##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-16783    VCA ANTECH, INC. (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    95-4097995(I.R.S. Employer
Identification No.)
 12401 West Olympic Boulevard
Los Angeles, California 90064-1022(Address of principal executive offices) (310) 571-6500(Registrants telephone number, including area code) 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 x No o. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o. Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date: common stock, $0.001 par value
40,957,118 shares as of August 3, 2004.




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##### Table of Contents



VCA ANTECH, INC.
FORM 10-Q
JUNE 30, 2004 TABLE OF CONTENTS PageNumberPart I. Financial InformationItem 1. Financial StatementsCondensed, Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 (Unaudited)
    
    1Condensed, Consolidated Income Statements for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    2Condensed, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    3Notes to Condensed, Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    45Item 4. Controls and Procedures
    
    45Part II. Other Information
    
    46Item 1. Legal Proceedings
    
    46Item 2. Changes in Securities and Use of Proceeds
    
    46Item 3. Defaults Upon Senior Securities
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    46Item 5. Other Information
    
    46Item 6. Exhibits and Reports on Form 8-K
    
    46Signature
    
    48Exhibit Index
    
    49Exhibit 3.4Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS VCA ANTECH, INC. AND
SUBSIDIARIES 
 CONDENSED, CONSOLIDATED BALANCE SHEETS
As of June 30, 2004 and December 31, 2003
(Unaudited)
(In thousands, except par value)
 June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,836
    
    
    $
    17,237Restricted cash
    
    
    1,365
    
    
    
    Trade accounts receivable, less allowance for uncollectible accounts of
$7,187 and $6,681 at June 30, 2004 and December 31, 2003, respectively
    
    
    26,753
    
    
    
    22,335Inventory, prepaid expenses and other
    
    
    10,778
    
    
    
    9,432Deferred income taxes
    
    
    12,672
    
    
    
    11,040Prepaid income taxes
    
    
    5,866
    
    
    
    7,266Total current assets
    
    
    90,270
    
    
    
    67,310Property and equipment, net
    
    
    110,967
    
    
    
    99,161Other assets:Goodwill
    
    
    477,733
    
    
    
    373,238Other intangible assets, net
    
    
    8,177
    
    
    
    4,692Deferred financing costs, net
    
    
    4,222
    
    
    
    4,601Other
    
    
    6,039
    
    
    
    5,801Total assets
    
    $
    697,408
    
    
    $
    554,803LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    4,578
    
    
    $
    2,403Accounts payable
    
    
    12,258
    
    
    
    9,208Accrued payroll and related liabilities
    
    
    18,200
    
    
    
    15,716Accrued interest
    
    
    1,665
    
    
    
    1,538Other accrued liabilities
    
    
    17,971
    
    
    
    15,006Total current liabilities
    
    
    54,672
    
    
    
    43,871Long-term obligations, less current portion
    
    
    393,989
    
    
    
    315,066Deferred income taxes
    
    
    28,914
    
    
    
    24,532Other liabilities
    
    
    11,860
    
    
    
    5,392Minority interest
    
    
    8,823
    
    
    
    4,019Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding
    
    
    
    
    
    
    Stockholders equity:Common stock, par value $0.001, 75,000 shares authorized, and 40,949 and
40,715 shares outstanding as of June 30, 2004 and December 31, 2003,
respectively
    
    
    41
    
    
    
    41Additional paid-in capital
    
    
    248,378
    
    
    
    244,311Accumulated deficit
    
    
    (49,420
    )
    
    
    (82,331
    )Accumulated other comprehensive income (loss)  unrealized gain (loss) on
hedging instruments
    
    
    161
    
    
    
    (82
    )Notes receivable from stockholders
    
    
    (10
    )
    
    
    (16
    )Total stockholders equity
    
    
    199,150
    
    
    
    161,923Total liabilities and stockholders equity
    
    $
    697,408
    
    
    $
    554,803
 The accompanying notes are an integral part of these condensed, consolidated financial statements. 1




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VCA ANTECH, INC. AND
SUBSIDIARIES 
 CONDENSED, CONSOLIDATED INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2004 and 2003
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Restated)
    
    
    
    
    
    (Restated)Revenue
    
    $
    169,947
    
    
    $
    142,761
    
    
    $
    314,297
    
    
    $
    268,340Direct costs
    
    
    119,943
    
    
    
    100,005
    
    
    
    224,733
    
    
    
    192,566Gross profit
    
    
    50,004
    
    
    
    42,756
    
    
    
    89,564
    
    
    
    75,774Selling, general and administrative
    
    
    11,765
    
    
    
    9,484
    
    
    
    20,466
    
    
    
    19,193Loss (gain) on sale of assets
    
    
    4
    
    
    
    78
    
    
    
    66
    
    
    
    (160
    )Operating income
    
    
    38,235
    
    
    
    33,194
    
    
    
    69,032
    
    
    
    56,741Interest expense, net
    
    
    6,098
    
    
    
    6,418
    
    
    
    12,083
    
    
    
    13,410Debt retirement costs
    
    
    810
    
    
    
    
    
    
    
    810
    
    
    
    7,417Other (income) expense
    
    
    (287
    )
    
    
    131
    
    
    
    (176
    )
    
    
    258Minority interest in income of subsidiaries
    
    
    755
    
    
    
    462
    
    
    
    1,171
    
    
    
    823Income before provision for income taxes
    
    
    30,859
    
    
    
    26,183
    
    
    
    55,144
    
    
    
    34,833Provision for income taxes
    
    
    12,692
    
    
    
    10,833
    
    
    
    22,233
    
    
    
    14,300Net income
    
    $
    18,167
    
    
    $
    15,350
    
    
    $
    32,911
    
    
    $
    20,533Basic earnings per common share
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.81
    
    
    $
    0.52Diluted earnings per common share
    
    $
    0.44
    
    
    $
    0.37
    
    
    $
    0.79
    
    
    $
    0.51Shares used for computing basic earnings per share
    
    
    40,837
    
    
    
    40,606
    
    
    
    40,789
    
    
    
    39,818Shares used for computing diluted earnings per share
    
    
    41,691
    
    
    
    41,136
    
    
    
    41,609
    
    
    
    40,288
 The accompanying notes are an integral part of these condensed, consolidated financial statements. 2




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VCA ANTECH, INC. AND
SUBSIDIARIES 
 CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004 and 2003
(Unaudited)
(In thousands)
 Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    32,911
    
    
    $
    20,533Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    7,435
    
    
    
    7,074Amortization of deferred financing costs and debt discount
    
    
    367
    
    
    
    456Provision for uncollectible accounts
    
    
    1,084
    
    
    
    1,557Debt retirement costs
    
    
    810
    
    
    
    7,417Loss (gain) on sale of assets
    
    
    66
    
    
    
    (160
    )Other
    
    
    (92
    )
    
    
    Minority interest in income of subsidiaries
    
    
    1,171
    
    
    
    823Distributions to minority interest partners
    
    
    (813
    )
    
    
    (797
    )Increase in accounts receivable
    
    
    (4,962
    )
    
    
    (5,351
    )Decrease (increase) in inventory, prepaid expenses and other assets
    
    
    (522
    )
    
    
    168Increase in accounts payable and other accrued liabilities
    
    
    598
    
    
    
    1,343Decrease in accrued payroll and related liabilities
    
    
    (2,596
    )
    
    
    (2,196
    )Increase (decrease) in accrued interest
    
    
    10
    
    
    
    (32
    )Decrease in prepaid income taxes
    
    
    3,435
    
    
    
    4,910Increase in deferred income tax assets
    
    
    (574
    )
    
    
    (877
    )Increase in deferred income tax liabilities
    
    
    3,987
    
    
    
    3,652Net cash provided by operating activities
    
    
    42,315
    
    
    
    38,520Cash flows used in investing activities:Business acquisitions, net of cash acquired
    
    
    (92,931
    )
    
    
    (19,926
    )Real estate acquired in connection with business acquisitions
    
    
    (4,385
    )
    
    
    (589
    )Property and equipment additions, net
    
    
    (9,027
    )
    
    
    (6,168
    )Proceeds from sale of assets
    
    
    179
    
    
    
    355Other
    
    
    123
    
    
    
    361Net cash used in investing activities
    
    
    (106,041
    )
    
    
    (25,967
    )Cash flows from financing activities:Repayment of long-term obligations, including redemption fees
    
    
    (146,842
    )
    
    
    (43,011
    )Proceeds from the issuance of long-term debt
    
    
    225,000
    
    
    
    Repayment of revolving credit facility
    
    
    
    
    
    
    (7,500
    )Payment of financing costs
    
    
    (794
    )
    
    
    (382
    )Proceeds from issuance of common stock under stock option plans
    
    
    1,961
    
    
    
    67Proceeds from issuance of common stock
    
    
    
    
    
    
    54,323Net cash provided by financing activities
    
    
    79,325
    
    
    
    3,497Increase in cash and cash equivalents
    
    
    15,599
    
    
    
    16,050Cash and cash equivalents at beginning of period
    
    
    17,237
    
    
    
    6,462Cash and cash equivalents at end of period
    
    $
    32,836
    
    
    $
    22,512
 The accompanying notes are an integral part of these condensed, consolidated financial statements. 3




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VCA ANTECH, INC. AND
SUBSIDIARIES 
 NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
 1. General The accompanying unaudited condensed, consolidated financial statements of
VCA Antech, Inc. and subsidiaries (the Company or VCA) have been prepared
in accordance with generally accepted accounting principles in the United
States (GAAP) for interim financial information and in accordance with the
rules and regulations of the United States Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles in the United States for complete
financial statements as permitted under applicable rules and regulations. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for the three and
six months ended June 30, 2004 are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the Companys
consolidated financial statements and footnotes thereto included in the
Companys 2003 Annual Report on Form 10-K. 2. Acquisitions National PetCare Centers, Inc. On June 1, 2004, the Company consummated a merger agreement with National
PetCare Centers, Inc. (NPC), which operated 67 animal hospitals located in 11
states as of the merger date. As of June 30, 2004, the Company had not
finalized the purchase price accounting for the transaction, however, as of
that date, the total consideration was $89.3 million consisting of $66.1
million in cash (net of cash acquired) paid to holders of NPC stock and debt,
$2.6 million in assumed debt, $12.8 million in assumed liabilities, $6.3 million of assumed operating leases whose terms were in
excess of market and $1.5 million paid for professional services. The
preliminary allocation for the $89.3 million is as follows: $11.6 million to
tangible assets, $76.3 million to goodwill and $1.4 million to other intangible
assets. The Company expects that approximately $18.6 million of the goodwill
for NPC will be fully deductible for income tax purposes. The Company intends to close underperforming NPC animal hospitals and
NPCs corporate office and to terminate NPC employees whose functions are
duplicative of those of VCA employees. The Company intends to incur costs
associated with these activities, consisting primarily of lease termination
costs and employee severance costs. These costs will result in an increase in
the total purchase price of the transaction. As of June 30, 2004, the Company
has not finalized its formal plan for these activities. 4




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##### Table of Contents



Total Acquisition Activity The
following table summarizes the number of acquired animal hospitals and
veterinary diagnostic laboratories (including the NPC acquisition on June 1,
2004): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Laboratories:Acquisitions
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    6Acquisitions relocated into the Companys laboratories
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    3
    
    
    
    
    
    
    
    4Animal hospitals:Acquisitions
    
    
    73
    
    
    
    11
    
    
    
    82
    
    
    
    16Acquisitions relocated into the Companys
animal hospitals
    
    
    (1
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (5
    )72
    
    
    
    6
    
    
    
    79
    
    
    
    11
 The following table summarizes the aggregate consideration, including
acquisition costs, paid by the Company for its acquisitions (including the NPC
acquisition on June 1, 2004) and the preliminary allocation of the purchase
price (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Consideration:Cash
    
    $
    80,410
    
    
    $
    13,813
    
    
    $
    94,185
    
    
    $
    19,374Obligation to be settled in cash or common stock
    
    
    
    
    
    
    2,250
    
    
    
    
    
    
    
    2,250Obligations to sellers (1)
    
    
    410
    
    
    
    220
    
    
    
    1,135
    
    
    
    682Notes payable and other liabilities assumed
    
    
    21,771
    
    
    
    1,180
    
    
    
    21,910
    
    
    
    1,230Total
    
    $
    102,591
    
    
    $
    17,463
    
    
    $
    117,230
    
    
    $
    23,536Purchase Price Allocation (2):Tangible assets
    
    $
    12,667
    
    
    $
    2,042
    
    
    $
    13,229
    
    
    $
    2,248Identifiable intangible assets
    
    
    3,768
    
    
    
    791
    
    
    
    4,478
    
    
    
    1,205Goodwill (3)
    
    
    86,156
    
    
    
    14,630
    
    
    
    99,523
    
    
    
    20,083Total
    
    $
    102,591
    
    
    $
    17,463
    
    
    $
    117,230
    
    
    $
    23,536
   (1)
    
    Represents a portion of the purchase price withheld (the
holdback) for offset of any amounts the Company may pay on behalf of
the former owner for any liabilities the Company did not assume at the
time of acquisition. The unused portion is paid to the seller after a
designated period following the date of acquisition.(2)
    
    Represents purchase price allocations subject to change in
accordance with GAAP. In addition, all purchase price adjustments
related to prior period acquisitions are reflected within the balances
above.(3)
    
    The Company expects that $26.4 million and $6.5 million of the
goodwill recorded for the three months ended June 30, 2004 and 2003,
respectively, and $38.3 million and $11.0 million of the goodwill
recorded for the six months ended June 30, 2004 and 2003, respectively,
will be fully deductible for income tax purposes. 5




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The following table summarizes goodwill assigned to the animal hospital and
laboratory segments (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Laboratory (1)
    
    $
    (1,530
    )
    
    $
    6,047
    
    
    $
    (1,482
    )
    
    $
    6,321Animal hospital
    
    
    87,686
    
    
    
    8,583
    
    
    
    101,005
    
    
    
    13,762Total
    
    $
    86,156
    
    
    $
    14,630
    
    
    $
    99,523
    
    
    $
    20,083
   (1)
    
    In 2004, the Company reallocated $1.5 million to non-contractual
customer relationships related to an acquisition that occurred in 2003. Partnership Interests During the six months ended June 30, 2004, the Company purchased the
ownership interests of partners in four partially-owned subsidiaries of the
Company; three of those interests were purchased during the second quarter of
2004. During the six months ended June 30, 2003, the Company purchased the
total ownership interest of partners in two partially-owned subsidiaries of the
Company; one of those interests was purchased during the second quarter of
2003. The following table summarizes the consideration paid by the Company and
the amount of goodwill recorded (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Consideration:Cash
    
    $
    250
    
    
    $
    106
    
    
    $
    306
    
    
    $
    106Notes receivable (1)
    
    
    184
    
    
    
    41
    
    
    
    184
    
    
    
    41Notes payable
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    763Total
    
    $
    434
    
    
    $
    147
    
    
    $
    621
    
    
    $
    910Goodwill recorded (2)
    
    $
    447
    
    
    $
    (1
    )
    
    $
    610
    
    
    $
    362
   (1)
    
    The Company forgave certain notes owed to the Company by the partner.(2)
    
    The Company expects that the goodwill recorded for the transactions will
be fully deductible for income tax purposes. Other Acquisition Payments During the six months ended June 30, 2004 and 2003, the Company paid
$500,000 and $438,000 respectively, of unused holdbacks to the respective
sellers. During the three months ended June 30, 2004, the Company paid $75,000
pursuant to the earn-out provisions of a purchase agreement related to a prior
acquisition. In June 2004, the Company paid $2.3 million in cash to settle an
obligation incurred in connection with a prior year acquisition. 6




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3. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost of an acquired entity over the
net of the amounts assigned to identifiable assets acquired and liabilities
assumed. Other intangible assets represent non-contractual customer
relationships for veterinary diagnostic laboratories, covenants-not-to-compete
and client lists, all of which are associated with acquisitions. The following table presents the changes in the carrying amount of
goodwill for the six months ended June 30, 2004 (in thousands): AnimalLaboratory
    
    Hospital
    
    TotalBalance as of January 1, 2004
    
    $
    94,770
    
    
    $
    278,468
    
    
    $
    373,238Goodwill acquired
    
    
    (1,407
    )
    
    
    101,615
    
    
    
    100,208Goodwill related to partnerships
    
    
    
    
    
    
    4,307
    
    
    
    4,307Goodwill written-off related to sale of animal hospital
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Balance as of June 30, 2004
    
    $
    93,363
    
    
    $
    384,370
    
    
    $
    477,733
 In addition to goodwill, the Company had other intangible assets as follows (in
thousands): As of June 30, 2004
    
    As of December 31, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountNon-contractual customer
relationships
    
    $
    1,530
    
    
    $
    (64
    )
    
    $
    1,466
    
    
    $
    
    
    
    $
    
    
    
    $
    Covenants-not-to-compete
    
    
    12,920
    
    
    
    (6,410
    )
    
    
    6,510
    
    
    
    10,141
    
    
    
    (5,515
    )
    
    
    4,626Client lists
    
    
    667
    
    
    
    (466
    )
    
    
    201
    
    
    
    498
    
    
    
    (432
    )
    
    
    66Total
    
    $
    15,117
    
    
    $
    (6,940
    )
    
    $
    8,177
    
    
    $
    10,639
    
    
    $
    (5,947
    )
    
    $
    4,692
 The aggregate amortization related to other intangible assets was as follows
(in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Aggregate amortization expense
    
    $
    553
    
    
    $
    438
    
    
    $
    993
    
    
    $
    915
 Based on balances at June 30, 2004, estimated amortization expense for other
intangible assets for the current year and the next four fiscal years is as
follows (in thousands): 2004
    
    $
    2,1302005
    
    $
    1,9012006
    
    $
    1,5462007
    
    $
    1,3072008
    
    $
    894
 7




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4. Calculation of Earnings per Common Share Basic and diluted earnings per common share were computed as follows (in
thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    2003Net income
    
    $
    18,167
    
    
    $
    15,350
    
    
    $
    32,911
    
    
    $
    20,533Weighted average common shares outstanding:Basic
    
    
    40,837
    
    
    
    40,606
    
    
    
    40,789
    
    
    
    39,818Effect of dilutive common shares:Stock options
    
    
    814
    
    
    
    494
    
    
    
    765
    
    
    
    452Contracts that may be settled in stock or cash
    
    
    40
    
    
    
    36
    
    
    
    55
    
    
    
    18Diluted
    
    
    41,691
    
    
    
    41,136
    
    
    
    41,609
    
    
    
    40,288Basic earnings per common share
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.81
    
    
    $
    0.52Diluted earnings per common share
    
    $
    0.44
    
    
    $
    0.37
    
    
    $
    0.79
    
    
    $
    0.51
 5. Interest-Rate Hedging Agreements The Company has entered into no-fee swap agreements (Swap Agreements),
whereby the Company pays to counterparties amounts based on fixed interest
rates and set notional amounts in exchange for the receipt of payments from
counterparties based on LIBOR and the same set notional principal amounts. A
summary of these agreements is as follows: Swap
#1
    
    Swap #2
    
    Swap #3Fixed interest rate
    
    
    2.22
    %
    
    
    1.72
    %
    
    
    1.51
    %Notional amount
    
    $40.0 million
    
    $20.0 million
    
    $20.0 millionEffective date
    
    
    11/29/2002
    
    
    
    5/30/2003
    
    
    
    5/30/2003Expiration date
    
    
    11/29/2004
    
    
    
    5/31/2005
    
    
    
    5/31/2005Counter party
    
    Wells Fargo Bank
    
    Wells Fargo Bank
    
    Goldman SachsQualifies for hedge accounting (1)
    
    No
    
    No
    
    Yes
   (1)
    
    Swap #1 and #2 are no longer considered effective as of May 2003
and March 2004, respectively. Both Swap #1 and Swap #2 were initially considered to be cash-flow hedging
instruments; however, management has determined that they are no longer
effective tools for mitigating interest-rate risk within an acceptable degree
of variance because the current interest rate environment is materially
different than managements projections at the inception of the contracts. As
a result of this determination, Swap #1 and Swap #2 no longer qualify for hedge
accounting and all changes in their market value are recognized as income or
expense in the period of change with the fair market value reflected as an
asset or liability on the balance sheet. 8




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##### Table of Contents



The following table summarizes the Companys payments and unrealized loss
(gain) recognized under the Swap Agreements (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Cash paid (1)
    
    $
    166
    
    
    $
    102
    
    
    $
    329
    
    
    $
    187Unrealized loss (gain) (2)
    
    $
    (287
    )
    
    $
    131
    
    
    $
    (176
    )
    
    $
    258
   (1)
    
    These payments are included in interest expense in the condensed,
consolidated income statements.(2)
    
    These unrealized losses (gains) are included in other (income)
expense in the condensed, consolidated income statements. The valuations of the Swap Agreements are determined by the counterparties
based on fair market valuations for similar agreements. At June 30, 2004, the
fair market value of the Swap Agreements resulted in an asset from
interest-rate hedging activities of $142,000 and at December 31, 2003,
resulted in a liability of $277,000. 6. Consolidation of Variable Interest Entities Under the provisions of Financial Accounting Standards Board
Interpretation No. 46R (FIN No. 46R), Consolidation of Variable Interest
Entities, adopted by the Company in the fourth quarter of 2003, the veterinary
medical groups for which the Company provides management services are variable
interest entities. As a result of adopting FIN No. 46R, the Company
consolidated the veterinary medical groups. The prior periods presented have
been restated to conform to the current period presentation. The restatement
resulted in an increase in both revenue and direct costs in the amount of $10.4
million and $20.0 million for the three and six months ended June 30, 2003,
thus there was no impact on gross profit, operating income, net income,
earnings per share or cash flows. 7. Lines of Business During the three and six months ended June 30, 2004 and 2003, the Company
had three reportable segments: Laboratory, Animal Hospital and Corporate.
These segments are strategic business units that have different products,
services and functions. The segments are managed separately because each is a
distinct and different business venture with unique challenges, rewards and
risks. The Laboratory segment provides testing services for veterinarians both
associated with the Company and independent of the Company. The Animal
Hospital segment provides veterinary services for companion animals and sells
related retail and pharmaceutical products. Corporate provides selling,
general and administrative support for the other two segments. The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as detailed in the Companys
consolidated financial statements and footnotes thereto included in the 2003
Annual Report on Form 10-K. The Company evaluates performance of segments
based on operating income. For purposes of reviewing the operating performance
of the segments, all intercompany sales and purchases are accounted for as if
they were transactions with independent third parties at current market prices. 9




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##### Table of Contents



Below is a summary of certain financial data for each of the three segments (in
thousands): Animal
    
    
    
    IntercompanyLaboratory
    
    Hospital
    
    Corporate
    
    Eliminations
    
    TotalThree Months Ended June 30, 2004Revenue
    
    $
    51,951
    
    
    $
    121,384
    
    
    $
    
    
    
    $
    (3,388
    )
    
    $
    169,947Direct costs
    
    
    27,983
    
    
    
    95,348
    
    
    
    
    
    
    
    (3,388
    )
    
    
    119,943Gross profit
    
    
    23,968
    
    
    
    26,036
    
    
    
    
    
    
    
    
    
    
    
    50,004Selling, general and administrative
    
    
    3,190
    
    
    
    3,056
    
    
    
    5,519
    
    
    
    
    
    
    
    11,765Loss on sale of assets
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4Operating income (loss)
    
    $
    20,776
    
    
    $
    22,978
    
    
    $
    (5,519
    )
    
    $
    
    
    
    $
    38,235Depreciation and amortization
    
    $
    897
    
    
    $
    2,536
    
    
    $
    386
    
    
    $
    
    
    
    $
    3,819Capital expenditures
    
    $
    1,057
    
    
    $
    4,078
    
    
    $
    427
    
    
    $
    
    
    
    $
    5,562Three Months Ended June 30, 2003Revenue
    
    $
    46,691
    
    
    $
    98,822
    
    
    $
    
    
    
    $
    (2,752
    )
    
    $
    142,761Direct costs
    
    
    25,615
    
    
    
    77,142
    
    
    
    
    
    
    
    (2,752
    )
    
    
    100,005Gross profit
    
    
    21,076
    
    
    
    21,680
    
    
    
    
    
    
    
    
    
    
    
    42,756Selling, general and administrative
    
    
    2,797
    
    
    
    2,519
    
    
    
    4,168
    
    
    
    
    
    
    
    9,484Loss (gain) on sale of assets
    
    
    21
    
    
    
    58
    
    
    
    (1
    )
    
    
    
    
    
    
    78Operating income (loss)
    
    $
    18,258
    
    
    $
    19,103
    
    
    $
    (4,167
    )
    
    $
    
    
    
    $
    33,194Depreciation and amortization
    
    $
    799
    
    
    $
    2,304
    
    
    $
    394
    
    
    $
    
    
    
    $
    3,497Capital expenditures
    
    $
    590
    
    
    $
    2,165
    
    
    $
    588
    
    
    $
    
    
    
    $
    3,343Six Months Ended June 30, 2004Revenue
    
    $
    101,133
    
    
    $
    219,340
    
    
    $
    
    
    
    $
    (6,176
    )
    
    $
    314,297Direct costs
    
    
    55,698
    
    
    
    175,211
    
    
    
    
    
    
    
    (6,176
    )
    
    
    224,733Gross profit
    
    
    45,435
    
    
    
    44,129
    
    
    
    
    
    
    
    
    
    
    
    89,564Selling, general and administrative
    
    
    6,363
    
    
    
    5,804
    
    
    
    8,299
    
    
    
    
    
    
    
    20,466Loss on sale of assets
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    66Operating income (loss)
    
    $
    39,071
    
    
    $
    38,260
    
    
    $
    (8,299
    )
    
    $
    
    
    
    $
    69,032Depreciation and amortization
    
    $
    1,718
    
    
    $
    4,937
    
    
    $
    780
    
    
    $
    
    
    
    
    7,435Capital expenditures
    
    $
    1,803
    
    
    $
    6,531
    
    
    $
    693
    
    
    $
    
    
    
    $
    9,027Six Months Ended June 30, 2003Revenue
    
    $
    88,389
    
    
    $
    185,129
    
    
    $
    
    
    
    $
    (5,178
    )
    
    $
    268,340Direct costs
    
    
    49,825
    
    
    
    147,919
    
    
    
    
    
    
    
    (5,178
    )
    
    
    192,566Gross profit
    
    
    38,564
    
    
    
    37,210
    
    
    
    
    
    
    
    
    
    
    
    75,774Selling, general and administrative
    
    
    5,504
    
    
    
    5,022
    
    
    
    8,667
    
    
    
    
    
    
    
    19,193Loss (gain) on sale of assets
    
    
    19
    
    
    
    (178
    )
    
    
    (1
    )
    
    
    
    
    
    
    (160
    )Operating income (loss)
    
    $
    33,041
    
    
    $
    32,366
    
    
    $
    (8,666
    )
    
    $
    
    
    
    $
    56,741Depreciation and amortization
    
    $
    1,553
    
    
    $
    4,781
    
    
    $
    740
    
    
    $
    
    
    
    $
    7,074Capital expenditures
    
    $
    1,764
    
    
    $
    3,358
    
    
    $
    1,046
    
    
    $
    
    
    
    $
    6,168
 10




---



##### Table of Contents



Animal
    
    
    
    
    
    IntercompanyLaboratory
    
    Hospital
    
    Corporate
    
    Eliminations
    
    TotalAt June 30, 2004Total assets
    
    $
    134,308
    
    
    $
    496,864
    
    
    $
    66,236
    
    
    $
    
    
    
    $
    697,408At December 31, 2003Total assets
    
    $
    130,799
    
    
    $
    374,940
    
    
    $
    49,064
    
    
    $
    
    
    
    $
    554,803
 Below is a reconciliation between total segment operating income after
eliminations and consolidated income before provision for income taxes as
reported on the condensed, consolidated income statements (in thousands): Three Months EndedJune 30,
    
    Six Months EndedJune 30,2004
    
    2003
    
    2004
    
    2003Total segment operating income after eliminations
    
    $
    38,235
    
    
    $
    33,194
    
    
    $
    69,032
    
    
    $
    56,741Interest expense, net
    
    
    6,098
    
    
    
    6,418
    
    
    
    12,083
    
    
    
    13,410Debt retirement costs
    
    
    810
    
    
    
    
    
    
    
    810
    
    
    
    7,417Other (income) expense
    
    
    (287
    )
    
    
    131
    
    
    
    (176
    )
    
    
    258Minority interest in income of subsidiaries
    
    
    755
    
    
    
    462
    
    
    
    1,171
    
    
    
    823Income before provision for income taxes
    
    $
    30,859
    
    
    $
    26,183
    
    
    $
    55,144
    
    
    $
    34,833
 8. Financing Transactions On June 1, 2004, the Company amended and restated its Credit and Guaranty
Agreement to replace its existing senior term D notes in the principal amount
of $145.3 million with an interest rate margin of 2.50% with new senior term E
notes in the principal amount of $225.0 million with an interest rate margin of
2.25%. The Company used the additional borrowings to fund the NPC merger as
detailed above in Footnote 2. Acquisitions and plans to use the remaining
borrowings for related merger costs and general corporate purposes. The
Company incurred debt retirement costs of $810,000 as a result of amending and
restating its Credit and Guaranty Agreement. In February 2003, the Company sold 3.8 million shares of its common stock
in exchange for net proceeds of $54.3 million. The Company used $42.7 million
of the net proceeds to voluntarily retire the remaining principal amount
outstanding of its 15.5% senior notes due 2010 at a price of 110% of the
principal amount plus accrued and unpaid interest. As a result of the debt
retirement the Company incurred debt retirement costs of $7.4 million. 9. Letters of Credit and Restricted Cash In connection with the acquisition of NPC, the Company assumed letter of credit
agreements, which serve as security for potential claims due under NPCs
existing workers compensation insurance policies. These letter of credit
agreements aggregated approximately $1.5 million at June 30, 2004, are
collateralized by $1.4 million of restricted cash and their terms are less than
one year. 11




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##### Table of Contents



10. Stock-Based Compensation The Company has granted stock options to various employees under multiple
stock option plans and is accounting for those options under the intrinsic
value method as prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Under that method, when options are
issued with a strike price equal to or greater than market price on date of
issuance, there is no impact on earnings either on the date of issuance or
thereafter, absent modification to the options. This method is not a
fair-value-based method of accounting as defined by Statements of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Fair-value-based methods of accounting require compensation expense to be
recognized annually equal to the fair market value of the options granted
divided by their vesting period. The following table presents net income and
earnings per common share for the three and six months ended June 30, 2004 and
2003 as if the Company accounted for its stock options under SFAS No. 123 and
the fair-value-based method of accounting (in thousands, except per share
amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003As reported
    
    $
    18,167
    
    
    $
    15,350
    
    
    $
    32,911
    
    
    $
    20,533Deduct: Total stock-based employee compensation
expense determined under fair-value-based
method for all awards, net of related tax effects
    
    
    (485
    )
    
    
    (215
    )
    
    
    (762
    )
    
    
    (428
    )Pro forma net income available to common stockholders
    
    $
    17,682
    
    
    $
    15,135
    
    
    $
    32,149
    
    
    $
    20,105Earnings per common share:Basic - as reported
    
    $
    0.44
    
    
    $
    0.38
    
    
    $
    0.81
    
    
    $
    0.52Basic - pro forma
    
    $
    0.43
    
    
    $
    0.37
    
    
    $
    0.79
    
    
    $
    0.50Diluted - as reported
    
    $
    0.44
    
    
    $
    0.37
    
    
    $
    0.79
    
    
    $
    0.51Diluted - pro forma
    
    $
    0.42
    
    
    $
    0.37
    
    
    $
    0.77
    
    
    $
    0.50
 11. Commitments and Contingencies The Company has certain contingent liabilities resulting from litigation
and claims incident to the ordinary course of its business. Management
believes that the probable resolution of such contingencies will not have a
material adverse effect on the Companys consolidated financial position or
results of operations. 12. Reclassifications Certain 2003 balances have been reclassified to conform to the 2004
financial statement presentation. The most significant of these changes was
the reclassification of depreciation and amortization into direct costs and
selling, general and administrative expense. 13. Condensed, Consolidating Information The Company has a legal structure comprised of a holding company and an
operating company. VCA is the holding company. Vicar Operating, Inc.
(Vicar) is the operating company and wholly-owned by VCA. Vicar owns the
capital stock of all of the Companys subsidiaries. In connection with Vicars issuance in November 2001 of $170.0 million of
9.875% senior subordinated notes, VCA and each existing and future domestic
wholly-owned restricted subsidiary of Vicar (the Guarantor Subsidiaries)
have, jointly and severally, fully and unconditionally guaranteed the 9.875%
senior subordinated notes. These guarantees are unsecured and subordinated in
right of payment to all existing and future indebtedness outstanding under the Credit and Guaranty
Agreement dated September 20, 2000 and any other indebtedness permitted to be
incurred by Vicar under the terms of the indenture agreement for the 9.875%
senior subordinated notes. 12




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##### Table of Contents



Vicars subsidiaries are composed of wholly-owned restricted subsidiaries
and partnerships. The partnerships may elect to serve as guarantors of Vicars
obligations, however, none of the partnerships have elected to do so (the
Non-Guarantor Subsidiaries). Vicar conducts all of its business through and
derives virtually all of its income from its subsidiaries. Therefore, Vicars
ability to make required payments with respect to its indebtedness (including
the 9.875% senior subordinated notes) and other obligations depends on the
financial results and condition of its subsidiaries and its ability to receive
funds from its subsidiaries. Pursuant to Rule 3-10 of Regulation S-X, the following condensed,
consolidating information is for VCA, Vicar, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries with respect to the 9.875% senior subordinated
notes. This condensed financial information has been prepared from the books
and records maintained by VCA, Vicar, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries. The condensed financial information may not
necessarily be indicative of results of operations or financial position had
the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries operated as
independent entities. The separate financial statements of the Guarantor
Subsidiaries are not presented because management has determined they would not
be material to investors. 13




---



##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING BALANCE SHEETS
As of June 30, 2004
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    30,451
    
    
    $
    2,288
    
    
    $
    97
    
    
    $
    
    
    
    $
    32,836Restricted cash
    
    
    
    
    
    
    1,365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,365Trade accounts receivable, net
    
    
    
    
    
    
    6
    
    
    
    26,075
    
    
    
    672
    
    
    
    
    
    
    
    26,753Inventory, prepaid expenses and other
    
    
    
    
    
    
    3,105
    
    
    
    7,083
    
    
    
    590
    
    
    
    
    
    
    
    10,778Deferred income taxes
    
    
    
    
    
    
    12,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,672Prepaid income taxes
    
    
    
    
    
    
    5,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,866Total current assets
    
    
    
    
    
    
    53,465
    
    
    
    35,446
    
    
    
    1,359
    
    
    
    
    
    
    
    90,270Property and equipment, net
    
    
    
    
    
    
    6,558
    
    
    
    101,971
    
    
    
    2,438
    
    
    
    
    
    
    
    110,967Other assets:Goodwill
    
    
    
    
    
    
    
    
    
    
    446,408
    
    
    
    31,325
    
    
    
    
    
    
    
    477,733Other intangible assets, net
    
    
    
    
    
    
    
    
    
    
    7,353
    
    
    
    824
    
    
    
    
    
    
    
    8,177Deferred financing costs, net
    
    
    
    
    
    
    4,222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,222Other
    
    
    29
    
    
    
    1,962
    
    
    
    3,287
    
    
    
    2,476
    
    
    
    (1,715
    )
    
    
    6,039Investment in subsidiaries
    
    
    236,294
    
    
    
    358,379
    
    
    
    32,260
    
    
    
    
    
    
    
    (626,933
    )
    
    
    Total assets
    
    $
    236,323
    
    
    $
    424,586
    
    
    $
    626,725
    
    
    $
    38,422
    
    
    $
    (628,648
    )
    
    $
    697,408Current liabilities:Current portion of long-term obligations
    
    $
    
    
    
    $
    2,618
    
    
    $
    1,960
    
    
    $
    300
    
    
    $
    (300
    )
    
    $
    4,578Accounts payable
    
    
    
    
    
    
    10,256
    
    
    
    2,002
    
    
    
    
    
    
    
    
    
    
    
    12,258Accrued payroll and related liabilities
    
    
    
    
    
    
    9,671
    
    
    
    8,177
    
    
    
    352
    
    
    
    
    
    
    
    18,200Accrued interest
    
    
    
    
    
    
    1,516
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    1,665Other accrued liabilities
    
    
    
    
    
    
    13,466
    
    
    
    4,505
    
    
    
    
    
    
    
    
    
    
    
    17,971Total current liabilities
    
    
    
    
    
    
    37,527
    
    
    
    16,793
    
    
    
    652
    
    
    
    (300
    )
    
    
    54,672Long-term obligations, less current portion
    
    
    
    
    
    
    393,795
    
    
    
    1,609
    
    
    
    
    
    
    
    (1,415
    )
    
    
    393,989Deferred income taxes
    
    
    
    
    
    
    28,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,914Other liabilities
    
    
    
    
    
    
    9,705
    
    
    
    2,155
    
    
    
    
    
    
    
    
    
    
    
    11,860Intercompany payable/(receivable)
    
    
    37,173
    
    
    
    (281,649
    )
    
    
    247,789
    
    
    
    (3,313
    )
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,823
    
    
    
    8,823Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Common stock
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Additional paid-in capital
    
    
    248,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,378Accumulated equity (deficit)
    
    
    (49,420
    )
    
    
    236,133
    
    
    
    358,379
    
    
    
    41,083
    
    
    
    (635,595
    )
    
    
    (49,420
    )Accumulated other comprehensive income -
unrealized gain on hedging instruments
    
    
    161
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    161Notes receivable from stockholders
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Total stockholders equity
    
    
    199,150
    
    
    
    236,294
    
    
    
    358,379
    
    
    
    41,083
    
    
    
    (635,756
    )
    
    
    199,150Total liabilities and stockholders equity
    
    $
    236,323
    
    
    $
    424,586
    
    
    $
    626,725
    
    
    $
    38,422
    
    
    $
    (628,648
    )
    
    $
    697,408
 14




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING BALANCE SHEETS
As of December 31, 2003
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    14,883
    
    
    $
    2,244
    
    
    $
    110
    
    
    $
    
    
    
    $
    17,237Trade accounts receivable, net
    
    
    
    
    
    
    6
    
    
    
    21,790
    
    
    
    539
    
    
    
    
    
    
    
    22,335Inventory, prepaid expenses and other
    
    
    
    
    
    
    2,607
    
    
    
    6,228
    
    
    
    597
    
    
    
    
    
    
    
    9,432Deferred income taxes
    
    
    
    
    
    
    11,040
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,040Prepaid income taxes
    
    
    
    
    
    
    7,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,266Total current assets
    
    
    
    
    
    
    35,802
    
    
    
    30,262
    
    
    
    1,246
    
    
    
    
    
    
    
    67,310Property and equipment, net
    
    
    
    
    
    
    6,692
    
    
    
    90,933
    
    
    
    1,536
    
    
    
    
    
    
    
    99,161Other assets:Goodwill
    
    
    
    
    
    
    
    
    
    
    351,130
    
    
    
    22,108
    
    
    
    
    
    
    
    373,238Other
intangible assets, net
    
    
    
    
    
    
    
    
    
    
    4,116
    
    
    
    576
    
    
    
    
    
    
    
    4,692Deferred financing costs, net
    
    
    
    
    
    
    4,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,601Other
    
    
    30
    
    
    
    1,939
    
    
    
    2,451
    
    
    
    2,296
    
    
    
    (915
    )
    
    
    5,801Investment in subsidiaries
    
    
    203,141
    
    
    
    313,565
    
    
    
    25,109
    
    
    
    
    
    
    
    (541,815
    )
    
    
    Total assets
    
    $
    203,171
    
    
    $
    362,599
    
    
    $
    504,001
    
    
    $
    27,762
    
    
    $
    (542,730
    )
    
    $
    554,803Current liabilities:Current portion of long-term obligations
    
    $
    
    
    
    $
    1,544
    
    
    $
    859
    
    
    $
    
    
    
    $
    
    
    
    $
    2,403Accounts payable
    
    
    
    
    
    
    7,295
    
    
    
    1,913
    
    
    
    
    
    
    
    
    
    
    
    9,208Accrued payroll and related liabilities
    
    
    
    
    
    
    7,837
    
    
    
    7,541
    
    
    
    338
    
    
    
    
    
    
    
    15,716Accrued interest
    
    
    
    
    
    
    1,517
    
    
    
    16
    
    
    
    5
    
    
    
    
    
    
    
    1,538Other accrued liabilities
    
    
    
    
    
    
    10,590
    
    
    
    4,423
    
    
    
    (7
    )
    
    
    
    
    
    
    15,006Total current liabilities
    
    
    
    
    
    
    28,783
    
    
    
    14,752
    
    
    
    336
    
    
    
    
    
    
    
    43,871Long-term obligations, less current portion
    
    
    
    
    
    
    314,451
    
    
    
    1,530
    
    
    
    
    
    
    
    (915
    )
    
    
    315,066Deferred income taxes
    
    
    
    
    
    
    24,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,532Other liabilities
    
    
    
    
    
    
    3,216
    
    
    
    2,176
    
    
    
    
    
    
    
    
    
    
    
    5,392Intercompany payable/(receivable)
    
    
    41,248
    
    
    
    (211,524
    )
    
    
    171,978
    
    
    
    (1,702
    )
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,019
    
    
    
    4,019Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity:Common stock
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Additional paid-in capital
    
    
    244,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244,311Accumulated equity (deficit)
    
    
    (82,331
    )
    
    
    203,223
    
    
    
    313,565
    
    
    
    29,128
    
    
    
    (545,916
    )
    
    
    (82,331
    )Accumulated other comprehensive loss -
unrealized loss on hedging instruments
    
    
    (82
    )
    
    
    (82
    )
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    (82
    )Notes receivable from stockholders
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Total stockholders equity
    
    
    161,923
    
    
    
    203,141
    
    
    
    313,565
    
    
    
    29,128
    
    
    
    (545,834
    )
    
    
    161,923Total liabilities and stockholders equity
    
    $
    203,171
    
    
    $
    362,599
    
    
    $
    504,001
    
    
    $
    27,762
    
    
    $
    (542,730
    )
    
    $
    554,803
 15




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING INCOME STATEMENTS
For the Three Months Ended June 30, 2004
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    
    
    
    $
    155,716
    
    
    $
    14,649
    
    
    $
    (418
    )
    
    $
    169,947Direct costs
    
    
    
    
    
    
    
    
    
    
    109,006
    
    
    
    11,355
    
    
    
    (418
    )
    
    
    119,943Gross profit
    
    
    
    
    
    
    
    
    
    
    46,710
    
    
    
    3,294
    
    
    
    
    
    
    
    50,004Selling, general and administrative
    
    
    
    
    
    
    5,519
    
    
    
    5,707
    
    
    
    539
    
    
    
    
    
    
    
    11,765Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Operating income (loss)
    
    
    
    
    
    
    (5,519
    )
    
    
    40,999
    
    
    
    2,755
    
    
    
    
    
    
    
    38,235Interest expense, net
    
    
    (1
    )
    
    
    6,101
    
    
    
    69
    
    
    
    (71
    )
    
    
    
    
    
    
    6,098Debt retirement costs
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Other income
    
    
    
    
    
    
    (287
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (287
    )Equity interest in income of subsidiaries
    
    
    18,167
    
    
    
    25,315
    
    
    
    2,071
    
    
    
    
    
    
    
    (45,553
    )
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755
    
    
    
    755Income before provision (benefit)
for income taxes
    
    
    18,168
    
    
    
    13,172
    
    
    
    43,001
    
    
    
    2,826
    
    
    
    (46,308
    )
    
    
    30,859Provision (benefit) for income taxes
    
    
    1
    
    
    
    (4,995
    )
    
    
    17,686
    
    
    
    
    
    
    
    
    
    
    
    12,692Net income
    
    $
    18,167
    
    
    $
    18,167
    
    
    $
    25,315
    
    
    $
    2,826
    
    
    $
    (46,308
    )
    
    $
    18,167
 16




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING INCOME STATEMENTS
For the Three Months Ended June 30, 2003
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    
    
    
    $
    132,132
    
    
    $
    10,878
    
    
    $
    (249
    )
    
    $
    142,761Direct costs
    
    
    
    
    
    
    
    
    
    
    91,790
    
    
    
    8,464
    
    
    
    (249
    )
    
    
    100,005Gross profit
    
    
    
    
    
    
    
    
    
    
    40,342
    
    
    
    2,414
    
    
    
    
    
    
    
    42,756Selling, general and administrative
    
    
    
    
    
    
    4,168
    
    
    
    4,930
    
    
    
    386
    
    
    
    
    
    
    
    9,484Loss (gain) on sale of assets
    
    
    
    
    
    
    (1
    )
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    78Operating income (loss)
    
    
    
    
    
    
    (4,167
    )
    
    
    35,333
    
    
    
    2,028
    
    
    
    
    
    
    
    33,194Interest expense, net
    
    
    (5
    )
    
    
    6,429
    
    
    
    37
    
    
    
    (43
    )
    
    
    
    
    
    
    6,418Other expense
    
    
    
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131Equity interest in income of subsidiaries
    
    
    15,347
    
    
    
    21,491
    
    
    
    1,609
    
    
    
    
    
    
    
    (38,447
    )
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462
    
    
    
    462Income before provision (benefit)
for income taxes
    
    
    15,352
    
    
    
    10,764
    
    
    
    36,905
    
    
    
    2,071
    
    
    
    (38,909
    )
    
    
    26,183Provision (benefit) for income taxes
    
    
    2
    
    
    
    (4,583
    )
    
    
    15,414
    
    
    
    
    
    
    
    
    
    
    
    10,833Net income
    
    $
    15,350
    
    
    $
    15,347
    
    
    $
    21,491
    
    
    $
    2,071
    
    
    $
    (38,909
    )
    
    $
    15,350
 17




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING INCOME STATEMENTS
For the Six Months Ended June 30, 2004
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    
    
    
    $
    289,578
    
    
    $
    25,394
    
    
    $
    (675
    )
    
    $
    314,297Direct costs
    
    
    
    
    
    
    
    
    
    
    205,478
    
    
    
    19,930
    
    
    
    (675
    )
    
    
    224,733Gross profit
    
    
    
    
    
    
    
    
    
    
    84,100
    
    
    
    5,464
    
    
    
    
    
    
    
    89,564Selling, general and administrative
    
    
    
    
    
    
    8,299
    
    
    
    11,263
    
    
    
    904
    
    
    
    
    
    
    
    20,466Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Operating income (loss)
    
    
    
    
    
    
    (8,299
    )
    
    
    72,771
    
    
    
    4,560
    
    
    
    
    
    
    
    69,032Interest expense, net
    
    
    (2
    )
    
    
    12,084
    
    
    
    109
    
    
    
    (108
    )
    
    
    
    
    
    
    12,083Debt retirement costs
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Other income
    
    
    
    
    
    
    (176
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176
    )Equity interest in income of subsidiaries
    
    
    32,910
    
    
    
    44,814
    
    
    
    3,497
    
    
    
    
    
    
    
    (81,221
    )
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171
    
    
    
    1,171Income before provision (benefit)
for income taxes
    
    
    32,912
    
    
    
    23,797
    
    
    
    76,159
    
    
    
    4,668
    
    
    
    (82,392
    )
    
    
    55,144Provision (benefit) for income taxes
    
    
    1
    
    
    
    (9,113
    )
    
    
    31,345
    
    
    
    
    
    
    
    
    
    
    
    22,233Net income
    
    $
    32,911
    
    
    $
    32,910
    
    
    $
    44,814
    
    
    $
    4,668
    
    
    $
    (82,392
    )
    
    $
    32,911
 18




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING INCOME STATEMENTS
For the Six Months Ended June 30, 2003
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    
    
    
    $
    248,299
    
    
    $
    20,516
    
    
    $
    (475
    )
    
    $
    268,340Direct costs
    
    
    
    
    
    
    
    
    
    
    176,884
    
    
    
    16,157
    
    
    
    (475
    )
    
    
    192,566Gross profit
    
    
    
    
    
    
    
    
    
    
    71,415
    
    
    
    4,359
    
    
    
    
    
    
    
    75,774Selling, general and administrative
    
    
    
    
    
    
    8,667
    
    
    
    9,797
    
    
    
    729
    
    
    
    
    
    
    
    19,193Gain on sale of assets
    
    
    
    
    
    
    (1
    )
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (160
    )Operating income (loss)
    
    
    
    
    
    
    (8,666
    )
    
    
    61,777
    
    
    
    3,630
    
    
    
    
    
    
    
    56,741Interest expense, net
    
    
    526
    
    
    
    12,893
    
    
    
    66
    
    
    
    (75
    )
    
    
    
    
    
    
    13,410Debt retirement costs
    
    
    7,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,417Other expense
    
    
    
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258Equity interest in income of subsidiaries
    
    
    25,219
    
    
    
    38,076
    
    
    
    2,882
    
    
    
    
    
    
    
    (66,177
    )
    
    
    Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    823
    
    
    
    823Income before provision (benefit)
for income taxes
    
    
    17,276
    
    
    
    16,259
    
    
    
    64,593
    
    
    
    3,705
    
    
    
    (67,000
    )
    
    
    34,833Provision (benefit) for income taxes
    
    
    (3,257
    )
    
    
    (8,960
    )
    
    
    26,517
    
    
    
    
    
    
    
    
    
    
    
    14,300Net income
    
    $
    20,533
    
    
    $
    25,219
    
    
    $
    38,076
    
    
    $
    3,705
    
    
    $
    (67,000
    )
    
    $
    20,533
 19




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2004
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    32,911
    
    
    $
    32,910
    
    
    $
    44,814
    
    
    $
    4,668
    
    
    $
    (82,392
    )
    
    $
    32,911Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Equity interest in earnings of subsidiaries
    
    
    (32,910
    )
    
    
    (44,814
    )
    
    
    (3,497
    )
    
    
    
    
    
    
    81,221
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    780
    
    
    
    6,296
    
    
    
    359
    
    
    
    
    
    
    
    7,435Amortization of deferred financing costs
and debt discount
    
    
    
    
    
    
    363
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    367Provision for uncollectible accounts
    
    
    
    
    
    
    
    
    
    
    849
    
    
    
    235
    
    
    
    
    
    
    
    1,084Debt retirement costs
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    66Other
    
    
    
    
    
    
    (92
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (92
    )Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171
    
    
    
    1,171Distributions to minority interest partners
    
    
    
    
    
    
    (813
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (813
    )Increase in accounts receivable
    
    
    
    
    
    
    
    
    
    
    (4,594
    )
    
    
    (368
    )
    
    
    
    
    
    
    (4,962
    )Decrease (increase) in inventory, prepaid
expenses and other assets
    
    
    
    
    
    
    (255
    )
    
    
    (274
    )
    
    
    7
    
    
    
    
    
    
    
    (522
    )Increase (decrease) in accounts payable and
other accrued liabilities
    
    
    
    
    
    
    5,837
    
    
    
    (4,588
    )
    
    
    7
    
    
    
    
    
    
    
    1,256Increase (decrease) in accrued payroll and
related liabilities
    
    
    
    
    
    
    1,834
    
    
    
    (5,102
    )
    
    
    14
    
    
    
    
    
    
    
    (3,254
    )Increase (decrease) in accrued interest
    
    
    
    
    
    
    (1
    )
    
    
    16
    
    
    
    (5
    )
    
    
    
    
    
    
    10Decrease in prepaid income taxes
    
    
    
    
    
    
    3,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,435Increase in deferred income tax assets
    
    
    
    
    
    
    (574
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (574
    )Increase in deferred income tax liabilities
    
    
    
    
    
    
    3,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,987Increase (decrease) in intercompany
payable/(receivable)
    
    
    (1,969
    )
    
    
    39,172
    
    
    
    (32,273
    )
    
    
    (4,930
    )
    
    
    
    
    
    
    Net cash provided by (used in) operating
activities
    
    
    (1,968
    )
    
    
    42,579
    
    
    
    1,717
    
    
    
    (13
    )
    
    
    
    
    
    
    42,315
 20




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS  (Continued)
For the Six Months Ended June 30, 2004
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCash flows from investing activities:Business acquisitions, net of cash acquired
    
    $
    
    
    
    $
    (92,931
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (92,931
    )Real estate acquired in connection with
business acquisitions
    
    
    
    
    
    
    (4,385
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,385
    )Property and equipment additions, net
    
    
    
    
    
    
    (7,224
    )
    
    
    (1,803
    )
    
    
    
    
    
    
    
    
    
    
    (9,027
    )Proceeds from sale of assets
    
    
    
    
    
    
    178
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    179Other
    
    
    7
    
    
    
    (13
    )
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    123Net cash provided by (used in)
investing activities
    
    
    7
    
    
    
    (104,375
    )
    
    
    (1,673
    )
    
    
    
    
    
    
    
    
    
    
    (106,041
    )Cash flows from financing activities:Repayment of long-term obligations
    
    
    
    
    
    
    (146,842
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146,842
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    225,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,000Payment of financing costs
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (794
    )Proceeds from issuance of common
stock under stock option plans
    
    
    1,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,961Net cash provided by financing activities
    
    
    1,961
    
    
    
    77,364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,325Increase (decrease) in cash and
cash equivalents
    
    
    
    
    
    
    15,568
    
    
    
    44
    
    
    
    (13
    )
    
    
    
    
    
    
    15,599Cash and cash equivalents at beginning
of period
    
    
    
    
    
    
    14,883
    
    
    
    2,244
    
    
    
    110
    
    
    
    
    
    
    
    17,237Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    30,451
    
    
    $
    2,288
    
    
    $
    97
    
    
    $
    
    
    
    $
    32,836
 21




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCash flows from operating activities:Net income
    
    $
    20,533
    
    
    $
    25,219
    
    
    $
    38,076
    
    
    $
    3,705
    
    
    $
    (67,000
    )
    
    $
    20,533Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Equity interest in earnings of subsidiaries
    
    
    (25,219
    )
    
    
    (38,076
    )
    
    
    (2,882
    )
    
    
    
    
    
    
    66,177
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    740
    
    
    
    6,018
    
    
    
    316
    
    
    
    
    
    
    
    7,074Amortization of deferred financing costs
and debt discount
    
    
    14
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    456Provision for uncollectible accounts
    
    
    
    
    
    
    
    
    
    
    1,408
    
    
    
    149
    
    
    
    
    
    
    
    1,557Debt retirement costs
    
    
    7,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,417Gain on sale of assets
    
    
    
    
    
    
    (1
    )
    
    
    (159
    )
    
    
    
    
    
    
    
    
    
    
    (160
    )Minority interest in income of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    823
    
    
    
    823Distributions to minority interest partners
    
    
    
    
    
    
    (797
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (797
    )Increase in accounts receivable
    
    
    
    
    
    
    (4
    )
    
    
    (5,196
    )
    
    
    (151
    )
    
    
    
    
    
    
    (5,351
    )Decrease (increase) in inventory, prepaid
expenses and other assets
    
    
    70
    
    
    
    363
    
    
    
    (322
    )
    
    
    57
    
    
    
    
    
    
    
    168Increase (decrease) in accounts payable and
other accrued liabilities
    
    
    
    
    
    
    2,395
    
    
    
    (1,132
    )
    
    
    80
    
    
    
    
    
    
    
    1,343Decrease in accrued payroll and
related liabilities
    
    
    
    
    
    
    (1,652
    )
    
    
    (521
    )
    
    
    (23
    )
    
    
    
    
    
    
    (2,196
    )Increase (decrease) in accrued interest
    
    
    
    
    
    
    (54
    )
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Decrease in prepaid income taxes
    
    
    
    
    
    
    4,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,910Increase in deferred income tax assets
    
    
    
    
    
    
    (877
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (877
    )Increase in deferred income tax liabilities
    
    
    
    
    
    
    3,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,652Increase (decrease) in intercompany
payable/(receivable)
    
    
    (15,011
    )
    
    
    52,148
    
    
    
    (33,038
    )
    
    
    (4,099
    )
    
    
    
    
    
    
    Net cash provided by (used in) operating
activities
    
    
    (12,196
    )
    
    
    48,408
    
    
    
    2,274
    
    
    
    34
    
    
    
    
    
    
    
    38,520
 22




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS  (Continued) CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS  (Continued)
For the Six Months Ended June 30, 2003
(Unaudited)
(In thousands) Non-Guarantor
    
    GuarantorVCA
    
    Vicar
    
    Subsidiaries
    
    Subsidiaries
    
    Elimination
    
    ConsolidatedCash flows used in investing activities:Business acquisitions, net of cash acquired
    
    $
    
    
    
    $
    (19,926
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (19,926
    )Real estate acquired in connection with
business acquisitions
    
    
    
    
    
    
    (589
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (589
    )Property and equipment additions, net
    
    
    
    
    
    
    (4,404
    )
    
    
    (1,764
    )
    
    
    
    
    
    
    
    
    
    
    (6,168
    )Proceeds from sale of assets
    
    
    
    
    
    
    348
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    355Other
    
    
    (4
    )
    
    
    138
    
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    361Net cash used in investing activities
    
    
    (4
    )
    
    
    (24,433
    )
    
    
    (1,530
    )
    
    
    
    
    
    
    
    
    
    
    (25,967
    )Cash flows from financing activities:Repayment of long-term obligations,
including redemption fees
    
    
    (41,808
    )
    
    
    (1,203
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,011
    )Repayment of revolving credit facility
    
    
    
    
    
    
    (7,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,500
    )Payment of financing costs
    
    
    (382
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (382
    )Proceeds from issuance of common
stock under stock option plans
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Proceeds from issuance of common stock
    
    
    54,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,323Net cash provided by (used in) financing
activities
    
    
    12,200
    
    
    
    (8,703
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,497Increase in cash and cash equivalents
    
    
    
    
    
    
    15,272
    
    
    
    744
    
    
    
    34
    
    
    
    
    
    
    
    16,050Cash and cash equivalents at beginning
of period
    
    
    
    
    
    
    5,083
    
    
    
    1,233
    
    
    
    146
    
    
    
    
    
    
    
    6,462Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    20,355
    
    
    $
    1,977
    
    
    $
    180
    
    
    $
    
    
    
    $
    22,512
 23




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##### Table of Contents



14. Subsequent Events Acquisitions From July 1, 2004 through August 3, 2004, the Company acquired one animal
hospital, which was merged into an existing VCA animal hospital, for an
aggregate consideration of $190,000 in cash. Common Stock On July 13, 2004, the Company amended its Amended and Restated Certificate
of Incorporation to increase the number of shares of common stock the Company
is authorized to issue from 75.0 million to 175.0 million. Stock Split On July 27, 2004, the Company announced a two-for-one stock split to be
effected in the form of a 100% stock dividend. To effect the stock split,
stock will be distributed on August 25, 2004 to stockholders of record as of
August 11, 2004. Pro forma earnings per common share, giving retroactive
effect to the stock split, are as follows (in thousands, except per share
amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Basic earnings per common
share
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.40
    
    
    $
    0.26Diluted earnings per common
share
    
    $
    0.22
    
    
    $
    0.19
    
    
    $
    0.40
    
    
    $
    0.25Shares used for computing basic earnings per share
    
    
    81,674
    
    
    
    81,212
    
    
    
    81,578
    
    
    
    79,636Shares used for computing diluted earnings per share
    
    
    83,382
    
    
    
    82,272
    
    
    
    83,218
    
    
    
    80,576
 24




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed,
consolidated financial statements provided under Part I, Item I of this
quarterly report onForm 10-Q. Certain statements contained herein may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve a number or
risks, uncertainties and other factors that could cause actual results to
differ materially, as discussed more fully herein. The forward-looking information set forth in this quarterly report on Form
10-Q is as of August 3, 2004, and we undertake no duty to update this
information. Shareholders and prospective investors can find information filed
with the SEC after August 3, 2004 at our website at www.investor.vcaantech.com
or at the SECs website at www.sec.gov. More information about potential
factors that could affect our business and financial results is included in the
section entitled Risk Factors. Overview We are a leading animal health care services company and operate the
largest networks of veterinary diagnostic laboratories and freestanding,
full-service animal hospitals in the United States. Our network of veterinary
diagnostic laboratories provides sophisticated testing and consulting services
used by veterinarians in the detection, diagnosis, evaluation, monitoring,
treatment and prevention of diseases and other conditions affecting animals.
Our animal hospitals offer a full range of general medical and surgical
services for companion animals. We treat diseases and injuries, offer
pharmaceutical products and perform a variety of pet wellness programs,
including health examinations, diagnostic testing, routine vaccinations,
spaying, neutering and dental care. At June 30, 2004, our laboratory network consisted of 25 laboratories
serving all 50 states and our animal hospital network consisted of 317 animal
hospitals in 36 states. We primarily focus on generating internal growth to
increase revenue and profitability. In addition, as part of our operating
plan, we plan to augment internal growth by acquiring animal hospitals,
however, we may pursue acquisitions of animal hospital chains or laboratories
if favorable opportunities are presented. In accord with that strategy, we
acquired National PetCare Centers, Inc., or NPC, on June 1, 2004 (discussed
below), which at the date of acquisition, operated 67 animal hospitals and
recorded annual revenues of $81.7 million for the year ended December 31, 2003. Significant Acquisition On June 1, 2004, the Company consummated a merger agreement with NPC,
which operated 67 animal hospitals located in 11 states as of the merger date.
This merger allowed us to expand our animal hospital operations in nine states,
particularly California and Texas, and to expand into two new states, Oregon
and Oklahoma. As of June 30, 2004, we had not finalized the purchase price accounting
for the transaction, however, as of June 30, 2004 the total consideration was
$89.3 million consisting of $66.1 million in cash paid to holders of NPC stock
and debt, $2.6 million in assumed debt, $12.8 million in assumed working
capital liabilities, $6.3 million of operating leases whose terms were in
excess of market and $1.5 million paid for professional services. We intend to close underperforming NPC animal hospitals and NPCs
corporate office and to terminate NPC employees whose functions are duplicative
of those of our employees. We intend to incur costs associated with these
activities, consisting primarily of lease termination costs and employee
severance costs. These costs will result in an increase in the total purchase
price of the transaction. As of June 30, 2004, we have not finalized our
formal plan for these activities. During the quarter ended June 30, 2004 we
incurred integration costs of $570,000 with respect to our acquisition of NPC.
We expect to incur additional integration costs during the remainder of 2004 as
we continue to integrate NPCs animal hospital operations into our own. These
integration costs will be expensed as incurred. The gross profit margins for NPCs animal hospitals have been historically
lower than the gross profit margins for our own animal hospitals. As a result,
we expect the integration of NPC to temporarily lower our animal hospital
margins until certain efficiencies and leverage are
realized.     
The total consideration, including merger costs and integration costs, was
funded with cash on-hand and the additional funds borrowed under our senior
credit facility on June 1, 2004. 25




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##### Table of Contents



Growth in Facilities The following table summarizes our growth in facilities: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Laboratories:Beginning of period
    
    
    23
    
    
    
    20
    
    
    
    23
    
    
    
    19Acquisitions and new facilities
    
    
    2
    
    
    
    5
    
    
    
    2
    
    
    
    6Relocated into other labs operated by us
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )End of period
    
    
    25
    
    
    
    23
    
    
    
    25
    
    
    
    23Animal hospitals:Beginning of period
    
    
    247
    
    
    
    233
    
    
    
    241
    
    
    
    229Acquisitions
    
    
    73
    
    
    
    11
    
    
    
    82
    
    
    
    16Relocated into hospitals operated by us
    
    
    (1
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (5
    )Sold or closed
    
    
    (2
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (2
    )End of period
    
    
    317
    
    
    
    238
    
    
    
    317
    
    
    
    238
 Stock Split On July 27, 2004, we announced a two-for-one stock split to be effected in
the form of a 100% stock dividend. To effect the stock split, stock will be
distributed on August 25, 2004 to stockholders of record as of August 11, 2004.
Earnings per share presented in future filings for periods prior to
July 1, 2004 will be adjusted to reflect the stock split. Reclassifications During 2004, we began including depreciation and amortization in direct
costs and selling, general and administrative expense. Prior periods presented
have been reclassified to reflect this change. Adoption of FIN No. 46R We adopted Financial Accounting Standards Board, FASB, Interpretation No.
46R, or FIN No. 46R, Consolidation of Variable Interest Entities, in the fourth
quarter of 2003 and accordingly, restated the prior periods to conform to the
current period presentation. Pursuant to FIN No. 46R, we consolidate the
operating results of the veterinary medical groups for which we provide
management services. The result of the consolidation is an increase in both
revenue and direct costs by an equal amount, thus there is no impact on
operating income, net income, earnings per share or cash flows. However,
hospital and consolidated operating margins are lower than our historical
reported margins because of the increase in revenue without a corresponding
increase in operating income or net income. 26




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##### Table of Contents



Basis of Reporting General Our discussion and analysis of our financial condition and results of
operations are based upon our unaudited condensed, consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America, or GAAP. We report our operations
in three segments: laboratory, animal hospital and corporate. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expense, and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an on-going basis. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Our estimates form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates due to changes in future
conditions. Revenue Recognition We recognize revenue only after the following criteria are met:  
    
    there exists adequate evidence of the transaction;
    
    delivery of goods has occurred or services have been rendered; and
    
    the price is not contingent on future activity and collectibility is reasonably assured. We report our revenue net of sales discounts. Laboratory Revenue Laboratory internal revenue growth was calculated using laboratory revenue
as reported, adjusted to exclude revenue for the newly acquired laboratories
that we did not own for the entire period presented and adjusted for the impact
resulting from any differences in the number of billing days in comparable
periods. Approximately 6% of laboratory revenue is intercompany revenue that was
generated by providing laboratory services to our animal hospitals. For
purposes of reviewing the operating performance of the business segments, all
intercompany revenue is accounted for as if the transaction was with an
independent third-party at current market prices. For financial reporting
purposes, intercompany revenue is eliminated as part of our consolidation. Discounts, such as those given to clients for prompt payment, are given to
clients in periods subsequent to the period the revenue was recognized. These
discounts are estimated and deducted from revenue in the period the related
revenue was recognized. These estimates are based upon historical experience.
Revisions to these estimates, if any, are not expected to have a material
effect on our condensed, consolidated financial statements. Animal Hospital Revenue Certain states prohibit business corporations from providing, or holding
themselves out as providers of, veterinary medical care. In these states, we
provide administrative and support services to veterinary medical groups
pursuant to management agreements. The veterinary medical groups are each
solely responsible for all aspects of the practice of veterinary medicine. In return for our
services, the veterinary medical groups pay us management fees. We consolidate
the financial results of these veterinary medical groups. Same-store revenue growth includes revenue generated by customers referred
from our relocated or combined animal hospitals, including those combined upon
acquisition and adjusted for the impact resulting from any differences in the
number of business days in comparable periods. 27




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##### Table of Contents



Direct Costs Laboratory direct costs are comprised of all costs of laboratory services,
including salaries of veterinarians, specialists, technicians and other
non-administrative, laboratory-based personnel, facilities rent, occupancy
costs, depreciation and amortization, and supply costs. Animal hospital direct costs are comprised of all costs of services and
products at the animal hospitals, including salaries of veterinarians,
technicians and all other animal hospital-based personnel, facilities rent,
occupancy costs, supply costs, depreciation and amortization, certain marketing
and promotional expense and costs of goods sold associated with the retail
sales of pet food and pet supplies. Selling, General and Administrative Expense Our selling, general and administrative expense is divided between our
laboratory, animal hospital and corporate segments. Laboratory selling,
general and administrative expense consists primarily of salary-related sales,
administrative, accounting personnel, selling, marketing and promotional
expense. Animal hospital selling, general and administrative expense consists
primarily of field management, certain administrative and accounting personnel,
recruiting and certain marketing expense. Corporate selling, general and
administrative expense consists of administrative expense at our headquarters,
including the salaries of corporate officers, rent, accounting, finance, legal
and other professional expense and occupancy costs as well as corporate
depreciation. Software Development Costs We frequently develop and implement new software to be used internally, or
enhance our existing internal software. We develop the software using our own
employees and/or outside consultants. Costs associated with the development of
new software are expensed as incurred. Costs related directly to the software
design, coding, testing and installation are capitalized and amortized over the
expected life of the software, generally three years. Costs related to
upgrades or enhancements of existing systems are capitalized if the
modifications result in additional functionality. Critical Accounting Policies and Significant Estimates We are required to make significant accounting estimates that directly
impact our consolidated financial statements and related disclosures.
Significant estimates are estimates that meet two criteria: (1) the estimates
require that we make assumptions about matters that are highly uncertain at the
time the estimates are made; and (2) there exist different estimates that could
reasonably be used in the current period, or changes in the estimates used are
reasonably likely to occur from period to period, both of which would have a
material impact on the presentation of the financial condition or results of
operations. We base our assumptions and estimates on historical experience and
on various other factors believed to be reasonable under the circumstances. We
have discussed with our audit committee the critical accounting policies for
our company, the basis for their underlying assumptions and estimates and the
nature of our related disclosures herein. We believe the critical accounting
policies for our company that are most affected by significant estimates and
judgments are as follows: Workers Compensation Expense Workers compensation expense is the cost to insure our company against
losses related to injuries incurred by our employees in the normal course of
their duties. In 2001, we restructured our workers compensation insurance
policies to a self-insurance retention program. The effect of this
restructuring was a shift of the significant portion of the financial risk
associated with claims losses from the insurance company to our company, while
the insurance company bears only the financial risk of large individual losses
and large aggregate losses. We estimate the amount that we will ultimately pay for losses associated
with workers compensation claims, or claims losses for the policy period.
These estimated claims losses are recorded as expense during the policy period.
Claims losses can vary substantially and, because they can take years to
develop fully, can be difficult to estimate. These estimates are based on
complex judgments regarding the probable number of claims that will be filed
and the nature of those claims. Both of those variables are highly uncertain
and combine to form a factor referred to as the loss pick. The loss pick
factor is multiplied by our payroll cost to determine what the projected costs
for claims and our related expense will be. 28




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##### Table of Contents



We estimate the loss pick by reviewing a minimum of five years of our
historical claims loss data and analyzing the trend of the development of
claims over time. We also review and adjust the loss pick for other major
factors such as the risk control environment and claims handling. We review
our loss pick on a quarterly basis considering the current loss trend and any
changes in the environment as indicated above. The loss pick is then applied
to our actual payroll costs to estimate the claims loss portion of our workers
compensation expense for the given period. Our insurance carriers require us to pre-fund claims at a certain loss
pick (the low-end in the following table), and give us a maximum loss pick
(the high-end in the following table), above which the carrier is responsible
for paying all claims. The ranges set forth by the insurance carrier reflect
the most probable potential for our workers compensation claims losses. The
increase in the insurance carriers range reflects the trend over the last
several years toward increasing workers compensation costs. Based on these
ranges, and the factors described above, we estimated our losses using a loss
pick of 2.10% for the policy years ending September 30, 2004 and 2003. The
increase in our loss pick reflects an increase in our claims loss trend during
the previous years. The following table reflects the loss pick percentages and total estimated
claims expense recorded by us and the probable ranges for the ultimate realized
loss picks and claims expense (in thousands): Claims Expense
    
    Probable Claims Expense RangeRecorded
    
    Low-End
    
    High-EndPayroll
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $Policy year ending 9/30/04
(9 months of policy
elapsed as of 6/30/04)
    
    $
    155,056
    
    
    
    2.10
    %
    
    $
    3,256
    
    
    
    1.53
    %
    
    $
    2,372
    
    
    
    2.82
    %
    
    $
    4,368Policy year ended 9/30/03
    
    
    185,907
    
    
    
    2.10
    %
    
    
    3,904
    
    
    
    1.59
    %
    
    
    2,931
    
    
    
    2.55
    %
    
    
    4,741Policy year ended 9/30/02
    
    
    169,022
    
    
    
    2.04
    %
    
    
    3,441
    
    
    
    1.54
    %
    
    
    2,603
    
    
    
    2.49
    %
    
    
    4,208Total
    
    $
    509,985
    
    
    
    2.08
    %
    
    $
    10,601
    
    
    
    1.55
    %
    
    $
    7,906
    
    
    
    2.61
    %
    
    $
    13,317
 We recognize the claims expense as part of the overall workers
compensation expense in direct costs and selling, general and administrative
expense of our segments, based on their respective payroll cost and the loss
pick percentage discussed and shown above, to calculate the claims loss portion
of the expense. The difference between the minimum amount of claims losses
pre-funded to the insurance carrier and the amount expensed is accrued and
included in other accrued liabilities. If our estimates prove to be incorrect
as the losses develop over several years, we may have to adjust the
accrual accordingly, and also may have to either pay additional
claims losses or receive refunds from our insurance carriers. This could
result in a need for us to recognize additional expense or have expense reduced
in future periods within the range shown above. The insurance policies in place prior to September 30, 2001 did not have
large deductibles, and we have accrued for the maximum possible expense under
these policies. In connection with the NPC acquisition, we assumed additional workers
compensation claim liabilities in the amount of $1.1 million, related to
self-insurance retention policies for four policy years. We reviewed policy
terms, claims history and current claims status for each policy to determine
that the assumed liability is adequate. Valuation of Goodwill Our goodwill represents the excess of the cost of an acquired entity over
the net of the amounts assigned to identifiable assets acquired and liabilities
assumed. The total amount of our net goodwill at June 30, 2004 was $477.7
million, consisting of $93.3 million for our laboratory operating segment and
$384.4 million for our animal hospital operating segment. Annually, and upon material changes in our operating environment, we test
our goodwill for impairment by comparing the fair market value of our reporting
units, which equate to our laboratory and animal hospital operating 29




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##### Table of Contents



segments,
to their respective net book value. At December 31, 2003, we estimated the
fair market value of each of our operating segments and determined that the estimated fair value of
each exceeded their respective net book value, resulting in a conclusion that
our goodwill was fairly stated. We will review our goodwill for impairment again at December 31, 2004 or
upon additional material changes in our operating environment, however, we do
not anticipate that there will be additional significant changes in our
operations or operating environments in the near future. Allowance for Uncollectible Accounts The allowance for uncollectible accounts is estimated based primarily upon
age of accounts receivable and loss history. Accounts receivable balances are
routinely reviewed in conjunction with collection efforts, historical
collection rates and other economic conditions that might ultimately affect the
collectibility of accounts when considering the adequacy of the amounts
recorded as allowance for uncollectible accounts. Significant changes in
client mix or economic conditions could affect our collection of accounts
receivable, cash flows and results of operations. 30




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##### Table of Contents



Results of Operations The following table sets forth components of our income statements
expressed as a percentage of revenue: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Laboratory
    
    
    30.6
    %
    
    
    32.7
    %
    
    
    32.2
    %
    
    
    32.9
    %Animal hospital
    
    
    71.4
    
    
    
    69.2
    
    
    
    69.8
    
    
    
    69.0Intercompany
    
    
    (2.0
    )
    
    
    (1.9
    )
    
    
    (2.0
    )
    
    
    (1.9
    )Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Direct costs
    
    
    70.6
    
    
    
    70.1
    
    
    
    71.5
    
    
    
    71.8Gross profit
    
    
    29.4
    
    
    
    29.9
    
    
    
    28.5
    
    
    
    28.2Selling, general and administrative
    
    
    6.9
    
    
    
    6.6
    
    
    
    6.5
    
    
    
    7.2Loss (gain) on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Operating income
    
    
    22.5
    
    
    
    23.3
    
    
    
    22.0
    
    
    
    21.1Interest expense, net
    
    
    3.6
    
    
    
    4.5
    
    
    
    3.8
    
    
    
    5.0Debt retirement costs
    
    
    0.5
    
    
    
    
    
    
    
    0.3
    
    
    
    2.8Other (income) expense
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.1Minority interest in income of subsidiairies
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.2Income before provision for income taxes
    
    
    18.2
    
    
    
    18.4
    
    
    
    17.6
    
    
    
    13.0Provision for income taxes
    
    
    7.5
    
    
    
    7.6
    
    
    
    7.1
    
    
    
    5.3Net income
    
    
    10.7
    %
    
    
    10.8
    %
    
    
    10.5
    %
    
    
    7.7
    %
 31




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##### Table of Contents



The following is a summary of the components of operating income (loss)
and operating margin by segment (in thousands): Inter-Animal
    
    
    
    
    
    companyLaboratory
    
    Hospital
    
    Corporate
    
    Eliminations
    
    TotalThree Months Ended June 30, 2004Revenue
    
    $
    51,951
    
    
    $
    121,384
    
    
    $
    
    
    
    $
    (3,388
    )
    
    $
    169,947Direct costs
    
    
    27,983
    
    
    
    95,348
    
    
    
    
    
    
    
    (3,388
    )
    
    
    119,943Gross profit
    
    
    23,968
    
    
    
    26,036
    
    
    
    
    
    
    
    
    
    
    
    50,004Selling, general and administrative
    
    
    3,190
    
    
    
    3,056
    
    
    
    5,519
    
    
    
    
    
    
    
    11,765Loss on sale of assets
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4Operating income (loss)
    
    $
    20,776
    
    
    $
    22,978
    
    
    $
    (5,519
    )
    
    $
    
    
    
    $
    38,235Operating margin
    
    
    40.0
    %
    
    
    18.9
    %
    
    
    (3.2
    )%
    
    
    
    
    
    
    22.5
    %Depreciation and amortization
    
    $
    897
    
    
    $
    2,536
    
    
    $
    386
    
    
    $
    
    
    
    $
    3,819Three Months Ended June 30, 2003Revenue
    
    $
    46,691
    
    
    $
    98,822
    
    
    $
    
    
    
    $
    (2,752
    )
    
    $
    142,761Direct costs
    
    
    25,615
    
    
    
    77,142
    
    
    
    
    
    
    
    (2,752
    )
    
    
    100,005Gross profit
    
    
    21,076
    
    
    
    21,680
    
    
    
    
    
    
    
    
    
    
    
    42,756Selling, general and administrative
    
    
    2,797
    
    
    
    2,519
    
    
    
    4,168
    
    
    
    
    
    
    
    9,484Loss (gain) on sale of assets
    
    
    21
    
    
    
    58
    
    
    
    (1
    )
    
    
    
    
    
    
    78Operating income (loss)
    
    $
    18,258
    
    
    $
    19,103
    
    
    $
    (4,167
    )
    
    $
    
    
    
    $
    33,194Operating margin
    
    
    39.1
    %
    
    
    19.3
    %
    
    
    (2.9
    )%
    
    
    
    
    
    
    23.3
    %Depreciation and amortization
    
    $
    799
    
    
    $
    2,304
    
    
    $
    394
    
    
    $
    
    
    
    $
    3,497Six Months Ended June 30, 2004Revenue
    
    $
    101,133
    
    
    $
    219,340
    
    
    $
    
    
    
    $
    (6,176
    )
    
    $
    314,297Direct costs
    
    
    55,698
    
    
    
    175,211
    
    
    
    
    
    
    
    (6,176
    )
    
    
    224,733Gross profit
    
    
    45,435
    
    
    
    44,129
    
    
    
    
    
    
    
    
    
    
    
    89,564Selling, general and administrative
    
    
    6,363
    
    
    
    5,804
    
    
    
    8,299
    
    
    
    
    
    
    
    20,466Loss on sale of assets
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    66Operating income (loss)
    
    $
    39,071
    
    
    $
    38,260
    
    
    $
    (8,299
    )
    
    $
    
    
    
    $
    69,032Operating margin
    
    
    38.6
    %
    
    
    17.4
    %
    
    
    (2.6
    )%
    
    
    
    
    
    
    22.0
    %Depreciation and amortization
    
    $
    1,718
    
    
    $
    4,937
    
    
    $
    780
    
    
    $
    
    
    
    $
    7,435Six Months Ended June 30, 2003Revenue
    
    $
    88,389
    
    
    $
    185,129
    
    
    $
    
    
    
    $
    (5,178
    )
    
    $
    268,340Direct costs
    
    
    49,825
    
    
    
    147,919
    
    
    
    
    
    
    
    (5,178
    )
    
    
    192,566Gross profit
    
    
    38,564
    
    
    
    37,210
    
    
    
    
    
    
    
    
    
    
    
    75,774Selling, general and administrative
    
    
    5,504
    
    
    
    5,022
    
    
    
    8,667
    
    
    
    
    
    
    
    19,193Loss (gain) on sale of assets
    
    
    19
    
    
    
    (178
    )
    
    
    (1
    )
    
    
    
    
    
    
    (160
    )Operating income (loss)
    
    $
    33,041
    
    
    $
    32,366
    
    
    $
    (8,666
    )
    
    $
    
    
    
    $
    56,741Operating margin
    
    
    37.4
    %
    
    
    17.5
    %
    
    
    (3.2
    )%
    
    
    
    
    
    
    21.1
    %Depreciation and amortization
    
    $
    1,553
    
    
    $
    4,781
    
    
    $
    740
    
    
    $
    
    
    
    $
    7,074
 32




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##### Table of Contents



Revenue The following table summarizes our revenue (in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeLaboratory
    
    $
    51,951
    
    
    $
    46,691
    
    
    
    11.3
    %
    
    $
    101,133
    
    
    $
    88,389
    
    
    
    14.4
    %Animal hospital
    
    
    121,384
    
    
    
    98,822
    
    
    
    22.8
    %
    
    
    219,340
    
    
    
    185,129
    
    
    
    18.5
    %Intercompany
    
    
    (3,388
    )
    
    
    (2,752
    )
    
    
    
    
    
    
    (6,176
    )
    
    
    (5,178
    )Total revenue
    
    $
    169,947
    
    
    $
    142,761
    
    
    
    19.0
    %
    
    $
    314,297
    
    
    $
    268,340
    
    
    
    17.1
    %
 Laboratory Revenue Laboratory revenue increased $5.3 million for the three months ended June
30, 2004 and increased $12.7 million for the six months ended June 30, 2004
compared to the same periods in the prior year. The components of the increase
in laboratory revenue are detailed below (in thousands, except average price
per requisition): Three Months Ended June 30,
    
    Six Months Ended June 30,Laboratory Revenue:
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeInternal growth:Number of requisitions
    
    
    2,295
    
    
    
    2,222
    
    
    
    3.3
    %
    
    
    4,291
    
    
    
    4,068
    
    
    
    5.5
    %Average revenue per requisition (1)
    
    $
    22.01
    
    
    $
    21.01
    
    
    
    4.8
    %
    
    $
    22.59
    
    
    $
    21.73
    
    
    
    4.0
    %Total internal revenue (2)
    
    $
    50,524
    
    
    $
    46,691
    
    
    
    8.2
    %
    
    $
    96,940
    
    
    $
    88,389
    
    
    
    9.7
    %Billing day adjustment (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    606
    
    
    
    Acquired revenue
    
    
    1,427
    
    
    
    
    
    
    
    
    
    
    
    3,587
    
    
    
    Total
    
    $
    51,951
    
    
    $
    46,691
    
    
    
    11.3
    %
    
    $
    101,133
    
    
    $
    88,389
    
    
    
    14.4
    %
   (1)
    
    Computed by dividing total internal revenue by the number of
requisitions.(2)
    
    Numbers may not calculate exactly due to rounding.(3)
    
    The 2004 billing day adjustment reflects the impact of one
additional billing day for the six months ended June 30, 2004 as
compared to the same period in the prior year. The increases in requisitions from internal growth for the three and six
months ended June 30, 2004 are the result of a continued trend in veterinary
medicine to focus on the importance of laboratory diagnostic testing in the
diagnosis and treatment of diseases. This trend is driven by an increase in
the number of specialists in the veterinary industry relying on diagnostic
testing, the increased focus on diagnostic testing in veterinary schools and
general increased awareness through ongoing marketing and continuing education
programs provided by ourselves, pharmaceutical companies and other service
providers in the industry. In addition, we continue to see the impact from the
recent migration of diagnostic testing from the human health care industry and
the advent of medicine in the veterinary industry that requires diagnostic
assessment and monitoring. The increases in the average revenue per requisition for the three and six
months ended June 30, 2004 is primarily attributable to price increases, which
approximated 2% to 4% in February 2004 and 3% to 5% in February 2003. These
price increases were partially offset by changes in the mix of tests performed
per requisition. As the result of our laboratory acquisitions subsequent to April 1, 2003,
we generated an additional $1.4 million of revenue (referred to in the above
table as acquired revenue) during the three months ended June 30, 2004 in
comparison to the same period in the prior year. As the result of our
laboratory acquisitions subsequent to January 1, 2003, we generated an
additional $3.6 million of revenue (referred to in the above table as acquired
revenue) during the six months ended June 30, 2004 in comparison to the same
period in the prior year. 33




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##### Table of Contents



Animal Hospital Revenue Animal hospital revenue increased $22.6 million for the three months ended
June 30, 2004 and increased $34.2 million for the six months ended June 30,
2004 compared to the same periods in the prior year. The components of the
increases are summarized in the following table (in thousands, except average
price per order): Three Months Ended June 30,
    
    Six Months Ended June 30,Animal Hospital Revenue:
    
    2004
    
    2003
    
    % Change
    
    2004
    
    2003
    
    % ChangeSame-store:Orders
    
    
    886
    
    
    
    894
    
    
    
    (0.9
    )%
    
    
    1,695
    
    
    
    1,706
    
    
    
    (0.6
    )%Average revenue per order (1)
    
    $
    114.69
    
    
    $
    108.79
    
    
    
    5.4
    %
    
    $
    110.99
    
    
    $
    105.06
    
    
    
    5.6
    %Same-store revenue (2)
    
    $
    101,613
    
    
    $
    97,316
    
    
    
    4.4
    %
    
    $
    188,143
    
    
    $
    179,248
    
    
    
    5.0
    %Business day adjustment (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,092
    
    
    
    Net acquired revenue
    
    
    19,771
    
    
    
    1,506
    
    
    
    
    
    
    
    30,105
    
    
    
    5,881Total
    
    $
    121,384
    
    
    $
    98,822
    
    
    
    22.8
    %
    
    $
    219,340
    
    
    $
    185,129
    
    
    
    18.5
    %
   (1)
    
    Computed by dividing same-store revenue by same-store orders.(2)
    
    Numbers may not calculate exactly due to rounding.(3)
    
    The 2004 business day adjustment reflects the impact of one
additional business day for the six months ended June 30, 2004 as
compared to the same period in the prior year. Over the last few years, certain pet-related products traditionally sold
at animal hospitals have become more widely available in retail stores and
other distribution channels, and, as a result, we have fewer customers coming
to our animal hospitals solely to purchase such items. In addition, there has
been a decline in the number of vaccinations as some recent professional
literature and research has suggested that vaccinations can be given to pets
less frequently. Orders for these pet-related products and vaccinations
generally generate revenue that is less than the average revenue for all
orders. In addition, our business strategy has placed greater emphasis on
high-quality veterinary care and wellness programs, which are higher priced
orders. These trends have resulted in a decrease in the number of orders and
an increase in the average revenue per order. Price increases also contributed to the increase in the average revenue
per order, which approximated 2.5% to 5% on services at most hospitals in both
February 2004 and 2003. Prices are reviewed on an annual basis for each
hospital and adjustments are made based on market considerations, demographics
and our costs. Net acquired revenue represents the revenue from those hospitals acquired,
sold or closed on after the beginning of the comparative period, which was
April 1, 2003 for the three months ended June 30, 2004 and January 1, 2003 for
the six months ended June 30, 2004. Fluctuations in net acquired revenue occur
due to the volume, size, and timing of acquisitions and disposals during the
periods compared. Gross Profit The
following table summarizes our gross profit and our gross profit as a percentage of
applicable revenue, or gross profit margin (in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    
    
    
    
    2004
    
    2003Gross
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossProfit
    
    
    
    
    
    Profit
    
    %
    
    
    
    
    
    Profit
    
    
    
    
    
    Profit
    
    %$
    
    Margin
    
    $
    
    Margin
    
    Change
    
    $
    
    Margin
    
    $
    
    Margin
    
    ChangeLaboratory
    
    $
    23,968
    
    
    
    46.1
    %
    
    $
    21,076
    
    
    
    45.1
    %
    
    
    13.7
    %
    
    $
    45,435
    
    
    
    44.9
    %
    
    $
    38,564
    
    
    
    43.6
    %
    
    
    17.8
    %Animal hospital
    
    
    26,036
    
    
    
    21.4
    %
    
    
    21,680
    
    
    
    21.9
    %
    
    
    20.1
    %
    
    
    44,129
    
    
    
    20.1
    %
    
    
    37,210
    
    
    
    20.1
    %
    
    
    18.6
    %Total gross profit
    
    $
    50,004
    
    
    
    29.4
    %
    
    $
    42,756
    
    
    
    29.9
    %
    
    
    17.0
    %
    
    $
    89,564
    
    
    
    28.5
    %
    
    $
    75,774
    
    
    
    28.2
    %
    
    
    18.2
    %
 34




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##### Table of Contents



Laboratory Gross Profit The increase in laboratory gross profit margins during the three and six
months ended June 30, 2004 was primarily attributable to increases in
laboratory revenue combined with operating leverage associated with our
laboratory business. Our operating leverage comes from the incremental margins
we realize on additional tests ordered by the same client, as well as when more
comprehensive tests are ordered. We are able to benefit from these incremental
margins due to the relative fixed cost nature of our laboratory business. Animal Hospital Gross Profit Since January 1, 2004, we have had significant growth in our animal
hospital division as a result of the acquisition of 82 hospitals. Sixty-seven of
these were acquired in the NPC merger on June 1, 2004. Our animal
hospital gross profit margin decreased for the three months ended
June 30, 2004 compared to the same period in the prior year,
primarily as a result of the impact of the relatively large number of
hospitals we recently acquired. As expected, the hospitals we recently
acquired, as a group, had a gross profit margin lower than those animal hospitals that
we have operated for a period of time sufficient to allow us to achieve
operating efficiencies. Animal
hospital gross profit margin during the six months ended June 30, 2004 was
consistent with the same period in the prior year. Selling, General and Administrative Expense The following table summarizes our selling, general and administrative
expense, or SG&A, and our expense as a percentage of applicable revenue (in
thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    
    
    
    
    2004
    
    2003% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeLaboratory
    
    $
    3,190
    
    
    
    6.1
    %
    
    $
    2,797
    
    
    
    6.0
    %
    
    
    14.1
    %
    
    $
    6,363
    
    
    
    6.3
    %
    
    $
    5,504
    
    
    
    6.2
    %
    
    
    15.6
    %Animal hospital
    
    
    3,056
    
    
    
    2.5
    %
    
    
    2,519
    
    
    
    2.5
    %
    
    
    21.3
    %
    
    
    5,804
    
    
    
    2.6
    %
    
    
    5,022
    
    
    
    2.7
    %
    
    
    15.6
    %Corporate
    
    
    5,519
    
    
    
    3.2
    %
    
    
    4,168
    
    
    
    2.9
    %
    
    
    32.4
    %
    
    
    8,299
    
    
    
    2.6
    %
    
    
    8,667
    
    
    
    3.2
    %
    
    
    (4.2
    )%Total SG&A
    
    $
    11,765
    
    
    
    6.9
    %
    
    $
    9,484
    
    
    
    6.6
    %
    
    
    24.1
    %
    
    $
    20,466
    
    
    
    6.5
    %
    
    $
    19,193
    
    
    
    7.2
    %
    
    
    6.6
    %
 Laboratory SG&A The increase in laboratory SG&A as a percentage of laboratory revenue
during the three and six months ended June 30, 2004 as compared to the same
periods in the prior year was the result of hiring additional sales personnel. Animal Hospital SG&A Animal hospital SG&A as a percentage of animal hospital revenue during the
three months ended June 30, 2004 was consistent with the same period in the
prior year. The decrease in animal hospital SG&A as a percentage of animal
hospital revenue during the six months ended June 30, 2004 was primarily
attributable to increases in animal hospital revenue combined with operating
leverage associated with our animal hospital business. 35




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##### Table of Contents



Corporate SG&A In March 2004, a claim with our insurance company was settled that
provided for the partial reimbursement of the Zoasis Corporation litigation
settlement incurred in 2002 and related legal fees. In addition, during the
three and six months ended June 30, 2004, we incurred integration costs of
$570,000 in connection with the NPC acquisition. The following table
reconciles corporate SG&A as reported to corporate SG&A excluding the insurance
claim settlement and integration costs (in thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    
    
    
    
    2004
    
    2003% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeCorporate SG&A as reported
    
    $
    5,519
    
    
    
    3.2
    %
    
    $
    4,168
    
    
    
    2.9
    %
    
    
    32.4
    %
    
    $
    8,299
    
    
    
    2.6
    %
    
    $
    8,667
    
    
    
    3.2
    %
    
    
    (4.2
    )%Impact of insurance claim settlement:Litigation settlement
reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,124
    
    
    
    
    
    
    
    Legal fees reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    801
    
    
    
    
    
    
    
    Integration costs
    
    
    (570
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (570
    )
    
    
    
    
    
    
    Corporate SG&A excluding the
insurance claim settlement
and integration costs
    
    $
    4,949
    
    
    
    2.9
    %
    
    $
    4,168
    
    
    
    2.9
    %
    
    
    18.7
    %
    
    $
    9,654
    
    
    
    3.1
    %
    
    $
    8,667
    
    
    
    3.2
    %
    
    
    11.4
    %
 Excluding the impact of the insurance claim settlement and integration
costs, Corporate SG&A as a percentage of total revenue during the three months
ended June 30, 2004 was consistent with the same period in the prior year.
Excluding the impact of the insurance claim settlement and integration costs,
corporate SG&A decreased as a percentage of total revenue during the six months
ended June 30, 2004 due to an increase in total revenue combined with operating
leverage. Interest Expense, Net The following table summarizes our interest expense, net of interest
income (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest expense:Revolving credit facility
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    27Senior term
C notes
    
    
    
    
    
    
    1,837
    
    
    
    
    
    
    
    3,675Senior term D notes
    
    
    893
    
    
    
    
    
    
    
    2,235
    
    
    
    Senior term E notes
    
    
    634
    
    
    
    
    
    
    
    634
    
    
    
    9.875% senior subordinated notes
    
    
    4,197
    
    
    
    4,197
    
    
    
    8,394
    
    
    
    8,39415.5% senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Interest-rate hedging agreements
    
    
    166
    
    
    
    102
    
    
    
    329
    
    
    
    187Amortization of deferred financing costs and debt discount
    
    
    183
    
    
    
    223
    
    
    
    367
    
    
    
    456Secured seller notes & other
    
    
    192
    
    
    
    185
    
    
    
    381
    
    
    
    3686,265
    
    
    
    6,544
    
    
    
    12,340
    
    
    
    13,629Interest income
    
    
    167
    
    
    
    126
    
    
    
    257
    
    
    
    219Total interest expense, net of interest income
    
    $
    6,098
    
    
    $
    6,418
    
    
    $
    12,083
    
    
    $
    13,410
 The decrease in net interest expense was primarily attributable to a
decrease in the average debt balances outstanding and a decrease in the
weighted average interest rate. 36




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##### Table of Contents



Debt Retirement Costs On June 1, 2004, we amended and restated our senior credit facility to
replace the existing senior term D notes in the principal amount of $145.3
million with an interest rate margin of 2.50% with new senior term E notes in
the principal amount of $225.0 million with an interest rate margin of 2.25%.
The additional borrowings were used to fund the acquisition of NPC, which we
discuss above in Significant Acquisition. In conjunction with amending and
restating our senior credit facility, we recorded debt retirement costs of
$810,000. On February 4, 2003, we voluntarily retired the entire principal amount of
our 15.5% senior notes with net proceeds received from the sale of our common
stock. In conjunction with that transaction, we recorded debt retirement costs
of $7.4 million. Provision for Income Taxes We recognized a litigation settlement reimbursement of $1.1 million during
the first quarter of 2004, which we discuss above in Corporate SG&A. This
reimbursement had no related tax expense and reduced our effective tax rate to
40.3% for the six months ended June 30, 2004. This reimbursement will not
impact our effective tax rate for individual quarters ending subsequent to
March 31, 2004. Our effective tax rate for the three months
ended June 30, 2004 was 41.1%. Liquidity and Capital Resources Cash and Cash Equivalents Cash and cash equivalents at June 30, 2004 totaled $32.8 million, up from
$17.2 million at December 31, 2003. The increase is a result of net cash
provided by operations and financing exceeding net cash used in investing
activities. Cash Flows from Operating Activities Net cash provided by operating activities increased $3.8 million for the
six months ended June 30, 2004 compared to the same period in the prior year.
This increase is primarily due to: (a) improved operating performance; (b)
acquisitions; and (c) an $1.2 million decrease in interest paid as a result of
a reduction in the weighted average debt balances outstanding and a reduction
in the weighted average interest rate. This increase was partially offset by:
(a) an $8.8 million increase in taxes paid; and (b) a use of $1.9 million from
changes in working capital. Cash Flows used in Investing Activities In each of the six months ended June 30, 2004 and 2003, net cash used in
investing activities was primarily comprised of cash used for the acquisition
of animal hospitals and laboratories, including the acquisition of NPC, and
expenditures for property and equipment. We anticipate spending an additional $3.0 million to $5.0 million for
acquisitions and $8.0 million to $10.0 million for property and equipment
during the remainder of 2004. However, we may spend more for acquisitions than
we are currently planning depending upon opportunities that present themselves
and our cash requirements may change accordingly. In addition, there may be
acquisition opportunities in the laboratory field that may impose additional
cash requirements. We intend to primarily use cash in our acquisitions but,
depending upon the timing and amount of our acquisitions, we may use stock or
debt to the extent we deem it appropriate. Our covenants under our senior
credit facility, as amended and restated on June 1, 2004, permitted the
acquisition of NPC and allow us to spend $50.0 million per year on other
acquisitions, and we would require a waiver or amendment to the covenant to
exceed this amount. Cash Flows from Financing Activities On June 1, 2004, we amended and restated our senior credit facility to
replace the existing senior term D notes in the principal amount of $145.3
million with an interest rate margin of 2.50% with new senior term E notes in
the principal amount of $225.0 million with an interest rate margin of 2.25%.
The additional borrowings were used to fund the acquisition of NPC, which we
discuss above in Significant Acquisition. 37




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##### Table of Contents



In February 2003, we completed an offering of common stock at an issue
price of $15.25 per share, in which we sold 3.8 million shares of our common
stock in exchange for net proceeds of $54.3 million. Approximately $42.7
million of the net proceeds received were used to redeem the entire principal
amount of our 15.5% senior notes due 2010 at a redemption price of 110% of the
principal amount, plus accrued and unpaid interest. Borrowings and repayments under our revolving credit facility are the
result of normal working capital shifts created by the seasonality of our
business and the timing of acquisition activity. In the fourth quarter of 2002
we borrowed $7.5 million, and in early 2003 we repaid the full amount. At June
30, 2004, we had no borrowings under our revolving credit facility. Future Cash Requirements The following table sets forth the scheduled principal, interest and other
contractual cash obligations due by us for each of the years indicated (in
thousands): Total
    
    2004 (1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterLong-term debt
    
    $
    397,917
    
    
    $
    2,631
    
    
    $
    3,022
    
    
    $
    29,477
    
    
    $
    110,217
    
    
    $
    82,562
    
    
    $
    170,008Capital lease obligations
    
    
    650
    
    
    
    144
    
    
    
    233
    
    
    
    146
    
    
    
    102
    
    
    
    25
    
    
    
    Operating leases
    
    
    374,893
    
    
    
    11,232
    
    
    
    22,340
    
    
    
    22,227
    
    
    
    22,168
    
    
    
    21,945
    
    
    
    274,981Fixed cash interest expense
    
    
    93,954
    
    
    
    8,798
    
    
    
    17,351
    
    
    
    17,184
    
    
    
    16,849
    
    
    
    16,985
    
    
    
    16,787Variable cash interest expense (2)
    
    
    44,609
    
    
    
    5,043
    
    
    
    11,680
    
    
    
    13,764
    
    
    
    10,934
    
    
    
    3,188
    
    
    
    Deferred income tax liabilities
    
    
    28,914
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,914Mandatorily redeemable partnership
interests
    
    
    2,155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,155Swap agreements (2)
    
    
    (364
    )
    
    
    (133
    )
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    942,728
    
    
    $
    27,715
    
    
    $
    54,395
    
    
    $
    82,798
    
    
    $
    160,270
    
    
    $
    124,705
    
    
    $
    492,845
   (1)
    
    Consists of the period July 1 through December 31, 2004.(2)
    
    We have both fixed-rate and variable-rate debt. The interest
payments on our variable-rate debt are based on a variable-rate
component plus a fixed 2.25%. Including the fixed 2.25%, we estimate
that the interest rate on our variable-rate debt will be 4.5%, 5.25%,
6.25%, 7.25%, and 7.75% for years 2004 through 2008, respectively.
These estimates are based on interest rate projections used to price
our interest rate swap agreements. Our consolidated financial
statements included in our 2003 Annual Report on Form 10-K discuss
these variable-rate notes in more detail. We anticipate that our cash on hand, cash from operations and, if needed,
our revolving credit facility will provide sufficient cash resources to fund
our contractual obligations and other cash needs for more than the next 12
months. Debt Covenants The senior credit facility contains certain financial covenants pertaining
to interest coverage, fixed charge coverage and leverage ratios. In addition,
the senior credit facility has restrictions pertaining to capital expenditures,
acquisitions and the payment of cash dividends. We currently believe the most
restrictive covenant is the fixed charge coverage ratio. The senior credit
facility defines the fixed charge coverage ratio as that ratio which is
calculated on a last twelve-month basis by dividing pro forma earnings before
interest, taxes, depreciation and amortization, as defined by the agreement, by
fixed charges. Fixed charges are defined as cash interest expense, scheduled
principal payments on debt obligations, capital expenditures, and provision for
income taxes. At June 30, 2004, we had a fixed charge coverage ratio of 1.63
to 1.00, which was in compliance with the required ratio of no less than 1.10
to 1.00. 38




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##### Table of Contents



Interest-Rate Hedging Agreements We entered into certain no-fee swap agreements whereby we pay to
counterparties amounts based on fixed interest rates and set notional principal
amounts in exchange for the receipt of payments from counterparties based on
London interbank offer rates, LIBOR, and the same set notional principal
amounts. A summary of these agreements is as follows: Swap #1
    
    Swap #2
    
    Swap #3Fixed interest rate
    
    2.22%
    
    1.72%
    
    
    1.51
    %Notional amount
    
    $40.0 million
    
    $20.0 million
    
    $20.0 millionEffective date
    
    11/29/2002
    
    5/30/2003
    
    
    5/30/2003Expiration date
    
    11/29/2004
    
    5/31/2005
    
    
    5/31/2005Counter party
    
    Wells Fargo Bank
    
    Wells Fargo Bank
    
    Goldman Sachs
 We entered into the swap agreements to hedge against the risk of
increasing interest rates. The contracts effectively convert a certain amount
of our variable-rate debt under our senior credit facility to fixed-rate debt
for purposes of controlling cash paid for interest. That amount is equal to
the notional amount of the swap agreements and the fixed rate conversion period
is equal to the terms of the contract. The impact of the swap agreements has
been factored into our future contractual cash requirements table above. In the future, we may enter into additional interest rate strategies to
take advantage of favorable current rate environments. We have not yet
determined what those strategies will be or their possible impact. Description of Indebtedness Senior Credit Facility At June 30, 2004, we had $224.4 million principal amount outstanding under
our senior term E notes and no borrowings outstanding under our revolving
credit facility. Borrowings under the senior credit facility bear interest, at our option,
on either the base rate, which is the higher of the administrative agents
prime rate or the Federal Funds Rate plus 0.5% plus a base rate margin, or the
adjusted eurodollar rate, which is the rate per annum obtained by dividing (1)
the rate of interest offered to the administrative agent on the London
interbank market by (2) a percentage equal to 100% minus the stated maximum
rate of all reserve requirements applicable to any member bank of the Federal
Reserve System in respect of eurocurrency liabilities plus a eurodollar rate
margin. The base rate margins for the revolving credit facility range from
1.00% to 2.25% per annum and the margin for the senior term E notes is 1.25%
per annum. The eurodollar rate margins for the revolving credit facility range
from 2.00% to 3.25% per annum and the margin for the senior term E notes is
2.25% per annum. The senior term E notes mature in September 2008 and the revolving credit
facility matures in September 2006. 9.875% Senior Subordinated Notes On November 27, 2001, Vicar Operating, Inc., our wholly-owned subsidiary,
issued $170.0 million in principal amount of senior subordinated notes due
December 1, 2009, which were exchanged on June 13, 2002 for substantially
similar securities that are registered under the Securities Act. Interest on
these senior subordinated notes is 9.875% per annum, payable semi-annually in
arrears in cash. At June 30, 2004, the outstanding principal balance of these
senior subordinated notes was $170.0 million. We and each existing
domestic wholly-owned subsidiary of Vicar have jointly and severally, fully and
unconditionally guaranteed these notes. Future domestic wholly-owned
subsidiaries of Vicar will also be required to guarantee these notes. These guarantees are unsecured and
subordinated in right of payment to all existing and future indebtedness
outstanding under the credit and guaranty agreement and any other indebtedness
permitted to be incurred by Vicar under the terms of the indenture agreement
governing these notes. Before December 1, 2004, we can redeem up to $59.5 million of principal on
our 9.875% senior subordinated notes at a redemption price of 109.9% of the
principal amount with proceeds from an equity offering. The 39




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##### Table of Contents



remaining portion may be paid off at our discretion beginning December 1,
2005 at a redemption price of 104.9% of the principal amount. Other Debt At June 30, 2004, we had seller notes secured by assets of animal
hospitals, unsecured debt and capital leases that totaled $4.2 million. Risk Factors This Form 10-Q, including Risk Factorsset forth below, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they materialize or prove incorrect, could cause our
results and the results of our consolidated subsidiaries to differ materially
from those expressed or implied by these forward-looking statements. All
statements other than statements of historical fact are statements that could
be deemed forward-looking statements, including any projections of earnings,
revenue or other financial items; any statements of the plans, strategies and
objectives of management for future operations; any statement concerning
proposed new services or developments; any statements regarding the future
economic conditions or performance; any statements of belief; and any
statements of assumptions underlying any of the foregoing. The risks,
uncertainties and assumptions referred to above include difficulty of managing
our growth and integrating our new acquisitions and other risks that are
described from time to time in our SEC reports, including but not limited to
the items discussed below. If we are unable to successfully integrate NPC animal hospital operations into
our animal hospital operations in a timely and efficient manner, we may incur
substantial costs, and our revenue, margins and net income may be adversely
affected. On June 1, 2004, we acquired NPC. Prior to our acquisition, the NPC
animal hospitals, as a group, operated at gross profit margins lower than our
animal hospitals, and, as a result, we expect our animal hospital
margins to be lower than historical amounts for the next several
quarters. We entered into the merger agreement with NPC with the
expectation that the merger will result in improved operating results and
beneficial synergies, such as the realization of improved operating margins at
animal hospitals through a strategy of centralizing various corporate and
administrative functions and leveraging fixed costs. Our ability to realize on
the benefits of this acquisition is dependent, in part, on achieving these
efficiencies and increasing the gross profit margins of the acquired NPC
hospitals. Achieving these anticipated business benefits will depend on whether our
operations and NPCs operations are successfully integrated in an efficient,
effective and timely manner. Any unanticipated costs or results, or delays or
failures in the integration process may negatively impact our combined revenue,
margins and net income. The combination of our company and NPC will require,
among other things, the retention of key management and professional personnel,
including specialists; the integration and expansion of the companies
management staff, veterinarians and other professional staff; and the
identification and elimination of unnecessary overhead and non-performing
hospitals. The integration of the operations of the combined companies requires the
dedication of management resources, which may temporarily detract attention
from the day-to-day business of the combined companies. Our field management
may spend a predominant amount of time integrating these new hospitals and less
time managing our existing hospitals in those regions. In addition, the
employees of the combined companies may be less productive as a result of
uncertainty during the integration process, which also may disrupt our
business. Even if we successfully integrate NPC into our operations, the
integration process itself will be accomplished over time and any attention
paid to the integration process at the expense of the day-to-day operations and
any uncertainty which results from the integration process itself may have an
adverse effect on the business and results of operations of the combined
companies. We also may experience unanticipated delays in converting the
systems of NPC animal hospitals into our systems, which may result in
unanticipated increases to payroll expense to collect our results and delays in
reporting our results. In addition, the present and potential customers of the animal hospitals
acquired in the NPC merger may not continue their current utilization patterns
or, alternatively, the merger and integration process may have an adverse
impact on the relationships between those customers and the veterinarians and
other animal health care professionals currently employed at the animal hospitals acquired in the NPC merger.
Any significant reduction in utilization 40




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patterns or any significant adverse impact on relationships between the
customers and the veterinarians or other animal health care professionals
currently employed at the animal hospitals acquired in the NPC merger may have
an adverse effect on the business and results of operations of the combined
companies. If we are unable to effectively execute our growth strategy, we may not
achieve our desired economies of scale and our margins and profitability may
decline. Our success depends in part on our ability to build on our position as a
leading animal health care services company through a balanced program of
internal growth initiatives and selective acquisitions of established animal
hospitals and laboratories. If we cannot implement or effectively execute
these initiatives and acquisitions, our results of operations will be adversely
affected. Even if we effectively implement our growth strategy, we may not
achieve the economies of scale that we have experienced in the past or that we
anticipate having in the future. Our internal growth rate may decline and
could become negative. Our laboratory internal revenue growth has fluctuated
between 11.9% and 14.1% for each fiscal year from 2001 through 2003. For the
three and six months ended June 30, 2004, our laboratory internal revenue
growth was 8.2% and 9.7%, respectively, which are both below our historical rates for the
prior three years. Our animal hospital same-store revenue growth rate has
fluctuated between 3.6% and 5.0% for each fiscal year from 2001 through 2003.
For the three and six months ended June 30, 2004, our animal hospital internal
revenue growth was 4.4% and 4.9%, respectively. Our internal growth may continue to
fluctuate and may be below our historical rates. Any reductions in the rate of
our internal growth may cause our revenues and margins to decrease. Our
historical growth rates and margins are not necessarily indicative of future
results. Demand for certain products could decline as their product life cycle
matures and the products become available in other channels of distribution
such as retail-oriented locations and through internet service providers. This
cycle could affect the frequency of veterinary visits and may result in a
reduction in revenue. Demand for vaccinations may also be impacted in the
future as protocols for vaccinations change. Vaccinations have been
recommended by some in the profession to be given less frequently. This may
result in fewer visits and potentially less revenue. Vaccine protocols for our
company are currently established by our veterinarians. Some of our
veterinarians have changed their protocols and others may change their protocol
in light of recent literature. Due to the fixed cost nature of our business, fluctuations in our revenue
could adversely affect our operating income. Approximately 56% of our expense for the year ended December 31, 2003,
particularly rent and personnel costs, are fixed costs and are based in part on
expectations of revenue. We may be unable to reduce spending in a timely
manner to compensate for any significant fluctuations in our revenue.
Accordingly, shortfalls in revenue may adversely affect our operating income. Difficulties integrating new acquisitions may impose substantial costs and
cause other problems for us. Our success depends on our ability to timely and cost-effectively acquire,
and integrate into our business, additional animal hospitals and laboratories.
Any difficulties in the integration process may result in increased expense,
loss of customers and a decline in profitability. We expect to acquire in the
ordinary course of business 20 to 25 animal hospitals per year with aggregate
annual revenues of approximately $25.0 million. In some cases, we have
experienced delays and increased costs in integrating some hospitals,
particularly where we acquire a large number of hospitals in a single region at
or about the same time. In these cases, our field management may spend a
predominant amount of time integrating these new hospitals and less time
managing our existing hospitals in those regions. During these periods, there
may be less attention directed to marketing efforts or staffing issues. In
these circumstances, we also have experienced delays in converting the systems
of acquired hospitals into our systems, which results in increased payroll
expense to collect our results and delays in reporting our results, both for a
particular region and on a consolidated basis. If this were to occur in the
future, it could result in decreased revenue, increased costs or lower margins. 41




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We continue to face risks in connection with our acquisitions including:  
    
    negative effects on our operating results;
    
    impairments of goodwill and other intangible assets;
    
    dependence on retention, hiring and training of key personnel, including specialists; and
    
    contingent and latent risks associated with the past operations of,
and other unanticipated problems arising in, an acquired business. The process of integration may require a disproportionate amount of the
time and attention of our management, which may distract managements attention
from its day-to-day responsibilities. In addition, any interruption or
deterioration in service resulting from an acquisition may result in a
customers decision to stop using us. For these reasons, we may not realize
the anticipated benefits of an acquisition, either at all or in a timely
manner. If that happens and we incur significant costs, it could have a
material adverse impact on our business. The carrying value of our goodwill could be subject to impairment write-down. At June 30, 2004, our balance sheet reflected $477.7 million of goodwill,
which is a substantial portion of our total assets of $697.4 million at that
date. We expect that the aggregate amount of goodwill on our balance sheet
will increase as a result of future acquisitions. We continually evaluate
whether events or circumstances have occurred that suggest that the fair market
value of each of our reporting units is below their carrying values. If we
determine that the fair market value of one of our reporting units is less than
its carrying value, this may result in an impairment write-down of the goodwill
for that reporting unit. The impairment write-down would be reflected as
expense and could have a material adverse effect on our results of operations
during the period in which we recognize the expense. At December 31, 2003, we
concluded that the fair value of our reporting units exceeded their carrying
value and accordingly, as of that date, our net goodwill was not impaired in
our consolidated financial statements. However, in the future we may incur
impairment charges related to the goodwill already recorded or arising out of
future acquisitions. We require a significant amount of cash to service our debt and expand our
business as planned. We have, and will continue to have, a substantial amount of debt. Our
substantial amount of debt requires us to dedicate a significant portion of our
cash flow from operations to pay down our indebtedness and related interest,
thereby reducing the funds available to use for working capital, capital
expenditures, acquisitions and general corporate purposes. At June 30, 2004, our debt consisted of:  
    
    $224.4 million in principal amount outstanding under our senior credit facility;
    
    $170.0 million in principal amount outstanding under our 9.875% senior subordinated notes; and
    
    $4.2 million in principal amount outstanding under our other debt. Our ability to make payments on our debt, and to fund acquisitions, will
depend upon our ability to generate cash in the future. Insufficient cash flow
could place us at risk of default under our debt agreements or could prevent us
from expanding our business as planned. Our ability to generate cash is
subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Our business may not generate
sufficient cash flow from operations, our strategy to increase operating
efficiencies may not be realized and future borrowings may not be available to
us under our senior credit facility in an amount sufficient to enable us to
service our debt or to fund our other liquidity needs. In order to meet our
debt obligations, we may need to 42




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refinance all or a portion of our debt. We may not be able to refinance
any of our debt on commercially reasonable terms or at all. Our debt instruments may adversely affect our ability to run our business. Our substantial amount of debt, as well as the guarantees of our
subsidiaries and the security interests in our assets and those of our
subsidiaries, could impair our ability to operate our business effectively and
may limit our ability to take advantage of business opportunities. For
example, our indenture and senior credit facility:  
    
    limit our funds available to repay the 9.875% senior subordinated
notes;
    
    limit our ability to borrow additional funds or to obtain other
financing in the future for working capital, capital expenditures,
acquisitions, investments and general corporate purposes;
    
    limit our ability to dispose of our assets, create liens on our
assets or to extend credit;
    
    make us more vulnerable to economic downturns and reduce our
flexibility in responding to changing business and economic conditions;
    
    limit our flexibility in planning for, or reacting to, changes in our business or industry;
    
    place us at a competitive disadvantage to our competitors with less debt; and
    
    restrict our ability to pay dividends, repurchase or redeem our
capital stock or debt, or merge or consolidate with another entity. The terms of our indenture and senior credit facility allow us, under
specified conditions, to incur further indebtedness, which would heighten the
foregoing risks. If compliance with our debt obligations materially hinders
our ability to operate our business and adapt to changing industry conditions,
we may lose market share, our revenue may decline and our operating results may
suffer. Our failure to satisfy covenants in our debt instruments will cause a default
under those instruments. In addition to imposing restrictions on our business and operations, our
debt instruments include a number of covenants relating to financial ratios and
tests. Our ability to comply with these covenants may be affected by events
beyond our control, including prevailing economic, financial and industry
conditions. The breach of any of these covenants would result in a default
under these instruments. An event of default would permit our lenders and
other debtholders to declare all amounts borrowed from them to be due and
payable, together with accrued and unpaid interest. Moreover, these lenders
and other debtholders would have the option to terminate any obligation to make
further extensions of credit under these instruments. If we are unable to
repay debt to our senior lenders, these lenders and other debtholders could
proceed against our assets. The significant competition in the companion animal health care services
industry could cause us to reduce prices or lose market share. The companion animal health care services industry is highly competitive
with few barriers to entry. To compete successfully, we may be required to
reduce prices, increase our operating costs or take other measures that could
have an adverse effect on our financial condition, results of operations,
margins and cash flow. If we are unable to compete successfully, we may lose
market share. There are many clinical laboratory companies that provide a broad range of
laboratory testing services in the same markets we service. Our largest
competitor for outsourced laboratory testing services is Idexx Laboratories,
Inc., or Idexx. Idexx currently competes or intends to compete in most of the
same markets in which we operate. In this regard, Idexx has recently acquired
additional laboratories in the markets in which we operate and has announced
plans to continue this expansion and aggressively bundles all of their
products and services to compete with us. Increased competition may lead to
pressures on the revenues and margins of our laboratory operations. Also,
Idexx and several other national companies provide on-site diagnostic equipment
that allows veterinarians to perform their own laboratory tests. 43




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Our primary competitors for our animal hospitals in most markets are
individual practitioners or small, regional, multi-clinic practices. Also,
regional pet care companies and some national companies, including operators of
super-stores, are developing multi-regional networks of animal hospitals in
markets in which we operate. Historically, when a competing animal hospital
opens in proximity to one of our hospitals, we have reduced prices,
expanded our facility, retained additional qualified personnel, increased our
marketing efforts or taken other actions designed to retain and expand our
client base. As a result, our revenue may decline and our costs may increase. We may experience difficulties hiring skilled veterinarians due to shortages
that could disrupt our business. As the pet population continues to grow, the need for skilled
veterinarians continues to increase. If we are unable to retain an adequate
number of skilled veterinarians, we may lose customers, our revenue may decline
and we may need to sell or close animal hospitals. As of June 30, 2004, there
were 28 veterinary schools in the country accredited by the American Veterinary
Medical Association. These schools graduate approximately 2,100 veterinarians
per year. There is a shortage of skilled veterinarians in some regional
markets in which we operate animal hospitals. During shortages in these
regions, we may be unable to hire enough qualified veterinarians to adequately
staff our animal hospitals, in which event we may lose market share and our
revenues and profitability may decline. If we fail to comply with governmental regulations applicable to our business,
various governmental agencies may impose fines, institute litigation or
preclude us from operating in certain states. The laws of many states prohibit business corporations from providing, or
holding themselves out as providers of, veterinary medical care. These laws
vary from state to state and are enforced by the courts and by regulatory
authorities with broad discretion. As of June 30, 2004, we operated 99 animal
hospitals in 12 states with these laws, including 22 in New York and 26 in
Texas. We may experience difficulty in expanding our operations into other
states with similar laws. Given varying and uncertain interpretations of the
veterinary laws of each state, we may not be in compliance with restrictions on
the corporate practice of veterinary medicine in all states. A determination
that we are in violation of applicable restrictions on the practice of
veterinary medicine in any state in which we operate could have a material
adverse effect on us, particularly if we were unable to restructure our
operations to comply with the requirements of that state. All of the states in which we operate impose various registration
requirements. To fulfill these requirements, we have registered each of our
facilities with appropriate governmental agencies and, where required, have
appointed a licensed veterinarian to act on behalf of each facility. All
veterinarians practicing in our clinics are required to maintain valid state
licenses to practice. Any failure in our information technology systems or disruption in our
transportation network (including disruption resulting from terrorist
activities) could significantly increase testing turn-around time, reduce our
production capacity and otherwise disrupt our operations. Our laboratory operations depend, in part, on the continued and
uninterrupted performance of our information technology systems and
transportation network. Our growth has necessitated continued expansion and
upgrade of our information technology systems and transportation network.
Sustained system failures or interruption in our transportation network or in
one or more of our laboratory operations could disrupt our ability to process
laboratory requisitions, perform testing, provide test results in a timely
manner and/or bill the appropriate party. We could lose customers and revenue
as a result of a system or transportation network failure. Our computer systems are vulnerable to damage or interruption from a
variety of sources, including telecommunications failures, electricity
brownouts or blackouts, malicious human acts and natural disasters. Moreover,
despite network security measures, some of our servers are potentially
vulnerable to physical or electrical break-ins, computer viruses and similar
disruptive problems. Despite the precautions we have taken, unanticipated
problems affecting our systems could cause interruptions in our information
technology systems. Our insurance policies may not adequately compensate us
for any losses that may occur due to any failures in our systems.
In addition, over time we have significantly customized the computer
systems in our laboratory business. We rely on a limited number of employees
to upgrade and maintain these systems. If we were to lose the services of 44




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some or all of these employees, it may be time-consuming for new employees
to become familiar with our systems, and we may experience disruptions in
service during these periods. Any substantial reduction in the number of available flights or delays in
the departure of flights, whether as a result of severe weather conditions, as
we recently experienced in the eastern United States, a terrorist attack or any
other type of disruption, will disrupt our transportation network and our
ability to provide test results in a timely manner. Any change in government
regulation related to transporting samples or specimens could also have an
impact on our business. In addition, our Test Express service, which services
customers outside of major metropolitan areas, is dependent on flight services
in and out of Memphis and the transportation network of Federal Express. Any
sustained interruption in either flight services in Memphis or the
transportation network of Federal Express would result in increased turn-around
time for the reporting of test results to customers serviced by our Test
Express service. The loss of Mr. Robert Antin, our Chairman, President and Chief Executive
Officer, could materially and adversely affect our business. We are dependent upon the management and leadership of our Chairman,
President and Chief Executive Officer, Robert Antin. We have an employment
contract with Mr. Antin which may be terminated at the option of Mr. Antin. We
do not maintain any key man life insurance coverage for Mr. Antin. The loss of
Mr. Antin could materially adversely affect our business. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2004, we had borrowings of $224.4 million under our senior
credit facility with fluctuating interest rates based on market benchmarks such
as LIBOR. To reduce the risk of increasing interest rates, we have entered
into three separate no-fee interest rate swap agreements. The first agreement
is for $40.0 million and commenced on November 29, 2002 and expires November
29, 2004. The second agreement is for $20.0 million and commenced on May 30,
2003 and expires May 31, 2005. The third agreement is for $20.0 million and
commenced on May 30, 2003 and expires May 31, 2005. These swap agreements have
the effect of reducing the amount of our debt exposed to variable interest
rates from $224.4 million to $144.4 million. Accordingly, for the twelve-month
period ending June 30, 2005, for every 1.0% increase in LIBOR we will pay an
additional $1.7 million in interest expense and for every 1.0% decrease in
LIBOR we will save $1.7 million in interest expense. We are considering entering into additional interest rate strategies to
take advantage of the current rate environment. We have not yet determined
what those strategies may be or their possible impact. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we have carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic reports
with the SEC. In accordance with the requirements of the SEC, our Chief Executive
Officer and Chief Financial Officer note that, since the date of the most
recent evaluation of our disclosure controls and procedures to the date of this
quarterly report on Form 10-Q, there have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses. Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Additionally, 45




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controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We are not subject to any legal proceedings other than ordinarily routine
litigation incidental to the conduct of our business. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:  3.1
    
    Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrants annual
report on Form 10-K filed March 29, 2002.3.2
    
    Certificate of Amendment to the Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to the Registrants
current report on Form 8-K filed July 16, 2004.3.3
    
    Certificate of Correction to the Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.2 to the Registrants current
report on Form 8-K filed July 16, 2004.3.4
    
    Amended and Restated Bylaws of Registrant.10.1
    
    Amended and Restated Credit and Guaranty Agreement, dated as of June 1,
2004, by and among Vicar Operating, Inc., VCA Antech, Inc., certain
subsidiaries of Vicar Operating, Inc. as guarantors, various lenders from
time to time party thereto, Goldman Sachs Credit Partners L.P., as joint
lead arranger and sole syndication agent, and Wells Fargo Bank, N.A., as
joint lead arranger and administrative agent. Incorporated by reference
to Exhibit 10.1 to the Registrants current report on Form 8-K filed June
1, 2004.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 46




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(b) Reports on Form 8-K:  (1)
    
    On April 14, 2004, VCA filed a report on Form 8-K under Items 5 and 7
relating to the filing of a shelf registration statement allowing VCA to
sell, from time to time, $250,000,000 of its common stock or other
equity or debt securities and the future re-sale by Green Equity
Investors III, L.P. of 6,846,937 million outstanding shares of VCA common
stock.(2)
    
    On April 27, 2004, VCA filed a report on Form 8-K under Items 5 and 7
relating to revised financial guidance for fiscal year 2004, and
furnished under Items 7 and 12 financial information for the first
quarter 2004.(3)
    
    On May 10, 2004, VCA filed a report on Form 8-K under Items 5 and 7
relating to the signing of the definitive merger agreement between VCA
and National PetCare Centers, Inc.(4)
    
    On May 27, 2004, VCA filed a report on Form 8-K under Items 5 and 7
relating to the signing of an Underwriting Agreement by VCA and Green
Equity Investors III, L.P. in connection with the sale of 3,000,000
shares of VCA common stock by Green Equity Investors III, L.P to Banc of
America.(5)
    
    On June 1, 2004, VCA filed a report on Form 8-K under Items 5 and 7
relating to the completion of the merger with National PetCare Centers,
Inc., the refinancing of its senior credit facility and revised financial
guidance for the second quarter and fiscal year 2004.(6)
    
    On June 29, 2004, VCA filed a report on Form 8-K under Item 5 relating
to managements recommendation to the Board of Directors to form an
independent nominating committee. 47




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SIGNATURE Pursuant to the requirements 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, in the City of Los Angeles, State of
California. Date:  August 6, 2004
    By:
    /s/ Tomas W. FullerTomas W. FullerChief Financial Officer 48




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EXHIBIT INDEX Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrants annual report
on Form 10-K filed March 29, 2002.3.2
    
    Certificate of Amendment to the Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to the Registrants
current report on Form 8-K filed July 16, 2004.3.3
    
    Certificate of Correction to the Certificate of Amendment to the Amended
and Restated Certificate of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.2 to the Registrants current report on Form 8-K
filed July 16, 2004.3.4
    
    Amended and Restated Bylaws of Registrant.10.1
    
    Amended and Restated Credit and Guaranty Agreement, dated as of June 1,
2004, by and among Vicar Operating, Inc., VCA Antech, Inc., certain
subsidiaries of Vicar Operating, Inc. as guarantors, various lenders from
time to time party thereto, Goldman Sachs Credit Partners L.P., as joint
lead arranger and sole syndication agent, and Wells Fargo Bank, N.A., as
joint lead arranger and administrative agent. Incorporated by reference to
Exhibit 10.1 to the Registrants current report on Form 8-K filed June 1,
2004.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 49