report. The consolidated statement of
operations data for the years ended June 30, 2006, 2007 and 2008, and the
consolidated balance sheet data as of June 30, 2007 and 2008, are derived
from our audited consolidated financial statements, which are included elsewhere
in this annual report. The consolidated statement of operations data for the
years ended June 30, 2004 and 2005, and the consolidated balance sheet data
as of June 30, 2004, 2005 and 2006, are derived from our audited
consolidated financial statements, which are not included in this annual report.
Our historical results are not necessarily indicative of results to be expected
for any future period.


21
 Consolidated
statement of operations data:


Year
      ended June 30,(in
      thousands, except per share
      data and number of representatives)
            
            Predecessor
            
            
            Successor2004
            
            
            2005
            
            
            2006
            
            
            2007
            
            
            2008Net
      sales
            
            $
            502,686
            
            
            $
            535,693
            
            
            $
            571,192
            
            
            $
            629,534
            
            
            $
            716,542Direct
      cost of products sold
            
            
            408,105
            
            
            
            436,955
            
            
            
            459,173
            
            
            
            507,997
            
            
            
            579,485Gross
      profit
            
            
            94,581
            
            
            
            98,738
            
            
            
            112,019
            
            
            
            121,537
            
            
            
            137,057Selling,
      general, andadministrative
      expenses(1)
            
            
            70,238
            
            
            
            72,954
            
            
            
            81,428
            
            
            
            88,117
            
            
            
            101,849Acquisition
      costs(2)
            
            
            496
            
            
            
            7,759
            
            
            
            -
            
            
            
            6
            
            
            
            37Depreciation
      and amortization(3)
            
            
            3,156
            
            
            
            3,149
            
            
            
            6,414
            
            
            
            6,504
            
            
            
            7,349Operating
      income
            
            
            20,691
            
            
            
            14,876
            
            
            
            24,177
            
            
            
            26,910
            
            
            
            27,822Other
      income (expense)Interest
      expense
            
            
            (4,984
            )
            
            
            (5,071
            )
            
            
            (13,726
            )
            
            
            (18,307
            )
            
            
            (10,277
            )Other
      income
            
            
            982
            
            
            
            672
            
            
            
            478
            
            
            
            582
            
            
            
            964Income
      before income taxes
            
            
            16,689
            
            
            
            10,477
            
            
            
            10,929
            
            
            
            9,185
            
            
            
            18,509Income
      tax expense
            
            
            (6,507
            )
            
            
            (3,203
            )
            
            
            (3,542
            )
            
            
            (3,957
            )
            
            
            (7,408
            )Net
      income
            
            $
            10,182
            
            
            $
            7,274
            
            
            $
            7,387
            
            
            $
            5,228
            
            
            $
            11,101Per
      share data:Earnings
      (loss) per common shareBasicCommon
            
            
            
            
            
            
            
            
            
            $
            0.43
            
            
            
            (13.01
            )
            
            
            0.46Class
      A
            
            $
            4.80
            
            
            $
            3.38Class
      L
            
            $
            4.80
            
            
            $
            3.38Class
      W
            
            $
            4.80
            
            
            $
            3.38DilutiveCommon
            
            
            
            
            
            
            
            
            
            $
            0.43
            
            
            
            (13.01
            )
            
            
            0.46Class
      A
            
            $
            4.09
            
            
            $
            2.82Class
      L
            
            $
            4.09
            
            
            $
            2.82Class
      W
            
            $
            4.09
            
            
            $
            2.82Shares
      used in computing earnings per share:BasicCommon
            
            
            
            
            
            
            
            
            
            
            2,084
            
            
            
            11,329
            
            
            
            24,330Class
      A
            
            
            1,869
            
            
            
            1,900Class
      L
            
            
            182
            
            
            
            182Class
      W
            
            
            72
            
            
            
            72DilutedCommon
            
            
            
            
            
            
            
            
            
            
            2,084
            
            
            
            11,329
            
            
            
            24,330Class
      A
            
            
            2,221
            
            
            
            2,307Class
      L
            
            
            197
            
            
            
            197Class
      W
            
            
            72
            
            
            
            72Consolidated
      balance sheet data:Total
      assets
            
            
            176,202
            
            
            
            197,449
            
            
            
            294,337
            
            
            
            330,034
            
            
            
            365,299Total
      current and long-term debt
            
            
            73,766
            
            
            
            61,633
            
            
            
            137,634
            
            
            
            118,886
            
            
            
            138,421Total
      stockholders' equity (deficit)
            
            
            30,612
            
            
            
            38,087
            
            
            
            (3,179
            )
            
            
            86,115
            
            
            
            96,224Cash
      dividend declaredPer
      common share
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            0.52
            
            
            $
            -Other
      data:Adjusted
      EBITDA(4)
            
            $
            25,325
            
            
            $
            26,456
            
            
            $
            31,069
            
            
            $
            34,002
            
            
            $
            36,172Field
      sales representatives(5)
            
            
            195
            
            
            
            220
            
            
            
            218
            
            
            
            238
            
            
            
            242




22




(1)
            
            Selling,
      general, and administrative expenses include salary, wages, commissions,
      and related benefits of $38,464, $39,022, $43,958, $47,619, and
      $55,022 for the years ended June 30, 2004, 2005, 2006, 2007, and 2008,
      respectively. Also, includes management and advisory services fees paid to
      Bain Capital Partners, V, L.P. totaling $750 for the years ended
      June 30, 2003, 2004, and 2005, respectively. Also includes management
      and advisory service fees and reimbursement of out-of-pocket expenses paid
      to Charlesbank totaling $575, $664, and $146 for the years ended
      June 30, 2005, 2006, and 2007, respectively. Refer to note 10 of our
      consolidated financial statements included in this Annual Report on Form
      10-K for further information.




(2)
            
            $496
      and $7,759 represent costs incurred in connection with the sale of
      Predecessor on June 30, 2005. Refer to note 3 of our consolidated
      financial statements included in this Annual Report on Form 10-K for
      further information. $6 and $37 represent costs of failed
      acquisitions.




(3)
            
            Depreciation
      expense includes the depreciation of property, plant and equipment and
      other assets and was $3,111, $3,114, $3,039, $3,129, and $3,178 for the
      years ended June 30, 2004, 2005, 2006, 2007, and 2008,
      respectively.(4)
            
            Adjusted
      EBITDA represents net income before interest expense, income tax expense,
      depreciation and amortization, and acquisition costs. We present adjusted
      EBITDA as a supplemental performance measure because we believe it
      facilitates operating performance comparisons from period to period and
      company to company by backing out potential differences caused by
      variations in capital structures (affecting interest expense), tax
      positions (such as the impact on periods or companies of changes in
      effective tax rates or net operating losses), the age and book
      depreciation of fixed assets (affecting relative depreciation expense),
      the impact of purchase accounting and the impact of non-recurring
      acquisition costs. Because adjusted EBITDA facilitates internal
      comparisons of our historical financial position and operating performance
      on a more consistent basis, we also use adjusted EBITDA in measuring our
      performance relative to that of our competitors and in evaluating
      acquisition opportunities. Adjusted EBITDA is not a measurement of our
      financial performance under generally accepted accounting principles in
      the United States, or GAAP, and should not be considered as an alternative
      to net income, operating income or any other performance measures derived
      in accordance with GAAP or as an alternative to cash flow from operating
      activities as a measure of our profitability or liquidity. We understand
      that although adjusted EBITDA is frequently used by securities analysts,
      lenders and others in their evaluation of companies, our calculation of
      adjusted EBITDA may not be comparable to other similarly titled measures
      of other companies. EBITDA has limitations as an analytical tool, and you
      should not consider it in isolation, or as a substitute for analysis of
      our results as reported under GAAP. Some of these limitations
      are:




•
            
            adjusted
      EBITDA does not reflect our cash expenditures, or future requirements, for
      capital expenditures or contractual
commitments;


•
            
            adjusted
      EBITDA does not reflect changes in, or cash requirements for, our working
      capital needs;


•
            
            adjusted
      EBITDA does not reflect the significant interest expense, or the cash
      requirements necessary to service interest or principal payments, on our
      debts;


•
            
            although
      depreciation and amortization are non-cash charges, the assets being
      depreciated and amortized will often have to be replaced in the future,
      and adjusted EBITDA does not reflect any cash requirements for such
      replacements; and


•
            
            other
      companies in our industry may calculate adjusted EBITDA differently than
      we do, limiting its usefulness as a comparative
  measure.




The
following table reconciles adjusted EBITDA to net income as determined in
accordance with GAAP for the periods indicated:





Year
      ended June 30,Predecessor
            
            
            Successor(in
      thousands)
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007
            
            
            2008Net
      income
            
            $
            10,182
            
            
            $
            7,274
            
            
            $
            7,387
            
            
            $
            5,228
            
            
            $
            11,101Interest
      expense
            
            
            4,984
            
            
            
            5,071
            
            
            
            13,726
            
            
            
            18,307
            
            
            
            10,277Income
      tax expense
            
            
            6,507
            
            
            
            3,203
            
            
            
            3,542
            
            
            
            3,957
            
            
            
            7,408Depreciation
      and amortization
            
            
            3,156
            
            
            
            3,149
            
            
            
            6,414
            
            
            
            6,504
            
            
            
            7,349Acquisition
      costs
            
            
            496
            
            
            
            7,759
            
            
            
            -
            
            
            
            6
            
            
            
            37Adjusted
      EBITDA
            
            $
            25,325
            
            
            $
            26,456
            
            
            $
            31,069
            
            
            $
            34,002
            
            
            $
            36,172





(5)
            
            Number
      of sales representatives is measured at the end of the period. Field sales
      representatives typically service our customers in their surrounding
      geographical area on a weekly
basis.




23


Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation.




The
following discussion should be read in conjunction with our consolidated
financial statements and notes to those consolidated financial statements,
included elsewhere in this Annual Report on Form 10-K. In addition to historical
information, this discussion contains forward-looking statements that involve
risks, uncertainties and assumptions that could cause actual results to differ
materially from our expectations. Factors that could cause such differences
include those described in “Risk factors” and elsewhere in this Annual Report on
Form 10-K.




Overview




Based
upon net sales, we are one of the largest distributors of animal health products
in the United States and Canada. We sell more than 40,000 products sourced from
over 1,500 manufacturers to over 65,000 customers, as well as provide
consultative services to our customers in the highly fragmented animal health
products industry. Products we distribute include pharmaceuticals, vaccines,
parasiticides, diagnostics, capital equipment, sanitizers, devices, supplies and
dairy lagoon treatment systems. Our principal customers are veterinarians,
production animal operators and animal health product retailers.




Our
growth has primarily been derived from internal growth initiatives supported by
select strategic acquisitions. Key factors and trends that have affected and we
believe will continue to affect our operating results include:




•
            
            Overall growth in the dairy
      industry. According to the
      USDA over the last several years the demand for dairy products has
      increased. As a result, the demand for production
      animal health productsin the dairy market has increased. We have
      capitalized on this demand with increased sales of our dairy related
      production animal health products. We anticipate that this trendof
      growth in the dairy market will continue in the future and that we will be
      able to fulfill the corresponding demand for related production animal
      health products, resulting in increased sales and
      profitability.




•
            
            Consolidation by our customers
      in the dairy industry. The dairy market is
      undergoing significant consolidation resulting in a shift towards larger
      operations.According
      to the USDA, dairies with 500 or more cattle currently account for 54% of
      the milk producing cow population in theUnited
      States,
      as compared to 24% in 1997.Over the last several years we
      have leveraged our relationships with larger dairies and our national
      footprint to gain market share in the dairy-related production animal
      health products market. We anticipate that this trend of dairy
      consolidation will continue and we will seek to continue to gain market
      share.




•
            
            Our ability to negotiate
      favorable terms from our manufacturers. Based upon net sales,
      we are one of the largest distributors in the production animal health
      products market. We believe that due to our market position and local
      market share, we have been able to negotiate, in many instances, better
      prices and more favorable terms, including rebates and sales and placement
      incentives, from our manufacturers than our
  competitors.




•
            
            Increased focus on companion
      animal customers. According
      to Sundale Research, over the last several years the market for companion
      animal health products has increased to approximately $3.3 billion.
      We believe this growth has been and will continue to be driven by the
      following trends:




•
            
            widespread
      ownership of companion animals;




•
            
            increased
      importance of companion animals in
households;




•
            
            growing
      awareness of companion animal health and
  wellness;




•
            
            technology
      migration from the human life science product sector into the practice of
      veterinary medicine;




•
            
            increased
      marketing programs sponsored by large pharmaceutical and companion animal
      nutrition companies; and




•
            
            prolonged
      companion animal life spans creating demand for geriatric companion animal
      care products.




24






Over
      the past three years we have begun to penetrate the urban and suburban
      veterinarian markets. We believe that by leveraging our centralized
      procurement and inventory management model we are well positioned to
      develop a leading cost-to-serve position in the companion animal health
      products market and to continue to capture market share, resulting in
      increased sales and profitability. While we believe we are a leader in the
      companion animal health product market, the market is highly fragmented
      with numerous national, regional and local distributors, and a few of our
      competitors with bigger market share have greater financial and other
      resources than we do.•
            
            Changes in consumer
      preferences. The demand for production animal health products is
      heavily dependent upon consumer demand for beef, dairy, poultry and swine.
      The food industry in general is subject to changing consumer trends,
      demands and preferences. For example, changes in consumer diets may
      negatively affect consumer demand for beef, dairy, poultry or swine, and
      therefore reduce the demand for our production animal health products.
      During the previous downturns in these markets, we experienced declines in
      sales and profitability.




We
generate revenue from our customers in three ways. Over 99% of our revenue is
generated through “buy/sell” transactions. The remainder comes from consignment
and agency transactions. In the “buy/sell” transactions, we take title to
inventory from our manufacturers. We sell products to customers and invoice
them. “Buy/sell” transactions are advantageous to us over other sales methods
because we take title to the inventory and are able to promote these products on
behalf of manufacturers and effectively manage the pricing and distribution of
these products. For our consignment sales, we do not take title to the product,
but we do stock and ship product to and invoice the customer. For our agency
sales, we transmit orders from our customers to our manufacturers. The
manufacturer ships the product directly to our customers and compensates us with
a commission payment for handling the order from our customer and providing
customer service. Manufacturers may occasionally switch between the “buy/sell”
and agency methods for particular products. Currently and for the past three
fiscal years, only one product with material sales has required treatment as a
consignment sale.




Contracts
with manufacturers are generally negotiated annually on a calendar year basis.
Sales growth goals are negotiated and used to determine rebate achievement.
Manufacturer rebates are classified in our accompanying consolidated statements
of operations as a reduction of direct cost of products sold. Manufacturer
rebates that are based on quarterly, trimester or annual goals have sales
performance tracked continually versus the goal, and rebate income is adjusted
accordingly when minimum hurdles are achieved.


Results
of Operations


The
following table summarizes historical results of operations for the period from
July 1, 2005 to June 30, 2008, on an actual basis and as a percentage
of net sales.




Our gross
profit may not be comparable to those of other entities, since some entities
include all of the costs related to their distribution network in cost of goods
sold and others, like us, report non-direct costs in selling, general, and
administrative expenses, and salaries, wages, commissions, and related
benefits.




25


Summary
consolidated results of operations table


Year
      ended June 30,(dollars
      in thousands)
            
            2006
            
            
            2007
            
            
            2008Net
      sales
            
            $
            571,192
            
            
            $
            629,534
            
            
            $
            716,542Direct
      cost of products sold
            
            
            459,173
            
            
            
            507,997
            
            
            
            579,485Gross
      profit
            
            
            112,019
            
            
            
            121,537
            
            
            
            137,057Selling,
      general, and administrative expenses (includes salary, wages,
              commission,
      and related benefits)
            
            
            81,428
            
            
            
            88,117
            
            
            
            101,849Acquisition
      costs
            
            
            -
            
            
            
            6
            
            
            
            37Depreciation
      and amortization
            
            
            6,414
            
            
            
            6,504
            
            
            
            7,349Operating
      income
            
            
            24,177
            
            
            
            26,910
            
            
            
            27,822Other
      income (expense):Interest
      expense
            
            
            (13,726
            )
            
            
            (18,307
            )
            
            
            (10,277
            )Other
      income
            
            
            478
            
            
            
            582
            
            
            
            964Income
      before income taxes
            
            
            10,929
            
            
            
            9,185
            
            
            
            18,509Income
      tax expense
            
            
            (3,542
            )
            
            
            (3,957
            )
            
            
            (7,408
            )Net
      income
            
            $
            7,387
            
            
            $
            5,228
            
            
            $
            11,101Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Direct
      cost of products sold
            
            
            80.4
            %
            
            
            80.7
            %
            
            
            80.9
            %Gross
      profit
            
            
            19.6
            %
            
            
            19.3
            %
            
            
            19.1
            %Selling,
      general, and administrative expenses (includes salary, wages,
              commission,
      and related benefits)
            
            
            14.3
            %
            
            
            14.0
            %
            
            
            14.2
            %Acquisition
      costs
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %Depreciation
      and amortization
            
            
            1.1
            %
            
            
            1.0
            %
            
            
            1.0
            %Operating
      income
            
            
            4.2
            %
            
            
            4.3
            %
            
            
            3.9
            %Other
      income (expense):Interest
      expense
            
            
            -2.4
            %
            
            
            -2.9
            %
            
            
            -1.4
            %Other
      income
            
            
            0.1
            %
            
            
            0.1
            %
            
            
            0.1
            %Income
      before income taxes
            
            
            1.9
            %
            
            
            1.5
            %
            
            
            2.6
            %Income
      tax expense
            
            
            -0.6
            %
            
            
            -0.7
            %
            
            
            -1.0
            %Net
      income
            
            
            1.3
            %
            
            
            0.8
            %
            
            
            1.6
            %


26


Fiscal
2008 compared to fiscal 2007





Net sales. Net sales
increased $87.0 million, or 13.8%, to $716.5 million for the year ended June 30,
2008, from $629.5 million for the year ended June 30, 2007. The increase in
net sales was primarily attributable to $60.2 million, or 69.2%, of sales
from seven acquisitions completed during the second, third and fourth quarters
of 2007 and the second quarter of 2008, the addition of new customers, continued
expansion into new territories, and increased sales to existing
customers.




Gross profit. Gross profit
increased $15.5 million, or 12.8%, to $137.0 million for the year ended
June 30, 2008, from $121.5 million for the year ended June 30, 2007.
The increase in gross profit resulted from sales growth, but was partially
offset by a reduction in vendor rebates.  Gross profit as a percentage
of sales was 19.1% for the year ended June 30, 2008, compared to 19.3% for
the year ended June 30, 2007.  The decrease in gross profit as a
percentage of sales was due to a reduction in vendor rebates.




Selling, general, and administrative
expenses. Selling, general, and administrative expenses, excluding
depreciation and amortization, increased  $13.7 million, or 15.6%, to
$101.8 million for the year ended June 30, 2008, from $88.1 million for the
year ended June 30, 2007. The increase was the result of an increase in
variable selling and distribution expenses driven by sales volume combined with
$0.6 million of increased Sarbanes-Oxley Section 404 implementation costs,
$1.1 million of increased public company related expenses, $1.1 million of
increased stock option expenses, $1.0 million of severance obligations accrued
primarily for the Company’s former Senior Vice President and Chief Operating
Officer, and $0.5 million of increased health care costs, all partially offset
by the inclusion in the prior year of $2.8 million of non-recurring legal
expenses related to the settlement of a dispute with a vendor. The fixed nature
of other corporate expenses helped to offset these increases, resulting in only
a slight increase in selling, general and administrative expenses as a percent
of sales from 14.0% for the year ended June 30, 2007, to 14.2% for the year
ended June 30, 2008.




Depreciation and
amortization. Depreciation and amortization increased from $6.5 million
for the year ended June 30, 2007, to $7.3 million for the year ended
June 30, 2008. The increase results primarily from increased amortization
of intangible assets driven by the acquisition of Kane Veterinary Products, Ltd.
in the second quarter of fiscal 2008 and adjustments to the purchase price
allocations of the acquisitions completed during the second, third, and fourth
quarters of 2007.




Other expenses. Other
expenses decreased $8.4 million, or 47.5%, to $9.3 million for the year ended
June 30, 2008, from $17.7 million for the year ended June 30, 2007. The
decrease in other expenses was due to a decrease in interest expense of $8.0
million to $10.3 million in the year ended June 30, 2008, as compared to $18.3
million in the year ended June 30, 2007. This decrease was due to $2.4
million of debt issue cost write-offs and early extinguishment penalties
incurred in the year ended June 30, 2007 as compared to $0.3 million of debt
issue cost write-offs in the year ended June 30, 2008, combined with lower
interest rates and decreased debt following the Company’s initial public
offering.




Income tax expenses. Income
tax expense increased $3.5 million to $7.4 million for the year ended
June 30, 2008, from $3.9 million for the year ended June 30, 2007. The
effective tax rate was 40.0% and 43.1% for the years ended June 30, 2008
and 2007, respectively. This decrease in the effective tax rate was primarily
attributable to a decrease in the Canadian tax rate in the year ended June 30,
2008, combined with an unfavorable blended state tax rate in the year ended June
30, 2007.




Fiscal
2007 compared to fiscal 2006




Net sales. Net sales
increased $58.3 million, or 10.2%, to $629.5 million for the year ended
June 30, 2007, from $571.2 million for the year ended June 30, 2006.
The increase in net sales was primarily attributable to the addition of new
customers, continued expansion into new territories, increased sales to existing
customers, and the acquisitions of six companies during the year ended
June 30, 2007. The number of field sales representatives increased to 238
as of June 30, 2007, from 218 as of June 30, 2006. The increase in
field sales representatives allowed the Company to expand into additional
territories and attract new customers.




Gross profit. Gross profit
increased $9.5 million, or 8.5%, to $121.5 million for the year ended
June 30, 2007, from $112.0 million for the year ended June 30, 2006.
Gross profit as a percentage of sales was 19.3% for the year ended June 30,
2007, compared to 19.6% for the year ended June 30, 2006. The Company’s
gross profit dollars increased as a result of sales growth but was slightly
offset by an unfavorable shift in product mix to lower gross margin products and
freight expense driven by an increase in fuel costs.




Selling, general, and administrative
expenses. Selling, general, and administrative expenses, excluding
depreciation and amortization, increased $6.7 million, or 8.2%, to $88.1 million
for the year ended June 30, 2007, from $81.4 million for the year ended
June 30, 2006. An increase in variable selling and administrative expenses
was due to increased sales volume combined with $2.8 million of non-recurring
legal expenses related to the settlement of a dispute with a vendor and $0.2
million of stock option expenses that represent the compensation expense
recognized from the issuance of incentive stock options in January 2007 through
June 30, 2007. Even with these increases, the fixed nature of certain
expenses drove a decrease in selling, general and administrative expenses as a
percent of sales from 14.3% for year ended June 30, 2006, to 14.0% for the
year ended June 30, 2007.




Depreciation and
amortization. Depreciation and amortization remained relatively constant
at $6.5 million for the year ended June 30, 2007, as compared to $6.4
million for the year ended June 30, 2006.




27


Other expenses. Other
expenses increased $4.5 million, or 33.8%, to $17.7 million for the year ended
June 30, 2007, from $13.2 million for the year ended June 30, 2006.
The increase in other expenses was due to an increase in interest expense of
$4.6 million to $18.3 million in the year ended June 30, 2007, as compared
to $13.7 million in the year ended June 30, 2006. This increase was due to
$2.4 million of debt issue cost write-offs and early extinguishment penalties
resulting from the pay off of the second lien notes totaling $85.0 million, and
additional debt primarily resulting from the September 2006 debt refinancing and
higher interest rates.




Income tax expenses. Income
tax expense increased $0.4 million or 11.7%, to $3.9 million for the year ended
June 30, 2007, from $3.5 million for the year ended June 30, 2006. The
effective tax rate was 43.1% and 32.4% for the years ended June 30, 2007
and 2006, respectively. This increase in the effective tax rate was attributable
to a combination of factors including: (1) a reduction of deferred tax
liabilities driven by the lowering of a state tax in the prior year that reduced
the prior year’s tax rate, (2) a change in our blended state tax rate in the
year ended June 30, 2007, and (3) permanent differences related to stock option
and other expenses.




Seasonality
of operating results




Historically,
our quarterly sales and operating results have varied significantly, and will
likely continue to do so in the future. Seasonality has been caused by product
usage, climate changes, promotions, rebates and announced price increases.
Historically, sales have been higher during the spring and fall months due to
increased sales of production animal health products. The transportation of
production animals during the spring and fall months drives seasonal product
usage. The transportation of production animals occurs during various times in
the animal’s life cycle. The cycle begins with the cow-calf stage where the calf
is born and raised to six to eight months of age. At that point the calf moves
to pasture for three to five months. The last movement occurs when the animal is
placed in the feedyard. Movement and climate changes cause stress upon the
animal, which increases the risk of disease. Thus, prior to each of these moves,
the animal is typically treated for disease prevention. These buying patterns
can also be affected by manufacturers’ and distributors’ marketing programs
launched during the summer months, particularly in June, which can cause
customers to purchase production animal health products in advance of actual
usage. This kind of early purchasing may reduce the sales in the months these
purchases would have typically been made. In the companion animal health
products market, sales of flea, tick and heartworm products drive sales during
the spring and summer months. See “Risk factors—Our quarterly operating
results may fluctuate due to factors outside of management’s control.”
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 manufacturers’ rebate programs are designed to include targets to be
achieved on calendar year sales. We anticipate that this trend with respect to
manufacturers’ rebate programs will continue, but will not have as strong an
impact upon the quarter ended December 31 as it has in prior years due to
manufactueres shifting growth goals from annual to quarterly or trimester
goals.




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.




Consolidated
statements of operations for the quarter ended (unaudited)





September
      30,
            
            
            December
      31,
            
            
            March
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            March
      31,
            
            
            June
      30,(in
      thousands)
            
            2006
            
            
            2006
            
            
            2007
            
            
            2007
            
            
            2007
            
            
            2007
            
            
            2008
            
            
            2008Net
      sales
            
            $
            145,702
            
            
            $
            170,279
            
            
            $
            153,874
            
            
            $
            159,679
            
            
            $
            164,365
            
            
            $
            203,230
            
            
            $
            170,650
            
            
            $
            178,297Direct
      cost of products sold
            
            
            118,648
            
            
            
            133,028
            
            
            
            124,828
            
            
            
            131,493
            
            
            
            135,734
            
            
            
            163,326
            
            
            
            137,815
            
            
            
            142,610Gross
      profit
            
            
            27,054
            
            
            
            37,251
            
            
            
            29,046
            
            
            
            28,186
            
            
            
            28,631
            
            
            
            39,904
            
            
            
            32,835
            
            
            
            35,687Selling,
      general, andadministrative
      expenses(1)
            
            
            20,120
            
            
            
            22,660
            
            
            
            21,411
            
            
            
            23,926
            
            
            
            22,917
            
            
            
            26,262
            
            
            
            25,546
            
            
            
            27,124Acquisition
      costs
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            37Depreciation
      and amortization
            
            
            1,540
            
            
            
            1,623
            
            
            
            1,657
            
            
            
            1,684
            
            
            
            1,645
            
            
            
            1,712
            
            
            
            1,924
            
            
            
            2,068Operating
      income
            
            
            5,394
            
            
            
            12,968
            
            
            
            5,978
            
            
            
            2,570
            
            
            
            4,069
            
            
            
            11,930
            
            
            
            5,365
            
            
            
            6,458Other
      income (expense):Other
      income
            
            
            140
            
            
            
            162
            
            
            
            132
            
            
            
            148
            
            
            
            287
            
            
            
            266
            
            
            
            219
            
            
            
            192Interest
      expense
            
            
            (4,090
            )
            
            
            (5,810
            )
            
            
            (5,874
            )
            
            
            (2,533
            )
            
            
            (2,647
            )
            
            
            (2,719
            )
            
            
            (2,492
            )
            
            
            (2,419
            )Income
      before income taxes
            
            
            1,444
            
            
            
            7,320
            
            
            
            236
            
            
            
            185
            
            
            
            1,709
            
            
            
            9,477
            
            
            
            3,092
            
            
            
            4,231Income
      tax expense
            
            
            (543
            )
            
            
            (2,921
            )
            
            
            (127
            )
            
            
            (366
            )(2)
            
            (688
            )
            
            
            (3,930
            )
            
            
            (1,215
            )
            
            
            (1,575
            )Net
      income (loss)
            
            $
            901
            
            
            $
            4,399
            
            
            $
            109
            
            
            $
            (181
            )
            
            $
            1,021
            
            
            $
            5,547
            
            
            $
            1,877
            
            
            $
            2,656




(1)
            Includes
      salaries, wages, commissions, and related
  benefits.




(2)
            Includes
      adjustments to state income tax expense for the impact of the state tax
      rate change on our deferred tax balances and other miscellaneous
      items.


28
 Liquidity
and capital resources
  The Company’s
primary sources of liquidity are cash flows generated from operations and
borrowings under the Company’s revolving credit facility established on June 30,
2005, and subsequently amended in September 2006 and October 2007. Funds are
expended to provide working capital that enables the Company to maintain
adequate inventory levels to promptly fulfill customer needs and expand
operations. The Company expects its capital resources to be sufficient to meet
anticipated cash needs for at least the next twelve months, and it expects cash
flows from operations to be sufficient to reduce outstanding borrowings under
the Company’s revolving credit agreement.
  Operating
activities. For the year ended June 30, 2008, net cash provided by
operating activities was $6.0 million, and was primarily attributable to $11.1
million in net income, $9.2 million of net non-cash costs, and a change in
deferred income taxes of $1.2 million, all partially offset by an increase in
working capital of $15.7 million. The non-cash costs included $7.3 million of
depreciation and amortization, $0.8 million of debt issue cost amortization, and
$1.3 million of stock option expenses. The debt issue cost amortization includes
the write-off of $0.3 of debt issue costs resulting from the August 2007
refinancing of the term loan debt. The change in working capital included a
decrease in accounts payable of $7.3 million and a decrease in accrued
liabilities of $9.9 million. The decrease in accounts payable resulted primarily
from a shift in purchasing to vendors with shorter payment terms. The decrease
in accrued liabilities resulted primarily from payments of income tax accruals,
liabilities related to acquisitions, and accrued non-recurring legal expenses
related to the July 2007 settlement of a dispute with a vendor. For the year
ended June 30, 2007, net cash provided by operating activities was
$10.4 million, and was primarily attributable to $5.2 million in net income
and $8.9 million of non-cash costs offset by a change in deferred income taxes
of $2.6 million and an increase in working capital of $1.1 million. The non-cash
costs included $6.5 million of depreciation and amortization and $2.2 million of
debt issue cost amortization. The debt issue cost amortization includes the
write-off of $1.5 million of debt issue costs resultingfrom
the pay off of the second lien notes. The change in working capital included an
increase in inventory of $5.9 million and changes in income tax
receivables/payables of $3.4 million, partially offset by an increase in
accounts payable of $8.2 million. The increase in inventory resulted from a rise
in inventory purchases that drove the corresponding increase in accounts
payable. The change in income tax receivables/payables resulted from estimated
tax payments partially offset by income tax accruals. For the fiscal year ended
June 30, 2006, net cash provided by operating activities was $12.9 million,
and was primarily attributable to net income of $7.4 million and non-cash costs
of $7.3 million, consisting principally of depreciation and
amortization.




Investing activities. For the
year ended June 30, 2008, net cash used for investing activities was $27.5
million, and was primarily attributable to $23.0 million, net of cash acquired,
for the acquisition of Kane Veterinary Supplies, Ltd., $4.1 million of purchases
of property, plant and equipment, and $2.2 million of purchase price adjustments
related to acquisitions completed in the prior year, all partially offset by
$1.7 of proceeds from the sale of property, plant, and equipment. For the year
ended June 30, 2007, net cash used for investing activities was
$24.7 million, and was primarily attributable to $21.9 million, net of cash
acquired, for the acquisition of six companies and purchases of property, plant
and equipment of $3.6 million. For the fiscal year ended
June 30, 2006, net cash used for investing activities was $3.9
million, and was primarily attributable to purchases of property, plant and
equipment totaling $3.3 million.




Financing activities. For the
year ended June 30, 2008, net cash provided by financing activities was
$16.0 million, and was primarily attributable to net borrowings from the
revolving credit facility totaling $20.9 million partially offset by an
unfavorable change in overdraft balances of $2.9 million and principal payments
on other debt totaling $1.4 million. Also during the year ended June 30, 2008,
the $44.5 million balance of the $45.0 million first lien term loan was paid in
full with the proceeds from the new $44.5 million first lien term loan. For the
year ended June 30, 2007, net cash provided by financing activities was
$18.8 million. Net proceeds from the issuance of common stock pursuant to
the initial public offering totaling $90.3 million combined with borrowings
received from a new $45.0 million first lien term loan and a new
$45.0 million second lien term loan were partially offset by the payment in
full of the outstanding $85.0 million balance of the second lien notes, the
payment of $54.5 million in dividends to common and preferred stockholders, and
the payment in full of the outstanding $26.5 million balance of the previous
first lien term loan. A change in overdraft balances totaling $4.8 million
accounted for the remainder of the increase in net cash provided by financing
activities. For the fiscal year ended June 30, 2006, net cash used for
financing activities was $13.6 million, and was primarily used to pay down the
balances of the revolving credit facility (Revolver) and the
$30.0 million first lien term loan.





Capital resources. In
September 2006, the Company’s revolving credit facility was amended with total
capacity totaling $125.0 million and maturity on June 30, 2010. The
outstanding borrowings under the Revolver bore interest, at the Company’s
option, as follows: (1) an interest rate per annum equal to the sum of
(a) the greater of (i) the Prime Rate in effect on such day, and
(ii) the Federal Funds Effective Rate in effect for such day plus
0.50% and (b) the applicable margin or (2) an interest rate per
annum equal to the sum of (a) the product of (i) the LIBOR rate in
effect for such Interest Period and (ii) the Statutory Reserves and
(b) the applicable margin.




In August
2007, the Company entered into a new $44.5 million first lien term loan and with
borrowings thereunder paid in full the $44.5 million balance of our then
existing $45.0 million first lien term loan. The $44.5 million first lien term
loan bears interest at an annual rate equal to LIBOR plus 2.0% and matures on
May 31, 2011. Borrowings are collateralized by a first priority interest in
and lien on all of the Company’s assets.




29


In
October 2007, the Revolver was amended to a $135.0 million facility, which
matures on June 30, 2010. The amended Revolver includes a $10.0 million
overcollateralization first drawn sub-limit that amortizes and expires on
March 31, 2009. The outstanding borrowings under the $10.0 million
overcollateralization first drawn sub-limit bear interest at the rate of 0.75%
above the rate as defined per the terms of the September 2006 Revolver
amendment. The outstanding borrowings under the Revolver’s base $125.0 million
facility bear interest at the rate of LIBOR plus 1.5% or the Prime Rate plus
0.0% until September 30, 2008, and thereafter at the rate as defined per
the terms of the September 2006 Revolver amendment. Borrowings remain
collateralized by a first priority interest in and lien on all of the Company’s
assets.




The
Company utilizes cash flow hedge accounting and uses derivative financial
instruments to convert a portion of its variable-rate debt to fixed-rate
debt.
  On
April 18, 2007, the Company entered into a $43.0 million notional value
swap transaction with a financial institution effective April 18, 2007. The
Company receives a floating rate based on LIBOR and pays a fixed rate of 4.95%.
The swap agreement terminates on June 28, 2010. As of June 30, 2008, the
fair value of this swap was a net liability of $1.2 million.
  On
April 18, 2007, the Company entered into a $52.0 million notional value
swap transaction with a financial institution effective April 18, 2007. The
Company receives a floating rate based on LIBOR and pays a fixed rate of 4.95%.
The swap agreement terminates on May 7, 2010. As of June 30, 2008, the fair
value of this swap was a net liability of $1.6 million.
  All swap
agreement fair values are recorded on the consolidated balance sheet as other
assets when the fair value is a net asset or as other long-term liabilities when
the fair value is a net liability. The fair values of our interest rate swap
agreements were estimated based on current settlement prices and quoted market
prices of comparable contracts and represent their carrying values. The Company
calculated no ineffectiveness on both interest rate swap agreements at
June 30, 2008. An unrealized loss of $1.7 million, net of taxes of $1.1
million, is recorded on the consolidated balance sheet as accumulated other
comprehensive income (loss).
  The
market values of the interest rate swap agreements recorded in other
comprehensive income (loss) may be recognized in the consolidated statements of
operations if certain terms in the Revolver or new term note change, if the
Revolver or new term note are extinguished, or if the interest rate swap
agreements are terminated prior to maturity. The net receipts or payments from
the interest rate swap agreements are recorded in interest expense.
  Interest
rates ranged from 6.73% to 8.38% as of June 30, 2007 and from 1.25% to
5.00% as of June 30, 2008. Additionally, the Company is required to pay a
commitment fee on the daily unused amount of the Revolver at a per annum
rate of 0.25%. The credit agreements contain certain covenants
that, among other things, restrict our ability to incur additional indebtedness,
make certain payments, sell assets, enter into certain transactions with
affiliates and create liens. Moreover, certain of these agreements require us to
maintain specified financial ratios. The most
restrictive covenant relates to the creation or assumption of additional
indebtedness. The Company was in compliance with all financial covenants at
June 30, 2008.
  Off-Balance
Sheet Arrangements
 As of
June 30, 2008, we did not have any off-balance sheet arrangements other
than the operating lease commitments in the contractual obligations table
below.


Contractual obligations


Our
contractual obligations as of June 30, 2008 mature as follows:


Payments Due by Period(in
      thousands)
            
            Total
            
            
            1
      Year or
              Less
            
            
            2-3 Years
            
            
            4-5
      Years
            
            
            More
      than
              5 YearsLine-of-credit
      to banks
            
            $
            93,224
            
            
            $
            —
            
            
            $
            93,224
            
            
            $
            —
            
            
            $
            —Operating
      lease commitments
            
            
            20,753
            
            
            
            4,805
            
            
            
            7,583
            
            
            
            5,323
            
            
            
            3,042Long-term
      debt obligations (including current portion)
            
            
            45,197
            
            
            
            1,259
            
            
            
            43,938
            
            
            
            —
            
            
            
            —Interest
      on long-term debt and line-of-credit(1)
            
            
            17,446
            
            
            
            7,694
            
            
            
            9,752
            
            
            
            —
            
            
            
            —Total
      contractual obligations(2)
            
            $
            176,620
            
            
            $
            13,758
            
            
            $
            154,497
            
            
            $
            5,323
            
            
            $
            3,042





(1)
            Future
      interest payments are calculated based on the assumption that all debt is
      outstanding until maturity. For debt instruments with variable interest
      rates, interest has been calculated for all future periods using the rates
      in effect as of June 30, 2008.




(2)
            There
      are some purchase obligations under purchase contracts, but management
      does not believe that they are
material.


30


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 freight and fuel costs, employee
wages and costs of products. Historically, we have been proactive in addressing
inflation in attempts to limit its effects through the enactment of cost control
initiatives.




Critical
accounting policies




The SEC
has issued disclosure guidance for “critical accounting policies.” The SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.




Our
significant accounting policies are described in note 2 to our consolidated
financial statements. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates.
However, our management is required to make certain estimates and assumptions
during the preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States. These
estimates and assumptions impact the reported amount of assets and liabilities
and disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period they are
determined to be necessary. Actual results could differ from those estimates.
The following are descriptions of our critical accounting policies that are
impacted by such judgments, assumptions and estimates:




Revenue
recognition. Revenue is recognized when title passes according to
shipping terms. Provision for sales returns is recorded at the time of sale for
estimated products returned by customers. Provision for sales discounts is
recorded at the time of sale. Revenues are presented net of sales taxes
collected from retail customers and remitted to government taxing
authorities.




Manufacturer
rebates. Inventory rebates are recognized when estimable and
probable and include inventory purchase rebates and sales-related rebates.
Inventory purchase rebates received are capitalized into inventory while
sales-related rebates are recorded as a reduction of cost of products sold.
Historically, actual results have not significantly deviated from those
determined using the estimates described above. We expect that our future
estimates will continue to be reasonable as our rebates are based upon specific
vendor program goals and are recorded each month based principally upon
achievement of sales performance measures.




Goodwill and other intangible
assets. At June 30, 2007 and 2008, the Company performed its
annual impairment test, and determined that no impairment had occurred. The
impairment test is performed by comparing the Company’s estimated fair value to
the carrying amount of its goodwill and other nonamortizing intangible assets.
If the carrying amount exceeds the fair value, an impairment loss would be
recognized in an amount equal to the excess. The Company will continue to
evaluate goodwill and other nonamortizing intangible assets consisting of
trademarks and trade names for potential impairment based upon any changes to
the Company’s operations or its operating business environment. Amortizing
intangible assets, including customer relationships and noncompete agreements,
are being amortized over their estimated useful lives of twelve and eight years,
respectively.




Item 7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk.




The
Company is exposed to certain market risks arising from transactions that are
entered into in the normal course of business. As part of our financial risk
management program, we use certain derivative financial instruments to manage
these risks. The Company does not engage in financial transactions for
speculative purposes and therefore holds no derivative instruments for trading
purposes. The Company’s exposure to market risk for changes in interest rates
relates to variable interest rates on borrowings under the Company’s credit
agreements. During April 2007, the Company entered into interest rate swap
agreements at an interest rate of 4.95% on $95.0 million of its debt in order to
manage exposure to interest rate changes related to these borrowings. This
interest rate swap effectively converted $95.0 million of debt from floating to
fixed interest rates. At June 30, 2008, the fair value of the interest rate
swap agreements was a net liability of $2.8 million. At June 30, 2008,
$42.3 million of the Company’s debt remained subject to market risk for changes
in interest rates. If the weighted average interest rate on the Company’s
remaining variable rate indebtedness rose 54 basis points (a 10.0% change from
the calculated weighted average interest rate as of June 30, 2008),
assuming no change in the Company’s outstanding balance under its Revolver and
$44.5 million first lien term loan, the Company’s annualized income before taxes
and cash flows from operating activities would decline by approximately $0.2
million. If the weighted average interest rate on the Company’s remaining
variable rate indebtedness decreased 54 basis points (a 10.0% change from the
calculated weighted average interest rate as of June 30, 2008), assuming no
change in the Company’s outstanding balance under its Revolver and $44.5 million
first lien term loan, the Company’s annualized income before taxes and cash
flows from operating activities would increase by approximately $0.2
million.




Item 8.
            Financial
      Statements and Supplementary Data.




The
consolidated financial statements required to be filed are indexed on page F-1
and are incorporated herein.




Item 9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.




None.


31


Item 9A.
            Controls
      and Procedures.




Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
  Our Chief
Executive Officer and our Chief Financial Officer have concluded that, as of
June 30, 2008, our disclosure controls and procedures are effective (i) to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms and (ii) to ensure that information required to be
disclosed by us in the reports that we submit under the Exchange Act is
accumulated and communicated to our management, including our principal
executive and principal financial officers, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required
disclosure.  This evaluation was completed under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer and included evaluation of our disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) or 15(d)-15(e)
promulgated under the Exchange Act. In
October 2007, the Company acquired Kane Veterinary Supplies, Ltd. The Company is
currently in the process of integrating Kane pursuant to the Sarbanes-Oxley Act
of 2002. The impact of this acquisition has not materially affected and is not
likely to materially affect the Company's internal control over financial
reporting. However, as a result of the Company's integration activities,
controls will be periodically changed. The Company believes, however, it will be
able to maintain sufficient controls over the substantive results of its
financial reporting throughout this integration process. In addition, the scope
of management’s assessment of the Company’s internal control over financial
reporting as of June 30, 2008, excluded the operations pertinent to Kane. Kane
attributed to approximately 6% percent of the Company’s consolidated net
operating revenues for the year ended June 30, 2008 and represented
approximately 6% percent of the Company’s consolidated total assets as of June
30, 2008.


Changes
in Internal Control Over Financial Reporting
  There
were no changes in our internal control over financial reporting during the
quarterly period ended June 30, 2008, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.


Management's
Annual Report on Internal Control Over Financial Reporting




Management's
Annual Report on Internal Control Over Financial Reporting, which appears on
page F-2 of this Annual Report on Form 10-K, is incorporated by
reference herein.




Item 9B.
            Other
      Information.




None.




PART III




Item 10.
            Directors,
      Executive Officers and Corporate
Governance.




Certain
information required by this Item 10 relating to our directors and
executive officers is incorporated by reference herein from our proxy statement
in connection with our 2008 annual meeting of stockholders, which proxy
statement will be filed with the SEC not later than 120 days after the close of
our fiscal year ended June 30, 2008.




Audit
Committee Financial Expert




Our board
of directors has determined that each of Messrs. Biegler, Pinkerton, and
Steinhart qualifies as an “audit committee financial expert” as defined in
Item 401(h) of Regulation S-K, and are “independent” as the term is
used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.




Code
of Ethics




We have
adopted a "code of ethics," as defined by regulations promulgated under the
Securities Act of 1933, as amended, and the Exchange Act, that applies to all of
our directors and employees worldwide, including our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A current copy of the Code
of Business Conduct and Ethics is available at the Corporate Governance section
of our website at www.ahii.com. A copy of the
Code of Business Conduct and Ethics may also be obtained, free of charge, upon a
request directed to: Animal Health International, Inc., 7 Village Circle, Suite
200, Westlake, Texas 76262, Attention: General Counsel. We intend to disclose
any amendment to or waiver of a provision of the Code of Business Conduct and
Ethics that applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions, by posting such information on our website available at www.ahii.com.


For
more corporate governance information, you are invited to access the Corporate
Governance section of our website available at www.ahii.com.
 32


Item 11.
            Executive
      Compensation.




Certain
information required by this Item 11 relating to remuneration of directors
and executive officers and other transactions involving management is
incorporated by reference herein from our proxy statement in connection with our
2008 annual meeting of stockholders, which proxy statement will be filed with
the SEC not later than 120 days after the close of our fiscal year ended
June 30, 2008.




Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.




Certain
information required by this Item 12 relating to security ownership of
certain beneficial owners and management is incorporated by reference herein
from our proxy statement in connection with our 2008 annual meeting of
stockholders, which proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended June 30, 2008. For
information on securities authorized for issuance under equity compensation
plans, see the section entitled “Market for Registrant’s Common Equity and
Related Stockholders Matters” in Part II, Item 5 in this Annual Report
on Form 10-K.




Item 13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.




Certain
information required by this Item 13 relating to certain relationships and
related transactions is incorporated by reference herein from our proxy
statement in connection with our 2008 annual meeting of stockholders, which
proxy statement will be filed with the SEC not later than 120 days after
the close of our fiscal year ended June 30, 2008.




Item 14.
            Principal
      Accounting Fees and Services.




Certain
information required by this Item 14 regarding principal accounting fees
and services is set forth under “Matters Concerning Our Independent Registered
Public Accounting Firm” in our proxy statement in connection with our 2008
annual meeting of stockholders, which proxy statement will be filed with the SEC
not later than 120 days after the close of our fiscal year ended
June 30, 2008.




PART IV




Item 15.
            Exhibits,
      Financial Statement Schedules.




(1)
            Financial Statements:Reference is made to the Index to Financial Statements in the
      section entitled “Financial Statements and Supplementary Data” in Part II,
      Item 8 of this Annual Report on Form
10-K.




(2)
            Financial Statement Schedules:These Schedules have been omitted because they are not required or
      because the required information is given in the consolidated financial
      statements or notes thereto.




(3)
            Exhibits:Exhibits are
      as set forth in the section entitled “Exhibit Index” which follows the
      section entitled “Signatures” in this Annual Report on Form 10-K. Exhibits
      which are incorporated herein by reference can be inspected and copied at
      the public reference rooms maintained by the SEC in Washington, D.C.,
      New York, New York, and Chicago, Illinois. Please call the SEC at
      1-800-SEC-0330 for further information on the public reference rooms. SEC
      filings are also available to the public from commercial document
      retrieval services and at the website maintained by the SEC at http://www.sec.gov.




33


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.




ANIMAL
      HEALTH INTERNATIONAL, INC.Date:
      September 9, 2008
            
            /s/    WILLIAMF. LACEYWilliam
      F. LaceySenior
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)







POWER
OF ATTORNEY




KNOWN ALL
MEN BY THESE PRESENTS that each individual whose signature appears below
constitutes and appoints each of James C. Robison and William F. Lacey such
person’s true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for such person and in such person’s name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that any said attorney-in-fact and agent, or any substitute or
substitutes of any of them, may lawfully do or cause to be done by virtue
hereof.




Pursuant
to the requirements of the Securities and Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/    JAMESC. ROBISON
              James
      C. Robison
            
            Chief
      Executive Officer, President and Chairman
              (Principal
      Executive Officer)
            
            September
      9, 2008/s/    WILLIAMF. LACEY
              William
      F. Lacey
            
            Sr.
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)
            
            September
      9, 2008/s/    MICHAELEISENSON
              Michael
      Eisenson
            
            Director
            
            September
      9, 2008/s/    MARKROSEN
              Mark
      Rosen
            
            Director
            
            September
      9, 2008/s/    BRANDONWHITE
              Brandon
      White
            
            Director
            
            September
      9, 2008/s/    RONALDSTEINHART
              Ronald
      Steinhart
            
            Director
            
            September
      9, 2008/s/    DAVIDBIEGLER
              David
      Biegler
            
            Director
            
            September
      9, 2008/s/    JERRYPINKERTON
              Jerry
      Pinkerton
            
            Director
            
            September
      9, 2008/s/    E.
      THOMASCORCORAN
              E.
      Thomas Corcoran
            
            Director
            
            September
      9, 2008







Animal
Health International, Inc.




Index to consolidated financial statements




Management's Annual Report on Internal Control over
      Financial Reporting
            
            F-2Reports of Independent Registered Public Accounting
      Firm
            
            F-3Consolidated Balance Sheets as of June 30, 2007 and
      2008
            
            F-5Consolidated Statements of Operations for the years ended
      June 30, 2006, 2007 and 2008
            
            F-6Consolidated Statements of Stockholders’ Equity and
      Comprehensive Income for the years ended June 30, 2006, 2007
      and 2008
            
            F-7Consolidated Statements of Cash Flows for the years ended
      June 30, 2006, 2007 and 2008
            
            F-8Notes to Consolidated Financial
    Statements
            
            F-9




F-1




Management's Annual Report on
Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The
Company acquired Kane Veterinary Supplies, Ltd.(Kane)
in October 2007, and management excluded from its assessmentof
the effectiveness of Animal Health International Inc.’s internal control over
financial reporting as of June 30, 2008, Kane's internal control over financial
reporting associated with total assets of approximately $23 million and total
revenues of approximately $43 million included in the consolidated financial
statements of Animal Health International Inc. and subsidiaries as of and for
the year ended June 30, 2008.Based
on our evaluation under the framework in Internal Control—Integrated Framework,
our management concluded that our internal control over financial reporting was
effective as of June 30, 2008.




The
effectiveness of our internal control over financial reporting as of
June 30, 2008 has been audited by KPMG LLP, the independent registered
public accounting firm that audited our financial statements included herein, as
stated in their report which is included herein.




/s/ James C. Robison
              
              James
      C. Robison
              Chief
      Executive Officer of the Company/s/ William F. Lacey
              
              William
      F. Lacey
              Chief
      Financial Officer of the Company




September
9, 2008




F-2




Report of Independent Registered Public Accounting
Firm






The Board
of Directors and Stockholders


Animal
Health International, Inc.:




We
have audited Animal Health International, Inc. and subsidiaries' (the Company)
internal control over financial reporting as of June 30, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). 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 Annual 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 and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included 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 to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. 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 U.S. 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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that 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, Animal Health International, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
June 30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




In October
2007, Animal Health International, Inc. acquired Kane Veterinary Supplies, Ltd
(Kane) and management excluded from its assessment of the effectiveness of
Animal Health International Inc.’s internal control over financial reporting as
of June 30, 2008, Kane's internal control over financial reporting associated
with total assets of approximately $23 million and total revenues of
approximately $43 million included in the consolidated financial statements of
Animal Health International Inc. and subsidiaries as of and for the year ended
June 30, 2008. Our audit of internal control over financial reporting of Animal
Health International Inc. also excluded an evaluation of the internal control
over financial reporting of Kane.





We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Animal
Health International, Inc. and subsidiaries as of June 30, 2008 and 2007, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended June 30, 2008, and our report dated
September 9, 2008 expressed an unqualified opinion on those consolidated
financial statements.




/s/
      KPMG LLP




Dallas,
Texas


September 9,
2008




F-3




Report
of Independent Registered Public Accounting Firm






The
      Board of Directors


Animal
      Health International, Inc.:





We have
audited the accompanying consolidated balance sheets of Animal Health
International, Inc. and subsidiaries as of June 30, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2008.  These consolidated financial statements
are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Animal Health International,
Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2008, in conformity with U.S. generally accepted accounting
principles.




As
discussed in note 2 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board’s
Interpretation 48, “Accounting for Uncertainty in Income Taxes—an interpretation
of FASB Statement No. 109” in fiscal year 2008, and the Company adopted the
provisions of the Financial Accounting Standards Board’s Statement of Financial
Accounting Standards 123 (revised 2004), “Share-Based Payment” in fiscal
year 2007.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Animal Health International, Inc.'s
internal control over financial reporting as of June 30, 2008, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated September 9, 2008,
expressed an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.







/s/
      KPMG LLP




Dallas,
Texas
 September
9, 2008




F-4


ANIMAL HEALTH
INTERNATIONAL, INC.




Consolidated Balance Sheets


June 30,
2007 and 2008


(In
thousands, excluding share information)


June
      30,
              2007
            
            
            June
      30,
              2008AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            7,751
            
            
            $
            2,452Accounts
      receivable, net
            
            
            73,958
            
            
            
            84,549Current
      portion of notes receivable
            
            
            63
            
            
            
            608Income
      tax receivable
            
            
            1,285
            
            
            
            1,167Merchandise
      inventories, net
            
            
            80,848
            
            
            
            98,847Deferred
      income taxes
            
            
            4,127
            
            
            
            2,682Prepaid
      expenses
            
            
            2,159
            
            
            
            1,657Total
      current assets
            
            
            170,191
            
            
            
            191,962Noncurrent
      assets:Notes
      receivable, net of current portion
            
            
            401
            
            
            
            511Property,
      plant, and equipment, net
            
            
            17,253
            
            
            
            17,096Goodwill
            
            
            78,598
            
            
            
            82,642Customer
      relationships
            
            
            29,737
            
            
            
            31,428Noncompete
      agreements
            
            
            2,390
            
            
            
            4,636Trademarks
      and trade names
            
            
            26,360
            
            
            
            33,170Debt
      issue costs and other assets, net of accumulated
    amortizationof
      $830 and $1,289, respectively
            
            
            5,104
            
            
            
            3,854Total
      assets
            
            $
            330,034
            
            
            $
            365,299Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            81,976
            
            
            $
            86,213Accrued
      liabilities
            
            
            15,644
            
            
            
            13,879Current
      portion of long-term debt
            
            
            1,363
            
            
            
            1,259Total
      current liabilities
            
            
            98,983
            
            
            
            101,351Noncurrent
      liabilities:Long-term
      debt, net of current portion
            
            
            117,523
            
            
            
            137,162Deferred
      lease incentives
            
            
            1,736
            
            
            
            1,437Deferred
      income taxes
            
            
            25,677
            
            
            
            26,282Other
      long-term liabilities
            
            
            —
            
            
            
            2,843Total
      liabilities
            
            
            243,919
            
            
            
            269,075Commitments
      and contingencies (note 13)Stockholders’
      equity:Preferred
      stock, par value $0.01 per share. Authorized 10,000,000
      shares,issued
      and outstanding 0 shares
            
            
            —
            
            
            
            —Common
      stock, par value $0.01 per share. Authorized 90,000,000
      shares,issued
      and outstanding 24,329,670 shares
            
            
            243
            
            
            
            243Additional
      paid-in capital
            
            
            128,367
            
            
            
            129,704Accumulated
      deficit
            
            
            (42,826
            )
            
            
            (31,725
            )Accumulated
      other comprehensive income (loss)
            
            
            331
            
            
            
            (1,998
            )Total
      stockholders’ equity
            
            
            86,115
            
            
            
            96,224Total
      liabilities and stockholders’ equity
            
            $
            330,034
            
            
            $
            365,299




See
accompanying Notes to Consolidated Financial Statements.




F-5


ANIMAL HEALTH INTERNATIONAL, INC.




Consolidated Statements of Operations


Years
ended June 30, 2006, 2007, and 2008


(In
thousands, except per share data)


Year
      ended June 30,2006
              
              
              2007
              
              
              2008Net
      sales
              
              $
              571,192
              
              
              $
              629,534
              
              
              $
              716,542Costs
      and expenses:Direct
      cost of products sold (excludes depreciation and
    amortization)
              
              
              459,173
              
              
              
              507,997
              
              
              
              579,485Salaries,
      wages, commissions, and related benefits
              
              
              43,958
              
              
              
              47,619
              
              
              
              55,022Selling,
      general, and administrative
              
              
              37,470
              
              
              
              40,498
              
              
              
              46,827Acquisition
      costs
              
              
              —
              
              
              
              6
              
              
              
              37Depreciation
      and amortization
              
              
              6,414
              
              
              
              6,504
              
              
              
              7,349Operating
      income
              
              
              24,177
              
              
              
              26,910
              
              
              
              27,822Other
      income (expense):Other
      income
              
              
              478
              
              
              
              582
              
              
              
              964Interest
      expense
              
              
              (13,726
              )
              
              
              (18,307
              )
              
              
              (10,277
              )Income
      before income taxes
              
              
              10,929
              
              
              
              9,185
              
              
              
              18,509Income
      tax expense
              
              
              (3,542
              )
              
              
              (3,957
              )
              
              
              (7,408
              )Net
      income
              
              $
              7,387
              
              
              $
              5,228
              
              
              $
              11,101Dividend
      on redeemable preferred stock
              
              
              (941
              )
              
              
              (53,323
              )
              
              
              —Deemed
      dividend upon conversion of redeemable preferred stock
              
              
              —
              
              
              
              (95,227
              )
              
              
              —Preferred
      stock participation in undistributed earnings
              
              
              (5,554
              )
              
              
              (4,062
              )
              
              
              —Net
      income (loss) available to common shareholders
              
              $
              892
              
              
              $
              (147,384
              )
              
              $
              11,101Earnings
      (loss) per common share:Basic
              
              $
              0.43
              
              
              $
              (13.01
              )
              
              $
              0.46Diluted
              
              $
              0.43
              
              
              $
              (13.01
              )
              
              $
              0.46Shares
      used in computing earnings per share:Basic
              
              
              2,084
              
              
              
              11,329
              
              
              
              24,330Diluted
              
              
              2,084
              
              
              
              11,329
              
              
              
              24,330See
      accompanying Notes to Consolidated Financial
    Statements.
  F-6




ANIMAL HEALTH INTERNATIONAL, INC.




Consolidated Statements of Stockholders’ Equity and Comprehensive
Income


Years
ended June 30, 2006, 2007, and 2008


(In thousands, excluding share
information)





Common Stock
            
            
            
            
            
            
            
            
            AccumulatedAdditional
            
            
            Accumulated
            
            
            otherNumber
      of
            
            
            
            
            
            paid-in
            
            
            earnings/
            
            
            comprehensiveshares
            
            
            Amount
            
            
            capital
            
            
            (deficit)
            
            
            income
      (loss)
            
            
            TotalBalance,
      June 30, 2005
            
            
            1,563,825
            
            
            
            16
            
            
            
            (9,424
            )
            
            
            —
            
            
            
            —
            
            
            
            (9,408
            )Issuance
      of common stock
            
            
            696,166
            
            
            
            7
            
            
            
            19
            
            
            
            —
            
            
            
            —
            
            
            
            26Dividend
      on redeemable preferred stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (941
            )
            
            
            —
            
            
            
            (941
            )Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,387
            
            
            
            —
            
            
            
            7,387Foreign
      currency translation
              adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (243
            )
            
            
            (243
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,144Balance,
      June 30, 2006
            
            
            2,259,991
            
            
            $
            23
            
            
            $
            (9,405
            )
            
            $
            6,446
            
            
            $
            (243
            )
            
            $
            (3,179
            )Dividend
      on common stock
              of
      $0.52 per share
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,177
            )
            
            
            —
            
            
            
            (1,177
            )Dividend
      on redeemable preferred
              stock
      of $25.12 per share
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (53,323
            )
            
            
            —
            
            
            
            (53,323
            )Forfeiture
      of common stock
            
            
            (5,503
            )
            
            
            (1
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1
            )Conversion
      of redeemable preferred
              stock
      into common stock
            
            
            12,975,182
            
            
            
            130
            
            
            
            47,370
            
            
            
            —
            
            
            
            —
            
            
            
            47,500Sale
      of common stock under initial
              public
      offering
            
            
            9,100,000
            
            
            
            91
            
            
            
            102,088
            
            
            
            —
            
            
            
            —
            
            
            
            102,179Costs
      directly associated with initial
              public
      offering
            
            
            —
            
            
            
            —
            
            
            
            (11,910
            )
            
            
            —
            
            
            
            —
            
            
            
            (11,910
            )Issuance
      of stock options
            
            
            —
            
            
            
            —
            
            
            
            224
            
            
            
            —
            
            
            
            —
            
            
            
            224Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,228
            
            
            
            —
            
            
            
            5,228Unrealized
      gain on derivative
              instrument, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            535
            
            
            
            535Foreign
      currency translation
              adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            39
            
            
            
            39Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,802Balance,
      June 30, 2007
            
            
            24,329,670
            
            
            $
            243
            
            
            $
            128,367
            
            
            $
            (42,826
            )
            
            $
            331
            
            
            $
            86,115Costs
      directly associated with initial
              public offering
            
            
            —
            
            
            
            —
            
            
            
            (5
            )
            
            
            —
            
            
            
            —
            
            
            
            (5
            )Issuance
      of stock options
            
            
            —
            
            
            
            —
            
            
            
            1,342
            
            
            
            —
            
            
            
            —
            
            
            
            1,342Comprehensive
      income:Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,101
            
            
            
            —
            
            
            
            11,101Unrealized
      loss on derivative
              instrument, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,241
            )
            
            
            (2,241
            )Foreign
      currency translation
              adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (88
            )
            
            
            (88
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,772Balance,
      June 30, 2008
            
            
            24,329,670
            
            
            $
            243
            
            
            $
            129,704
            
            
            $
            (31,725
            )
            
            $
            (1,998
            )
            
            $
            96,224See
      accompanying Notes to Consolidated Financial
    Statements.




F-7




ANIMAL HEALTH INTERNATIONAL, INC.




Consolidated Statements of Cash Flows


Years
ended June 30, 2006, 2007, and 2008


(In
thousands)





Year
      ended June 30,2006
            
            
            2007
            
            
            2008Cash
      flows from operating activities:Net
      income
            
            $
            7,387
            
            
            $
            5,228
            
            
            $
            11,101Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
            
            
            6,414
            
            
            
            6,504
            
            
            
            7,349Amortization
      of debt issue costs
            
            
            807
            
            
            
            2,214
            
            
            
            805Stock
      option expense
            
            
            —
            
            
            
            224
            
            
            
            1,342(Gain)
      loss on sale of equipment
            
            
            36
            
            
            
            (26
            )
            
            
            (292
            )Deferred
      income taxes
            
            
            (3,649
            )
            
            
            (2,629
            )
            
            
            1,167Deferred
      lease incentives
            
            
            2,020
            
            
            
            —
            
            
            
            224Changes
      in assets and liabilities (net of effects of
acquisitions):Accounts
      receivable
            
            
            1,907
            
            
            
            1,363
            
            
            
            (1,102
            )Merchandise
      inventories
            
            
            (796
            )
            
            
            (5,935
            )
            
            
            1,634Income
      taxes receivable/payable
            
            
            1,256
            
            
            
            (3,353
            )
            
            
            12Prepaid
      expenses
            
            
            (118
            )
            
            
            (509
            )
            
            
            948Accounts
      payable
            
            
            (9,733
            )
            
            
            8,171
            
            
            
            (7,348
            )Accrued
      liabilities and other
            
            
            7,335
            
            
            
            (822
            )
            
            
            (9,877
            )Net
      cash provided by operating activities
            
            
            12,866
            
            
            
            10,430
            
            
            
            5,963Cash
      flows from investing activities:Purchase
      of property, plant, and equipment
            
            
            (3,300
            )
            
            
            (3,567
            )
            
            
            (4,074
            )Purchase
      of other assets
            
            
            (1,526
            )
            
            
            (395
            )
            
            
            (12
            )Business
      acquisitions, net of cash acquired (includes $1,376 and$1,017
      of direct acquisiton costs)
            
            
            —
            
            
            
            (21,936
            )
            
            
            (23,033
            )Purchase
      price adjustments
            
            
            536
            
            
            
            742
            
            
            
            (2,246
            )Proceeds
      from sale of property, plant, and equipment
            
            
            92
            
            
            
            206
            
            
            
            1,674Net
      changes in notes receivable
            
            
            252
            
            
            
            275
            
            
            
            144Net
      cash used for investing activities
            
            
            (3,946
            )
            
            
            (24,675
            )
            
            
            (27,547
            )Cash
      flows from financing activities:Repayment
      of long-term debt
            
            
            (3,794
            )
            
            
            (112,381
            )
            
            
            (45,933
            )Borrowings
      of long-term debt
            
            
            —
            
            
            
            90,002
            
            
            
            44,550Net
      borrowings (repayments) under revolving credit facilities
            
            
            (6,093
            )
            
            
            1,188
            
            
            
            20,902Debt
      issue costs
            
            
            (175
            )
            
            
            (630
            )
            
            
            (487
            )Change
      in overdraft balances
            
            
            (2,589
            )
            
            
            4,833
            
            
            
            (2,937
            )Dividend
      on redeemable preferred stock
            
            
            (941
            )
            
            
            (53,323
            )
            
            
            —Dividend
      on common stock
            
            
            —
            
            
            
            (1,177
            )
            
            
            —Net
      proceeds from (costs for) the issuance of common stock
            
            
            26
            
            
            
            90,269
            
            
            
            (5
            )Net
      cash provided by (used for) financing activities
            
            
            (13,566
            )
            
            
            18,781
            
            
            
            16,090Effect
      of exchange rate changes in cash and cash equivalents
            
            
            99
            
            
            
            179
            
            
            
            195Net
      increase (decrease) in cash and cash equivalents
            
            
            (4,547
            )
            
            
            4,715
            
            
            
            (5,299
            )Cash
      and cash equivalents, beginning of year
            
            
            7,583
            
            
            
            3,036
            
            
            
            7,751Cash
      and cash equivalents, end of year
            
            $
            3,036
            
            
            $
            7,751
            
            
            $
            2,452See
      accompanying Notes to Consolidated Financial
  Statements.


F-8




ANIMAL HEALTH INTERNATIONAL, INC.




Notes to Consolidated Financial Statements


June 30,
2007 and 2008


(Dollars
in thousands)




(1)
Organization




Animal
Health International, Inc. (the Company), formerly known as Walco International
Holdings, Inc., was incorporated in Delaware in May 2005. Through its wholly
owned subsidiaries, Walco International, Inc. and Kane Veterinary Supplies, Ltd.
(note 3), the Company’s primary business activity is the sale and distribution
of animal health products, supplies, services and technology through operating
divisions located throughout the United States, Canada and Taiwan.


(2)
Summary of significant accounting policies




(a)
Basis of consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform to the current year presentation.




(b)
Revenue recognition




Revenues
are recognized when the title passes according to shipping terms. Sales returns
and allowances are immaterial in all periods presented as most product returns
from customers are returned to product manufacturers for full credit. Any losses
incurred on sales returns are recognized in the period the products are
returned. Provision for sales discounts is recorded at the time of sale.Revenues are presented net of sales taxes collected from retail customers
and remitted to government taxing authorities.




For
multiple arrangements in which a customer signs up for a multi-year exclusive
supply agreement and receives certain equipment and software products at no
charge, revenue is recognized using the relative fair value method, whereby each
separate unit of accounting is recognized as revenue at its relative fair value,
in which the delivered item (certain equipment and software products) is limited
to the non-contingent amount. Since all consideration paid by the customer is
contingent upon delivery of the product, no amount is recorded as equipment and
software revenue under these multiple element arrangements.




(c)
Direct cost of products sold




Direct
cost of products sold includes the cost of inventories, net of purchase rebates,
and inbound and outbound freight costs.




(d)
Rebates




Inventory
rebates are recognized when estimable and probable and include inventory
purchase rebates and sales-related rebates. Inventory purchase rebates received
are capitalized into inventory while sales-related rebates are recorded as a
reduction of cost of sales.




(e)
Shipping and handling




The
Company invoices certain customers for shipping and handling. This revenue is
included in net sales and was $905, $1,058, and $1,114 for the years ended
June 30, 2006, 2007, and 2008 respectively. The costs associated with
shipping and handling are reflected in direct cost of products sold in the
consolidated statements of operations and were $9,302, $10,238, and $11,988
for the years ended June 30, 2006, 2007, and 2008,
respectively.




(f)
Rent expense




Minimum
rental expenses are recognized on a straight-line basis over the term of the
lease. The Company recognizes minimum rent starting when possession of the
property is taken from the landlord. When a lease contains a predetermined fixed
escalation of the minimum rent, the Company recognizes the related rent expense
on a straight-line basis and records the difference between the recognized
rental expense and the amounts payable under the lease as deferred lease
incentives. Tenant allowances received are reflected in deferred lease
incentives and amortized on a straight-line basis as a reduction to rent expense
over the term of the lease.




F-9


(g) Income
taxes
  The Company
classifies interest and penalties attributable to income taxes as part of income
tax expense. Accruals for interest and penalties totaled $0 and $0 as of June
30, 2007 and 2008, respectively.
 (h)
Cash and cash equivalents
  All
highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents. These amounts are stated at cost, which
approximates fair value. Book overdrafts totaling $16,561 and $13,624 at
June 30, 2007 and 2008, respectively, are classified as accounts payable in
the consolidated balance sheets.


(i)
Accounts receivable




Accounts
receivable consist primarily of receivables from trade customers. The Company
records an allowance for doubtful accounts to allow for any amounts which may be
unrecoverable. This allowance is based upon an analysis of historical write-offs
and is adjusted as necessary to reserve for specific accounts that are judged to
be potentially uncollectible. Specific accounts determined to be uncollectible
are written-off against the allowance.




(j)
Merchandise inventories




Merchandise
inventories are stated at the lower of average cost or market. Inventories
include the cost of product, net of purchase rebates, and inbound freight, and
primarily consist of finished goods stored in warehouses.




(k)
Property, plant, and equipment




Property,
plant, and equipment are recorded at cost. Depreciation is determined for
financial reporting purposes primarily using the straight-line method over the
estimated useful lives of the assets, which are as follows (in
years):




Buildings
      and improvements
            
            10-40Leasehold
      improvements
            
            5-10Equipment:Warehouse
            
            3-8Automotive
            
            3-8Computer
      hardware and software
            
            3-5Office
            
            3-8




Depreciation
expense related to property, plant, and equipment was
$2,759, $2,795, and $3,278 for the years ended June 30, 2006, 2007, and
2008 respectively. The Company periodically reviews long-lived assets for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the
undiscounted expected future cash flows from an asset is less than the carrying
value of the asset, impairment must be recognized in the financial statements by
writing down the asset to its fair value.  At June 30, 2007 and 2008, no
impairment had occurred.




(l)
Goodwill and other intangible assets




At
June 30, 2007 and 2008, the Company performed its annual impairment test,
and determined that no impairment had occurred. The impairment test is performed
by comparing the Company’s estimated fair value to the carrying amount of its
goodwill and other nonamortizing intangible assets. If the carrying amount
exceeds the fair value, an impairment loss would be recognized in an amount
equal to the excess. The Company will continue to evaluate goodwill and other
nonamortizing intangible assets consisting of trademarks and trade names for
potential impairment based upon any changes to the Company’s operations or its
operating business environment. Amortizing intangible assets including customer
relationships and noncompete agreements are being amortized over their estimated
useful lives of twelve and eight years, respectively.




(m)
Debt issue costs and other assets




Debt
issue costs are capitalized and amortized to interest expense over the term of
the underlying debt utilizing the straight-line method, which approximates the
effective interest method. Other assets include equipment held for lease, which
are amortized over their useful lives, and investments, which are recorded at
cost.




F-10




(n)
Stock options
  Concurrent
with the effective date of its initial public offering, the Company issued
options to purchase an aggregate of 749,300 shares under terms established by
the 2007 Stock Option and Incentive Plan, which was adopted by the Company’s
Board of Directors and approved by its stockholders in January 2007. The Company
also issued options to purchase 9,500 shares in May 2007, and an additional
750,000 shares in November 2007. The Company reserved 2,500,000 shares of its
common stock for the issuance of awards under the 2007 Stock Option and
Incentive Plan. The options vest over a four-year period, carry a ten-year term,
and have an exercise price of $11.00 per share for the initial 749,300 shares,
$13.53 per share for the 9,500 shares granted in May 2007, and $11.47 per share
for the 750,000 shares granted in November 2007. The options issued are
incentive stock options, which are not performance-based and vest with continued
employment. Unexercised options may be forfeited in the event of termination of
employment. Options to purchase 203,200 shares were vested and had a weighted
average exercise price of $11.03, but no options were exercised as of June 30,
2008.  There were 1,090,450 of options to purchase shares remaining
available for future issuance at June 30, 2008.
  The
Company uses the Black-Scholes formula to estimate the value of stock options
granted to employees and expects to continue to use this option valuation model.
The Company includes a forfeiture estimate in the amount of compensation expense
being recognized. The forfeiture estimate is based on historical employee
turnover rates. The estimated fair value of the options is amortized to expense
on a straight-line basis over the four-year vesting period.


The
following weighted average assumptions were used for the 2007 and 2008 option
grants: risk-free interest rate of 4.75% on the initial 749,300 shares, 4.45% on
the subsequent 9,500 shares, and 3.25% on the last 750,000 shares, dividend
yield of 0% for all shares, annual volatility factor of the expected market
price of the Company’s common stock of 31.0% for the initial 749,300 shares and
subsequent 9,500 shares, and 30.9% for the 750,000 shares, estimated forfeiture
rate of 8.4%, and an expected life of the options of 6.25 years. The risk-free
interest rate was determined based on a yield curve of U.S. Treasury rates
ranging from five to seven years. Expected volatility was established based on
historical volatility of the stock prices of other companies in industries
similar to the Company. Based on these assumptions, the 2007 options were valued
at $4.49 per share for the initial 749,300 shares and $5.43 per share for the
subsequent 9,500 shares, and the 2008 options were valued at $4.28 per share for
the 750,000 shares. Total compensation expense for these options is $5,347
including the following amounts charged or to be charged to compensation expense
each year ended June 30 over each four-year vesting period: $224 in 2007, $1,342
in 2008, $1,337 in 2009, $1,337 in 2010, $855 in 2011, and $252 in 2012. 
The weighted average remaining contract term for these options was 9.6 years and
9.0 years at June 30, 2007 and 2008, respectively.




A summary
of stock option activity is as follows:




Options
            
            
            Weighted average
              exercise
      prices
            
            
            Weighted average fair
              value
      at grant dateBalance
      at July 1, 2006
            
            
            —
            
            
            $
            —
            
            
            $
            —Granted
            
            
            758,800
            
            
            
            11.03
            
            
            
            4.50Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
            
            
            (12,500
            )
            
            
            11.00
            
            
            
            4.49Balance
      at July 1, 2007
            
            
            746,300
            
            
            
            11.03
            
            
            
            4.50Granted
            
            
            750,000
            
            
            
            11.47
            
            
            
            4.28Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
            
            
            (86,750
            )
            
            
            11.01
            
            
            
            4.48Balance
      at June 30, 2008
            
            
            1,409,550
            
            
            $
            11.27
            
            
            $
            4.38




Intrinsic
value for stock options is defined as the difference between the current market
value and the exercise price. The exercise price of stock options outstanding
and exercisable at June 30, 2008 exceeded the market value, and therefore,
the aggregate intrinsic value for these stock options was $2,582 and $0 at
June 30, 2007 and 2008, respectively.




F-11




(o)
Earnings per share
  Earnings
per share reflects application of the two class method. All classes of common
stock participate pro rata in dividends. Therefore, the two class method of
calculating earnings per share has been applied. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the reporting period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. For the calculation of diluted earnings per share, the basic
weighted average number of shares is increased by the dilutive effect of stock
options determined using the treasury stock method. The components of basic and
diluted earnings per share are as follows (in thousands, except per share
amounts):
  Year
      Ended June 30,2006
              
              
              2007
              
              
              2008Net
      income
              
              $
              7,387
              
              
              $
              5,228
              
              
              $
              11,101Dividend
      on redeemable preferred stock
              
              
              (941
              )
              
              
              (53,323
              )
              
              
              —Deemed
      dividend upon conversion of redeemable preferred stock
              
              
              —
              
              
              
              (95,227
              )
              
              
              —Preferred
      stock participation in undistributed earnings
              
              
              (5,554
              )
              
              
              (4,062
              )
              
              
              —Net
      income (loss) available to common shareholders
              
              $
              892
              
              
              $
              (147,384
              )
              
              $
              11,101Basic
      weighted average shares outstanding
              
              
              2,084
              
              
              
              11,329
              
              
              
              24,330Dilutive
      effect of stock options
              
              
              —
              
              
              
              —
              
              
              
              —Diluted
      weighted average shares outstanding
              
              
              2,084
              
              
              
              11,329
              
              
              
              24,330Basic
      earnings (loss) per share
              
              $
              0.43
              
              
              $
              (13.01
              )
              
              $
              0.46Diluted
      earnings (loss) per share
              
              $
              0.43
              
              
              $
              (13.01
              )
              
              $
              0.46
  The
Company has reflected the excess of the fair value of the common stock issued
upon conversion of the redeemable preferred stock, over the carrying amount of
the redeemable preferred stock, as a deemed dividend upon conversion of
preferred stock.
 All common
stock equivalents are excluded from diluted earnings per share in the years
ended June 30, 2007 and 2008, as the results were
anti-dilutive.
 (p)
Foreign currency translation




The
functional currency for the Company’s Canadian operations is the Canadian
dollar, and the functional currency for the Company's Taiwan operations is the
NEW Taiwan dollar. Assets and liabilities for these operations are translated at
the exchange rate in effect at the balance sheet date, and income and expenses
are translated at average exchange rates prevailing during the year. Translation
gains or losses are included within stockholders’ equity as part of accumulated
other comprehensive income (loss).




(q)
Fair value of financial instruments




Cash,
accounts and notes receivable, accounts payable and accrued liabilities are
reflected in the financial statements at amounts which approximate fair value,
primarily because of the short-term maturity of those instruments. The Company
determined, based on adjustable interest rates applicable to its long-term debt,
that the fair value approximates the carrying value of its
obligations.




(r)
Use of estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Such
estimates and assumptions are subject to inherent uncertainties, which may
result in actual results differing significantly from reported
amounts.




(s)
Concentration of credit risk




The
Company provides credit in the normal course of business to customers based on
their creditworthiness and generally requires no collateral from such customers.
The Company maintains allowances for potential credit losses.




F-12


(t)
Effect of recently issued accounting pronouncements
 
 In June
2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation 48, Accounting
for Uncertainty in Income Taxes—an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 requires companies to determine whether it
is more likely than not that a tax position will be sustained upon examination
by the appropriate taxing authorities before any part of the benefits can be
recorded in the financial statements. This interpretation also provides guidance
on classification, accounting in interim periods, and expanded disclosure
requirements. FIN 48 was adopted by the Company in the first quarter of fiscal
2008. The impact on the Company’s consolidated financial statements was not
material.
  In September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) 157, Fair
Value Measurements, which defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. In February
2008, the FASB issued FASB Staff Position 157-2 (FSP 157-2), Effective
Date of FASB Statement No. 157. Under the terms of FSP 57-2, the
provisions of SFAS 157 will be adopted for financial instruments in the first
quarter of fiscal 2009, and, when required, for nonfinancial assets and
nonfinancial liabilities in the first quarter of fiscal 2010. The Company does
not expect that the provisions to be adopted in fiscal 2009 will have a
significant impact upon its future consolidated financial statements and is
currently assessing the impact of provisions to be adopted in fiscal
2010.




In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin 108 (SAB 108), “Considering
the Effects of Prior Year Misstatements in Current Year Financial Statements.”SAB 108 expresses the SEC Staff’s views regarding the process of
quantifying financial statement misstatements. SAB 108 addresses the diversity
in practice in quantifying financial statement misstatements and the potential
under current practice for the build up of improper amounts on the balance
sheet. SAB 108 is effective for the Company’s current fiscal year. The Company
recorded a pre-tax adjustment of $308 to reduce capitalized freight during the
fourth quarter of 2007 upon the adoption of SAB 108. This amount was not
material to any other periods.




In February
2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities—an Amendment of FASB Statement 115. The
statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. Most of the
provisions of this statement apply only to entities that elect the fair value
option; however, the amendment to FASB Statement 115, applies to all
entities with available-for-sale and trading securities. SFAS 159 will be
effective for the Company in the first quarter of fiscal 2009. The Company does
not expect that adoption of SFAS 159 will have a significant impact upon its
future consolidated financial statements.




In December
2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS
141R), which replaces SFAS 141. SFAS 141R establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is to be applied prospectively to business combinations
for which the acquisition date is on or after an entity’s fiscal year that
begins after December 15, 2008. SFAS 141R will be effective for the Company
in the first quarter of fiscal 2010. The Company is currently assessing the
impact SFAS 141R may have on its future consolidated financial
statements.




In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No.
133. SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities.  The objective is to improve
financial reporting disclosures regarding how and why derivative instruments are
used, how derivative instruments and related hedge items are accounted for, and
how derivative instruments and related hedge items affect financial position,
financial performance, and cash flows.  SFAS 161 will be effective for
the Company in the third quarter of fiscal 2009.  The Company does not
expect that adoption of SFAS 161 will have a significant impact upon its future
consolidated financial statements.




(3)
Acquisitions


On
June 30, 2005, Charlesbank Equity Fund VI, Limited Partnership
(Charlesbank), in conjunction with the existing management team, acquired all of
the outstanding stock of Walco Holdings, Inc.
  The
Company paid more than the fair value of the underlying net assets as a result
of the expectation of its ability to earn a higher rate of return from the
acquired business than would be expected if those net assets had to be acquired
or developed separately.


F-13




The
excess of purchase price over the fair value of assets acquired and liabilities
assumed was allocated to goodwill and will not be amortized. As a result of a
previous change in ownership, a portion of management’s ownership interest has
been carried over at historical cost and has resulted in a “deemed dividend” of
$9,465, which is recorded in additional paid-in capital. During the year ended
June 30, 2007, $742 of reduced goodwill resulting from the resolution of a tax
uncertainty from the acquisition was recorded. None of the goodwill is
deductible for income tax purposes. In connection with the acquisition,
additional intangible assets were recorded based upon independent third party
appraisals including customer relationships, noncompete agreements, and
trademarks and trade names. The customer relationships are amortized on a
straight-line basis over twelve years, which approximate their expected
useful lives. Noncompete agreements are amortized on a straight-line basis
over eight years. Trademarks and trade names are not amortized because they
have indefinite useful lives.
 
 In
October 2006, the Company acquired certain assets of Farm City Animal Supply,
Inc. and all of the outstanding stock of Hawaii Mega-Cor., Inc.  In
November 2006, the Company acquired all of the outstanding stock of Paul E.
Blackmer, D.V.M., Inc. In January 2007, the Company acquired all of the
outstanding stock of Cattleman’s Supply, Inc. In March 2007, the Company
acquired the business assets of Veterinarian’s Outlet of Sunnyside,
Inc.  In April 2007, the Company acquired all of the outstanding stock
of Veterinarian’s Outlet Incorporated. The Company paid $22,052 in cash for
these six acquisitions (plus approximately
$1,376 in direct acquisition costs) and issued $2,400 in notes payable to
certain selling stockholders.  In addition, the Company is obligated to
make additional cash payments to certain selling stockholders if certain
performance targets are met through December 2009.  Substantially all of
these contingent payments, if any, will be accounted for as goodwill when and if
earned.
  The
following table summarizes the June 30, 2007, preliminary estimated fair values
of the assets acquired and liabilities assumed at the dates of the
acquisitions:
 Cash
      and cash equivalents
                  
                  $
                  1,492Accounts
      receivable, net
                  
                  
                  5,271Merchandise
      inventories, net
                  
                  
                  3,479Prepaid
      expenses
                  
                  
                  141Property,
      plant and equipment, net
                  
                  
                  632Goodwill
                  
                  
                  19,401Trademarks
      and trade names
                  
                  
                  100Total
      assets acquired
                  
                  
                  30,516Accounts
      payable
                  
                  
                  3,848Accrued
      liabilities
                  
                  
                  798Current
      portion of long-term debt
                  
                  
                  800Long-term
      debt, net of current portion
                  
                  
                  1,642Total
      liabilities assumed
                  
                  
                  7,088Net
      assets acquired
                  
                  $
                  23,428
  During
fiscal 2008, in connection with fiscal 2007 acquisitions, additional intangible
assets were recorded based upon independent third party appraisals including
customer relationships, noncompete agreements, and trademarks and trade names.
The customer relationships are amortized on a straight-line basis
over twelve years, which approximates their expected useful lives. The
noncompete agreements are amortized on a straight-line basis over either two or
five years, based upon the term of the agreement. Trademarks and trade names are
not amortized because they have indefinite useful lives. These purchase price
adjustments resulted in a $7,210 reduction in the balance of goodwill offset by
a $2,038 increase in trademarks and trade names, a $2,103 increase in noncompete
agreements, and a $3,069 increase in customer relationships at June 30,
2008. Additionally, $764 of miscellaneous costs and earnout payments related to
these acquisitions were incurred during the year ended June 30, 2008 and charged
to goodwill. During the year ended June 30, 2008, $1,482 of increased goodwill
resulting from the resolution of tax uncertainties from these acquisitions was
recorded.


In
October 2007, the Company acquired all of the outstanding stock of Kane
Veterinary Supplies, Ltd. for $22,184 in cash (plus $1,017 in direct
acquisition costs).  In addition, the Company is obligated to make
additional cash payments to certain selling stockholders if certain performance
targets are met through October 2010.  Substantially all of these
contingent payments, if any, will be accounted for as goodwill when and if
earned.  Kane Veterinary Supplies, Ltd. is based in Edmonton, Canada, and
is a leading distributor of animal health products in both the production and
companion animal markets.


F-14


The
following table summarizes the June 30, 2008, fair values of the assets acquired
and liabilities assumed at the date of the acquisition of Kane Veterinary
Supplies, Ltd.:
 
 Cash
      and cash equivalents
              
              $
              168Accounts
      receivable, net
              
              
              5,169Current
      portion of notes receivable
              
              
              150Merchandise
      inventories, net
              
              
              9,779Prepaid
      expenses
              
              
              220Notes
      receivable, net of current portion
              
              
              650Property,
      plant and equipment, net
              
              
              410Goodwill
              
              
              9,008Customer
      relationships
              
              
              1,824Noncompete
      agreements
              
              
              1,112Trademarks
      and trade names
              
              
              4,772Total
      assets acquired
              
              
              33,262Accounts
      payable
              
              
              7,500Accrued
      liabilities
              
              
              453Current
      portion of long-term debt
              
              
              13Long-term
      debt, net of current portion
              
              
              4Deferred
      lease incentives
              
              
              73Deferred
      income taxes
              
              
              2,018Total
      liabilities assumed
              
              
              10,061Net
      assets acquired
              
              $
              23,201
  The 2007 and
2008 acquisitions serve to further the Company's strategy to access additional
products lines, sales representatives, customer opportunities, manufacturer
relationships and sales territories.  Pro
forma consolidated statements of income are not presented because the
acquisitions detailed above are not material individually or in the aggregate to
the Company’s financial position, results of operations or cash flows.  The
results of operations for each acquisition were included in the Company's
consolidated results of operations beginning with the date of each
acquisition.
  (4)
Accounts receivable, net
 June 30,
                2007
              
              
              June 30,
                2008Trade
      accounts receivable
              
              $
              66,939
              
              
              $
              75,141Vendor
      rebate receivables
              
              
              7,602
              
              
              
              10,296Other
      receivables
              
              
              222
              
              
              
              26974,763
              
              
              
              85,706Less
      allowance for doubtful accounts
              
              
              (805
              )
              
              
              (1,157
              )Accounts
      receivable, net
              
              $
              73,958
              
              
              $
              84,549
  Bad
debt expense (recovery) totaled $776, $(293), and $690 respectively, for the
years ended June 30, 2006, 2007, and 2008. Bad debt write-offs, net of
recoveries, totaled $522, $(20), and $338, respectively for the years ended
June 30, 2006, 2007, and 2008.
  Vendor
rebates range from one-time purchase opportunities to sales-related programs
that last a month, a quarter, a trimester, or the entire calendar year. The
receivable for annual sales-related rebate programs are recognized as the
established threshold is achieved.


F-15


(5)
Notes receivable
 June 30,
                  2007
                
                
                June 30,
                  2008Note
      receivable from Sparhawk Laboratories, Inc.
                
                $
                325
                
                
                $
                325Other
      notes receivable
                
                
                139
                
                
                
                794464
                
                
                
                1,119Less
      current portion of notes receivable
                
                
                (63
                )
                
                
                (608
                )Notes
      receivable
                
                $
                401
                
                
                $
                511
  On
March 4, 2004, one of the Company's subsidiaries entered into a Securities
Purchase Agreement (the Agreement) with Sparhawk Laboratories, Inc.
(Sparhawk). In connection with the Agreement, the Company lent $1,000 to
Sparhawk in return for a note receivable (the Note), bearing interest at
13%, and warrants (the Warrants) to acquire 333 shares of common stock in
Sparhawk for $1 a share, representing potential ownership of Sparhawk in the
amount of 19.99% as of March 4, 2004. The Note and the Warrants are
collectively referred to as “Securities” pursuant to terms of the Agreement. The
Note was issued at a discount, and the initial price of the Note was $950 and
the Warrants $50 at the time of closing of the Agreement. The Warrants are
included in other long-term assets in the accompanying balance sheet. As of
June 30, 2007 and 2008, the Note had accrued interest of $12 and $12,
respectively.
  The
Company is not required to provide any future funding to Sparhawk under the
terms of the Agreement or any other agreement, and the Company does not have the
ability to significantly influence the operations of Sparhawk.
  Interest
on the Note is repayable to the Company on the last day of each calendar
quarter. Principal payments are due on the fifth anniversary of the Note,
subject to prepayment events, as defined. Through June 30, 2008, Sparhawk
has made principal payments totaling $637.
  (6)
Property, plant, and equipment, net
 June 30,
                  2007
                
                
                June 30,
                  2008Land
                
                $
                3,897
                
                
                $
                3,540Buildings
      and improvements
                
                
                5,168
                
                
                
                4,525Leasehold
      improvements
                
                
                2,702
                
                
                
                3,655Construction
      in progress
                
                
                1,275
                
                
                
                112Equipment:Warehouse
                
                
                1,344
                
                
                
                2,234Automotive
                
                
                4,771
                
                
                
                6,525Office/software
                
                
                3,054
                
                
                
                3,99522,211
                
                
                
                24,586Less
      accumulated depreciation
                
                
                (4,958
                )
                
                
                (7,490
                )Property,
      plant, and equipment, net
                
                $
                17,253
                
                
                $
                17,096
  Expenditures
for maintenance and repairs were $1,575, $1,744, and $2,154 and for the years
ended June 30, 2006, 2007, and 2008, respectively.
  (7)
Goodwill and other intangible assets


Gross
              Carrying
              amount
            
            
            Accumulated
              amortization
            
            
            Net
              Carrying
              amountJune 30,
      2007:Goodwill
            
            $
            78,598
            
            
            $
            —
            
            
            $
            78,598Customer
      relationships
            
            
            35,685
            
            
            
            (5,948
            )
            
            
            29,737Noncompete
      agreements
            
            
            3,192
            
            
            
            (802
            )
            
            
            2,390Trademarks
      and trade names
            
            
            26,360
            
            
            
            —
            
            
            
            26,360$
            143,835
            
            
            $
            (6,750
            )
            
            $
            137,085June 30,
      2008:Goodwill
            
            $
            82,642
            
            
            $
            —
            
            
            $
            82,642Customer
      relationships
            
            
            40,578
            
            
            
            (9,150
            )
            
            
            31,428Noncompete
      agreements
            
            
            6,407
            
            
            
            (1,771
            )
            
            
            4,636Trademarks
      and trade names
            
            
            33,170
            
            
            
            —
            
            
            
            33,170$
            162,797
            
            
            $
            (10,921
            )
            
            $
            151,876




F-16


Amortization
expense related to intangible assets totaled $3,375, $3,375, and $4,171 for the
years ended June 30, 2006, 2007, and 2008, respectively. Based on the
current estimated useful lives assigned to intangibles assets, amortization
expense for fiscal 2009, 2010, 2011, 2012, and 2013 is projected to total
$4,571, $4,496, $4,496, $4,237, and $3,867, respectively.




(8)
Long-term debt


June 30,
              2007
            
            
            June 30,
              2008Credit
      agreement—Revolving credit facility
            
            $
            72,322
            
            
            $
            93,224Credit
      agreement—Term Note
            
            
            44,663
            
            
            
            44,100Other
            
            
            1,901
            
            
            
            1,097118,886
            
            
            
            138,421Less
      current portion
            
            
            (1,363
            )
            
            
            (1,259
            )$
            117,523
            
            
            $
            137,162




Credit
agreements




On
June 30, 2005, the Company and a group of financial institutions entered
into certain credit agreements (the Credit Agreements), which included a
$110,000 revolving credit facility (the Revolver), a $30,000 term loan, and
a $40,000 second lien loan.





In
September 2006, the Revolver was amended with total capacity totaling $125.0
million and maturity on June 30, 2010. The outstanding borrowings under the
Revolver bore interest, at the Company’s option, as follows: (1) an
interest rate per annum equal to the sum of (a) the greater of (i) the
Prime Rate in effect on such day, and (ii) the Federal Funds Effective Rate
in effect for such day plus 0.50% and (b) the applicable margin or
(2) an interest rate per annum equal to the sum of (a) the product of
(i) the LIBOR rate in effect for such Interest Period and (ii) the
Statutory Reserves and (b) the applicable margin.




In August
2007, the Company entered into a new $44.5 million first lien term loan and with
borrowings thereunder paid in full the $44.5 million balance of our then
existing $45.0 million first lien term loan. The $44.5 million first lien term
loan bears interest at an annual rate equal to LIBOR plus 2.0% and matures on
May 31, 2011. Borrowings are collateralized by a first priority interest in
and lien on all of the Company’s assets.




In
October 2007, the Revolver was amended to a $135.0 million facility, which
matures on June 30, 2010. The amended Revolver includes a $10.0 million
overcollateralization first drawn sub-limit that amortizes and expires on
March 31, 2009. The outstanding borrowings under the $10.0 million
overcollateralization first drawn sub-limit bear interest at the rate of 0.75%
above the rate as defined per the terms of the September 2006 Revolver
amendment. The outstanding borrowings under the Revolver’s base $125.0 million
facility bear interest at the rate of LIBOR plus 1.5% or the Prime Rate plus
0.0% until September 30, 2008, and thereafter at the rate as defined per
the terms of the September 2006 Revolver amendment. Borrowings remain
collateralized by a first priority interest in and lien on all of the Company’s
assets.




The
Company utilizes cash flow hedge accounting and uses derivative financial
instruments to convert a portion of its variable-rate debt to fixed-rate debt.




On
April 18, 2007, the Company entered into a $43.0 million notional value
swap transaction with a financial institution effective April 18, 2007. The
Company receives a floating rate based on LIBOR and pays a fixed rate of 4.95%.
The swap agreement terminates on June 28, 2010. As of June 30, 2008, the
fair value of this swap was a net liability of $1.2 million.




On
April 18, 2007, the Company entered into a $52.0 million notional value
swap transaction with a financial institution effective April 18, 2007. The
Company receives a floating rate based on LIBOR and pays a fixed rate of 4.95%.
The swap agreement terminates on May 7, 2010. As of June 30, 2008, the fair
value of this swap was a net liability of $1.6 million.




All swap
agreement fair values are recorded on the consolidated balance sheet as other
assets when the fair value is a net asset or as other long-term liabilities when
the fair value is a net liability. The fair values of the interest rate swap
agreements were estimated based on current settlement prices and quoted market
prices of comparable contracts and represent their carrying values. The Company
calculated no ineffectiveness on both interest rate swap agreements at
June 30, 2008. An unrealized loss of $1.7 million, net of taxes of $1.1
million, is recorded on the consolidated balance sheet as accumulated other
comprehensive income (loss).




The
market values of the interest rate swap agreements recorded in other
comprehensive income (loss) may be recognized in the consolidated statements of
operations if certain terms in the Revolver or new term note change, if the
Revolver or new term note are extinguished, or if the interest rate swap
agreements are terminated prior to maturity. The net receipts or payments from
the interest rate swap agreements are recorded in interest
expense.




F-17


Interest
rates ranged from 6.73% to 8.38% as of June 30, 2007 and from 1.25% to
5.00% as of June 30, 2008. Additionally, the Company is required to pay a
commitment fee on the daily unused amount of the Revolver at a per annum
rate of 0.25%. The credit agreements contain certain covenants
that, among other things, restrict our ability to incur additional indebtedness,
make certain payments, sell assets, enter into certain transactions with
affiliates and create liens. Moreover, certain of these agreements require us to
maintain specified financial ratios.The most
restrictive covenant relates to the creation or assumption of additional
indebtedness. The Company was in compliance with all financial covenants at
June 30, 2008.
  The
Credit Agreements restrict the amount of payments that may be made by the
consolidated subsidiaries of the Company to the Company. These restrictions
limit the total amount of such payments to the total of $55,000 as defined in
the Credit Agreements. At June 30, 2007, $85,615 or 99.4% of total net
assets were restricted. At June 30, 2008, $95,724 or 99.5% of total net
assets were restricted.
  Summary
financial data for Animal Health International, Inc. on a stand-alone basis as
of June 30 of each year is as follows:




2007
            
            
            2008Balance
      SheetAssets:Investment
      in subsidiaries
            
            $
            86,115
            
            
            $
            96,224Total
      assets
            
            $
            86,115
            
            
            $
            96,224Stockholders'
      equity:Common
      stock
            
            
            243
            
            
            
            243Additional
      paid-in capital
            
            
            128,367
            
            
            
            129,704Accumulated
      earnings (deficit)
            
            
            (42,826
            )
            
            
            (31,725
            )Accumulated
      other comprehensive income (loss)
            
            
            331
            
            
            
            (1,998
            )Total
      stockholders' equity (deficit)
            
            
            86,115
            
            
            
            96,224Total
      liabilities and stockholders' equity
            
            $
            86,115
            
            
            $
            96,2242007
            
            
            2008Expenses
      of parent
            
            $
            (816
            )
            
            $
            (2,400
            )Tax
      benefit of parent
            
            
            326
            
            
            
            960Earnings
      from subsidiaries
            
            
            5,718
            
            
            
            12,541Net
      income
            
            $
            5,228
            
            
            $
            11,1012007
            
            
            2008Statement
      of Cash FlowsNet
      loss of parent
            
            $
            (490
            )
            
            $
            (1,440
            )Net
      cash used for operating activities
            
            
            (490
            )
            
            
            (1,440
            )Investment
      in subsidiaries
            
            
            (89,779
            )
            
            
            1,440Net
      cash provided by (used for) investing activities
            
            
            (89,779
            )
            
            
            1,440Dividends
      received
            
            
            54,500
            
            
            
            —Dividends
      paid
            
            
            (54,500
            )
            
            
            —Net
      proceeds from issuance of common stock
            
            
            90,269
            
            
            
            —Net
      cash provided by financing activities
            
            
            90,269
            
            
            
            —Net
      change in cash
            
            $
            —
            
            
            $
            —





F-18


Principal
payments




Scheduled
principal payments for all outstanding borrowings on June 30, 2008
(including outstanding borrowings under the Credit Agreements) are as
follows:




Year
      ending June 30:2009
            
            $
            1,2592010
            
            
            93,9622011
            
            
            43,2002012
            
            
            —2013
            
            
            —Thereafter
            
            
            —$
            138,421




For the
years ended June 30, 2006, 2007, and 2008, the Company paid interest of
$12,332, $15,880, and $9,821, respectively.




(9)
Preferred stock




As of
June 30, 2008, the Company had one class of undesignated preferred stock
authorized with no shares issued or outstanding. The Board of Directors of the
Company may designate and issue preferred stock in one or more series. The Board
of Directors can fix the rights, preferences and privileges of the shares of
each series and any of its qualifications, limitations or
restrictions.




In
September 2006, the Company paid an aggregate dividend of $53,323 to the holders
of shares of shares of our previously outstanding redeemable preferred stock and
an aggregate dividend of $1,177 to the holders of shares of our common stock. A
portion of the dividend on the redeemable preferred stock reduced the aggregate
liquidation amount that is due to holders of outstanding redeemable preferred
stock upon the liquidation, dissolution, or winding up of the Company, or, at
the election of at least a majority of the shares of redeemable preferred stock,
upon the closing of an extraordinary transaction, as defined in the Company’s
Certificate of Incorporation.




On
January 8, 2007, the Board of Directors approved a 1.63576-for-1 stock
split of our common stock, which became effective on January 12, 2007. All
share data has been retroactively adjusted to reflect this reverse split. The
preferred stock participation rate was adjusted accordingly. On January 30,
2007, in connection with the Company’s initial public offering, each share of
the Company’s redeemable preferred stock converted into 6.11337 shares of common
stock.




(10)
Related-party transactions




Effective
June 30, 2005, the Company entered into an agreement with Charlesbank
Capital Partners, LLC, an affiliate of the Company’s current largest
stockholder, for the provision of management and advisory services. Upon the
closing of the Company’s initial public offering, the Company’s agreement for
management and advisory services with Charlesbank was terminated. Included in
selling, general and administrative expense as a management fee was $664, $146,
and $0 for the years ended June 30, 2006, 2007 and 2008,
respectively.




The
Company has property lease agreements with certain employees. The Company
incurred related rent expense of $102, $268, and $396 during the years ended
June 30, 2006, 2007, and 2008, respectively. The total future obligations
outstanding at June 30, 2008, with respect to such leases are
$571.




Effective
October 1, 2007, the Company’s Senior Vice President and Chief Operating
Officer (the COO) separated from employment with the Company. In connection with
such separation, the Company and the COO entered into a Separation Agreement and
Full and Final Release dated October 4, 2007, whereby the Company is
obligated to pay the COO certain cash consideration, vest 50,000 of his stock
options, allow him to retain the right to exercise stock options for ten years
from the date of grant, pay certain of his COBRA premiums for health and welfare
benefits, reimburse him for certain life and disability insurance coverage
costs, and transfer title and ownership of certain assets and equipment to him.
The Company’s obligations are subject to the COO’s compliance with certain
post-employment restrictive covenants, which limit the COO’s ability to compete
with the Company, solicit customers or employees of the Company, or divulge
confidential information concerning the Company. These obligations totaled $710
and were charged to selling, general, and administrative costs in the second
quarter of the year ended June 30, 2008.




(11)
Employee benefit plans




The
Company has a defined contribution 401(k) savings plan (the Plan) that
covers eligible employees. Company contributions to this plan are made based on
the Company’s attainment of certain earnings goals. The Company may also make
discretionary contributions to the Plan. Total Company contributions to the Plan
were $214 for the year ended June 30, 2006, $534 for the year ended
June 30, 2007, and $381 for the year ended June 30, 2008.




F-19


(12)
Income taxes




Income
taxes have been provided as follows:




Year
      ended June 30,2006
            
            
            2007
            
            
            2008Current
      income tax expense:Federal
      tax expense
            
            $
            5,878
            
            
            $
            4,963
            
            
            $
            6,015State
      and other tax expense
            
            
            940
            
            
            
            822
            
            
            
            1,029Foreign
      tax expense
            
            
            429
            
            
            
            110
            
            
            
            1,5527,247
            
            
            
            5,895
            
            
            
            8,596Deferred
      income tax benefit
            
            
            (3,705
            )
            
            
            (1,938
            )
            
            
            (1,188
            )Total
      income tax expense
            
            $
            3,542
            
            
            $
            3,957
            
            
            $
            7,408




Deferred
taxes consist of the following:




June
      30,2007
            
            
            2008Deferred
      tax assets:Accounts
      receivable
            
            $
            300
            
            
            $
            380Accrued
      liabilities
            
            
            2,403
            
            
            
            2,057Merchandise
      inventories
            
            
            672
            
            
            
            724Stock
      Options
            
            
            —
            
            
            
            285Swaps
            
            
            —
            
            
            
            1,093Deferred
      lease incentives
            
            
            752
            
            
            
            627Total
      deferred tax assets
            
            
            4,127
            
            
            
            5,166Deferred
      tax liabilities:Prepaid
      expenses
            
            
            (226
            )
            
            
            (478
            )Property,
      plant, and equipment
            
            
            (550
            )
            
            
            (984
            )Intangible
      assets
            
            
            (24,901
            )
            
            
            (27,304
            )Total
      deferred tax liabilities
            
            
            (25,677
            )
            
            
            (28,766
            )Net
      deferred tax assets (liabilities)
            
            $
            (21,550
            )
            
            $
            (23,600
            )




Deferred
tax assets are recognized for the estimated future tax effects of deductible
temporary differences.  As of June 30, 2007 and 2008, the Company has
not recorded a valuation allowance as the Company believes it is more likely
than not that the deferred tax assets will be realized.




A
reconciliation of income taxes computed at statutory rates to the reported
income tax expense from continuing operations is as follows:





Year
      ended June 30,2006
            
            
            2007
            
            
            2008Income
      tax expense computed at federalstatutory rate
            
            $
            3,825
            
            
            $
            3,215
            
            
            $
            6,477State
      taxes, net of federal benefit
            
            
            71
            
            
            
            495
            
            
            
            726Permanent
      items and other
            
            
            (354
            )
            
            
            247
            
            
            
            205Total
      income tax expense
            
            $
            3,542
            
            
            $
            3,957
            
            
            $
            7,408




For the
years ended June 30, 2006, 2007, and 2008, the Company paid income taxes of
$3,709, $9,157, and $7,942 respectively.




As of
June 30, 2008, the Company has not provided for U.S. federal income taxes on
earnings of its Canadian subsidiaries of $4,896 as these earnings are considered
permanently invested.








F-20


(13)
Commitments and contingencies




The
Company leases certain vehicles, computer equipment and facilities under
noncancelable operating leases that expire in various years through 2018. Future
minimum lease payments by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more, consist of
the following at June 30, 2008:




OperatingleasesYear
      ending June 30:2009
            
            $
            4,8052010
            
            
            4,1292011
            
            
            3,4542012
            
            
            2,8342013
            
            
            2,489Thereafter
            
            
            3,042Total
      minimum lease payments
            
            $
            20,753




Rental
expense for the years ended June 30, 2006, 2007, and 2008 was $4,639,
$5,266, and $6,494 respectively.




The
Company is involved in various matters of litigation arising in the normal
course of business. In July 2007, the Company paid $1,650 to settle a dispute
with a former vendor. This amount was charged to selling, general, and
administrative costs and accrued for at June 30, 2007. In addition, the
Company has had an ongoing dispute with a competitor regarding a patent
infringement matter. In 2006, the Company established a $2,500 reserve for this
dispute within accrued liabilities and charged the amount against selling,
general, and administrative costs. Although the ultimate liability from this
dispute and other existing or potential claims cannot be ascertained, management
does not anticipate that any related outcomes would have a materially adverse
effect on the Company’s financial position, operating results or cash
flows.




(14)
Quarterly financial data (unaudited)


September
      30,
            
            
            December
      31,
            
            
            March
      31,
            
            
            June
      30,(in
      thousands, except per share data)
            
            2006
            
            
            2006
            
            
            2007
            
            
            2007Net
      sales
            
            $
            145,702
            
            
            $
            170,279
            
            
            $
            153,874
            
            
            $
            159,679Gross
      profit
            
            
            27,054
            
            
            
            37,251
            
            
            
            29,046
            
            
            
            28,186Income
      before income taxes
            
            
            1,444
            
            
            
            7,320
            
            
            
            236
            
            
            
            185Net
      income (loss)
            
            $
            901
            
            
            $
            4,399
            
            
            $
            109
            
            
            $
            (181
            )Net
      income (loss) available to common shareholders
            
            $
            (52,422
            )
            
            $
            652
            
            
            $
            (95,433
            )
            
            $
            (181
            )Earnings
      (loss) per share:Basic
            
            $
            (23.22
            )
            
            $
            0.29
            
            
            $
            (5.71
            )
            
            $
            (0.01
            )Diluted
            
            $
            (23.22
            )
            
            $
            0.29
            
            
            $
            (5.71
            )
            
            $
            (0.01
            )Weighted
      average shares outstanding:Basic
            
            
            2,258
            
            
            
            2,258
            
            
            
            16,727
            
            
            
            24,330Diluted
            
            
            2,258
            
            
            
            2,258
            
            
            
            16,727
            
            
            
            24,330September
      30,
            
            
            December
      31,
            
            
            March
      31,
            
            
            June
      30,2007
            
            
            2007
            
            
            2008
            
            
            2008Net
      sales
            
            $
            164,365
            
            
            $
            203,230
            
            
            $
            170,650
            
            
            $
            178,297Gross
      profit
            
            
            28,631
            
            
            
            39,904
            
            
            
            32,835
            
            
            
            35,687Income
      before income taxes
            
            
            1,709
            
            
            
            9,477
            
            
            
            3,092
            
            
            
            4,231Net
      income
            
            $
            1,021
            
            
            $
            5,547
            
            
            $
            1,877
            
            
            $
            2,656Net
      income available to common shareholders
            
            $
            1,021
            
            
            $
            5,547
            
            
            $
            1,877
            
            
            $
            2,656Earnings
      per share:Basic
            
            $
            0.04
            
            
            $
            0.23
            
            
            $
            0.08
            
            
            $
            0.11Diluted
            
            $
            0.04
            
            
            $
            0.23
            
            
            $
            0.08
            
            
            $
            0.11Weighted
      average shares outstanding:Basic
            
            
            24,330
            
            
            
            24,330
            
            
            
            24,330
            
            
            
            24,330Diluted
            
            
            24,330
            
            
            
            24,372
            
            
            
            24,373
            
            
            
            24,330




F-21


Exhibit
index


Number
            
            
            Description3.1(1)
            
            
            Form
      of Fourth Amended and Restated Certificate of Incorporation of Animal
      Health International, Inc.3.2(1)
            
            
            Form
      of Amended and Restated By-laws of Animal Health International,
    Inc.4.1(2)
            
            
            Specimen
      Stock Certificate10.1(3)
            
            
            Livestock
      Products Agreement entered into on May 23, 2007 and effective as of
      December 23, 2006 by and between Pfizer Inc. and Walco International,
      Inc.10.2(4)
            
            
            Livestock
      Products Agreement entered into on April 3, 2008 and effective as of
      December 22, 2007 by and between Pfizer Inc. and Walco International,
      Inc.10.3(1)
            
            
            Amended
      and Restated Credit Agreement, dated September 2006, by and among Animal
      Health International, Inc., each of the credit parties party thereto, each
      of the financial institutions party thereto, JPMorgan Chase Bank, N.A., as
      administrative agent for the Lenders and General Electric Capital
      Corporation as documentation agent for the lenders10.4(5)
            
            
            Second
      Amended and Restated Credit Agreement, dated October 2007, by and among
      Walco International, Inc., each of the credit parties party thereto, each
      of the financial institutions party thereto, JPMorgan Chase Bank, N.A., as
      administrative agent for the Lenders and General Electric Capital
      Corporation as documentation agent for the lenders10.5(1)
            
            
            Term
      Loan Agreement, dated September 2006, by and among Animal Health
      International, Inc., each of the credit parties party thereto and
      Wilmington Trust, as administrative agent for the lenders10.6
            
            
            Term
      Loan Agreement, dated August 10, 2007, by and among Animal Health
      International, Inc., each of the credit parties party thereto and Wells
      Fargo Bank, National Association, as administrative agent for the
      lenders10.7(2)
            
            
            2007
      Stock Option and Incentive Plan10.8(2)
            
            
            Form
      of Incentive Stock Option Agreement under the 2007 Stock Option and
      Incentive Plan10.9(2)
            
            
            Form
      of Non-Qualified Stock Option Agreement under the 2007 Stock Option and
      Incentive Plan for Company Employees10.10(2)
            
            
            Form
      of Deferred Stock Unit Award under the 2007 Stock Option and Incentive
      Plan10.11(2)
            
            
            Form
      of Restricted Stock Award Agreement under the 2007 Stock Option and
      Incentive Plan10.12(1)
            
            
            Employment
      Agreement between Animal Health International, Inc. and James Robison,
      dated as of May 1, 199710.13(1)
            
            
            Amendment
      No. 1 to Employment Agreement between Animal Health International, Inc.
      and James Robison dated as of June 30, 200510.14(7)
            
            
            Amendment
      No. 2 to Employment Agreement between Animal Health International, Inc.
      and James Robison, dated as of May 7, 200810.15(6)
            
            
            Non-Compete
      Agreement between Walco International, Inc. and Kathy Hassenpflug dated as
      of March 10, 200010.16(6)
            
            
            Non
      Competition Addendum between Walco International, Inc. and Kathy
      Hassenpflug dated as of September 30, 200510.17(1)
            
            
            Employment
      Agreement between Animal Health International, Inc. and William Lacey,
      dated as of August 15, 200310.18(1)
            
            
            Amendment
      No. 1 to Employment Agreement between Animal Health International, Inc.
      and William Lacey, dated as of June 30, 200510.19(1)
            
            
            Employment
      Agreement between Animal Health International, Inc. and Damian Olthoff,
      dated as of April 1, 200610.20(1)
            
            
            Employment
      Agreement between Animal Health International, Inc. and Greg Eveland,
      dated as of September 1, 1997







10.21(1)
            
            
            Amendment
      No.1 to Employment Agreement between Animal Health International,
      Inc. and Greg Eveland, dated as of June 30, 200510.22(8)
            
            
            Separation
      Agreement and Full Release, dated as of October 4, 2007, between Animal
      Health International, Inc., Walco International, Inc., and Greg
      Eveland10.23(1)
            
            
            Form
      of Indemnification Agreement between Animal Health International, Inc. and
      each of its Directors and Executive Officers10.24(6)
            
            
            Amended
      and Restated Plan for Compensation of Non-Employee Directors10.25(2)
            
            
            Non-Employee
      Directors' Deferred Compensation Program


21.1
            
            
            List
      of Subsidiaries23.1
            
            
            Consent
      of KPMG LLP24.1
            
            
            Powers
      of Attorney (included on signature page hereto)31.1
            
            
            Rule 13a-14(a)/15d-14(a)
      Certification, executed by James C. Robison, Chief Executive Officer,
      President and Director31.2
            
            
            Rule 13a-14(a)/15d-14(a)
      Certification, executed by William F. Lacey, Chief Financial
      Officer32.1
            
            
            Section 1350
      Certifications, executed by James C. Robison, Chief Executive Officer,
      President and Director, and William F. Lacey, Chief Financial
      Officer







(1)
            Incorporated
      by reference to Amendment No. 2 to our Registration Statement on Form S-1
      (File No. 333-137656) filed on December 13, 2006(2)
            Incorporated
      by reference to Amendment No. 4 to our Registration Statement on Form
      S-1 (File No. 333-137656) filed on January 16, 2007(3)
            Incorporated
      by reference to our Current Report on Form 8-K filed on May 30,
    2007(4)
            Incorporated
      by reference to our Current Report on Form 8-K filed on April 7,
      2008


(5)
            Incorporated
      by reference to our Quarterly Report on Form 10-Q filed on February 7,
      2008(6)
            Incorporated
      by reference to our Quarterly Report on Form 10-Q filed on November 7,
      2007


(7)
            Incorporated
      by reference to our Quarterly Report on Form 10-Q filed on May 8,
      2008(8)
            Incorporated
      by reference to our Current Report on Form 8-K filed on October 5,
      2007