VCA ANTECH INC - 10-Q Quarterly Report

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 September 30, 2002









OR









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

Commission File Number: 0-16783

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)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.001 par value

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 the number of shares outstanding of each of the issuer’s class of common stock as of the latest practicable date: Common stock, $0.001 par value 36,762,975 shares as of November 8, 2002.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED, CONSOLIDATED BALANCE SHEETS As of September 30, 2002 and December 31, 2001 (Unaudited)
		CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited)
		CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2002 and 2001 (Unaudited)
		NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
		SIGNATURE
		Certification
		Certification
		EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2

VCA ANTECH, INC.
FORM 10-Q
SEPTEMBER 30, 2002

TABLE OF CONTENTS


		Page Number

Part I.	Financial Information




Item 1.	Financial Statements




	Condensed, Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 (Unaudited)		3




	Condensed, Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited)		4




	Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (Unaudited)		5




	Notes to Condensed, Consolidated Financial Statements		6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24




Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48




Item 4.	Controls and Procedures		48




Part II.	Other Information




Item 1.	Legal Proceedings		49




Item 2.	Changes in Securities		49




Item 3.	Defaults Upon Senior Securities		49




Item 4.	Submission of Matters to a Vote of Security Holders		50




Item 5.	Other Information		50




Item 6.	Exhibits and Reports on Form 8-K		50




	Signature		51




	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		52




	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		53




	Exhibit Index		54

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
As of September 30, 2002 and December 31, 2001
(Unaudited)
(In thousands, except par value)


			September 30,			December 31,
			2002			2001

ASSETS




Current assets:




	Cash and cash equivalents		$	32,358		$	7,103




	Trade accounts receivable, less allowance for uncollectible accounts of $6,011 and $5,241 at September 30, 2002 and December 31, 2001, respectively			20,791			18,036




	Inventory, prepaid expenses and other			7,880			6,879




	Deferred income taxes			9,682			7,364




	Prepaid income taxes			—			2,782

		Total current assets		70,711			42,164




Property and equipment, net				93,604			89,244




Other assets:




	Goodwill, net			332,543			317,262




	Covenants not to compete, net			4,522			4,827




	Deferred financing costs, net			7,394			11,380




	Other assets			4,606			3,644

		Total assets	$	513,380		$	468,521

LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:




	Current portion of long-term obligations		$	1,793		$	5,159




	Accounts payable			9,131			7,313




	Accrued payroll and related liabilities			14,509			11,717




	Accrued interest			5,659			2,254




	Income taxes payable			2,035			—




	Other accrued liabilities			13,195			16,351

		Total current liabilities		46,322			42,794




Long-term obligations, less current portion				387,041			379,173




Deferred income taxes				9,371			1,684




Minority interest				5,732			5,106




Stockholders’ equity:




	Common stock, par value $0.001, 75,000 shares authorized, 36,761 and 36,736 shares outstanding as of September 30, 2002 and December 31, 2001, respectively			37			37




	Additional paid-in capital			188,865			188,840




	Accumulated deficit			(123,429	)		(146,594	)




	Accumulated comprehensive loss—unrealized loss on hedging instruments			(319	)		(1,855	)




	Notes receivable from stockholders			(240	)		(664	)

		Total stockholders’ equity		64,914			39,764

		Total liabilities and stockholders’ equity	$	513,380		$	468,521

The accompanying notes are an integral part of these condensed, consolidated financial statements.

VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(In thousands, except per share)


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2001			2002			2001

Revenue			$	114,972		$	102,636		$	336,892		$	305,365




Direct costs (excludes operating depreciation of $2,399 and $2,105 for the three months ended September 30, 2002 and 2001, respectively, and $7,007 and $6,183 for the nine months ended September 30, 2002 and 2001, respectively; includes non-cash compensation of $283 and $1,412 for the three and nine months ended September 30, 2001, respectively)				77,157			70,681			226,749			213,454

				37,815			31,955			110,143			91,911




Selling, general and administrative expense (includes non- cash compensation of $1,240 and $6,199 for the three and nine months ended September 30, 2001, respectively)				8,732			9,591			25,893			30,365




Depreciation and amortization				3,028			6,432			9,330			19,121




Write-down and (gain) loss on sale of assets				(80	)		(92	)		(80	)		8,745

		Operating income		26,135			16,024			75,000			33,680




Net interest expense				10,208			10,317			30,541			32,387




Other (income) expense				(5	)		4			(159	)		233




Minority interest in income of subsidiaries				430			404			1,360			1,104

		Income (loss) before provision for income taxes and extraordinary item		15,502			5,299			43,258			(44	)




Provision for income taxes				6,466			3,275			18,092			6,741

		Income (loss) before extraordinary item		9,036			2,024			25,166			(6,785	)




Extraordinary loss on early extinguishment of debt (net of income tax benefit of $1,390)				2,001			—			2,001			—

		Net income (loss)		7,035			2,024			23,165			(6,785	)




Increase in carrying amount of redeemable preferred stock				—			5,362			—			15,583

		Net income (loss) available to common stockholders	$	7,035		$	(3,338	)	$	23,165		$	(22,368	)

Basic earnings (loss) per common share:




	Income (loss) before extraordinary item		$	0.24		$	(0.19	)	$	0.68		$	(1.27	)




	Extraordinary loss on early extinguishment of debt			(0.05	)		—			(0.05	)		—

	Earnings (loss) per common share		$	0.19		$	(0.19	)	$	0.63		$	(1.27	)

Diluted earnings (loss) per common share:




	Income (loss) before extraordinary item		$	0.24		$	(0.19	)	$	0.68		$	(1.27	)




	Extraordinary loss on early extinguishment of debt			(0.05	)		—			(0.05	)		—

	Earnings (loss) per common share		$	0.19		$	(0.19	)	$	0.63		$	(1.27	)

Shares used for computing basic earnings (loss) per share				36,756			17,878			36,744			17,643

Shares used for computing diluted earnings (loss) per share				37,094			17,878			37,088			17,643

The accompanying notes are an integral part of these condensed, consolidated financial statements.

VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(In thousands)


				Nine Months Ended
				September 30,

				2002			2001

Cash flows from operating activities:




	Net income (loss)			$	23,165		$	(6,785	)




		Adjustments to reconcile net income (loss) to net cash provided by operating activities:




			Depreciation and amortization		9,330			19,121




			Amortization of deferred financing costs and debt discounts		1,264			1,667




			Provision for uncollectible accounts		2,347			2,182




			Extraordinary loss on early extinguishment of debt		3,391			—




			Non-cash compensation		—			7,611




			Interest paid in kind on 15.5% senior notes		7,045			12,259




			Write-down and (gain) loss on sale of assets		(80	)		8,745




			Minority interest in income of subsidiaries		1,360			1,104




			Distributions to minority interest partners		(1,339	)		(1,083	)




			Increase in accounts receivable		(5,055	)		(3,736	)




			Decrease (increase) in inventory, prepaid expenses and other assets		(918	)		685




			Increase (decrease) in accounts payable and accrued liabilities		3,945			(307	)




			Increase in accrued payroll and related liabilities		2,792			3,930




			Increase (decrease) in accrued interest		3,405			(1,547	)




			Decrease in prepaid income taxes		2,782			479




			Increase in income taxes payable		2,035			—




			Increase in deferred income tax asset		(2,318	)		(1,180	)




			Increase in deferred income tax liability		7,687			6,171

	Net cash provided by operating activities				60,838			49,316

Cash flows from investing activities:




			Business acquisitions, net of cash acquired		(17,845	)		(20,615	)




			Real estate acquired in connection with business acquisitions		—			(675	)




			Property and equipment additions, net		(13,405	)		(9,929	)




			Proceeds from sale of assets		1,391			603




			Other		159			285

	Net cash used in investing activities				(29,700	)		(30,331	)

Cash flows from financing activities:




			Repayment of long-term obligations		(145,978	)		(3,735	)




			Proceeds from issuance of long-term debt		143,061			—




			Payment of accrued financing and recapitalization costs		(3,415	)		(2,138	)




			Proceeds from issuance of common stock under stock option plans		25			—




			Other		424			—

	Net cash used in financing activities				(5,883	)		(5,873	)

Increase in cash and cash equivalents					25,255			13,112




Cash and cash equivalents at beginning of period					7,103			10,519

Cash and cash equivalents at end of period				$	32,358		$	23,631

The accompanying notes are an integral part of these condensed, consolidated financial statements.

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)

(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 accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted 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 nine months ended September 30, 2002 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 2001 Annual Report on Form 10-K.

(2) Acquisitions

During the third quarter of 2002, the Company purchased seven animal hospitals, for an aggregate consideration (including acquisition costs) of $6.8 million, consisting of $6.3 million in cash and the assumption of liabilities totaling $500,000. The $6.8 million aggregate purchase price was allocated as follows: $200,000 to tangible assets, $6.2 million to goodwill and $359,000 to other intangible assets.

During the nine months ended September 30, 2002, the Company purchased 18 animal hospitals, for an aggregate consideration (including acquisition costs) of $16.1 million, consisting of $15.1 million in cash and the assumption of liabilities totaling $1.0 million. The $16.1 million aggregate purchase price was allocated as follows: $449,000 to tangible assets, $14.7 million to goodwill and $956,000 to other intangible assets.

During the nine months ended September 30, 2002, the Company also made payments in the amount of approximately $2.7 million related to contractual obligations related to prior year acquisitions.

(3) Calculation of Per Share Amounts

Below is a reconciliation of the income (loss) and shares used in the computations of the basic and diluted earnings (loss) per share (“EPS”) (in thousands, except per share amounts):


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2001			2002			2001

Income (loss) before extraordinary item			$	9,036		$	2,024		$	25,166		$	(6,785	)




Increase in carrying amount of redeemable preferred stock				—			5,362			—			15,583

Income (loss) available to common stockholders before extraordinary item				9,036			(3,338	)		25,166			(22,368	)




Extraordinary loss on early extinguishment of debt, net of income tax benefit				2,001			—			2,001			—

Net income (loss) available to common stockholders (basic and diluted)			$	7,035		$	(3,338	)	$	23,165		$	(22,368	)

Weighted average common shares outstanding:




	Basic			36,756			17,878			36,744			17,643




	Effect of dilutive common stock equivalents:




		Stock options		338			—			344			—

	Diluted			37,094			17,878			37,088			17,643

Basic earnings (loss) per common share:




	Income (loss) before extraordinary item		$	0.24		$	(0.19	)	$	0.68		$	(1.27	)




	Extraordinary loss on early extinguishment of debt			(0.05	)		—			(0.05	)		—

	Earnings (loss) per common share		$	0.19		$	(0.19	)	$	0.63		$	(1.27	)

Diluted earnings (loss) per common share:




	Income (loss) before extraordinary item		$	0.24		$	(0.19	)	$	0.68		$	(1.27	)




	Extraordinary loss on early extinguishment of debt			(0.05	)		—			(0.05	)		—

	Earnings (loss) per common share		$	0.19		$	(0.19	)	$	0.63		$	(1.27	)

The anti-dilutive effect of 1,150,000 shares of common stock equivalents from outstanding warrants has been excluded from EPS calculations for both the three and nine months ended September 30, 2001. Additionally, the anti-dilutive effect of 538,000 and 651,000 shares from outstanding stock options have been excluded from EPS calculations for the three and nine months ended September 30, 2001, respectively.

(4) Comprehensive Income (Loss)

Below is a calculation of comprehensive income (loss) (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2002			2001			2002			2001

Net income (loss)	$	7,035		$	2,024		$	23,165		$	(6,785	)




Cumulative effect of change to new accounting principle		—			—			—			(525	)




Unrealized gain (loss) on hedging instruments		645			(883	)		1,695			(1,726	)




Less portion of unrealized (gain) loss recognized as other (income) expense		(5	)		4			(159	)		233

Net comprehensive income (loss)	$	7,675		$	1,145		$	24,701		$	(8,803	)

All gains and losses on hedging instruments are the result of an interest rate collar agreement. See Footnote (8), “Derivatives ” for additional information. By the end of the agreement, these unrealized gains will offset against unrealized losses recognized in prior periods and will in aggregate net to zero. Accordingly, there has been no income tax benefit or expense relating to these unrealized gains and losses recognized in the Company’s net income (loss) or comprehensive income (loss). The unrealized gains and losses recognized as other (income) expense relate to the ineffective portion of the interest rate collar agreement.

(5) Extraordinary Loss on Early Extinguishment of Debt

On August 29, 2002, the Company refinanced its senior credit facility by borrowing $143.1 million in Senior Term C notes and used these proceeds to pay the entire outstanding principal balance on the Senior Term A and B notes. In conjunction with the transaction the Company wrote off $3.4 million in deferred financing costs as an extraordinary loss on early extinguishment of debt, which provided a related tax benefit of $1.4 million.

(6) Lines of Business

During the three and nine months ended September 30, 2002 and 2001, 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 products. Corporate provides selling, general and administrative support for the other segments and recognizes revenue associated with a consulting agreement.

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 2001 Annual Report on Form 10-K. The Company evaluates performance of segments based on profit or loss before income taxes, interest income, interest expense and minority interest, which are evaluated on a consolidated level. 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.

Below is a summary of certain financial data for each of the three segments (in thousands):


				Animal					Intercompany
		Laboratory		Hospital		Corporate			Eliminations			Total

Three Months Ended September 30, 2002




	Revenue	$	38,650	$	78,118	$	500		$	(2,296	)	$	114,972




	Operating income (loss)		13,523		16,012		(3,400	)		—			26,135




	Depreciation/amortization expense		715		1,961		352			—			3,028




	Capital expenditures		4,501		2,417		283			—			7,201




Three Months Ended September 30, 2001




	Revenue	$	33,471	$	70,531	$	500		$	(1,866	)	$	102,636




	Operating income (loss)		9,512		11,459		(4,947	)		—			16,024




	Depreciation/amortization expense		1,153		3,688		1,591			—			6,432




	Capital expenditures		670		2,515		440			—			3,625




Nine Months Ended September 30, 2002




	Revenue	$	116,911	$	225,383	$	1,500		$	(6,902	)	$	336,892




	Operating income (loss)		41,596		43,306		(9,902	)		—			75,000




	Depreciation/amortization expense		2,138		6,166		1,026			—			9,330




	Capital expenditures		5,931		6,372		1,102			—			13,405




Nine Months Ended September 30, 2001




	Revenue	$	101,855	$	207,665	$	1,500		$	(5,655	)	$	305,365




	Operating income (loss)		27,527		29,770		(23,617	)		—			33,680




	Depreciation/amortization expense		3,457		10,829		4,835			—			19,121




	Capital expenditures		1,548		6,418		1,963			—			9,929




At September 30, 2002




	Identifiable assets	$	114,913	$	341,106	$	57,361			—		$	513,380




At December 31, 2001




	Identifiable assets	$	110,466	$	322,657	$	35,398			—		$	468,521

Below is a reconciliation between total segment operating income after eliminations and consolidated income (loss) before provision for income taxes as reported on the condensed, consolidated statements of operations (in thousands):


		Three Months Ended					Nine Months Ended
		September 30,					September 30,

		2002			2001		2002			2001

Total segment operating income after eliminations		$	26,135		$	16,024	$	75,000		$	33,680




Net interest expense			10,208			10,317		30,541			32,387




Other (income) expense			(5	)		4		(159	)		233




Minority interest in income of subsidiaries			430			404		1,360			1,104

	Income (loss) before provision for income taxes and extraordinary item	$	15,502		$	5,299	$	43,258		$	(44	)

(7) Other (Income) Expense

As a result of changes in the time value of an interest rate collar agreement, the Company recognized a non-cash gain of $5,000 and a non-cash loss of $4,000 during the three months ended September 30, 2002 and 2001, respectively, and recognized a non-cash gain of $159,000 and a non-cash loss of $233,000 during the nine months ended September 30, 2002 and 2001, respectively. See Footnote (8), “Derivatives” for additional information.

(8) Derivatives

The Company entered into a no-fee interest rate collar agreement with Wells Fargo Bank effective November 15, 2000 and expiring November 15, 2002, (the “Collar Agreement”). The Collar Agreement is based on the London interbank offer rate (“LIBOR”), which resets monthly, and has a cap and floor notional amount of $62.5 million, with a cap and floor interest rate of 7.5% and 5.9%, respectively. As a result of LIBOR rates being below the floor interest rate of 5.9%, the Company made payments under this agreement amounting to $666,000 and $347,000 for the three months ended September 30, 2002 and 2001, respectively, and $1.9 million and $600,000 for the nine months ended September 30, 2002 and 2001, respectively. These payments have been reported as part of interest expense.

The Collar Agreement is accounted for as a cash flow hedge with its market value reported as a liability on the balance sheet. This liability decreased approximately $1.7 million to $326,000 at September 30, 2002 from $2.0 million at December 31, 2001. Of this decrease, $1.5 million has been recognized in comprehensive income and the other $159,000 has been recognized in other income. The valuation of the Collar Agreement is determined by Wells Fargo Bank. As the result of adopting Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, in 2001, the Company recorded a cumulative adjustment to other comprehensive income of approximately $525,000 during the nine months ended September 30, 2001.

When the Collar Agreement expires on November 15, 2002, the Company intends to enter into additional derivative contracts to hedge against part or all of the risk of increasing interest rates that would increase interest payments on the $142.7 million of Senior Term C notes, which are based on variable rates.

(9) Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board, (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually, or whenever there is an indication of impairment. Intangible assets with finite lives will continue to be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

SFAS No. 142 requires companies to allocate their goodwill to identifiable reporting units, which are then tested for impairment using a two-step process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not necessary and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires a hypothetical allocation of the fair value of the reporting unit to the reporting unit’s assets and liabilities as if the unit were just purchased by the company at the fair value price. In this hypothetical purchase, the excess of the fair value of the reporting unit over its re-evaluated, marked-to-market net assets would be the new basis for the reporting unit’s goodwill and a write down to this new value would be recognized as an expense.

The Company adopted SFAS No. 142 on January 1, 2002. In doing so, it determined that it had two reporting units, Laboratory and Animal Hospital. On April 15, 2002, an independent valuation group concluded that the fair value of the Company’s reporting units exceeded it’s carrying value and accordingly, as of that date, there were no goodwill impairment issues. The Company plans to perform a valuation of its reporting units in January of each year, or upon significant changes in the Company’s business environment.

As of September 30, 2002 the Company’s goodwill, net of accumulated amortization was $332.5 million. The Company recorded $2.3 million and $6.9 million in goodwill amortization, for the three and nine months ended September 30, 2001, respectively. Because of the adoption of SFAS No. 142 there was no amortization of goodwill for the three and nine months ended September 30, 2002.

The following table presents net income (loss) available to common stockholders and earnings (loss) per share as if SFAS No. 142 had been adopted as of January 1, 2001 (in thousands):


			Three Months Ended					Nine Months Ended
			September 30,					September 30,

			2002		2001			2002		2001

Net income (loss) available to common stockholders			$	7,035	$	(3,338	)	$	23,165	$	(22,368	)




Add back goodwill amortization, net of tax				—		1,765			—		5,206

		Adjusted net income (loss)	$	7,035	$	(1,573	)	$	23,165	$	(17,162	)

Basic earnings (loss) per share:




	Reported net income (loss)		$	0.19	$	(0.19	)	$	0.63	$	(1.27	)




	Goodwill amortization, net of tax			—		0.10			—		0.30

	Adjusted basic earning (loss) per share		$	0.19	$	(0.09	)	$	0.63	$	(0.97	)

Diluted earnings (loss) per share:




	Reported net income (loss)		$	0.19	$	(0.19	)	$	0.63	$	(1.27	)




	Goodwill amortization, net of tax			—		0.10			—		0.30

	Adjusted diluted earnings (loss) per share		$	0.19	$	(0.09	)	$	0.63	$	(0.97	)

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2002 (in thousands):


			Animal
	Laboratory		Hospital		Total

Balance as of January 1, 2002	$	85,101	$	232,161	$	317,262




Goodwill acquired and purchase price adjustments		—		15,281		15,281

Balance as of September 30, 2002	$	85,101	$	247,442	$	332,543

In addition to goodwill, the Company has other intangible assets as follows (in thousands):


		As of September 30, 2002

		Gross Carrying		Accumulated			Net Carrying
		Amount		Amortization			Amount

Covenants not to compete		$	12,301	$	(7,779	)	$	4,522




Client lists			579		(461	)		118

	Total	$	12,880	$	(8,240	)	$	4,640

The aggregate amortization related to other intangible assets was as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2002		2001		2002		2001

Aggregate amortization expense (1)	$	276	$	1,715	$	1,297	$	5,158

(1) Does not include goodwill amortization of $2.3 million and $6.9 million for the three and nine months ended September 30, 2001, respectively. There was no goodwill amortization recorded in 2002.

Estimated amortization expense for other intangible assets for the next five years is as follows (in thousands):


For the Year Ending
December 31,

2002	$	1,773




2003	$	1,814




2004	$	1,802




2005	$	1,492




2006	$	1,389

(10) Accounting Pronouncements

Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will adopt SFAS No. 143 in the first quarter of fiscal year 2003. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its consolidated financial statements.

Impairment of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation for discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of by Sale, and the accounting and reporting provisions relating to the impairment or disposal of long-lived assets of Accounting Principles Board Opinion No. 30 (“APB No. 30”), Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The Company adopted SFAS No. 144 on January 1, 2002, with no material impact to its financial statements.

Gains and Losses from Extinguishment of Debt and Capital Leases

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, to be applied in fiscal years beginning after May 15, 2002, with early adoption encouraged.

Under SFAS No. 145, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of APB No. 30. Under APB No. 30, events are considered extraordinary only if they possess a high degree of abnormality and are not likely to recur in the foreseeable future. Any gains or losses on extinguishment of debt that do not meet the criteria of APB No. 30 shall be classified as a component of income from recurring operations. In addition, any gains or losses on extinguishment of debt that were classified as an extraordinary item in prior periods presented that do not meet the criteria of APB No. 30 shall be reclassified as a component of income from recurring operations.

The Company will adopt SFAS No. 145 at the beginning of fiscal year 2003. As detailed in Footnote (5), “Extraordinary Loss on Early Extinguishment of Debt,” the Company recognized an extraordinary loss related to the early extinguishment of debt of approximately $3.4 million, before taxes, during the three months ended September 30, 2002. In addition, the Company recognized extraordinary losses related to the early extinguishment of debt, before taxes in the amount of approximately $17.2 million and $4.5 million during years 2001 and 2000, respectively. The Company does not believe these losses on extinguishment of debt meet the criteria of APB No. 30 as the Company has historically participated in and may continue to participate in periodic debt refinancing. As a result of adopting SFAS No. 145, the Company will reclassify losses on extinguishment of debt from extraordinary losses to a component of income from recurring operations. This reclassification will not impact net income.

SFAS No. 145 also amends SFAS No. 13, Accounting for Leases. Under SFAS No. 145, if a capital lease is modified such that it becomes an operating lease, a gain or loss must be recognized similar to the accounting used for sale-leaseback transactions as provided in SFAS No. 28 and No. 98. At September 30, 2002, the Company had capital lease obligations of $43,000. Although the Company may enter into more capital leases, management does not expect this provision of SFAS No. 145 to have a material impact on its financial statements.

Costs Associated with Exit or Disposal of Activities

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when a company is committed to future payment of those liabilities under a binding, legal obligation. SFAS No. 146 supercedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which required that exit and disposal costs be recognized as liabilities when a company formalized its plan for exiting or disposing of an activity even if no legal obligation had been established.

SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, however early adoption is encouraged. Costs associated with exit or disposal activities will be recognized in income from continuing operations before income taxes, unless these are costs associated with discontinued operations, which would require disclosure as part of discontinued operations, net of taxes. The Company has no plans to exit or dispose of any of its business activities under the definition of SFAS No. 146, nor does the Company anticipate that SFAS No. 146 will change any of its business practices.

Goodwill Impairment Test

In August 2002, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 02-13, Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB No. 142, Goodwill and Other Intangible Assets. EITF Issue No. 02-13 was issued to provide guidance on how to account for deferred tax balances in determining a reporting unit’s fair value, a reporting unit’s carrying amount and the implied fair value of goodwill. The consensus in this issue will be applied prospectively in performing either the first or second step of the impairment test required by SFAS No. 142 for tests performed after September 12, 2002. The Company has not determined yet what impact EITF Issue No. 02-13 will have on its consolidated financial statements.

(11) Reclassifications

Certain 2001 balances have been reclassified to conform to the 2002 financial statement presentation.

(12) Commitments and Contingencies

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. The Company operates 58 animal hospitals in 11 states with these laws. The Company may experience difficulty in expanding operations into other states with similar laws. Given varying and uncertain interpretations of the veterinary laws of each state, the Company may not be in compliance with restrictions on the corporate practice of veterinary medicine in all states. A determination that the Company is in violation of applicable restrictions on the practice of veterinary medicine in any state in which it operates could have a material adverse effect, particularly if the Company were unable to restructure its operations to comply with the requirements of that state.

The Company currently is a party to a lawsuit in the State of Ohio in which that state has alleged that the management of a veterinary medical group licensed to practice veterinary medicine in that state violates the Ohio statute prohibiting business corporations from providing or holding themselves out as providers of veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining the Company from operating in the State of Ohio in a manner that is in violation of the state statute. In response, the Company restructured its operations in the State of Ohio in a manner believed to conform to the state law and the court’s order. The Attorney General of the State of Ohio informed the Company

that it disagreed with the Company’s position that the Company is in compliance with the court’s order. In June 2001, the Company appeared at a status conference before the trial court at which time the court directed the parties to meet together to attempt to settle this matter. Consistent with the trial court’s directive, the Company engaged in discussions with the Attorney General’s office in the State of Ohio. The parties were not able to reach a settlement prior to an additional status conference that occurred in February 2002. At that status conference, the court ordered the parties to participate in a court-supervised settlement conference that occurred in April 2002. Pursuant to discussions with the Ohio Attorney General at that settlement conference, the Company submitted to the Ohio Attorney General a revised management agreement that incorporates further revisions to the structure of its operations in Ohio. Following its review of the revised agreement, the Ohio Attorney General requested further revisions to the management agreement, and, in response, the Company has submitted a further revised agreement which is consistent with those suggestions and which currently is under review by the Ohio Attorney General. If a settlement cannot be reached, the Company may be required to discontinue operations in the state. The five animal hospitals in the State of Ohio had a net book value of $6.4 million as of September 30, 2002. If the Company was required to discontinue operations in the State of Ohio, it may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue and operating income of $1.6 million and $461,000, respectively, for the nine months ended September 30, 2002, and $2.1 million and $409,000, for the year ended December 31, 2001.

On November 30, 2001, two majority stockholders of a company that merged with Zoasis.com, Inc. in June 2000 filed a civil complaint against VCA, Zoasis.com, Inc. and Robert Antin. In the merger, the two stockholders received a less than 10% interest in Zoasis. At the same time, VCA acquired a less than 20% interest in Zoasis.com, Inc. for an investment of $5.0 million. Robert Antin, VCA’s Chief Executive Officer, President and Chairman of the Board, is the majority stockholder of Zoasis.com and serves on its board of directors. The complaint alleges securities fraud under California law, common law fraud, negligent misrepresentation and declaratory judgment arising from the plaintiffs’ investment in Zoasis.com. On December 31, 2001, the Company filed a demurrer to the complaint. On February 25, 2002, the plaintiffs filed an opposition to the Company’s demurrer, and on March 1, 2002, the Company filed our reply to plaintiffs’ opposition. On March 7, 2002, the Company’s demurrer was denied. On March 22, 2002, the Company filed an answer to plaintiffs’ complaint denying all allegations in the complaint, and the Company filed a counter claim alleging breach of contract and claim and delivery. The Company is currently involved in the discovery process. A status conference was held on May 9, 2002 at which the judge ordered the parties to participate in mediation. Mediation occurred on August 7, 2002, and no settlement was reached. The court has scheduled a final status conference for January 31, 2003, and a trial date of February 14, 2003.

All of the states in which the Company operates impose various registration requirements. To fulfill these requirements, each facility has been registered with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing in animal hospitals owned or operated by the Company are required to maintain valid state licenses to practice.

(13) Subsequent Events

Acquisitions

From October 1, 2002 through November 8, 2002, the Company acquired one animal hospital and one laboratory for an aggregate consideration (including acquisition costs) of $3.0 million, consisting of $2.4 million in cash, and the assumption of liabilities totaling $595,000.

Repayment of 13.5% Senior Subordinated and 15.5% Senior Notes

On October 24, 2002, the Company borrowed $25.0 million in additional Senior Term C notes under the credit and guaranty agreement. The proceeds from this borrowing and $25.2 million of cash on-hand were used to voluntarily repay the remaining principal balance of $15.0 million for the Company’s 13.5% senior subordinated notes and repay $30.0 million of its 15.5% senior notes. As a result of repaying these notes, the Company will recognize an additional extraordinary loss, net of income tax benefit, of approximately $5.5 million during the fourth quarter of 2002.

Swap Agreement

On November 7, 2002 the Company entered into a no-fee swap agreement with Wells Fargo Bank effective November 29, 2002 and expiring November 29, 2004. The agreement swaps monthly variable LIBOR rates for a fixed rate of 2.22% on a notional amount of $40.0 million. The agreement qualifies for hedge accounting.

(14) Condensed, Consolidating Information

In 2000, the Company established 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 other 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 senior debt credit agreement and any other indebtedness permitted to be incurred by Vicar under the terms of the indenture agreement for the 9.875% senior subordinated notes.

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 and 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 and Non-Guarantor Subsidiaries. The condensed financial information may not necessarily be indicative of results of operations or financial position had the Guarantors and 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.

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING BALANCE SHEETS
As of September 30, 2002
(Unaudited)
(In thousands)


									Guarantor		Non-Guarantor
			VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Current assets:




	Cash and equivalents		$	—		$	30,460		$	1,717	$	181		$	—		$	32,358




	Trade accounts receivable, net			—			—			20,094		697			—			20,791




	Inventory, prepaid expenses and other			—			1,246			6,060		574			—			7,880




	Deferred income taxes			—			9,682			—		—			—			9,682

		Total current assets		—			41,388			27,871		1,452			—			70,711




Property and equipment, net				—			7,877			83,133		2,594			—			93,604




Other assets:




	Goodwill, net			—			—			310,012		22,531			—			332,543




	Covenants not to compete, net			—			—			3,807		715			—			4,522




	Deferred financing costs, net			714			6,680			—		—			—			7,394




	Other assets			246			456			2,137		1,767			—			4,606




Investment in subsidiaries				152,635			227,997			24,094		—			(404,726	)		—

		Total assets	$	153,595		$	284,398		$	451,054	$	29,059		$	(404,726	)	$	513,380

Current liabilities:




	Current portion of long-term obligations		$	—		$	1,484		$	305	$	4		$	—		$	1,793




	Accounts payable			—			5,978			3,153		—			—			9,131




	Accrued payroll and related liabilities			—			8,176			6,016		317			—			14,509




	Accrued interest			—			5,649			10		—			—			5,659




	Income taxes payable			—			2,035			—		—			—			2,035




	Other accrued liabilities			—			9,719			3,338		138			—			13,195

		Total current liabilities		—			33,041			12,822		459			—			46,322




Long-term obligations, less current portion				61,240			324,825			976		—			—			387,041




Deferred income taxes				—			9,371			—		—			—			9,371




Minority interest				—			—			—		—			5,732			5,732




Intercompany payable (receivable)				27,441			(235,474	)		209,259		(1,226	)		—			—




Stockholders’ equity:




	Common stock			37			—			—		—			—			37




	Additional paid-in capital			188,865			—			—		—			—			188,865




	Retained earnings (accumulated deficit)			(123,429	)		152,954			227,997		29,826			(410,777	)		(123,429	)




	Accumulated comprehensive loss			(319	)		(319	)		—		—			319			(319	)




	Notes receivable from stockholders			(240	)		—			—		—			—			(240	)

		Total stockholders’ equity		64,914			152,635			227,997		29,826			(410,458	)		64,914

		Total liabilities and stockholders’ Equity	$	153,595		$	284,398		$	451,054	$	29,059		$	(404,726	)	$	513,380

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING BALANCE SHEETS
As of December 31, 2001
(Unaudited)
(In thousands)


									Guarantor		Non-Guarantor
			VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Current assets:




	Cash and equivalents		$	—		$	3,467		$	3,260	$	376		$	—		$	7,103




	Trade accounts receivable, net			—			—			17,702		334			—			18,036




	Inventory, prepaid expenses and other			—			1,165			5,160		554			—			6,879




	Deferred income taxes			—			7,364			—		—			—			7,364




	Prepaid income taxes			—			2,782			—		—			—			2,782

		Total current assets		—			14,778			26,122		1,264			—			42,164




Property and equipment, net				—			8,421			78,225		2,598			—			89,244




Other assets:




	Goodwill, net			—			—			298,198		19,064			—			317,262




	Covenants not to compete, net			—			—			4,211		616			—			4,827




	Deferred financing costs, net			780			10,600			—		—			—			11,380




	Other assets			320			498			1,986		840			—			3,644




Investment in subsidiaries				123,842			179,391			19,920		—			(323,153	)		—

		Total assets	$	124,942		$	213,688		$	428,662	$	24,382		$	(323,153	)	$	468,521

Current liabilities:




	Current portion of long-term obligations		$	—		$	4,766		$	389	$	4		$	—		$	5,159




	Accounts payable			—			5,223			2,074		16			—			7,313




	Accrued payroll and related liabilities			—			5,019			6,440		258			—			11,717




	Accrued interest			—			2,254			—		—			—			2,254




	Other accrued liabilities			—			13,373			2,968		10			—			16,351

		Total current liabilities		—			30,635			11,871		288			—			42,794




Long-term obligations, less current portion				54,345			324,152			672		4			—			379,173




Deferred income taxes				—			1,684			—		—			—			1,684




Minority interest				—			—			—		—			5,106			5,106




Intercompany payable (receivable)				30,833			(266,625	)		236,728		(936	)		—			—




Stockholders’ equity:




	Common stock			37			—			—		—			—			37




	Additional paid-in capital			188,840			—			—		—			—			188,840




	Retained earnings (accumulated deficit)			(146,594	)		125,697			179,391		25,026			(330,114	)		(146,594	)




	Accumulated comprehensive loss			(1,855	)		(1,855	)		—		—			1,855			(1,855	)




	Notes receivable from stockholders			(664	)		—			—		—			—			(664	)

		Total stockholders’ equity		39,764			123,842			179,391		25,026			(328,259	)		39,764

		Total liabilities and stockholders’ equity	$	124,942		$	213,688		$	428,662	$	24,382		$	(323,153	)	$	468,521

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002
(Unaudited)
(In thousands)


								Guarantor		Non-Guarantor
		VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Revenue		$	—		$	500		$	105,480	$	9,228		$	(236	)	$	114,972




Direct costs			—			—			70,573		6,820			(236	)		77,157

			—			500			34,907		2,408			—			37,815




Selling, general and administrative expense			—			3,628			4,733		371			—			8,732




Depreciation and amortization			—			352			2,497		179			—			3,028




Gain on sale of assets			—			(80	)		—		—			—			(80	)

	Operating income (loss)		—			(3,400	)		27,677		1,858			—			26,135




Net interest expense			2,408			7,813			21		(34	)		—			10,208




Other income			—			(5	)		—		—			—			(5	)




Equity interest in income of subsidiaries			8,507			17,035			1,462		—			(27,004	)		—

	Income before minority interest, provision for income taxes, and extraordinary item		6,099			5,827			29,118		1,892			(27,004	)		15,932




Minority interest in income of subsidiaries			—			—			—		—			430			430

	Income (loss) before provision for income taxes and extraordinary item		6,099			5,827			29,118		1,892			(27,434	)		15,502




Provision (benefit) for income taxes			(936	)		(4,681	)		12,083		—			—			6,466

	Income before extraordinary item		7,035			10,508			17,035		1,892			(27,434	)		9,036




Extraordinary loss on early extinguishment of debt, net of tax			—			2,001			—		—			—			2,001

	Net income	$	7,035		$	8,507		$	17,035	$	1,892		$	(27,434	)	$	7,035

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2001
(Unaudited)
(In thousands)


								Guarantor		Non-Guarantor
		VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Revenue		$	—		$	500		$	93,939	$	8,366		$	(169	)	$	102,636




Direct costs			—			—			64,710		6,140			(169	)		70,681

			—			500			29,229		2,226			—			31,955




Selling, general and administrative expense			—			3,948			5,335		308			—			9,591




Depreciation and amortization			—			1,591			4,558		283			—			6,432




Gain on sale of assets			—			(92	)		—		—			—			(92	)

	Operating income (loss)		—			(4,947	)		19,336		1,635			—			16,024




Net interest expense			4,229			6,062			31		(5	)		—			10,317




Other (income) expense			—			4			—		—			—			4




Equity interest in income of subsidiaries			4,454			11,093			1,236		—			(16,783	)		—

	Income before minority interest and provision for income taxes		225			80			20,541		1,640			(16,783	)		5,703




Minority interest in income of subsidiaries			—			—			—		—			404			404

	Income before provision for income taxes		225			80			20,541		1,640			(17,187	)		5,299




Provision (benefit) for income taxes			(1,799	)		(4,374	)		9,448		—			—			3,275

	Net income	$	2,024		$	4,454		$	11,093	$	1,640		$	(17,187	)	$	2,024

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2002
(Unaudited)
(In thousands)


								Guarantor		Non-Guarantor
		VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Revenue		$	—		$	1,500		$	309,421	$	26,642		$	(671	)	$	336,892




Direct costs			—			—			208,057		19,363			(671	)		226,749

			—			1,500			101,364		7,279			—			110,143




Selling, general and administrative expense			—			10,456			14,389		1,048			—			25,893




Depreciation and amortization			—			1,026			7,776		528			—			9,330




Gain on sale of assets			—			(80	)		—		—			—			(80	)

	Operating income (loss)		—			(9,902	)		79,199		5,703			—			75,000




Net interest expense			6,935			23,614			83		(91	)		—			30,541




Other income			—			(159	)		—		—			—			(159	)




Equity interest in income of subsidiaries			27,257			48,606			4,434		—			(80,297	)		—

	Income before minority interest, provision for income taxes and extraordinary item		20,322			15,249			83,550		5,794			(80,297	)		44,618




Minority interest in income of subsidiaries			—			—			—		—			1,360			1,360

	Income before provision for income taxes and extraordinary item		20,322			15,249			83,550		5,794			(81,657	)		43,258




Provision (benefit) for income taxes			(2,843	)		(14,009	)		34,944		—			—			18,092

	Income before extraordinary item		23,165			29,258			48,606		5,794			(81,657	)		25,166




Extraordinary loss on early extinguishment of debt, net of tax			—			2,001			—		—			—			2,001

	Net income	$	23,165		$	27,257		$	48,606	$	5,794		$	(81,657	)	$	23,165

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2001
(Unaudited)
(In thousands)


								Guarantor		Non-Guarantor
		VCA			Vicar			Subsidiaries		Subsidiaries			Elimination			Consolidated

Revenue		$	—		$	1,500		$	281,814	$	22,538		$	(487	)	$	305,365




Direct costs			—			—			197,342		16,599			(487	)		213,454

			—			1,500			84,472		5,939			—			91,911




Selling, general and administrative expense			—			11,537			18,010		818			—			30,365




Depreciation and amortization			—			4,835			13,533		753			—			19,121




Write-down and (gain) loss on sale of assets			—			8,745			—		—			—			8,745

	Operating income (loss)		—			(23,617	)		52,929		4,368			—			33,680




Net interest expense			12,332			19,976			102		(23	)		—			32,387




Other expense			—			233			—		—			—			233




Equity interest in income of subsidiaries			1,194			30,302			3,287		—			(34,783	)		—

	Income before minority interest and provision for income taxes		(11,138	)		(13,524	)		56,114		4,391			(34,783	)		1,060




Minority interest in income of subsidiaries			—			—			—		—			1,104			1,104

	Income (loss) before provision for income taxes		(11,138	)		(13,524	)		56,114		4,391			(35,887	)		(44	)




Provision (benefit) for income taxes			(4,353	)		(14,718	)		25,812		—			—			6,741

	Net income (loss)	$	(6,785	)	$	1,194		$	30,302	$	4,391		$	(35,887	)	$	(6,785	)

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002
(Unaudited)
(In thousands)


									Guarantor			Non-Guarantor
			VCA			Vicar			Subsidiaries			Subsidiaries			Elimination			Consolidated

Cash from operating activities:




	Net income		$	23,165		$	27,257		$	48,606		$	5,794		$	(81,657	)	$	23,165




	Adjustments to reconcile net income to net cash provided by (used in) operating activities:




		Equity interest in earnings of subsidiaries		(27,257	)		(48,606	)		(4,434	)		—			80,297			—




		Depreciation and amortization		—			1,026			7,776			528			—			9,330




		Amortization of deferred financing costs and debt discount		(84	)		1,348			—			—			—			1,264




		Provision for uncollectible accounts		—			—			2,068			279			—			2,347




		Extraordinary loss on early extinguishment of debt		—			3,391			—			—			—			3,391




		Interest paid in kind on senior subordinated notes		7,045			—			—			—			—			7,045




		Gain on sale of assets		—			(80	)		—			—			—			(80	)




		Minority interest in income of subsidiaries		—			—			—			—			1,360			1,360




		Distributions to minority interest partners		—			(1,339	)		—			—			—			(1,339	)




		Increase in accounts receivable		—			—			(4,413	)		(642	)		—			(5,055	)




		Decrease (increase) in inventory, prepaid expenses and other assets		74			(155	)		(817	)		(20	)		—			(918	)




		Increase in accounts payable and accrued liabilities		—			1,358			2,544			43			—			3,945




		Increase (decrease) in accrued payroll and related liabilities		—			3,157			(365	)		—			—			2,792




		Increase in accrued interest		—			3,395			10			—			—			3,405




		Decrease in prepaid income taxes		—			2,782			—			—			—			2,782




		Increase in income tax payable		—			2,035			—			—			—			2,035




		Increase in deferred income tax asset		—			(2,318	)		—			—			—			(2,318	)




		Increase in deferred income tax liability		—			7,687			—			—			—			7,687




		Increase (decrease) in intercompany payable (receivable)		(3,392	)		55,869			(46,300	)		(6,177	)		—			—

	Net cash provided by (used in) operating activities			(449	)		56,807			4,675			(195	)		—			60,838

Cash flows from investing activities:




		Business acquisitions, net of cash acquired		—			(17,845	)		—			—			—			(17,845	)




		Property and equipment additions, net		—			(7,475	)		(5,930	)		—			—			(13,405	)




		Proceeds from sale of assets		—			1,391			—			—			—			1,391




		Other		—			447			(288	)		—			—			159

	Net cash used in investing activities			—			(23,482	)		(6,218	)		—			—			(29,700	)

Cash flows from financing activities:




		Repayment of long-term obligations		—			(145,978	)		—			—			—			(145,978	)




		Proceeds from issuance of long term debt		—			143,061			—			—			—			143,061




		Payment of accrued financing and recapitalization costs		—			(3,415	)		—			—			—			(3,415	)




		Proceeds from issuance of common stock under stock option plans		25			—			—			—			—			25




		Other		424			—			—			—			—			424

	Net cash provided by (used in) financing activities			449			(6,332	)		—			—			—			(5,883	)

Increase (decrease) in cash and cash equivalents				—			26,993			(1,543	)		(195	)		—			25,255




Cash and cash equivalents at beginning of year				—			3,467			3,260			376			—			7,103

Cash and cash equivalents at end of year			$	—		$	30,460		$	1,717		$	181		$	—		$	32,358

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001
(Unaudited)
(In thousands)


										Guarantor			Non-Guarantor
				VCA			Vicar			Subsidiaries			Subsidiaries			Elimination			Consolidated

Cash from operating activities:




	Net income (loss)			$	(6,785	)	$	1,194		$	30,302		$	4,391		$	(35,887	)	$	(6,785	)




		Adjustments to reconcile net income (loss) to




		net cash provided by operating activities:




			Equity interest in earnings of subsidiaries		(1,194	)		(30,302	)		(3,287	)		—			34,783			—




			Depreciation and amortization		—			4,835			13,533			753			—			19,121




			Amortization of deferred financing costs and debt discount		97			1,570			—			—			—			1,667




			Provision for uncollectible accounts		—			—			1,959			223			—			2,182




			Non-cash compensation		—			771			6,840			—			—			7,611




			Interest paid in kind on senior subordinated notes		12,259			—			—			—			—			12,259




			Write-down and loss on sale of assets		—			8,745			—			—			—			8,745




			Minority interest in income of subsidiaries		—			—			—			—			1,104			1,104




			Distributions to minority interest partners		—			(1,083	)		—			—			—			(1,083	)




			Increase in accounts receivable, net		—			—			(3,435	)		(301	)		—			(3,736	)




			Decrease (increase) in inventory, prepaid expense and other assets		(25	)		177			624			(91	)		—			685




			Increase (decrease) in accounts payable and accrued liabilities		—			(790	)		483			—			—			(307	)




			Increase (decrease) in accrued payroll and related liabilities		—			3,900			(19	)		49			—			3,930




			Increase (decrease) in accrued interest		—			(1,678	)		131			—			—			(1,547	)




			Decrease in prepaid income taxes		—			479			—			—			—			479




			Increase in deferred income tax asset		—			(1,180	)		—			—			—			(1,180	)




			Increase in deferred income tax liability		—			6,171			—			—			—			6,171




			Decrease (increase) in intercompany payable (receivable)		(4,352	)		52,837			(43,588	)		(4,897	)		—			—

	Net cash provided by operating activities				—			45,646			3,543			127			—			49,316

Cash flows from investing activities:




			Business acquisitions, net of cash acquired		—			(20,615	)		—			—			—			(20,615	)




			Real estate acquired in connection with business acquisitions		—			(675	)		—			—			—			(675	)




			Property and equipment additions, net		—			(8,381	)		(1,548	)		—			—			(9,929	)




			Proceeds from sale of assets		—			603			—			—			—			603




			Other		—			195			90			—			—			285

	Net cash used in investing activities				—			(28,873	)		(1,458	)		—			—			(30,331	)

Cash flows from financing activities:




			Repayment of long-term obligations		—			(3,735	)		—			—			—			(3,735	)




			Payment of accrued financing and recapitalization costs		—			(2,138	)		—			—			—			(2,138	)

	Net cash used in financing activities				—			(5,873	)		—			—			—			(5,873	)

Increase in cash and cash equivalents					—			10,900			2,085			127			—			13,112




Cash and cash equivalents at beginning of year					—			8,165			2,073			281			—			10,519

Cash and cash equivalents at end of year				$	—		$	19,065		$	4,158		$	408		$	—		$	23,631

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 1 of this quarterly report on Form 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 of 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 November 8, 2002, and we undertake no duty to update this information. Should events occur subsequent to November 8, 2002 that make it necessary to update the forward-looking information contained in this Form 10-Q, the updated forward-looking information will be filed with the Securities and Exchange Commission in a quarterly report on Form 10-Q or a current report on Form 8-K, each of which will be available at our website at www.vcaantech.com. More information about potential factors that could affect our business and financial results is included in the section entitled “Risk Factors.”

Overview

We operate a leading animal health care services company and operate the largest networks of veterinary diagnostic laboratories and free-standing, 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 routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care.

Our company was formed in 1986 by Robert Antin, Arthur Antin and Neil Tauber, who have served since our inception as our Chief Executive Officer, Chief Operating Officer and Senior Vice President, respectively. During the 1990s, we established a premier position in the veterinary diagnostic laboratory and animal hospital markets through both internal growth and acquisitions. By 1997, we achieved a critical mass, building a laboratory network of 12 laboratories servicing animal hospitals in all 50 states and completing acquisitions for a total of 160 animal hospitals. At September 30, 2002, our laboratory network consisted of 19 laboratories serving all 50 states and our animal hospital network consisted of 225 animal hospitals in 33 states. We primarily focus on generating internal growth to increase revenue and profitability. In order to augment internal growth, we may selectively acquire laboratories and intend to acquire approximately 15 to 25 animal hospitals per year, depending upon the attractiveness of candidates and the strategic fit with our existing operations.

The following table summarizes our growth in facilities for the periods presented:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2002			2001			2002			2001

Laboratories:




	Beginning of period		18			15			16			15




	Acquisitions and new facilities		1			—			3			—




	Relocated into other labs operated by us		—			—			—			—

	End of period		19			15			19			15

Animal hospitals:




	Beginning of period		220			211			214			209




	Acquisitions		7			5			18			18




	Relocated into hospitals operated by us		(2	)		(2	)		(7	)		(10	)




	Sold or closed		—			—			—			(3	)

	End of period		225			214			225			214

	Owned at end of period		167			161			167			161




	Managed at end of period		58			53			58			53

Basis of Reporting

General

Our discussion and analysis of our financial condition and results of operations are based upon our condensed, consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Revenue is recognized 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.

Laboratory Revenue

A portion of laboratory revenue is intercompany revenue that was generated by providing laboratory services to our animal hospitals. This revenue is eliminated in the condensed, consolidated statements of operations.

Laboratory revenue is presented net of discounts. Some discounts, such as those given to clients for prompt payment, are applied to clients’ accounts in periods subsequent to the period the revenue was recognized. These discounts which are not yet applied to clients’ accounts are estimated and deducted from revenue in the period the related revenue was recognized. These estimates are based upon historical experience. Errors in estimates would not have a material effect on our financial statements.

Animal Hospital Revenue

Animal hospital revenue is comprised of revenue of the animal hospitals that we own and the management fees of animal hospitals that we manage. Certain states prohibit business corporations from providing or holding themselves out as providers of veterinary medical care. In these states, we enter into arrangements with a veterinary medical group that provides all veterinary medical care, while we manage the administrative functions associated with the operation of the animal hospitals and we own or lease the hospital facility. In return for our services, the veterinary medical group pays us management fees. We do not consolidate the operations of animal hospitals that we manage. However, for purposes of calculating same-facility revenue growth in our animal hospitals, we use the combined revenue of animal hospitals owned and managed for the entire periods presented. Same-facility revenue growth includes revenue generated by customers referred from relocated or combined animal hospitals.

Other Revenue

Other revenue is comprised of consulting fees from Heinz Pet Products relating to the marketing of its proprietary pet food.

Direct Costs

Laboratory direct costs are comprised of all costs of laboratory services, including salaries of veterinarians, technicians and other non-administrative, laboratory-based personnel, facilities rent, occupancy costs and supply costs. Animal hospital direct costs are comprised of all costs of services and products at the hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel employed by the hospitals we own, facilities rent, occupancy costs, supply costs, certain marketing and promotional expenses and costs of goods sold associated with the retail sales of pet food and pet supplies. Direct costs do not include salaries of veterinarians, technicians and certain other hospital-based personnel employed by the hospitals we manage. As a result, our direct costs are lower as a percentage of revenue than if we had consolidated the operating results of the animal hospitals we manage into our operating results.

Selling, General and Administrative

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 sales and administrative personnel and selling, marketing and promotional expense. Animal hospital selling, general and administrative expense consists primarily of field management and administrative personnel, recruiting and certain marketing expenses. Corporate selling, general and administrative expense consists of administrative expense at our headquarters, including the salaries of corporate officers, professional expense, rent and occupancy costs.

EBITDA and Adjusted EBITDA

EBITDA is operating income before depreciation and amortization. Adjusted EBITDA for the 2001 periods represent EBITDA adjusted to exclude management fees paid pursuant to our management services agreement with Leonard Green & Partners which was terminated in November 2001, non-cash compensation and write-down of assets. No adjustments have been made to the EBITDA calculations for 2002.

EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. We believe EBITDA is a useful measure of our operating performance as it reflects earnings before the impact of items that may change from period to period for reasons not directly related to our operations, such as depreciation and amortization, interest and taxes and other non-operating or non-recurring items that occurred in 2001. EBITDA is also an important component of the financial ratios included in our debt covenants and provides us with a measure of our ability to service our debt and meet capital expenditure requirements from our operating results. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.

Non-Cash Compensation

Certain stock options granted in 2000 qualified as variable stock options. Related to these variable stock options, we recorded non-cash compensation of approximately $1.5 million and $7.6 million in the three and nine months ended September 30, 2001, respectively. Non-cash compensation is included in laboratory direct costs and in selling, general and administrative expense. In August 2001, all of these options were exercised.

Software Development Costs

We frequently research, 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. Most costs associated with the development of new software are expensed as incurred, particularly in the preliminary planning stages and the post-implementation and training stages. Costs related directly to the software design, coding, testing and installation are capitalized. Costs related to upgrades or enhancements of existing systems are capitalized if the modifications result in additional functionality.

Critical Accounting Policies and Significant Estimates

Under accounting principles generally accepted in the United States, management is required to make assumptions and estimates that directly impact our consolidated financial statements and related disclosures. Because of the uncertainties inherent in making assumptions and estimates, actual results in future periods may differ significantly from our assumptions and estimates. Management bases its assumptions and estimates on historical experience and on various other factors believed to be reasonable under the circumstances. The following represent what management believes are the critical accounting policies most affected by significant management estimates and judgments.

Worker’s Compensation Expense

On October 8, 2001, we entered into a one-year workers’ compensation insurance policy with a $250,000 per-occurrence deductible and a stop-loss aggregate deductible of $4.7 million. We have determined that $3.9 million is a reasonable estimate of expected claims losses under this policy and we are accruing for these losses over the twelve-month period ending September 30, 2002. In determining this estimate, in conjunction with the insurance carrier, we reviewed our five-year history of total claims losses, ratio of losses to premiums paid, payroll growth and the current risk control environment. We are pre-funding estimated claims losses to the insurance carrier of approximately $2.9 million.

Impairment of Goodwill

Goodwill relates to acquisitions and represents the purchase price paid and liabilities assumed in excess of the fair market value of tangible assets acquired. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, we are required to allocate our goodwill to identifiable reporting units, which are then tested for impairment using a two-step process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not necessary and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires a hypothetical allocation of the fair value of the reporting unit to the reporting unit’s assets and liabilities as if the unit were just purchased by the company at the fair value price. In this hypothetical purchase, the excess of the fair value of the reporting unit over its re-evaluated, marked-to-market net assets would be the new basis for the reporting unit’s goodwill and a write-down to this new value would be recognized as an expense.

We have determined that we have two reporting units, laboratory and animal hospital. We hired independent valuation experts to estimate the fair market value of these reporting units. The independent valuation experts concluded that the estimated value for each reporting unit is greater than the carrying amount of the net assets for those reporting units. Therefore, no impairment issues exist, and the second step of the test is not necessary. We plan to perform a valuation of our reporting units in the fourth quarter of each year or upon significant changes in our business environment.

Impairment of Long-lived Assets

We adopted SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets on January 1, 2002. Under SFAS No. 144, we will continually evaluate whether events, circumstances or net losses at the entity level have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of these assets may not be recoverable. When factors indicate that these assets should be evaluated for possible impairment, we will estimate the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the long-lived assets in question. If that estimate is less than the carrying value of the assets under review, we will recognize an impairment loss equal to that difference.

Legal Settlements

We are a party to various legal proceedings. Although we cannot determine the ultimate disposition of these proceedings, we can use judgment to reasonably estimate our liability for legal settlement costs that may arise as a result of these proceedings. Based on our prior experience, the nature of the current proceedings, and our insurance policy coverage for such matters, we have accrued $900,000 as of September 30, 2002 for legal settlements as part of other accrued liabilities.

Results of Operations

The following table sets forth components of our statements of operations data expressed as a percentage of revenue for the three and nine months ended September 30, 2002 and 2001:


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2002			2001			2002			2001

Revenue:




	Laboratory			33.6	%		32.6	%		34.7	%		33.4	%




	Animal hospital			68.0			68.7			66.9			68.0




	Other			0.4			0.5			0.4			0.5




	Intercompany			(2.0	)		(1.8	)		(2.0	)		(1.9	)

		Total revenue		100.0			100.0			100.0			100.0




Direct costs				67.1			68.9			67.3			69.9




Selling, general and administrative expense				7.6			9.3			7.7			9.9




Depreciation and amortization				2.7			6.3			2.7			6.3




Write-down and (gain) loss on sale of assets				(0.1	)		(0.1	)		—			2.9

		Operating income		22.7			15.6			22.3			11.0




Net interest expense				8.9			10.1			9.0			10.6




Other expense				—			—			—			0.1




Minority interest in income of subsidiaries				0.4			0.4			0.4			0.3




Provision for income taxes				5.6			3.1			5.4			2.2




Extraordinary loss on early extinguishment of debt, net of taxes				1.7			—			0.6			—

		Net income (loss)		6.1	%		2.0	%		6.9	%		(2.2	)%

The following table is a summary of the components of operating income by segment (in thousands):


										Inter-
					Animal					company
			Laboratory		Hospital		Corporate			Eliminations			Total

Three Months Ended September 30, 2002




	Revenue		$	38,650	$	78,118	$	500		$	(2,296	)	$	114,972




	Direct costs			21,849		57,604		—			(2,296	)		77,157




	Selling, general and administrative			2,563		2,541		3,628			—			8,732




	Depreciation and amortization			715		1,961		352			—			3,028




	Gain on sale of assets			—		—		(80	)		—			(80	)

		Operating income (loss)	$	13,523	$	16,012	$	(3,400	)	$	—		$	26,135

Three Months Ended September 30, 2001




	Revenue		$	33,471	$	70,531	$	500		$	(1,866	)	$	102,636




	Direct costs			20,081		52,466		—			(1,866	)		70,681




	Selling, general and administrative			2,725		2,918		3,948			—			9,591




	Depreciation and amortization			1,153		3,688		1,591			—			6,432




	Gain on sale of assets			—		—		(92	)		—			(92	)

		Operating income (loss)	$	9,512	$	11,459	$	(4,947	)	$	—		$	16,024


										Inter-
					Animal					company
			Laboratory		Hospital		Corporate			Eliminations			Total

Nine Months Ended September 30, 2002




	Revenue		$	116,911	$	225,383	$	1,500		$	(6,902	)	$	336,892




	Direct costs			65,545		168,106		—			(6,902	)		226,749




	Selling, general and administrative			7,632		7,805		10,456			—			25,893




	Depreciation and amortization			2,138		6,166		1,026			—			9,330




	Write-down and (gain) loss on sale of assets			—		—		(80	)		—			(80	)

		Operating income (loss)	$	41,596	$	43,306	$	(9,902	)	$	—		$	75,000

Nine Months Ended September 30, 2001




	Revenue		$	101,855	$	207,665	$	1,500		$	(5,655	)	$	305,365




	Direct costs			61,566		157,543		—			(5,655	)		213,454




	Selling, general and administrative			9,305		9,523		11,537			—			30,365




	Depreciation and amortization			3,457		10,829		4,835			—			19,121




	Write-down and loss on sale of assets			—		—		8,745			—			8,745

		Operating income (loss)	$	27,527	$	29,770	$	(23,617	)	$	—		$	33,680

Revenue

The following table summarizes our revenue (in thousands):


		Three Months Ended September 30,									Nine Months Ended September 30,

								%									%
		2002			2001			Change			2002			2001			Change

Laboratory		$	38,650		$	33,471			15.5	%	$	116,911		$	101,855			14.8	%




Animal hospital			78,118			70,531			10.8	%		225,383			207,665			8.5	%




Other			500			500						1,500			1,500




Intercompany			(2,296	)		(1,866	)					(6,902	)		(5,655	)

	Total revenue	$	114,972		$	102,636			12.0	%	$	336,892		$	305,365			10.3	%

Laboratory Revenue

Laboratory revenue increased $5.2 million, or 15.5% for the three months ended September 30, 2002 and increased $15.1 million, or 14.8% for the nine months ended September 30, 2002 compared to the same prior-year periods. The three months ended September 30, 2002 contains one less billing day than the prior-year quarter. The nine-month periods contain the same number of billing days. The components of same-facility revenue growth, as adjusted to eliminate revenue from the one extra billing day in the three months ended September 30, 2001, were as follows:


		Three Months Ended			Nine Months Ended
		September 30, 2002			September 30, 2002

Sales volume			8.9	%		5.7	%




Average price per requisition			8.1			9.1




	Same-facility revenue growth as adjusted		17.0	%		14.8	%

These increases in volume and average price per requisition were primarily the result of continued emphasis on selling our pet health and wellness programs, which increased our sales volume and the type and number of tests per requisition, and implementation of a price increase for most tests in February 2002. The same-facility revenue growth, as adjusted, for the three months ended September 30, 2002 is not indicative of future trends, as revenue for the prior-year quarter was negatively impacted by the events of September 11, 2001.

Animal Hospital Revenue

The following table summarizes our animal hospital revenue as reported and the combined revenue of animal hospitals that we owned and managed, had we consolidated the operating results of the animal hospitals we managed into our operating results (in thousands):


	Three Months Ended September 30,									Nine Months Ended September 30,

							%									%
	2002			2001			Change			2002			2001			Change

Animal hospital revenue as reported	$	78,118		$	70,531			10.8	%	$	225,383		$	207,665			8.5	%




Less: Management fees paid to us by veterinary medical groups		(11,520	)		(9,309	)					(33,713	)		(28,270	)




Add: Revenue of animal hospitals managed		21,246			17,581						61,501			52,580

Combined revenue of animal hospitals Owned and managed	$	87,844		$	78,803			11.5	%	$	253,171		$	231,975			9.1	%

Animal hospital revenue as reported increased $7.6 million, or 10.8%, for the three months ended September 30, 2002 and $17.7 million, or 8.5%, for the nine months ended September 30, 2002 compared to the same prior-year periods. These increases in animal hospital revenue resulted from the acquisition of animal hospitals and same-facility revenue growth.

Combined revenue of animal hospitals that we owned and managed increased $9.0 million, or 11.5% for the three months ended September 30, 2002 compared to the same prior-year period. This increase is primarily the result of same-facility revenue growth of 5.7%, or $4.4 million, and net acquired revenue of $4.6 million. Net acquired revenue is from the change in revenue that results from hospitals that are acquired, sold or closed on or subsequent to July 1, 2001. In addition, the three months ended September 30, 2002 included one additional business day as compared to the same prior-year period. Same-facility revenue growth, adjusted to exclude the additional business day, was 4.7% for the three months ended September 30, 2002. Combined revenue of animal hospitals that we owned and managed increased $21.2 million, or 9.1% for the nine months ended September 30, 2002 compared to the same prior-year period. This increase is primarily the result of same-facility growth of 3.6%, or $7.9 million, and net acquired revenue of $13.3 million. Net acquired revenue is from the change in revenue that results from the hospitals that are acquired, sold or closed on or subsequent to January 1, 2001. Same-facility revenue growth was primarily due to increases in the average amount spent per visit and revenue generated by customers referred from relocated or combined animal hospitals. Discussions in medical literature suggest than small animals may not require as many or as frequent vaccinations as is currently accepted practice. Any reduction in the number of visits to our hospitals resulting from less frequent vaccinations will negatively impact our ability to

continue to achieve same-facility revenue growth rates consistent with our current levels. In addition, products and supplies that we currently sell are becoming available in other distribution channels that may adversely affect our sales and the number of client visits to our hospitals.

Direct Costs

The following table summarizes our direct costs and our direct costs as a percentage of applicable revenue (in thousands):


		Three Months Ended September 30,															Nine Months Ended September 30,

		2002						2001									2002						2001

					% of						% of			%						% of						% of			%
		$			Revenue			$			Revenue			Change			$			Revenue			$			Revenue			Change

Laboratory		$	21,849			56.5	%	$	20,081			60.0	%		8.8	%	$	65,545			56.1	%	$	61,566			60.4	%		6.5	%




Animal hospital			57,604			73.7	%		52,466			74.4	%		9.8	%		168,106			74.6	%		157,543			75.9	%		6.7	%




Intercompany			(2,296	)					(1,866	)								(6,902	)					(5,655	)

	Total direct costs	$	77,157			67.1	%	$	70,681			68.9	%		9.2	%	$	226,749			67.3	%	$	213,454			69.9	%		6.2	%

Laboratory Direct Costs

Laboratory direct costs increased $1.8 million, or 8.8%, for the three months ended September 30, 2002 and $4.0 million, or 6.5%, for the nine months ended September 30, 2002 compared to the same prior-year periods. Laboratory direct costs as percentages of laboratory revenue were 56.5% and 60.0% for the three months ended September 30, 2002 and 2001 and 56.1% and 60.4% for the nine months ended September 30, 2002 and 2001. However, laboratory direct costs for the three and nine months ended September 30, 2001 include non-cash compensation of $283,000 and $1.4 million. Excluding non-cash compensation, laboratory direct costs as a percentage of laboratory revenue would have been 59.2% and 59.1% for the three and nine months ended September 30, 2001. The current year decreases in laboratory direct costs as a percentage of laboratory revenue as compared to the same prior-year periods primarily were attributable to additional operating leverage gained on increases in laboratory revenue.

Animal Hospital Direct Costs

The following table summarizes our animal hospital direct costs as reported and the combined direct costs of animal hospitals owned and managed had we consolidated the operating results of the animal hospitals we managed into our operating results (in thousands):


	Three Months Ended September 30,

	2002						2001

				% of						% of
	$			Revenue			$			Revenue			% Change

Animal hospital direct costs as reported	$	57,604			73.7	%	$	52,466			74.4	%		9.8	%




Add: Direct costs of animal hospitals managed		21,246						17,581




Less: Management fees charged by us to veterinary medical groups		(11,520	)					(9,309	)

Combined direct costs of animal hospitals owned and managed	$	67,330			76.6	%	$	60,738			77.1	%		10.9	%


	Nine Months Ended September 30,

	2002						2001

				% of						% of
	$			Revenue			$			Revenue			% Change

Animal hospital direct costs as reported	$	168,106			74.6	%	$	157,543			75.9	%		6.7	%




Add: Direct costs of animal hospitals managed		61,501						52,580




Less: Management fees charged by us to veterinary medical groups		(33,713	)					(28,270	)

Combined direct costs of animal hospitals owned and managed	$	195,894			77.4	%	$	181,853			78.4	%		7.7	%

Combined direct costs of animal hospitals owned and managed increased $6.6 million, or 10.9% for the three months ended September 30, 2002 and the $14.0 million or 7.7% for the nine months ended September 30, 2002. Combined direct costs of animal hospitals owned and managed as a percentage of animal hospital revenue decreased to 76.6% for the three months ended September 30, 2002 from 77.1% from the prior year period and decreased to 77.4% for the nine months ended September 30, 2002 from 78.4% for the prior year period.

Animal hospital direct costs as reported increased $5.1 million, or 9.8%, for the three months ended September 30, 2002 and $10.6 million, or 6.7%, for the nine months ended September 30, 2002 compared to the same prior-year periods. Animal hospital direct costs as reported as a percentage of animal hospital revenue decreased to 73.7% for the three months ended September 30, 2002 from 74.4% for the prior-year period and decreased to 74.6% for the nine months ended September 30, 2002 from 75.9% for the prior-year period.

These decreases in animal hospital direct costs as a percentage of animal hospital revenue during these periods primarily were attributable to additional operating leverage gained on increases in animal hospital revenue, because most of the costs associated with this business do not increase proportionately with increases in the volume of services rendered.

Selling, General and Administrative Expense

The following table summarizes our selling, general and administrative expense (“SG&A”) and our expense as a percentage of applicable revenue (in thousands):


		Three Months Ended September 30,													Nine Months Ended September 30,

		2002					2001								2002					2001

				% of					% of			%					% of					% of			%
		$		Revenue			$		Revenue			Change			$		Revenue			$		Revenue			Change

Laboratory		$	2,563		6.6	%	$	2,725		8.1	%		(5.9	)%	$	7,632		6.5	%	$	9,305		9.1	%		(18.0	)%




Animal hospital			2,541		3.3	%		2,918		4.1	%		(12.9	)%		7,805		3.5	%		9,523		4.6	%		(18.0	)%




Corporate			3,628		3.2	%		3,948		3.8	%		(8.1	)%		10,456		3.1	%		11,537		3.8	%		(9.4	)%

	Total SG&A	$	8,732		7.6	%	$	9,591		9.3	%		(9.0	)%	$	25,893		7.7	%	$	30,365		9.9	%		(14.7	)%

Laboratory SG&A

Laboratory SG&A for the three months ended September 30, 2002 decreased $162,000, or 5.9%, compared to the same prior-year period. Laboratory SG&A for the nine months ended September 30, 2002 decreased $1.7 million, or 18.0%, compared to the same prior-year period. However, laboratory SG&A includes non-cash compensation of $573,000 for the three months ended September 30, 2001 and $2.9 million for the nine months ended September 30, 2001. If non-cash compensation were excluded from the three months ended September 30, 2001, current period laboratory SG&A would have increased $411,000 or 19.1%, compared to the same prior-year period. Prior year laboratory SG&A would have been 6.4% of laboratory revenue as compared to 6.6% for the three months ended September 30, 2002. If non-cash compensation were excluded from the nine months ended September 30, 2001, current period laboratory SG&A would have increased $1.2 million, or 18.6%, compared to the same prior-year period. Prior year laboratory SG&A would have been 6.3% of laboratory revenue as compared to 6.5% for the nine months ended September 30, 2002.

These increases in laboratory SG&A in 2002 as compared to 2001, as adjusted to exclude non-cash compensation, were primarily due to the salaries associated with new sales representatives, an increase in commission payments to sales representatives due to increased sales, additional marketing costs incurred on our pet health and wellness programs, and an increase in legal costs in 2002.

Animal Hospital SG&A

Animal hospital SG&A for the three months ended September 30, 2002 decreased $377,000 or 12.9%, compared to the same prior-year period. Animal hospital SG&A for the nine months ended September 30, 2002 decreased $1.7 million, or 18.0%, compared to the same prior-year period. However, animal hospital SG&A includes non-cash compensation of $512,000 for the three months ended September 30, 2001 and $2.6 million for the nine months ended September 30, 2001. If non-cash compensation were excluded from the three months ended September 30, 2001, current period animal hospital SG&A would have increased $135,000 or 5.6%, compared to the same prior-year period. Prior year animal hospital SG&A would have been 3.4% as a percentage of animal hospital revenue as compared to 3.3% for the three months ended September 30, 2002. If non-cash compensation were excluded for the nine months ended September 30, 2001, current period animal hospital SG&A would have increased $842,000 or 12.1%, compared to the same prior-year period. Prior year animal hospital SG&A would have been 3.4% of animal hospital revenue as compared to 3.5% for the nine months ended September 30, 2002.

These increases in animal hospital SG&A in 2002 as compared to 2001, as adjusted to exclude non-cash compensation, primarily were due to the salaries associated with the addition of regional medical directors, and an increase in legal costs in 2002.

Corporate SG&A

Corporate SG&A for the three months ended September 30, 2002 decreased $320,000 or 8.1% compared to the same prior-year period. Corporate SG&A for the nine months ended September 30, 2002 decreased $1.1 million or 9.4%, compared to the same prior-year period. However, corporate SG&A for the three months ended September 30, 2001 includes non-cash compensation of $155,000 and management fees of $620,000 paid pursuant to our management agreement with Leonard Green & Partners that was terminated in November 2001. Corporate SG&A for the nine months ended September 30, 2001 includes non-cash compensation of $771,000 and management fees of $1.9 million, as described above. If non-cash compensation and management fees were excluded from the three months ended September 30, 2001, current year corporate SG&A would have increased $455,000, or 14.3%, compared to the same prior-year period. Prior year corporate SG&A would have been 3.1% as a percentage of total revenue as compared to 3.2% for the three months ended September 30, 2002. If non-cash compensation and management fees were excluded from the nine months ended September 30, 2001, current year corporate SG&A would have increased $1.6 million, or 17.4%, compared to the same prior-year period. Prior year corporate SG&A would have been 2.9% as a percentage of total revenue as compared to 3.1% for the nine months ended September 30, 2002.

These increases in corporate SG&A in 2002 as compared to 2001, as adjusted to exclude non-cash compensation and management fees, were primarily due to the fees associated with increased professional services and insurance costs as a result of becoming a publicly-traded company and accounting fees incurred in connection with changing our external auditors from Arthur Andersen LLP to KPMG LLP.

Adjusted EBITDA

The following tables summarize our Adjusted EBITDA and our Adjusted EBITDA as a percentage of applicable revenue (in thousands):


		Three Months Ended September 30,

		2002						2001

					% of						% of
		$			Revenue			$			Revenue			% Change

Laboratory Adjusted EBITDA (1)		$	14,238			36.8	%	$	11,521			34.4	%		23.6	%




Animal hospital Adjusted EBITDA (2)			17,973			23.0	%		15,659			22.2	%		14.8	%




Other revenue			500						500




Corporate selling, general and administrative (3)			(3,628	)		(3.2	)%		(3,173	)		(3.1	)%




Gain on sale of assets			80						92

	Total Adjusted EBITDA	$	29,163			25.4	%	$	24,599			24.0	%		18.6	%

(1) For the three months ended September 30, 2001, laboratory EBITDA was adjusted to exclude non-cash compensation of $856,000. There were no such adjustments in 2002.

(2) For the three months ended September 30, 2001, animal hospital EBITDA was adjusted to exclude non-cash compensation of $512,000. There were no such adjustments in 2002.

(3) For the three months ended September 30, 2001, corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $155,000 and management fees of $620,000. There were no such adjustments in 2002.


		Nine Months Ended September 30,

		2002						2001

					% of						% of
		$			Revenue			$			Revenue			% Change

Laboratory Adjusted EBITDA (1)		$	43,734			37.4	%	$	35,264			34.6	%		24.0	%




Animal hospital Adjusted EBITDA (2)			49,472			22.0	%		43,159			20.8	%		14.6	%




Other revenue			1,500						1,500




Corporate selling, general and administrative (3)			(10,456	)		(3.1	)%		(8,906	)		(2.9	)%




Gain (loss) on sale of assets			80						(125	)

	Total Adjusted EBITDA	$	84,330			25.0	%	$	70,892			23.2	%		19.0	%

(1) For the nine months ended September 30, 2001, laboratory EBITDA was adjusted to exclude non-cash compensation of $4.3 million. There were no such adjustments in 2002.

(2) For the nine months ended September 30, 2001, animal hospital EBITDA was adjusted to exclude non-cash compensation of $2.6 million. There were no such adjustments in 2002.

(3) For the nine months ended September 30, 2001, corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $771,000 and management fees of $1.9 million. There were no such adjustments in 2002.

Depreciation and Amortization

Depreciation and amortization expense decreased $3.4 million, or 52.9%, for the three months ended September 30, 2002 and decreased $9.8 million, or 51.2%, for the nine months ended September 30, 2002, compared to the same prior-year periods.

This decrease is primarily related to our implementation of SFAS No. 142, the result of which was that we no longer amortized goodwill as of January 1, 2002. For a detailed discussion of SFAS No. 142, see “New Accounting Pronouncements.” For the three and nine months ended September 30, 2001 we had $2.3 million and $6.9 million of goodwill amortization expense, respectively. Additionally, in November 2001, we terminated non-competition agreements with members of senior management. For the three and nine months ended September 30, 2001, we had expense related to the amortization of non-competition agreements of $1.3 million and $3.9 million, respectively.

Net Interest Expense

Net interest expense decreased $109,000 or 1.1% to $10.2 million for the three months ended September 30, 2002 from $10.3 million for the three months ended September 30, 2001. Net interest expense decreased $1.9 million, or 5.7%, to $30.5 million for the nine months ended September 30, 2002 from $32.4 million for the nine months ended September 30, 2001.

The decrease in net interest expense primarily was due to the effect of decreasing interest rates on our variable-rate obligations, and the refinancing of a portion of our higher-yield, fixed-rate debt with lower-yield, fixed-rate debt.

Other (Income) Expense

Other (income) expense consisted of non-cash gains or losses on a hedging instrument resulting from changes in the time value of our collar agreement. See Footnote (8), “Derivatives” to the Notes to Condensed, Consolidated Financial Statements for additional information.

Provision for Income Taxes

Our effective income tax rate for each period can vary from the statutory rate primarily due to the non-deductibility for income tax purposes of certain items. In 2001, our effective income tax rate varied from the statutory rate primarily due to the non-deductibility of the amortization of a portion of goodwill, the recognition of non-cash compensation and the write-down of zero-tax-basis assets. In 2002, our effective income tax rate is comparable to the statutory rate.

Minority Interest in Income of Subsidiaries

Minority interest in income of subsidiaries represents our partners’ proportionate share of net income generated by our subsidiaries that we do not wholly own. The increases in minority interest for the three and nine months ended September 30, 2002 were the result of a change in the proportionate ownership percentages of the subsidiaries, primarily due to an increase in the number of partners.

Increase in Carrying Amount of Redeemable Preferred Stock

The holders of our series A redeemable preferred stock and our series B redeemable preferred stock were entitled to receive dividends at a rate of 14% and 12%, respectively. The dividends not paid in cash compounded quarterly. The dividends earned during the three and nine months ended September 30, 2001 were added to the liquidation preference of the preferred stock. In November 2001, we redeemed all of the outstanding series A and series B redeemable preferred stock using proceeds from our initial public offering.

Extraordinary Loss on Early Extinguishment of Debt

On August 29, 2002 we refinanced our senior credit facility by borrowing $143.1 million in Senior Term C notes and used these proceeds to pay the entire outstanding principal balance on the Senior Term A and B notes. In conjunction with the transaction we wrote off $3.4 million in deferred financing costs as an extraordinary loss on early extinguishment of debt that provided a related tax benefit of $1.4 million.

Liquidity and Capital Resources

Discussion of 2002

Our cash and cash equivalents increased to $32.4 million at September 30, 2002, from $7.1 million at December 31, 2001. The increase is primarily from $60.8 million provided by operating activities offset by $29.7 million used in investing activities and $5.9 million used in financing activities.

Net cash of $60.8 million provided by operating activities consisted primarily of $23.2 million of net income adjusted for non-cash expenses of $23.3 million, a $3.4 million increase in accrued interest, a $2.8 million decrease in prepaid income taxes, a $2.0 million increase in income taxes payable, a $5.4 million net change in deferred tax assets and liabilities and approximately $700,000 provided by working capital changes.

Net cash of $29.7 million used in investing activities during the nine months ended September 30, 2002 includes $13.4 million to purchase property and equipment and $17.8 million related to the acquisition of 18 animal hospitals and current payments made related to animal hospitals acquired in prior periods.

Net cash of $5.9 million used in financing activities during the nine months ended September 30, 2002 is primarily the result of regularly-scheduled debt payments of $2.9 million and payments related to accrued financing costs of $3.4 million. In addition, we borrowed approximately $143.1 million in Senior Term C notes, and used the proceeds to repay all of our outstanding Senior Term A and B notes of $143.1 million.

Future Cash Requirements

We expect to fund our liquidity needs primarily from operating cash flows, cash on hand and, if needed, borrowings under our $50.0 million revolving credit facility, which we have not utilized as of September 30, 2002. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures and satisfy our scheduled principal and interest payments under debt and capital lease obligations for at least the next 12 months. However, a significant portion of our cash requirements will be determined by the pace and size of our acquisitions.

Estimated future uses of cash for the remainder of 2002 include capital expenditures for land, buildings and equipment of approximately $4.1 million. In addition, we intend to use available liquidity to continue our growth through the selective acquisition of animal hospitals, primarily for cash. We continue to examine acquisition opportunities in the laboratory field, which may impose additional cash requirements. Our acquisition program contemplates the acquisition of 15 to 25 animal hospitals per year and a planned cash commitment of up to $30.0 million. However, we may purchase either fewer or greater number of facilities depending upon opportunities that present themselves and our cash requirements may change accordingly. In addition, although we intend to primarily use cash in our acquisitions, we may use debt or stock to the extent we deem it appropriate.

In October 2002, we used $25.2 million of cash on hand and incurred additional borrowings of $25.0 million under our senior credit facility to voluntarily repay the entire $15.0 million principal balance on our 13.5% senior subordinated notes and $30.0 million of our 15.5% senior notes, plus fees and prepayment premiums. See “Description of Indebtedness” for additional information. After this transaction, we will use approximately $624,000 of cash during the remainder of 2002 to pay mandatory principal payments due on our outstanding indebtedness.

Description of Indebtedness

Senior Term Notes and Revolving Credit Facility

In September 2000, we entered into a credit and guaranty agreement for $300.0 million of senior secured credit facilities, which included a $50.0 million revolving credit facility as well as Senior Term A and B notes. On August 29, 2002, we refinanced our senior credit facility by borrowing $143.1 million in Senior Term C notes and used these proceeds to pay the entire outstanding principal balance on the Senior Term A and B notes. In conjunction with the transaction we wrote off $3.4 million in deferred financing costs as extraordinary loss on early extinguishment of debt, which provided a related tax benefit of $1.4 million.

The August 2002 senior credit facility refinancing resulted in a 63 basis point reduction in the weighted average interest rate of our senior term notes.

Borrowings under the credit and guaranty agreement 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%, 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.” 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 C notes is 2.00%. 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 C notes is 3.00%.

As of September 30, 2002, we had $142.7 million principal amount outstanding under the Senior Term C notes and we had not utilized the revolving credit facility. The Senior Term C notes mature in September 2008 and the revolving credit facility matures in September 2006.

The credit and guaranty agreement contains certain financial covenants pertaining to interest coverage, fixed charge coverage and leverage ratios. In addition, the credit and guaranty agreement has restrictions pertaining to capital expenditures, acquisitions and the payment of dividends on all classes of stock. We currently believe the most restrictive covenant is the fixed-charge coverage ratio, which is calculated on a last twelve-month basis by dividing pro forma adjusted EBITDA by fixed charges. Fixed charges are defined as cash interest expense, scheduled principal payments on debt obligations, capital expenditures, management fees paid and provision for income taxes. At September 30, 2002, we had a fixed charge coverage ratio of 1.50 to 1.00. The credit and guaranty agreement requires a fixed-charge coverage ratio of no less than 1.10 to 1.00.

Senior Subordinated Notes

In September 2000, we issued $20.0 million principal amount of senior subordinated notes due on September 20, 2010. As of September 30, 2002, the outstanding principal balance of our senior subordinated notes was $15.0 million. On October 24, 2002 we prepaid the entire outstanding balance of these notes. See “October 2002 Debt Prepayment” below.

In November 2001, Vicar, our wholly-owned subsidiary, issued $170.0 million 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. As of September 30, 2002, the outstanding principal balance of these senior subordinated notes was $170.0 million. We and each existing and future domestic wholly-owned restricted subsidiary of Vicar have jointly and severally, fully and unconditionally guaranteed 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 for these notes.

Senior Notes

In September 2000, we issued $100.0 million principal amount of senior notes due September 20, 2010. Interest on our senior notes is 15.5% per annum, payable semi-annually in arrears in cash or by issuance of additional senior notes. We have issued $25.9 million in additional senior notes to pay interest since the issue date. As of September 30, 2002, the outstanding principal balance of our senior notes was $66.7 million.

On October 24, 2002 we prepaid $30.0 million principal amount on our senior notes plus accrued interest and prepayment premium. See “October 2002 Debt Prepayment” below.

Other Debt

We have secured seller notes, unsecured debt and capital leases which total $1.7 million at September 30, 2002.

October 2002 Debt Prepayment

On October 24, 2002 we prepaid $30.0 million principal amount of our 15.5% senior notes and retired all of our outstanding 13.5% senior subordinated notes in the aggregate principal amount of $15.0 million. We prepaid these notes with funds from an additional $25.0 million of Senior Term C notes issued under the our senior credit facility and $25.2 million of cash on hand. For the next twelve months, this net reduction in debt and the lower effective interest rate will result in an estimated net annual pre-tax savings of approximately $5.0 million in interest expense calculated assuming a 5.0% rate on our variable Senior Term C notes and an opportunity cost of 1.5% for the cash used.

In connection with this repayment we expect to incur approximately $9.6 million of costs, including $4.8 million in prepayment premium and transaction costs, and $4.8 million in non-cash costs pertaining to the write-off of unamortized discount and deferred financing costs associated with the debt retired. These charges will be recognized during the fourth quarter of 2002 as an extraordinary loss in the amount of approximately $5.5 million, net of income tax benefit.

Future Cash Obligations for Long-Term Debt, Interest and Operating Leases

The following table sets forth our scheduled principal, interest and other contractual annual cash obligations due by us for each of the years ending December 31, adjusted to reflect the impact of the no-fee swap agreement with Wells Fargo, which becomes effective November 29, 2002, the additional Senior Term C notes borrowed and the voluntary repayment of our 13.5% senior subordinated notes and a portion of our 15.5% senior notes, which occurred in October 2002 (in thousands):


	Total		2002		2003		2004		2005		2006		Thereafter

Long-term debt	$	378,538	$	3,541	$	1,894	$	1,860	$	4,044	$	21,487	$	345,712




Fixed interest		174,720		20,694		19,333		19,134		21,328		22,448		71,783




Variable interest		54,675		7,588		5,926		7,584		11,013		11,744		10,820




Collar agreement		2,340		2,340		—		—		—		—		—




PIK interest		16,610		—		—		—		16,610		—		—




Capital lease obligations		79		79		—		—		—		—		—




Operating leases		192,612		12,247		12,530		12,575		12,285		12,165		130,810




Other long-term obligations		2,424		2,424		—		—		—		—		—

	$	821,998	$	48,913	$	39,683	$	41,153	$	65,280	$	67,844	$	559,125

We have both fixed-rate and variable-rate debt. Our variable-rate debt is based on a variable-rate component plus a fixed margin. We projected the variable-rate component to be 1.83%, 1.68%, 2.90%, 3.75% and 4.27% for years 2002 through 2006, respectively. Our consolidated financial statements included in our 2001 Annual Report on Form 10-K discuss these variable-rate notes in more detail.

Through March 2005, interest on our 15.5% senior notes is payable semi-annually and, at our option, in cash or by issuing additional senior notes. The additional senior notes are considered paid-in-kind interest, commonly referred to as “PIK interest,” and are reflected in the above table. They have the same terms as the original notes except they mature in September 2005. We have issued additional senior notes for all of our historical interest payments on the 15.5% senior notes and intend to continue doing so through March 2005. After March 2005, interest is payable semi-annually, in cash.

Our Collar Agreement

On November 13, 2000, we entered into a no-fee interest rate collar agreement with Wells Fargo Bank effective November 15, 2000 and expiring November 15, 2002. Our collar agreement is considered a cash flow hedge based on the London interbank offer rate, or LIBOR, pays out monthly, resets monthly and has a cap and floor notional amount of $62.5 million, with a cap rate of 7.5% and floor rate of 5.9%.

The actual cash paid by us as a result of LIBOR rates falling below the floor of our collar agreement is recorded as a component of earnings. For the nine months ended September 30, 2002, we have made payments of $1.9 million that are included in interest expense.

At September 30, 2002, the fair market value of our collar agreement was a net liability to us of $326,000 and is included in other accrued liabilities on our balance sheet.

On November 7, 2002 we entered into a no-fee swap agreement with Wells Fargo Bank effective November 29, 2002 and expiring November 29, 2004. The agreement swaps monthly variable LIBOR rates for a fixed rate of 2.22% on a notional amount of $40.0 million. The agreement qualifies for hedge accounting.

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 will be or their possible impact.

New Accounting Pronouncements

Goodwill and Other Intangible Assets

In June 2001, the Financial Accounting Standards Board, (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually, or whenever there is an indication of impairment. Intangible assets with finite lives will continue to be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

We adopted SFAS No. 142 on January 1, 2002. In doing so, we determined that we have two reporting units, Laboratory and Animal Hospital. On April 15, 2002, an independent valuation group concluded that the fair value of our reporting units exceeded their carrying value and accordingly, as of that date, we concluded there were no goodwill impairment issues. We plan to perform a valuation of our reporting units annually, or upon significant changes in our business environment.

As of September 30, 2002 our goodwill, net of accumulated amortization, was $332.5 million. We recorded $2.3 million and $6.9 million in goodwill amortization, for the three and nine months ended September 30, 2001, respectively. Because of the adoption of SFAS No. 142 there was no amortization of goodwill for the three and nine months ended September 30, 2002.

Goodwill Impairment Test

In August 2002, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 02-13, Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB No. 142, Goodwill and Other Intangible Assets. EITF Issue No. 02-13 was issued to provide guidance on how to account for deferred tax balances in determining a reporting unit’s fair value, a reporting unit’s carrying amount and the implied fair value of goodwill. The consensus in this issue will be applied prospectively in performing either the first or second step of the impairment test required by SFAS No. 142 for tests performed after September 12, 2002. We have not determined yet what impact EITF Issue No. 02-13 will have on our consolidated financial statements.

Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We will adopt SFAS No. 143 in the first quarter of fiscal year 2003. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial statements.

Impairment of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation for discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of by Sale, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (“APB No. 30”), Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We adopted SFAS No. 144 on January 1, 2002 without material impact on our financial statements.

We will continually evaluate whether events, circumstances or net losses at the entity level have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of these assets may not be recoverable. When factors indicate that these assets should be evaluated for possible impairment, we will estimate the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the long-lived assets in question. If that estimate is less than the carrying value of the assets under review, we will recognize an impairment loss equal to that difference.

Gains and Losses from Extinguishment of Debt and Capital Leases

We will adopt SFAS No. 145 at the beginning of fiscal year 2003. As detailed in Footnote (5), “Extraordinary Loss on Early Extinguishment of Debt”, we recognized extraordinary losses related to the early extinguishment of debt of approximately $3.4 million, before taxes, during the three months ended September 30, 2002. We also expect to incur an additional extraordinary loss in the fourth quarter of 2002 related to additional prepayment of debt in the amount of $5.5 million, net of income tax benefit. In addition, we recognized extraordinary losses related to the early extinguishment of debt, before taxes in the amount of approximately $17.2 million and $4.5 million during years 2001 and 2000, respectively. We do not believe these losses on extinguishment of debt meet the criteria of APB No. 30 as we have historically participated in and may continue to participate in periodic debt refinancing. As a result of adopting SFAS No. 145, we will reclassify the losses on extinguishment of debt from extraordinary losses to a component of income from recurring operations for filings subsequent to January 1, 2003. This reclassification will not impact net income.

SFAS No. 145 also amends SFAS No. 13, Accounting for Leases. Under SFAS No. 145, if a capital lease is modified such that it becomes an operating lease, a gain or loss must be recognized similar to the accounting used for sale-leaseback transactions as provided in SFAS No. 28 and No. 98. At September 30, 2002, we had capital lease obligations of $43,000. Although the Company may enter into more capital leases, management does not expect SFAS No. 145 to have a material impact on its financial statements.

Costs Associated with Exit or Disposal of Activities

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when a company is committed to future payment of those liabilities under a binding, legal obligation. SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination

Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which required that exit and disposal costs be recognized as liabilities when a company formalized its plan for exiting or disposing of an activity even if no legal obligation had been established.

SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, however early adoption is encouraged. Currently, we have no plans to exit or dispose of any of its business activities that would require the use of SFAS No. 146 nor do we anticipate that SFAS No. 146 will change any of our business practices.

Outlook

In our third quarter of 2002, we reported earnings per diluted share before extraordinary item of $0.24, which was $0.04 above the street consensus. In light of these results, we raised our targets for 2002. Our goal for 2002 income before extraordinary loss on early extinguishment of debt has increased to a range of $27 to $28 million and our goal for 2002 EBITDA is a range of $100 to $103 million. Based upon 37.2 million shares expected to be outstanding, annual earnings per diluted share before extraordinary loss on early extinguishment of debt for 2002 is currently expected to be $0.74.

Our future results of operations in this outlook involve a number of risks and uncertainties that are discussed below. We believe that we have the service offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenue, costs, margins and profits are all influenced by a number of factors, all of which are inherently difficult to forecast.

Risk Factors

This Quarterly Report on Form 10-Q, including “Risk Factors” set forth below, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never 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 Securities and Exchange Commission reports, including but not limited to the items discussed below.

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. Our internal growth rate may decline and could become negative. Our laboratory internal revenue growth has fluctuated between 9.1% and 12.6% for each fiscal year from 1998 through 2001. Similarly, our animal hospital same-facility revenue growth rate has fluctuated between 2.6% and 7.0% over the same fiscal years. 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.

Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.

Since January 1, 1996, we have experienced rapid growth and expansion. Our failure to manage our growth effectively may increase our costs of operations and hinder our ability to execute our business strategy. Our rapid growth has placed, and will continue to place, a significant strain on our management and operational systems and resources. At January 1, 1996, we operated 59 hospitals, operated laboratories servicing approximately 9,000 customers in 27 states and had approximately 1,150 full-time equivalent employees. At September 30, 2002, we operated 225 hospitals, operated laboratories servicing approximately 13,000 customers in all 50 states and had approximately 3,500 full-time equivalent employees. If our business continues to grow, we will need to improve and enhance our overall financial and managerial controls, reporting systems and procedures, and expand, train and manage our workforce in order to maintain control of expense and achieve desirable economies of scale. We also will need to increase the capacity of our current systems to meet additional demands.

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 15 to 25 animal hospitals per year, however, based on the opportunity, the number could be higher. Historically we have experienced delays and increased costs in integrating some hospitals primarily 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. These factors have resulted in decreased revenue, increased costs and lower margins. We continue to face risks in connection with our acquisitions including:

• negative effects on our operating results;

• impairments of goodwill;

• dependence on retention, hiring and training of key personnel, including specialists;

• impairment of intangible assets; 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-downs.

At September 30, 2002, our balance sheet reflected $332.5 million of goodwill, which is a substantial portion of our total assets of $513.4 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 exceeds their carrying values. If we determine that the fair market value of one of our reporting units does not exceed 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. In 2002, an independent valuation group concluded that the fair value of

our goodwill exceeded it’s carrying value and accordingly, as of that date, there were no goodwill impairment issues. 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.

In October 2002, we borrowed $25.0 million in additional Senior Term C notes. These proceeds and cash on-hand were used to voluntarily repay the entire principal on our 13.5% senior subordinated notes and $30.0 million in principal on our 15.5% senior notes. The following table details our debt balances at September 30, 2002 and the pro forma balances as if the additional Senior Term C notes were incurred and the voluntary repayment of our 13.5% senior subordinated notes and a portion of our 15.5% senior notes had occurred on September 30, 2002 (in thousands):


		As of September 30, 2002

		Actual			Adjustment			Pro Forma

Senior Term C notes		$	142,703		$	25,000		$	167,703




13.5% senior subordinated notes			15,000			(15,000	)		—




9.875% senior subordinated notes			170,000						170,000




15.5% senior notes			66,715			(30,000	)		36,715




Other			1,658						1,658

			396,076						376,076




Less – unamortized discount			(7,242	)		4,214			(3,028	)

	Total debt obligations	$	388,834					$	373,048

The following table sets forth our scheduled principal and interest payments due by us for each of the years ending December 31, adjusted to reflect the impact of the no-fee swap agreement with Wells Fargo, which becomes effective November 29, 2002, the additional Senior Term C notes borrowed and the voluntary repayment of our 13.5% senior subordinated notes and a portion of our 15.5% senior notes, which occurred in October 2002 (in thousands):


		2002		2003		2004		2005		2006

Long-term debt		$	3,541	$	1,894	$	1,860	$	4,044	$	21,487




Fixed interest			20,694		19,333		19,134		21,328		22,448




Variable interest			7,588		5,926		7,584		11,013		11,744




Collar agreement			2,340		—		—		—		—




PIK interest			—		—		—		16,610		—

	Total	$	34,163	$	27,153	$	28,578	$	52,995	$	55,679

Through March 2005, interest on our 15.5% senior notes is payable semi-annually and, at our option, in cash or by issuing additional senior notes. The additional senior notes are considered PIK interest and are reflected in the above table. They have the same terms as the original notes except they mature in September 2005. We have issued additional senior notes for all of our historical interest payments on the 15.5% senior notes and intend to continue doing so through March 2005. After March 2005, interest is payable semi-annually, in cash.

Our ability to make payments on our debt, and to fund acquisitions, will depend on 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 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 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 indentures and senior credit facility:

• limit our funds available to repay the senior notes and 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 indentures 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.

Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect our operating income.

Approximately 57% of our expense, 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.

The significant competition in the animal health care services industry could cause us to reduce prices or lose market share.

The animal diagnostic laboratory and animal health care service industries are 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. which currently competes or intends to compete in most of the same markets we are in. Also, Idexx and several other national companies provide on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests.

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 close 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 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 September 30, 2002, 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 across the country, particularly in some regional markets in which we operate animal hospitals including Northern California. During these 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 September 30, 2002 we operated 58 animal hospitals in 11 states with these laws, including 21 in New York. 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.

We currently are a party to a lawsuit in the State of Ohio in which that State has alleged that our management of a veterinary medical group licensed to practice veterinary medicine in that state violates the Ohio statute prohibiting business corporations from providing or holding themselves out as providers of veterinary

medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining us from operating in the State of Ohio in a manner that is in violation of the State of Ohio statute. In response, we restructured our operations in the State of Ohio in a manner believed to conform to the state law and the court’s order. The Attorney General of the State of Ohio informed us that it disagreed with our position that we are in compliance with the court’s order. In June 2001 we appeared at a status conference before the trial court, at which time the court directed the parties to meet together to attempt to settle this matter. Consistent with the trial court’s directive, we engaged in discussions with the Attorney General’s office in the State of Ohio. The parties were not able to reach a settlement prior to an additional status conference that occurred in February 2002. At that status conference, the court ordered the parties to participate in a court-supervised settlement conference that occurred in April 2002. Pursuant to discussions with the Ohio Attorney General at that settlement conference, we submitted to the Ohio Attorney General a revised management agreement that incorporates further revisions to the structure of our operations in Ohio. Following its review of the revised agreement, the Ohio Attorney General requested further revisions to the management agreement, and, in response we have submitted a further revised agreement that currently is under review by the Ohio Attorney General. We may not be able to reach a settlement, in which case we may be required to discontinue our operations in the state. Our five animal hospitals in the State of Ohio have a net book value of $6.4 million as of September 30, 2002. If we were required to discontinue our operations in the State of Ohio, we may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue and operating income of $1.6 million and $461,000, respectively, for the nine months ended September 30, 2002, and $2.1 million and $409,000, for the year ended December 31, 2001.

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 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, 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 electronic 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 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 will disrupt our transportation network and our ability to provide test results in a timely manner. 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.

There is a concentration of ownership among our existing executive officers, directors and principal stockholders.

Our executive officers, directors and principal stockholders beneficially own, in the aggregate, approximately 35.6% of our outstanding common stock. As a result, these stockholders are able to significantly affect our management, our policies and all matters requiring stockholder approval. The directors supported by these stockholders will be able to significantly affect decisions relating to our capital structure, including decisions to issue additional capital stock, implement stock repurchase programs and be in our indebtedness. The effects of this concentration of ownership may deter hostile takeovers, delay or prevent changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interests.

Political events and the uncertainly resulting from them may have a material adverse effect on our operating results.

The terrorist attacks which took place in the United States on September 11, 2001, along with the United States’ military campaign against terrorism in Afghanistan and elsewhere, ongoing violence in the Middle East and increasing speculation regarding future military action against Iraq have created many economic and political uncertainties, some of which may affect the markets in which we operate, our operations and profitability and your investment. The potential near-term and long-term effect these attacks may have for our customers, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable and we may not be able to foresee events that could have an adverse effect on our markets, our business or your investment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have certain debt obligations as well as a collar agreement that are exposed to market risk associated with variable interest rates. As of September 30, 2002, we had borrowings of $142.7 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 entered into a no-fee interest rate collar agreement with a cap and floor notional amount of $62.5 million, a cap rate of 7.5% and a floor rate of 5.9%, both based on LIBOR. The collar agreement expires November 15, 2002.

Accordingly, for the period January 1, 2002 to November 15, 2002:

• if the benchmark rate is below 5.9% and a change in the rate does not cause the benchmark to exceed 5.9%, every one-half percent increase in the benchmark rate will cause interest expense to increase by $445,000, while a one-half percent decrease will cause interest expense to decrease by $445,000;

• if the benchmark rate is equal to or between 5.9% and 7.5% and a change in the rate does not cause the benchmark to exceed 7.5% or drop below 5.9%, every one-half percent increase in the benchmark rate will cause interest expense to increase by $718,000, while a one-half percent decrease will cause interest expense to decrease by $718,000; and

• if the benchmark rate is above 7.5% and a change in the rate does not cause the benchmark to drop below 7.5%, every one-half percent increase in the benchmark rate would cause interest expense to increase by $445,000, while a one-half percent decrease would cause interest expense to decrease by $445,000.

On October 24, 2002 we repaid $30.0 million of our 15.5% senior notes and retired all of our $15.0 million outstanding 13.5% senior subordinated notes. Funds used to repay the debt and related fees and transaction costs were derived from an additional $25.0 million of Senior Term C notes issued under our senior credit facility and $25.2 million of cash on hand. As a result of this transaction we increased the amount of our debt subject to fluctuating interest rates from $142.7 million at September 30, 2002 to $167.7 million.

The net impact of these two transactions reduced the amount of our debt subject to the risk of fluctuating interest rates to $127.7 million. Based on this $127.7 million, for every 1% increase or decrease in interest rates our annual interest expense will increase or decrease by $1.3 million.

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

Within the 90-day period prior to the date of this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting us to material information required to be included by us in this quarterly report on Form 10-Q.

There have been no significant changes in our internal controls, or in other factors, which could significantly affect internal controls subsequent to the date that we completed the evaluation.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Ohio Attorney General’s office filed a lawsuit on December 14, 1998, in the Franklin County Court of Common Pleas in the State of Ohio in which the state alleged that our management of a veterinary medical group licensed to practice veterinary medicine in that state violates the Ohio statute prohibiting business corporations from providing, or holding themselves out as providers of, veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining us from operating in the State of Ohio in a manner that is in violation of the state statute. In response, we restructured our operations in the State of Ohio in a manner believed to conform to the state law and the court’s order. The Attorney General of the State of Ohio informed us that it disagreed with our position that we are in compliance with the court’s order. In June 2001, we appeared at a status conference before the trial court at which time the court directed the parties to meet together to attempt to settle this matter. Consistent with the trial court’s directive, we engaged in discussions with the Attorney General’s office in the State of Ohio. The parties were not able to reach a settlement prior to an additional status conference that occurred in February 2002. At that status conference, the court ordered the parties to participate in a court-supervised settlement conference that occurred in April 2002. Pursuant to discussions with the Ohio Attorney General at that settlement conference, we submitted to the Ohio Attorney General a revised management agreement that incorporates further revisions to the structure of our operations in Ohio. Following its review of the revised agreement, the Ohio Attorney General requested further revisions to the management agreement, and, in response, we have submitted a further revised agreement that currently is under review by the Ohio Attorney General. If a settlement cannot be reached, the company would be required to discontinue operations in the state. Our five animal hospitals in the State of Ohio have a book value of $6.4 million as of September 30, 2002. If we were required to discontinue our operations in the State of Ohio, we may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue and operating income of $1.6 million and $461,000, respectively, for the nine months ended September 30, 2002, and $2.1 million and $409,000, for the year ended December 31, 2001.

On November 30, 2001, two majority stockholders of a company that merged with Zoasis.com, Inc. in June 2000 filed a civil complaint against VCA, Zoasis.com, Inc. and Robert Antin. In the merger, the two stockholders received a less than 10% interest in Zoasis. At the same time, VCA acquired a less than 20% interest in Zoasis.com, Inc. for an investment of $5.0 million. Robert Antin, VCA’s Chief Executive Officer, President and Chairman of the Board, is the majority stockholder of Zoasis.com and serves on its board of directors. The complaint alleges securities fraud under California law, common law fraud, negligent misrepresentation and declaratory judgment arising from the plaintiffs’ investment in Zoasis.com. On December 31, 2001, we filed a demurrer to the complaint. On February 25, 2002, the plaintiffs filed an opposition to our demurrer, and on March 1, 2002, we filed our reply to plaintiffs’ opposition. On March 7, 2002, our demurrer was denied. On March 22, 2002, we filed an answer to plaintiffs’ complaint denying all allegations in the complaint, and we filed a counter claim alleging breach of contract and claim and delivery. We currently are involved in the discovery process. A status conference was held on May 9, 2002 at which the judge ordered the parties to participate in mediation. Mediation occurred on August 7, 2002, and no settlement was reached. The court has scheduled a final status conference for January 31, 2003, and a trial date of February 14, 2003.

We are a party to various other legal proceedings that arise in the ordinary course of business. Although we cannot determine the ultimate disposition of these proceedings, we can use judgment to reasonably estimate our liability for legal settlement costs that may arise as a result of these proceedings. Based on our prior experience, the nature of the current proceedings and our insurance policy coverage for such matters, we have accrued a minimal amount for legal settlements as part of other accrued liabilities.

ITEM 2. CHANGES IN SECURITIES

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:

99.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

(1) Report on form 8-K, filed July 26, 2002, reporting under item 5, earnings for the second quarter ended June 30, 2002 and earnings guidance.

(2) Report on form 8-K, filed September 3, 2002, reporting under item 5, the Fourth Amendment to the Credit & Guaranty Agreement, which provided for the repayment of Senior Term A and B notes with the proceeds from the issuance of Senior Term C notes which bear a lower interest rate than the weighted average interest rate for the Senior Term A and B notes.

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, on today’s date, November 14, 2002.


	By:		/s/ Tomas W. Fuller Tomas W. Fuller
	Its:		Chief Financial Officer

Certification of
Chief Executive Officer
of VCA Antech, Inc.

I, Robert L. Antin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002.


By:		/s/ Robert L. Antin Robert L. Antin Chief Executive Officer

Certification of
Chief Financial Officer
of VCA Antech, Inc.

I, Tomas W. Fuller, certify that:

Date: November 14, 2002


By:		/s/ Tomas W. Fuller Tomas W. Fuller Chief Financial Officer

EXHIBIT INDEX


Exhibit 99.1			1




Exhibit 99.2			2

	•		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.

(1)		For the three months ended September 30, 2001, laboratory EBITDA was adjusted to exclude non-cash compensation of $856,000. There were no such adjustments in 2002.




(2)		For the three months ended September 30, 2001, animal hospital EBITDA was adjusted to exclude non-cash compensation of $512,000. There were no such adjustments in 2002.




(3)		For the three months ended September 30, 2001, corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $155,000 and management fees of $620,000. There were no such adjustments in 2002.

(1)		For the nine months ended September 30, 2001, laboratory EBITDA was adjusted to exclude non-cash compensation of $4.3 million. There were no such adjustments in 2002.




(2)		For the nine months ended September 30, 2001, animal hospital EBITDA was adjusted to exclude non-cash compensation of $2.6 million. There were no such adjustments in 2002.




(3)		For the nine months ended September 30, 2001, corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $771,000 and management fees of $1.9 million. There were no such adjustments in 2002.

	•		negative effects on our operating results;

	•		impairments of goodwill;

	•		dependence on retention, hiring and training of key personnel, including specialists;

	•		impairment of intangible assets; and

	•		contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, an acquired business.

	•		limit our funds available to repay the senior notes and 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.

	•		if the benchmark rate is below 5.9% and a change in the rate does not cause the benchmark to exceed 5.9%, every one-half percent increase in the benchmark rate will cause interest expense to increase by $445,000, while a one-half percent decrease will cause interest expense to decrease by $445,000;

	•		if the benchmark rate is equal to or between 5.9% and 7.5% and a change in the rate does not cause the benchmark to exceed 7.5% or drop below 5.9%, every one-half percent increase in the benchmark rate will cause interest expense to increase by $718,000, while a one-half percent decrease will cause interest expense to decrease by $718,000; and

	•		if the benchmark rate is above 7.5% and a change in the rate does not cause the benchmark to drop below 7.5%, every one-half percent increase in the benchmark rate would cause interest expense to increase by $445,000, while a one-half percent decrease would cause interest expense to decrease by $445,000.

	99.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	(1)		Report on form 8-K, filed July 26, 2002, reporting under item 5, earnings for the second quarter ended June 30, 2002 and earnings guidance.

	(2)		Report on form 8-K, filed September 3, 2002, reporting under item 5, the Fourth Amendment to the Credit & Guaranty Agreement, which provided for the repayment of Senior Term A and B notes with the proceeds from the issuance of Senior Term C notes which bear a lower interest rate than the weighted average interest rate for the Senior Term A and B notes.

1.		I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;

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

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

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a.		Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c.		Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a.		All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and