VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 11/07/2008 14:27:36)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16783
 
VCA Antech, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   95-4097995
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
12401 West Olympic Boulevard
Los Angeles, California 90064-1022

(Address of principal executive offices)
(310) 571-6500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ Accelerated filer  o   Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ .
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value, 84,633,329 shares as of November 4, 2008.
 
 

 


 

VCA Antech, Inc.
Form 10-Q
September 30, 2008
Table of Contents
             
        Page  
        Number  
  Financial Information        
  Financial Statements (Unaudited)        
 
  Condensed, Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007     1  
 
      2  
 
  Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007     3  
 
  Notes to Condensed, Consolidated Financial Statements     4  
      16  
  Quantitative and Qualitative Disclosures About Market Risk     30  
  Controls and Procedures     31  
  Other Information        
  Legal Proceedings     31  
  Risk Factors     31  
  Unregistered Sales of Equity Securities and Use of Proceeds     31  
  Defaults Upon Senior Securities     32  
  Submission of Matters to a Vote of Security Holders     32  
  Other Information     32  
  Exhibits     32  
 
  Signature     33  
 
  Exhibit Index     34  
  EXHIBIT 31.1
  EXHIBIT 31.2
  EXHIBIT 32.1

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value)
                 
    September 30,     December 31,  
    2008     2007  
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 95,303     $ 110,866  
Trade accounts receivable, less allowance for uncollectible accounts of $11,474 and $10,940 at September 30, 2008 and December 31, 2007, respectively
    44,948       42,650  
Inventory
    24,998       25,517  
Prepaid expenses and other
    19,245       15,307  
Deferred income taxes
    15,284       14,402  
Prepaid income taxes
    549       8,160  
 
           
Total current assets
    200,327       216,902  
Property and equipment, less accumulated depreciation and amortization of $143,486 and $124,884 at September 30, 2008 and December 31, 2007, respectively
    251,242       214,020  
Goodwill
    890,393       821,967  
Other intangible assets, net
    33,914       22,373  
Notes receivable, net
    12,766       3,493  
Deferred financing costs, net
    1,186       1,537  
Other
    15,738       6,419  
 
           
Total assets
  $ 1,405,566     $ 1,286,711  
 
           
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Current portion of long-term obligations
  $ 7,778     $ 7,886  
Accounts payable
    23,685       28,092  
Accrued payroll and related liabilities
    34,427       38,341  
Other accrued liabilities
    47,405       42,074  
 
           
Total current liabilities
    113,295       116,393  
Long-term obligations, less current portion
    546,791       552,294  
Deferred income taxes
    36,208       28,197  
Other liabilities
    8,474       11,236  
Minority interest
    13,422       10,207  
 
               
Commitments and contingencies
               
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding
           
 
               
Stockholders’ equity:
               
Common stock, par value $0.001, 175,000 shares authorized, 84,631 and 84,335 shares outstanding as of September 30, 2008 and December 31, 2007, respectively
    85       84  
Additional paid-in capital
    306,765       296,037  
Accumulated earnings
    382,891       275,598  
Accumulated other comprehensive loss
    (2,365 )     (3,335 )
 
           
Total stockholders’ equity
    687,376       568,384  
 
           
Total liabilities and stockholders’ equity
  $ 1,405,566     $ 1,286,711  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Income Statements
(Unaudited)
(In thousands, except per share amounts)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Revenue
  $ 332,035     $ 306,537     $ 974,301     $ 871,987  
Direct costs
    243,267       220,235       705,536       619,887  
 
                       
Gross profit
    88,768       86,302       268,765       252,100  
Selling, general and administrative expense
    22,003       22,295       67,990       65,811  
Write-down and loss on sale of assets
    90       333       33       875  
 
                       
Operating income
    66,675       63,674       200,742       185,414  
Interest expense, net
    6,709       8,930       21,369       21,374  
Other expense (income)
    12       (1 )     (24 )     226  
 
                       
Income before minority interest and provision for income taxes
    59,954       54,745       179,397       163,814  
Minority interest in income of subsidiaries
    1,180       1,187       3,125       3,061  
 
                       
Income before provision for income taxes
    58,774       53,558       176,272       160,753  
Provision for income taxes
    23,000       21,329       68,979       64,364  
 
                       
Net income
  $ 35,774     $ 32,229     $ 107,293     $ 96,389  
 
                       
 
                               
Basic earnings per share
  $ 0.42     $ 0.38     $ 1.27     $ 1.15  
 
                       
Diluted earnings per share
  $ 0.42     $ 0.38     $ 1.25     $ 1.13  
 
                       
 
                               
Weighted-average shares outstanding
for basic earnings per share
    84,463       83,957       84,394       83,769  
 
                       
Weighted-average shares outstanding
for diluted earnings per share
    85,789       85,752       85,789       85,572  
 
                       
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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VCA Antech, Inc. and Subsidiaries
Condensed, Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
                 
    Nine Months Ended  
    September 30,  
    2008     2007  
Cash flows from operating activities:
               
Net income
  $ 107,293     $ 96,389  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    23,762       19,764  
Amortization of debt issue costs
    351       253  
Provision for uncollectible accounts
    3,671       3,561  
Write-down and loss on sale of assets
    33       875  
Share-based compensation
    5,309       3,429  
Minority interest in income of subsidiaries
    3,125       3,061  
Distributions to minority interest partners
    (2,797 )     (2,262 )
Deferred income taxes
    9,894       4,627  
Excess tax benefit from exercise of stock options
    (1,846 )     (6,576 )
Other
    212       (115 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (5,736 )     (4,823 )
Inventory, prepaid expenses and other assets
    (5,972 )     1,140  
Accounts payable and other accrued liabilities
    (438 )     (1,195 )
Accrued payroll and related liabilities
    (3,553 )     (3,958 )
Income taxes
    9,457       20,983  
 
           
Net cash provided by operating activities
    142,765       135,153  
 
           
Cash flows from investing activities:
               
Business acquisitions, net of cash acquired
    (89,775 )     (214,758 )
Real estate acquired in connection with business acquisitions
    (15,063 )     (7,962 )
Property and equipment additions
    (39,764 )     (38,033 )
Proceeds from sale of assets
    1,774       1,774  
Other
    (15,024 )     (188 )
 
           
Net cash used in investing activities
    (157,852 )     (259,167 )
 
           
Cash flows from financing activities:
               
Repayment of long-term obligations
    (5,852 )     (6,282 )
Proceeds from issuance of long-term obligations
          160,000  
Payment of debt issue costs
          (897 )
Proceeds from issuance of common stock under stock option plans
    3,574       6,668  
Excess tax benefit from exercise of stock options
    1,846       6,576  
 
           
Net cash (used in) provided by financing activities
    (432 )     166,065  
 
           
Effect of currency exchange rate changes on cash and cash equivalents
    (44 )      
 
           
(Decrease) increase in cash and cash equivalents
    (15,563 )     42,051  
Cash and cash equivalents at beginning of period
    110,866       45,104  
 
           
Cash and cash equivalents at end of period
  $ 95,303     $ 87,155  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements
September 30, 2008
(Unaudited)
1. Nature of Operations
     Our company, VCA Antech, Inc. (“VCA”) is a Delaware corporation formed in 1986 and is based in Los Angeles, California. We are an animal healthcare company with three strategic segments: veterinary diagnostic laboratories (“Laboratory”), animal hospitals (“Animal Hospital”) and veterinary medical technology (“Medical Technology”).
     We operate a full-service veterinary diagnostic laboratory network serving all 50 states. Our laboratory network 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. At September 30, 2008, we operated 42 laboratories of various sizes located strategically throughout the United States and Canada.
     Our animal hospitals offer a full range of general medical and surgical services for companion animals. Our animal hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet-wellness programs, including health examinations, diagnostic testing, vaccinations, spaying, neutering and dental care. At September 30, 2008, we operated 467 animal hospitals throughout 39 states.
     Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, provides education and training on the use of that equipment, and provides consulting and mobile imaging services.
2. Basis of Presentation
     Our accompanying unaudited, condensed, consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) 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 notes required by GAAP in the United States for annual financial statements as permitted under applicable rules and regulations. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for the full year ending December 31, 2008. For further information, refer to our consolidated financial statements and notes thereto included in our 2007 Annual Report on Form 10-K.
     The preparation of our condensed, consolidated financial statements in accordance with GAAP in the United States requires management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.
3. Acquisitions
     We acquired the following animal hospitals and laboratories during the nine months ended September 30, 2008:
         
Animal Hospitals:
       
Acquisitions
    43  
Acquisitions relocated into our existing animal hospitals
    (9 )
 
     
Total
    34  
 
     
Laboratories:
       
Acquisitions
    3  
Acquisitions relocated into our existing laboratories
     
 
     
Total
    3  
 
     

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
3. Acquisitions, continued
Animal Hospital and Laboratory Acquisitions
     The following table summarizes the preliminary purchase price, including acquisition costs, paid by us for the 43 animal hospitals and three laboratories we acquired during the nine months ended September 30, 2008, and the preliminary allocation of the purchase price (in thousands):
         
Preliminary Purchase Price:
       
Cash
  $ 88,136  
Liabilities assumed
    4,794  
 
     
Total
  $ 92,930  
 
     
 
       
Preliminary Allocation of the Purchase Price:
       
Tangible assets
  $ 3,093  
Identifiable intangible assets
    16,828  
Goodwill (1)
    73,009  
 
     
Total
  $ 92,930  
 
     
 
(1)   We expect that $59.5 million of the goodwill recorded for these acquisitions as of September 30, 2008 will be fully deductible for income tax purposes.
     In addition to the purchase price listed above are cash payments made for real estate acquired in connection with our purchase of animal hospitals totaling $15.1 million for the nine months ended September 30, 2008.
Other Acquisition Payments
     In connection with substantially all of our acquisitions, we withheld a portion of the purchase price (“holdback”) as security for indemnification obligations of the sellers under the acquisition agreement. We paid $2.2 million to sellers for the unused portion of holdbacks during the nine months ended September 30, 2008. The total outstanding holdbacks at September 30, 2008 and December 31, 2007 were $4.3 million and $2.2 million, respectively.
     We also paid $538,000 for earn-out payments during the nine months ended September 30, 2008.
4. Goodwill and Other Intangible Assets
Goodwill
     Goodwill represents the excess of the cost of an acquired entity over the net of the fair value of identifiable assets acquired and liabilities assumed. The following table presents the changes in the carrying amount of our goodwill for the nine months ended September 30, 2008 (in thousands):
                                 
            Animal     Medical        
    Laboratory     Hospital     Technology     Total  
Balance as of December 31, 2007
  $ 95,344     $ 707,463     $ 19,160     $ 821,967  
Goodwill acquired
    315       73,198             73,513  
Goodwill related to minority interests
          1,769             1,769  
Other (1)
    62       (6,918 )           (6,856 )
 
                       
Balance as of September 30, 2008
  $ 95,721     $ 775,512     $ 19,160     $ 890,393  
 
                       

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
4. Goodwill and Other Intangible Assets, continued
 
(1)   Other includes purchase price adjustments and earn-out payments. During the three months ended September 30, 2008, we recorded adjustments to goodwill for a $2.3 million refund received related to Healthy Pet’s working capital calculation and $2.5 million for the release of a deferred tax valuation reserve related to the Pet’s Choice acquisition.
Other Intangible Assets
     In addition to goodwill, we have amortizable intangible assets at September 30, 2008 and December 31, 2007 as follows (in thousands):
                                                 
    As of September 30, 2008     As of December 31, 2007  
    Gross             Net     Gross             Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Covenants not-to-compete
  $ 16,626     $ (7,709 )   $ 8,917     $ 13,487     $ (6,928 )   $ 6,559  
Non-contractual customer relationships
    23,173       (3,089 )     20,084       12,992       (2,755 )     10,237  
Favorable lease asset
    5,612       (1,483 )     4,129       5,594       (1,019 )     4,575  
Technology
    1,259       (1,003 )     256       1,270       (822 )     448  
Trademarks
    699       (233 )     466       582       (185 )     397  
Contracts
                      380       (309 )     71  
Client lists
    121       (59 )     62       137       (51 )     86  
 
                                   
Total
  $ 47,490     $ (13,576 )   $ 33,914     $ 34,442     $ (12,069 )   $ 22,373  
 
                                   
     The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Aggregate amortization expense
  $ 1,792     $ 967     $ 4,739     $ 2,997  
 
                       
     The estimated amortization expense related to intangible assets for the remainder of 2008 and each of the succeeding years thereafter as of September 30, 2008 is as follows (in thousands):
         
Remainder of 2008
  $ 1,848  
2009
    6,835  
2010
    6,024  
2011
    5,213  
2012
    2,751  
Thereafter
    11,243  
 
     
Total
  $ 33,914  
 
     

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
5. Other Accrued Liabilities
     Other accrued liabilities consisted of the following (in thousands):
                 
    September 30,     December 31,  
    2008     2007  
Accrued workers’ compensation insurance
  $ 9,078     $ 6,051  
Deferred revenue
    8,005       7,018  
Interest rate swap liability
    4,301       5,827  
Accrued health insurance
    3,932       3,273  
Holdbacks
    4,320       2,215  
Accrued lease payments
    1,818       2,329  
Accrued liability insurance
    2,209       1,787  
Accrued post-retirement healthcare
    1,594       1,281  
Accrued accounting fees
    1,320       690  
Other
    10,828       11,603  
 
           
 
  $ 47,405     $ 42,074  
 
           
6. Interest Rate Swap Agreements
     We have entered into interest rate swap agreements whereby we pay to the counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from counterparties based on current London Interbank Offer Rates (“LIBOR”) and the same set notional principal amounts. The purpose of these hedges is to offset the variability of cash flows due to our outstanding variable rate debt under our senior term notes. A summary of these agreements is as follows:
                                 
    Interest Rate Swap Agreements
     
Fixed interest rate
    5.51%       4.95%       5.34%       2.64%  
Notional amount (in millions)
    $50.0       $ 75.0       $100.0       $100.0  
Effective date
    6/20/2006       4/30/2007       6/11/2007       2/12/2008  
Expiration date
    6/30/2009       4/30/2009       12/31/2009       2/26/2010  
Counterparty
  Goldman Sachs   Wells Fargo   Goldman Sachs   Wells Fargo
Qualifies for hedge accounting
  Yes   Yes   Yes   Yes
     The following table summarizes cash received or cash paid and ineffectiveness reported in earnings as a result of our interest rate swap agreements (in thousands):
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2008   2007   2008   2007
Cash paid (received) (1)
  $ 1,639     $ (426 )   $ 4,030     $ (1,446 )
Recognized (gain) loss from ineffectiveness (2)
  $ 12     $ 108     $ (24 )   $ 335  
 
(1)   Our interest rate swap agreements effectively convert a certain amount of our variable-rate debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid for interest. The above table depicts both cash payments to and receipts from the counterparties on our swap agreements. These payments and receipts are offset by a corresponding decrease or increase in interest paid on our variable-rate debt under our senior credit facility.
 
(2)   These recognized (gains) losses are included in other expense (income) in our consolidated income statements.
     On January 1, 2008, we adopted the applicable provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement s (“SFAS No. 157”), which defines fair value, establishes a framework

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
6. Interest Rate Swap Agreements, continued
for measuring fair value and expands disclosures about fair value measurements related to financial instruments. In December 2007, the Financial Accounting Standards Board (“FASB”) provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis. Accordingly, our adoption of SFAS No. 157 was limited to our financial assets and liabilities, which consist of our interest rate swap agreements.
     We use the market approach to measure fair value for our interest rate swap agreements. The market approach uses prices and other relevant information generated by market transactions involving comparable assets or liabilities.
     SFAS No. 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. SFAS No. 157 establishes a three-tiered fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
    Level 1. Observable inputs such as quoted prices in active markets;
 
    Level 2. Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
 
    Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
     The following table reflects the fair value as defined by SFAS No. 157, of our interest rate swap agreements which are measured on a recurring basis (in thousands):
                                 
            Basis of Fair Value Measurement  
            Quoted Prices     Significant Other     Significant  
    Balance at     In Active Markets     Observable     Unobservable  
    September 30,     for Identical Items     Inputs     Inputs  
    2008     (Level 1)     (Level 2)     (Level 3)  
 
                               
Interest rate swap agreements:
                               
Prepaid expenses and other
  $ 730     $     $ 730     $  
 
                       
Other accrued liabilities
  $ 4,301     $     $ 4,301     $  
 
                       
7. Share-Based Compensation
Stock Option Activity
     There were no stock options granted during the nine months ended September 30, 2008. The aggregate intrinsic value of our stock options exercised during the three and nine months ended September 30, 2008 was $4.5 million and $5.8 million, respectively, and the actual tax benefit realized on options exercised during these periods was $1.8 million and $2.2 million, respectively.
     At September 30, 2008 there was $98,000 of total unrecognized compensation cost related to our stock options. This cost is expected to be recognized over a weighted-average period of less than one year.

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
7. Share-Based Compensation, continued
     The compensation cost that has been charged against income for stock options for the three months ended September 30, 2008 and 2007 was $418,000 and $440,000, respectively. The corresponding income tax benefit recognized was $163,000 and $175,000 for the three months ended September 30, 2008 and 2007, respectively.
     The compensation cost that has been charged against income for stock options for the nine months ended September 30, 2008 and 2007 was $1.3 million and $1.4 million, respectively. The corresponding income tax benefit recognized was $503,000 and $569,000 for the nine months ended September 30, 2008 and 2007, respectively.
Non-vested Stock Activity
     During the nine months ended September 30, 2008, we granted 420,445 shares of non-vested common stock, 177,000 of which were issued to certain of our executives and contain performance conditions. The performance-based awards provide that the number of shares that will ultimately vest will be between 0% and 100% of the total granted based upon the attainment of performance targets. Assuming continued service through each vesting date, these awards vest in three installments as follows: 25% in March 2010, 50% in March 2011 and 25% in March 2012.
     Total compensation cost charged against income related to non-vested stock awards was $1.6 million and $689,000 for the three months ended September 30, 2008 and 2007, respectively. The corresponding income tax benefit recognized in the income statement was $611,000 and $274,000 for the three months ended September 30, 2008 and 2007, respectively.
     Total compensation cost charged against income related to non-vested stock awards was $4.0 million and $2.0 million for the nine months ended September 30, 2008 and 2007, respectively. The corresponding income tax benefit recognized in the income statement was $1.6 million and $783,000 for the nine months ended September 30, 2008 and 2007, respectively.
     At September 30, 2008, there was $16.3 million of unrecognized compensation cost related to these non-vested shares, which will be recognized over a weighted-average period of 3.0 years, assuming the performance conditions are met. A summary of our non-vested stock activity for the nine months ended September 30, 2008 is as follows (in thousands, except per share amounts):
                 
            Weighted-  
            Average Fair  
            Value  
    Shares     Per Share  
Outstanding at December 31, 2007
    352,832     $ 32.90  
Granted
    420,445       30.31  
Vested
    (2,667 )     40.59  
Forfeited/Canceled
    (1,500 )     32.34  
 
           
Outstanding at September 30, 2008
    769,110     $ 31.46  
 
           
8. Calculation of Earnings per Share
     Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic and diluted earnings per share were calculated as follows (in thousands, except per share amounts):

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
8. Calculation of Earnings per Share, continued
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Net income
  $ 35,774     $ 32,229     $ 107,293     $ 96,389  
 
                       
 
                               
Weighted-average common shares outstanding:
                               
Basic
    84,463       83,957       84,394       83,769  
Effect of dilutive potential common shares:
                               
Stock options
    1,184       1,718       1,271       1,750  
Non-vested shares
    142       77       124       53  
 
                       
Diluted
    85,789       85,752       85,789       85,572  
 
                       
 
                               
Basic earnings per share
  $ 0.42     $ 0.38     $ 1.27     $ 1.15  
 
                       
Diluted earnings per share
  $ 0.42     $ 0.38     $ 1.25     $ 1.13  
 
                       
     For the three months ended September 30, 2008, potential common shares of 45,330 was excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.
     For the nine months ended September 30, 2008 and 2007, potential common shares of 45,330 and 49,729, respectively, were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.
9. Comprehensive Income
     Total comprehensive income consists of net income and the other comprehensive gain (loss) during the three and nine months ended September 30, 2008 and 2007. The following table provides a summary of comprehensive income (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Net income
  $ 35,774     $ 32,229     $ 107,293     $ 96,389  
Other comprehensive gain (loss):
                               
 
                               
Foreign currency translation adjustments
    (206 )           (224 )      
Unrealized loss on foreign currency
    (92 )           (92 )      
 
                               
Unrealized loss on hedging instruments
    (218 )     (3,069 )     (1,983 )     (2,135 )
Tax benefit
    129       1,219       808       848  
 
                               
Loss (gain) on hedging instruments reclassified to income
    1,639       (426 )     4,030       (1,446 )
Tax (expense) benefit
    (639 )     170       (1,569 )     575  
 
                       
Other comprehensive gain (loss)
    613       (2,106 )     970       (2,158 )
 
                       
Total comprehensive income
  $ 36,387     $ 30,123     $ 108,263     $ 94,231  
 
                       
10.   Segment Reporting
     Our reportable segments are Laboratory, Animal Hospital and Medical Technology. These segments are strategic business units that have different services, products and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risks and rewards. Our Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
10. Segment Reporting, continued
animal hospitals and those independent of us. Our Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services to the veterinary market. We also operate a corporate office that provides general and administrative support services for our other segments.
     The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2007 Annual Report on Form 10-K. We evaluate the performance of our segments based on gross profit and operating income. For purposes of reviewing the operating performance of our segments, all intercompany sales and purchases are accounted for as if they were transactions with independent third parties at current market prices.
     The following is a summary of certain financial data for each of our segments (in thousands):
                                                 
            Animal     Medical             Intercompany        
    Laboratory     Hospital     Technology     Corporate     Eliminations     Total  
 
                                               
Three Months Ended September 30, 2008
                                               
 
                                               
External revenue
  $ 69,035     $ 253,251     $ 9,749     $     $     $ 332,035  
Intercompany revenue
    8,030             2,797             (10,827 )      
 
                                   
Total revenue
    77,065       253,251       12,546             (10,827 )     332,035  
Direct costs
    41,792       202,965       8,224             (9,714 )     243,267  
 
                                   
Gross profit
    35,273       50,286       4,322             (1,113 )     88,768  
Selling, general and administrative expense
    5,178       5,643       3,120       8,062             22,003  
Write-down and loss on sale of assets
    3       25       2       60             90  
 
                                   
Operating income (loss)
  $ 30,092     $ 44,618     $ 1,200     $ (8,122 )   $ (1,113 )   $ 66,675  
 
                                   
 
                                               
Depreciation and amortization
  $ 1,923     $ 5,816     $ 404     $ 446     $ (152 )   $ 8,437  
Capital expenditures
  $ 2,777     $ 11,327     $ 46     $ 756     $ (685 )   $ 14,221  
 
                                               
Three Months Ended September 30, 2007
                                               
 
                                               
External revenue
  $ 66,964     $ 229,409     $ 10,164     $     $     $ 306,537  
Intercompany revenue
    7,302             927             (8,229 )      
 
                                   
Total revenue
    74,266       229,409       11,091             (8,229 )     306,537  
Direct costs
    38,628       181,825       7,830             (8,048 )     220,235  
 
                                   
Gross profit
    35,638       47,584       3,261             (181 )     86,302  
Selling, general and administrative expense
    4,859       5,411       2,761       9,264             22,295  
Write-down and loss on sale of assets
    14       312       6       1             333  
 
                                   
Operating income (loss)
  $ 30,765     $ 41,861     $ 494     $ (9,265 )   $ (181 )   $ 63,674  
 
                                   
 
                                               
Depreciation and amortization
  $ 1,742     $ 4,461     $ 409     $ 512     $ (100 )   $ 7,024  
Capital expenditures
  $ 2,084     $ 7,383     $ 142     $ 1,468     $ (280 )   $ 10,797  

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
10. Segment Reporting, continued
                                                 
            Animal     Medical             Intercompany        
    Laboratory     Hospital     Technology     Corporate     Eliminations     Total  
 
                                               
Nine Months Ended September 30, 2008
                                               
                                                 
External revenue
  $ 211,684     $ 730,352     $ 32,265     $     $     $ 974,301  
Intercompany revenue
    23,950             5,968             (29,918 )      
 
                                   
Total revenue
    235,634       730,352       38,233             (29,918 )     974,301  
Direct costs
    122,145       586,309       24,776             (27,694 )     705,536  
 
                                   
Gross profit
    113,489       144,043       13,457             (2,224 )     268,765  
Selling, general and administrative expense
    15,314       16,815       9,502       26,359             67,990  
Write-down and loss (gain) on sale of assets
    3       (64 )     22       72             33  
 
                                   
Operating income (loss)
  $ 98,172     $ 127,292     $ 3,933     $ (26,431 )   $ (2,224 )   $ 200,742  
 
                                   
 
                                               
Depreciation and amortization
  $ 5,378     $ 16,234     $ 1,205     $ 1,359     $ (414 )   $ 23,762  
Capital expenditures
  $ 8,192     $ 30,473     $ 303     $ 2,198     $ (1,402 )   $ 39,764  
 
                                               
Nine Months Ended September 30, 2007
                                               
 
                                               
External revenue
  $ 206,233     $ 635,046     $ 30,708     $     $     $ 871,987  
Intercompany revenue
    20,840             2,190             (23,030 )      
 
                                   
Total revenue
    227,073       635,046       32,898             (23,030 )     871,987  
Direct costs
    115,467       505,581       21,541             (22,702 )     619,887  
 
                                   
Gross profit
    111,606       129,465       11,357             (328 )     252,100  
Selling, general and administrative expense
    14,872       16,292       8,389       26,258             65,811  
Write-down and loss on sale of assets
    72       756       46       1             875  
 
                                   
Operating income (loss)
  $ 96,662     $ 112,417     $ 2,922     $ (26,259 )   $ (328 )   $ 185,414  
 
                                   
 
                                               
Depreciation and amortization
  $ 4,688     $ 12,751     $ 1,216     $ 1,390     $ (281 )   $ 19,764  
Capital expenditures
  $ 9,808     $ 23,663     $ 566     $ 4,604     $ (608 )   $ 38,033  
 
                                               
At September 30, 2008
                                               
Total assets
  $ 194,493     $ 1,026,914     $ 43,175     $ 150,122     $ (9,138 )   $ 1,405,566  
 
                                   
At December 31, 2007
                                               
Total assets
  $ 178,846     $ 934,366     $ 54,954     $ 125,173     $ (6,628 )   $ 1,286,711  
 
                                   
11. Commitments and Contingencies
     We have certain commitments, including operating leases and purchase agreements. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2007 Annual Report on Form 10-K. We also have contingencies as follows:
a. Earn-out Payments
     We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria are attained, at September 30, 2008, we will be obligated to pay an additional $1.1 million.

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
11. Commitments and Contingencies, continued
b. Officers’ Compensation
     Each of our Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”) and Chief Financial Officer (“CFO”) has entered into an employment agreement with our company. The agreements provide for a base salary and annual bonuses set by our Compensation Committee of the Board of Directors. As of any given date, under their contracts, each officer has the following remaining term: five years for the CEO, three years for the COO and two years for the CFO. Our Senior Vice President (“SVP”) has entered into a letter agreement with the Company pursuant to which certain payments will be made to our SVP in the event his employment is terminated.
     In the event any of these officers’ employment is terminated due to death or disability, each officer, or their estate, is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), the continued vesting of his non-vested stock, the acceleration of the vesting of his options that would have vested during the 24 months following the date of termination, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites.
     In the event any of these officers terminate their employment agreements for cause (or, in the case of our SVP, he terminates his employment for good reason), we terminate any of their employment agreements (or, in the case of our SVP, we terminate his employment) without cause or a change of control occurs (in which case such employment agreements, and our SVP’s employment with us, terminate automatically), each officer is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement (and in the case of our SVP, for two years), a bonus based on past bonuses, the continued vesting of his non-vested stock, the acceleration of the vesting of his options, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites. Notwithstanding the foregoing, if the CFO’s employment agreement or our SVP’s employment is terminated by us without cause, accelerated vesting of their respective options will be limited to those options that would have vested during the 24 months following the date of termination.
     In the event of a change of control, the cash value of all benefits due under their employment contracts (or, in the case of our SVP, his letter agreement) as a result of the termination would be immediately payable to the officers. In addition, if any of the amounts payable to these officers under these provisions constitute “excess parachute payments” under the Internal Revenue Code, each officer is entitled to an additional payment to cover the tax consequences associated with the excess parachute payment.
c. Other Contingencies
     We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
12. Recent Accounting Pronouncements
     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS No. 162 will not change the accounting or disclosure requirement for the financial statements. The new standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. The provisions of SFAS No. 162 will be effective 60 days following SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of “Present Fairly in Conformity With Generally Accepted Accounting Principles”. Currently, we believe that SFAS No. 162 will not have a material impact on our consolidated financial statements.
     In April 2008, the FASB issued FSP (“FASB Staff Position”) FAS (“Financial Accounting Standard”) 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends FASB Statement No. 142, Goodwill and Other Intangible Assets, to improve the consistency between the useful life of a recognized intangible asset under Statement No. 142 and the period of expected cash flows used to measure the fair value of the

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
12. Recent Accounting Pronouncements, continued
asset under Statement No 141, Business Combinations , and other U.S. generally accepted accounting principals (“GAAP”). The provisions of FSP FAS 142-3 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting FSP FAS 142-3 on our consolidated financial statements.
     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133 (“SFAS No. 161”). SFAS No. 161 will change the disclosure requirement for derivative instruments and hedging activities to enhance the current disclosure framework in SFAS No. 133. The additional disclosures will require information about how derivatives and hedging activities affect an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 161 on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. The provisions of SFAS No. 141R will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 141R on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. This new standard will significantly change the accounting for transactions with minority interest holders. The provisions of SFAS No. 160 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 160 on our consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits entities to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. We adopted SFAS No. 159 on January 1, 2008. Upon adoption, we did not elect the fair value option for any items within the scope of SFAS No. 159 and, therefore, the adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, it eliminates inconsistencies in the guidance provided in previous accounting pronouncements. In December 2007, the FASB provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at least annually. Accordingly, we adopted SFAS No. 157 on January 1, 2008, as required for our financial assets and financial liabilities, which did not have a material impact on our consolidated financial statements. The provisions of SFAS No. 157 as it related to our non-financial assets and liabilities will be effective for our company on January 1, 2009. We are currently evaluating the impact of SFAS No. 157 with respect to our non-financial assets and liabilities on our consolidated financial statements.

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VCA Antech, Inc. and Subsidiaries
Notes To Condensed, Consolidated Financial Statements (Continued)
13. Subsequent Events
Revolving Credit Facility
     On October 1, 2008, we borrowed $35.0 million under our revolving credit facility for general corporate purposes. Borrowings under this facility bear interest, at our option, on either: (1) the base rate (as defined below) plus a margin of 0.50% per annum; or (2) the adjusted Euro dollar rate (as defined below) plus a margin of 1.50% per annum.
     The base rate is the higher of (a) Wells Fargo’s prime rate or (b) the Federal funds rate plus 0.5%. The adjusted Euro dollar rate is defined as the rate per annum obtained by dividing (1) the rate of interest offered to Wells Fargo 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 “Euro currency liabilities”. We elected the base rate which represented 5.0% on October 1, 2008, based upon Wells Fargo’s prime rate plus the margin of 0.50%. The base rate has subsequently been lowered to 4.0% effective November 3, 2008.
Share-Based Compensation
     On October 28, 2008 we issued 1,124,500 options under the 2006 Equity Incentive Plan. The options vest in three equal installments on February 20, 2010, 2011 and 2012, respectively. Our preliminary estimate of the fair value of the options on the grant date is $5.20 per share. Our estimated total compensation cost net of forfeitures is $5.6 million.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         
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Introduction
      The following discussion should be read in conjunction with our condensed, consolidated financial statements provided under Part I, Item I of this Quarterly report on Form 10-Q . We have included herein statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We generally identify forward-looking statements in this report using words like “believe,” “intend,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict,” “potential,” “continue,” or similar expressions. You may find some of these statements below and elsewhere in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our Annual Report on Form 10-K , particularly in “Risk Factors,” Part I, Item 1A of that report.
      The forward-looking information set forth in this Quarterly report on Form 10-Q is as of November 7, 2008, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after November 7, 2008 at our website at http://investor.vcaantech.com or at the SEC’s website at www.sec.gov .
     We are a leading national animal healthcare company. We provide veterinary services and diagnostic testing to support veterinary care and we sell diagnostic imaging equipment, other medical technology products and related services to veterinarians. Our reportable segments are as follows:
    Our Laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At September 30, 2008, our Laboratory network consisted of 42 laboratories serving all 50 states and certain areas in Canada.
 
    Our Animal Hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical and retail products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At September 30, 2008, our animal hospital network consisted of 467 animal hospitals in 39 states.
 
    Our Medical Technology segment sells digital radiography and ultrasound imaging equipment, related computer hardware, software and ancillary services.
     The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworm and ticks, and the number of daylight hours.
Executive Overview
     During the three months ended September 30, 2008 we were able to operate successfully in spite of the current economic crisis. We experienced continued revenue growth in both our Laboratory and Animal Hospital operating segments. We accomplished this through a combination of acquisitions and organic revenue growth. Our Laboratory internal revenue growth was 3.1%, and our Animal Hospital same-store revenue, adjusted for one less business day in the current period grew by 1.4%. Although our organic revenue growth rates have been impacted by the economic crisis, we have been able to continue our long record of earnings growth by increasing our rate of acquisitions and through our continued emphasis on expense management.

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Acquisitions and Facilities
     Our growth strategy includes the acquisition of independent animal hospitals. We currently anticipate that we will acquire $100.0 million to $110.0 million of annualized Animal Hospital revenue by the end of 2008. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. The following table summarizes the changes in the number of facilities operated by our Animal Hospital and Laboratory segments during the nine months ended September 30, 2008:
         
Animal Hospitals:
       
Beginning of period
    438  
Acquisitions
    43  
Acquisitions relocated into our existing animal hospitals
    (10 )
Created
    1  
Sold/closed
    (5 )
 
       
End of period
    467  
 
       
 
       
Laboratories:
       
Beginning of period
    36  
Acquisitions
    3  
Acquisitions relocated into our existing laboratories
     
Created
    3  
 
       
End of period
    42  
 
       
Critical Accounting Policies
          Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, valuation of goodwill and other intangible assets, income taxes, and self-insured liabilities can be found in our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no material changes to those policies as of this Quarterly Report on Form 10-Q for the period ended September 30, 2008.
Valuation of Goodwill
     In accordance with Statement of Financial Accounting Standards No.142, Goodwill and Other Intangible Assets, we are required to test our goodwill for impairment annually, or sooner if circumstances indicate an impairment may exist. As a result of a decline in our market capitalization from approximately $2.5 billion as of September 30, 2008 to $1.6 billion as of October 31, 2008, we examined the goodwill of our Medical Technology reporting unit for impairment. As mentioned previously in our 2007 Form 10-K, the fair values of our Laboratory and Animal Hospital reporting units significantly exceeded their respective book value and accordingly, the decline in market capitalization did not require us to perform an additional analysis on those reporting units. The fair value of our Medical Technology reporting unit however did not significantly exceed its respective book value as of October 31, 2007. As a result, we calculated a preliminary estimate of the fair value of the Medical Technology reporting unit which indicated that currently there was no impairment. We will perform our regularly scheduled annual impairment analysis of all our reporting units as of October 31, 2008 which will include both discounted cash flow techniques and market comparables.

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Consolidated Results of Operations
     The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2008   2007   2008   2007
Revenue:
                               
Laboratory
    23.2 %     24.2 %     24.2 %     26.0 %
Animal Hospital
    76.3       74.8       75.0       72.8  
Medical Technology
    3.8       3.6       3.9       3.8  
Intercompany
    (3.3 )     (2.6 )     (3.1 )     (2.6 )
 
                               
Total revenue
    100.0       100.0       100.0       100.0  
Direct costs
    73.3       71.8       72.4       71.1  
 
                               
Gross profit
    26.7       28.2       27.6       28.9  
Selling, general and administrative expense
    6.6       7.3       7.0       7.5  
Write-down and loss (gain) on sale of assets
          0.1             0.1  
 
                               
Operating income
    20.1       20.8       20.6       21.3  
Interest expense, net
    2.0       2.9       2.2       2.5  
 
                               
Income before minority interest and provision for income taxes
    18.1       17.9       18.4       18.8  
Minority interest in income of subsidiairies
    0.4       0.4       0.3       0.4  
 
                               
Income before provision for income taxes
    17.7       17.5       18.1       18.4  
Provision for income taxes
    6.9       7.0       7.1       7.3  
 
                               
Net income
    10.8 %     10.5 %     11.0 %     11.1 %
 
                               
Revenue
     The following table summarizes our revenue (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007             2008     2007        
            % of             % of     %             % of             % of     %  
    $     Total     $     Total     Change     $     Total     $     Total     Change  
 
                                                                               
Laboratory
  $ 77,065       23.2 %   $ 74,266       24.2 %     3.8 %   $ 235,634       24.2 %   $ 227,073       26.0 %     3.8 %
Animal Hospital
    253,251       76.3 %     229,409       74.8 %     10.4 %     730,352       75.0 %     635,046       72.8 %     15.0 %
Medical Technology
    12,546       3.8 %     11,091       3.6 %     13.1 %     38,233       3.9 %     32,898       3.8 %     16.2 %
Intercompany
    (10,827 )     (3.3 )%     (8,229 )     (2.6 )%     31.6 %     (29,918 )     (3.1 )%     (23,030 )     (2.6 )%     29.9 %
 
                                                                       
Total revenue
  $ 332,035       100.0 %   $ 306,537       100.0 %     8.3 %   $ 974,301       100.0 %   $ 871,987       100.0 %     11.7 %
 
                                                                       
     Consolidated revenue increased $25.5 million for the three months ended September 30, 2008 and $102.3 million for the nine months ended September 30, 2008. The increase in consolidated revenue for the three and nine months ended September 30, 2008 was attributable to revenue from acquired animal hospitals, and to a lesser extent organic growth. Our Laboratory internal revenue growth was 3.1% and 3.2% for the three and nine months ended September 30, 2008. Our Animal Hospital same-store revenue growth, adjusted for one less business day in the current periods, was 1.4% and 1.0% for the three and nine months ended September 30, 2008.

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Gross Profit
     The following table summarizes our gross profit in both dollars and as a percentage of applicable revenue, or gross margin (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007             2008     2007        
            Gross             Gross     %             Gross             Gross     %  
    $     Margin     $     Margin     Change     $     Margin     $     Margin     Change  
Laboratory
  $ 35,273       45.8 %   $ 35,638       48.0 %     (1.0 )%   $ 113,489       48.2 %   $ 111,606       49.1 %     1.7 %
Animal Hospital
    50,286       19.9 %     47,584       20.7 %     5.7 %     144,043       19.7 %     129,465       20.4 %     11.3 %
Medical Technology
    4,322       34.4 %     3,261       29.4 %     32.5 %     13,457       35.2 %     11,357       34.5 %     18.5 %
Intercompany
    (1,113 )             (181 )                     (2,224 )             (328 )                
 
                                                                       
Total gross profit
  $ 88,768       26.7 %   $ 86,302       28.2 %     2.9 %   $ 268,765       27.6 %   $ 252,100       28.9 %     6.6 %
 
                                                                       
     Consolidated gross profit increased $2.5 million for the three months ended September 30, 2008 and $16.7 million for the nine months ended September 30, 2008. The increase for the three and nine months ended September 30, 2008 was primarily due to acquired animal hospitals as discussed above and to a lesser extent organic revenue growth partially offset by a decline in margins.
Segment Results
Laboratory Segment
     The following table summarizes revenue and gross profit for our Laboratory segment (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007             2008     2007        
            Gross             Gross     %             Gross             Gross     %  
    $     Margin     $     Margin     Change     $     Margin     $     Margin     Change  
 
                                                                               
Revenue
  $ 77,065             $ 74,266               3.8 %   $ 235,634             $ 227,073               3.8 %
Gross profit
  $ 35,273       45.8 %   $ 35,638       48.0 %     (1.0 )%   $ 113,489       48.2 %   $ 111,606       49.1 %     1.7 %
     Laboratory revenue increased $2.8 million for the three months ended September 30, 2008 and increased $8.6 million for the nine months ended September 30, 2008 as compared to the same periods in the prior year. The components of the increase in Laboratory revenue are detailed below (in thousands, except percentages and average price per requisition):
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007     % Change     2008     2007     % Change  
Laboratory Revenue:
                                               
Internal growth:
                                               
Number of requisitions (1)
    3,286       3,132       4.9 %     10,062       9,725       3.5 %
Average revenue per reqisition (2)
  $ 23.30     $ 23.71       (1.7 )%   $ 23.29     $ 23.35       (0.3 )%
 
                                       
Total internal revenue (1)
  $ 76,565     $ 74,266       3.1 %   $ 234,306     $ 227,073       3.2 %
Acquired revenue (3)
    500                     1,328                
 
                                       
Total
  $ 77,065     $ 74,266       3.8 %   $ 235,634     $ 227,073       3.8 %
 
                                       
 
(1)   Internal revenue and requisitions were calculated using Laboratory operating results, adjusted to exclude the operating results of acquired laboratories for the comparable periods that we did not own them in the prior year.
 
(2)   Computed by dividing internal revenue by the number of requisitions.
 
(3)   Acquired revenue represents revenue recognized from our acquired laboratories for the comparable current year period that we did not own them in the prior year.

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     The increase in requisitions from internal growth is the result of a continued trend in veterinary medicine to focus on the importance of laboratory diagnostic testing in the diagnosis, early detection and treatment of diseases, and the migration of certain tests to outside laboratories that have historically been performed in veterinary hospitals. This trend is driven by an increase in the number of specialists in the veterinary industry relying on diagnostic testing, the increased focus on diagnostic testing in veterinary schools and general increased awareness through ongoing marketing and continuing education programs provided by us, pharmaceutical companies and other service providers in the industry.
     The decline in the average revenue per requisition is attributable to many factors including changes in the overall mix, performing lower-priced tests historically performed at the veterinary hospitals, and a decrease in certain higher-priced tests which have resulted from the current economic crisis. The decline in the average revenue per requisition was partially offset by price increases which ranged from 3% to 4% in both February 2008 and 2007.
     No single customer represented more than 10% of our Laboratory revenue during the periods presented. We derive our Laboratory revenue from services provided to over 16,000 clients and shifts in the purchasing habits of any individual animal hospital or small group of animal hospitals is not material to our Laboratory revenue. Other companies are developing networks of animal hospitals, however, and shifts in the purchasing habits of these networks have the potential of a greater impact on our Laboratory revenue.
     The decrease in Laboratory margins experienced during the three and nine months ended September 30, 2008 was primarily due to the combination of the decline in our revenue growth, relative to increasing transportation costs, in addition to costs incurred in advance of projected revenue related to our expansion into Canada.
     Laboratory gross profit is calculated as Laboratory revenue less Laboratory direct costs. Laboratory direct costs are comprised of all costs of laboratory services, including but not limited to, salaries of veterinarians, specialists, technicians and other laboratory-based personnel, transportation and delivery costs, facilities rent, occupancy costs, depreciation and amortization and supply costs.
Animal Hospital Segment
     The following table summarizes revenue and gross profit for the Animal Hospital segment (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2008   2007           2008   2007    
            Gross           Gross   %           Gross           Gross   %
    $   Margin   $   Margin   Change   $   Margin   $   Margin   Change
 
                                                                               
Revenue
  $ 253,251             $ 229,409               10.4 %   $ 730,352             $ 635,046               15.0 %
Gross profit
  $ 50,286       19.9 %   $ 47,584       20.7 %     5.7 %   $ 144,043       19.7 %   $ 129,465       20.4 %     11.3 %
     Animal Hospital revenue increased $23.8 million for the three months ended September 30, 2008 and $95.3 million for the nine months ended September 30, 2008 as compared to the same periods in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average price per order):
                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007     % Change     2008     2007     % Change  
Animal Hospital Revenue:
                                               
Same-store facilities:
                                               
Orders (1)(2)
    1,556       1,640       (5.1 )%     3,964       4,137       (4.2 )%
Average revenue per order (3)
  $ 148.16     $ 138.64       6.9 %   $ 146.75     $ 139.17       5.4 %
 
                                       
Same-store revenue (1)
  $ 230,533     $ 227,312       1.4 %   $ 581,660     $ 575,668       1.0 %
Business day adjustment (4)
    2,069                     1,757                
Net acquired revenue (5)
    20,649       2,097               146,935       59,378          
 
                                       
Total
  $ 253,251     $ 229,409       10.4 %   $ 730,352     $ 635,046       15.0 %
 
                                       

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(1)   Same-store revenue and orders were calculated using Animal Hospital operating results, adjusted to exclude the operating results for newly acquired animal hospitals that we did not own as of the beginning of the comparable period in the prior period and adjusted for the impact resulting from any differences in the number of business days in the comparable periods. Same-store revenue also includes revenue generated by customers referred from our relocated or combined animal hospitals, including those merged upon acquisition.
 
(2)   The change in orders may not calculate exactly due to rounding.
 
(3)   Computed by dividing same-store revenue by same-store orders. The average revenue per order may not calculate exactly due to rounding.
 
(4)   The 2008 business day adjustment reflects the impact of one additional business day in 2008 as compared to 2007 for both 2007 periods presented.
 
(5)   Net acquired revenue represents the revenue from those animal hospitals acquired, net of revenue from those animal hospitals sold or closed, on or after the beginning of the comparable period, which was July 1, 2007 for the three-month analysis, and January 1, 2007 for the nine-month analysis. Fluctuations in net acquired revenue occur due to the volume, size, and timing of acquisitions and dispositions during the periods from this date through the end of the applicable period.
     Our business strategy is to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher-priced orders. Over the last few years, some pet-related products traditionally sold in our animal hospitals are now widely available in retail stores and other distribution channels. In addition, there has been a decline in the number of vaccinations as some recent professional literature and research has suggested that vaccinations can be given to pets less frequently. These trends have resulted in a decrease in lower-priced orders and an increase in higher-priced orders. However, during the three and nine months ended September 30, 2008, we experienced a decrease in both lower and higher-priced orders as a result of the current economic environment.
     Price increases also contributed to the increase in the average revenue per order. Prices at each of our hospitals are reviewed regularly and adjustments are made based on market considerations, demographics and our costs. These adjustments historically have approximated 5% to 6% on most services at the majority of our hospitals and are typically implemented in February of each year.
     Animal Hospital gross profit is calculated as Animal Hospital revenue less Animal Hospital direct costs. Animal Hospital direct costs are comprised of all costs of services and products at the animal hospitals, including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expenses incurred by each individual animal hospital and costs of goods sold associated with the retail sales of pet food and pet supplies.
     Consistent with our growth strategies, over the last several years we have acquired a significant number of animal hospitals. Many of these newly acquired animal hospitals had lower gross margins at the time of acquisition than those previously operated by us. Historically, these lower gross margins, in the aggregate, have been favorably impacted subsequent to the acquisition by improvements in Animal Hospital revenue, increased operating leverage and our integration efforts. However, due to the substantial amount of acquisition activity that has occurred in a relatively short period of time, our gross margins have declined. Our Animal Hospital gross margin declined to 19.9% for the three months ended September 30, 2008 and 19.7% for the nine months ended September 30, 2008 as compared to 20.7% and 20.4% in the comparable prior year periods. Our Animal Hospital same-store gross margins remained relatively unchanged totaling 20.6% and 20.4% for the three and nine months ended September 30, 2008 and as compared to 20.9% and 20.7% for the three and nine months ended September 30, 2007.

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Medical Technology Segment
     The following table summarizes revenue and gross profit for the Medical Technology segment (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
    2008   2007           2008   2007    
            Gross           Gross   %           Gross           Gross   %
    $   Margin   $   Margin   Change   $   Margin   $   Margin   Change
 
                                                                               
Revenue
  $ 12,546             $ 11,091               13.1 %   $ 38,233             $ 32,898               16.2 %
Gross profit
  $ 4,322       34.4 %   $ 3,261       29.4 %     32.5 %   $ 13,457       35.2 %   $ 11,357       34.5 %     18.5 %
     Medical Technology revenue increased $1.5 million for the three months ended September 30, 2008 and $5.3 million for the nine months ended September 30, 2008 as compared to the same periods in the prior year which was primarily attributable to revenue on sales of our digital radiography equipment. Ultrasound revenues declined slightly year over year. We believe the business life cycle for ultrasound equipment is maturing and accordingly, the demand for these types of products and related services may continue to decline in the near term.
     Medical Technology gross profit is calculated as Medical Technology revenue less Medical Technology direct costs. Medical Technology direct costs are comprised of all product and service costs, including, but not limited to, all costs of equipment, related products and services, salaries of technicians, support personnel, trainers, consultants and other non-administrative personnel, depreciation and amortization and supply costs.
     Medical Technology gross profit increased $1.1 million for the three months ended September 30, 2008 and $2.1 million for the nine months ended September 30, 2008 as compared to the same periods in the prior year primarily due to an increase in revenue as discussed above combined with an increase in gross margins. The increase in margins during the three months ended September 30, 2008 was primarily a result of a decrease in the average cost per unit of our digital radiography imaging equipment. In 2007, we implemented a strategic shift in our pricing model in an effort to mitigate the effects of increasing competition by providing better value to our customers through additional functionality. This resulted in a decline in margins as the average cost per unit increased to a greater extent than the average revenue per unit. Currently, as a result of the challenging economic environment, customers are purchasing more machines with less functionality or our standard configuration. This has resulted in an increase in margins as the average cost per unit has declined to a greater degree than the average revenue per unit.
Intercompany Revenue
     Laboratory revenue for the three and nine months ended September 30, 2008 included intercompany revenue of $8.0 million and $24.0 million, respectively, that was generated by providing laboratory services to our animal hospitals. Medical Technology revenue for the three and nine months ended September 30, 2008 included intercompany revenue of $2.8 million and $6.0 million, respectively, that was generated by providing products and services to our animal hospitals and laboratories. For purposes of reviewing the operating performance of our business segments, all intercompany transactions are accounted for as if the transaction was with an independent third party at current market prices. For financial reporting purposes, intercompany transactions are eliminated as part of our consolidation.

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Selling, General and Administrative Expense
     The following table summarizes our selling, general and administrative expense (“SG&A”) in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007             2008     2007        
            % of             % of     %             % of             % of     %  
    $     Revenue     $     Revenue     Change     $     Revenue     $     Revenue     Change  
 
Laboratory
  $ 5,178       6.7 %   $ 4,859       6.5 %     6.6 %   $ 15,314       6.5 %   $ 14,872       6.5 %     3.0 %
Animal Hospital
    5,643       2.2 %     5,411       2.4 %     4.3 %     16,815       2.3 %     16,292       2.6 %     3.2 %
Medical Technology
    3,120       24.9 %     2,761       24.9 %     13.0 %     9,502       24.9 %     8,389       25.5 %     13.3 %
Corporate
    8,062       2.4 %     9,264       3.0 %     (13.0 )%     26,359       2.7 %     26,258       3.0 %     0.4 %
 
                                                                       
Total SG&A
  $ 22,003       6.6 %   $ 22,295       7.3 %     (1.3 )%   $ 67,990       7.0 %   $ 65,811       7.5 %     3.3 %
 
                                                                       
     Consolidated selling, general and administrative expense decreased $292,000 for the three months ended September 30, 2008 and increased $2.2 million for the nine months ended September 30, 2008.
     The decline for the three months ended September 30, 2008 was primarily due to a decrease in integration expenses associated with the Healthy Pet acquisition in 2007.
     The increase for the nine months ended September 30, 2008 was primarily attributable to expanding our administrative operations in order to manage our recent acquisitions, compensation and benefits related to annual salary increases, and share-based compensation expense due to non-vested shares granted in 2007 and 2008.
Operating Income
     The following table summarizes our operating income in both dollars and as a percentage of applicable revenue (in thousands, except percentages):
                                                                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2008     2007             2008     2007        
            % of             % of     %             % of             % of     %  
    $     Revenue     $     Revenue     Change     $     Revenue     $     Revenue     Change  
 
Laboratory
  $ 30,092       39.0 %   $ 30,765       41.4 %     (2.2 )%   $ 98,172       41.7 %   $ 96,662       42.6 %     1.6 %
Animal Hospital
    44,618       17.6 %     41,861       18.2 %     6.6 %     127,292       17.4 %     112,417       17.7 %     13.2 %
Medical Technology
    1,200       9.6 %     494       4.5 %     142.9 %     3,933       10.3 %     2,922       8.9 %     34.6 %
Corporate
    (8,122 )     (2.4 )%     (9,265 )     (3.0 )%     (12.3 )%     (26,431 )     (2.7 )%     (26,259 )     (3.0 )%     0.7 %
Intercompany
    (1,113 )     10.3 %     (181 )     2.2 %     514.9 %     (2,224 )     7.4 %     (328 )     1.4 %     578.0 %
 
                                                                       
Total operating income
  $ 66,675       20.1 %   $ 63,674       20.8 %     4.7 %   $ 200,742       20.6 %   $ 185,414       21.3 %     8.3 %
 
                                                                       
     The increase in our consolidated operating income was primarily due to both revenue growth and our ability to leverage our existing cost structure.

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Interest Expense, Net
     The following table summarizes our interest expense, net of interest income (in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2008     2007     2008     2007  
Interest expense (income):
                               
Senior term notes
  $ 5,385     $ 9,432     $ 17,961     $ 23,205  
Interest rate hedging agreements
    1,639       (433 )     4,077       (1,450 )
Capital leases and other
    395       811       1,437       1,510  
Amortization of debt costs
    118       116       351       253  
 
                       
 
    7,537       9,926       23,826       23,518  
Interest income
    (828 )     (996 )     (2,457 )     (2,144 )
 
                       
Total interest expense, net of interest income
  $ 6,709     $ 8,930     $ 21,369     $ 21,374  
 
                       
     The decrease in net interest expense for the three months ended September 30, 2008 was primarily attributable to a decrease in the weighted average interest rate in comparison to the prior year.
Provision for Income Taxes
     Our effective tax rate was 39.1% for both the three and nine months ended September 30, 2008 compared to 39.8% and 40.0% for the three and nine months ended September 30, 2007, respectively. The effective tax rate is subject to ongoing review and evaluation by management and could change in future quarters.
Liquidity and Capital Resources
Introduction
     We generate cash primarily from payments made by customers for our veterinary services, payments from animal hospitals and other clients for our laboratory services, and from proceeds received from the sale of our imaging equipment and other related services. Our business historically has experienced strong liquidity, as fees for services provided in our animal hospitals are due at the time of service and fees for laboratory services are collected under standard industry terms. Our cash disbursements are primarily for payments related to the compensation of our employees, supplies and inventory purchases for our operating segments, occupancy and other administrative costs, interest expense, payments on long-term borrowings, capital expenditures and animal hospital acquisitions. Cash outflows fluctuate with the amount and timing of the settlement of these transactions.
     We manage our cash, investments and capital structure so we are able to meet the short-term and long-term obligations of our business while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable investment and financing within the overall constraints of our financial strategy.
     At September 30, 2008, our consolidated cash and cash equivalents totaled $95.3 million, representing an increase of $8.1 million as compared to the prior year. In addition, cash flows generated from operating activities totaled $142.8 million in 2008, representing an increase of $7.6 million as compared to the nine months ended September 30, 2007.
     We have historically funded our working capital requirements, capital expenditures and investment in animal hospital acquisitions from internally generated cash flows and we expect to do so in the future. In an attempt to partially mitigate our risk of any inability to access our lines of credit, on October 1, 2008 we borrowed $35.0 million under our revolving credit facility. These funds will remain available for general corporate purposes as necessary. We also have access to an unused $40.0 million revolving credit facility, which allows us to maintain further operating and financial flexibility. Historically, we have been able to obtain cash from other borrowings. The availability of financing in the form of debt or equity however is influenced by many factors including our profitability, operating cash flows, debt levels, debt ratings, contractual restrictions, and market conditions. Although in the past we have been able to obtain financing for material transactions on terms that we believe to be reasonable, there is a possibility that we may not be able to obtain financing on favorable terms in the future.

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Future Cash Flows
Short-term
     As mentioned previously, other than our acquisitions of hospital chains, we historically have funded our working capital requirements, capital expenditures and investments in animal hospital acquisitions from internally generated cash flow. We anticipate that our cash on hand, net cash provided by operations and our revolving credit facility will be sufficient to meet our anticipated cash requirements for the next 12 months. If we consummate one or more significant acquisitions of animal hospital chains during this period, we may seek additional debt or equity financing.
     For the year ended December 31, 2008, we expect to spend $90.0 million to $100.0 million, excluding real estate, related to the acquisition of independent animal hospitals. The ultimate number of acquisitions is largely dependent upon the attractiveness of the candidates and the strategic fit with our existing operations. From January 1, 2008 through September 30, 2008, we spent $89.8 million in connection with the acquisition of 43 animal hospitals and three laboratories, as well as $15.1 million for the related real estate. In addition, we expect to spend approximately $60.0 million in 2008 for both property and equipment additions and capital costs necessary to maintain our existing facilities.
Long-term
     Our long-term liquidity needs, other than those related to the day-to-day operations of our business, including commitments for operating leases, generally are comprised of scheduled principal and interest payments for our outstanding long-term indebtedness, capital expenditures related to the expansion of our business and acquisitions in accordance with our growth strategy. In addition to the scheduled payments on our senior term notes, we are required to make mandatory prepayments in the event we have excess cash flow. Pursuant to the terms of our senior credit facility, mandatory prepayments are due on our senior term notes equal to 75% of any excess cash flow at the end of 2008, 2009 and 2010. Excess cash flow is defined as earnings before interest, taxes, depreciation and amortization less voluntary and scheduled debt repayments, capital expenditures, interest payable in cash, taxes payable in cash and cash paid for acquisitions. These payments reduce on a pro rata basis the remaining scheduled principal payments.
     We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If this cash flow is insufficient, we expect that we will need to refinance such indebtedness, amend its terms to extend the maturity dates, or issue common stock in our company. Our management cannot make any assurances that such refinancing or amendments, if necessary, will be available on attractive terms, if at all.
Debt Related Covenants
     Our senior credit facility contains certain financial covenants pertaining to fixed charge coverage and leverage ratios. In addition, the senior credit facility has restrictions pertaining to capital expenditures, acquisitions and the payment of cash dividends. As of September 30, 2008, we were in compliance with these covenants.
     At September 30, 2008, we had a fixed charge coverage ratio of 1.65 to 1.00, which was in compliance with the required ratio of no less than 1.20 to 1.00. The senior credit facility defines the fixed charge coverage ratio as that ratio that is calculated on a last 12-month basis by dividing pro forma earnings before interest, taxes, depreciation and amortization, as defined by the senior credit facility (“pro forma earnings”), by fixed charges. Fixed charges are defined as cash interest expense, scheduled principal payments on debt obligations, capital expenditures, and provision for income taxes. Pro forma earnings include 12 months of operating results for businesses acquired during the period.
     At September 30, 2008, we had a leverage ratio of 1.90 to 1.00, which was in compliance with the required ratio of no more than 3.00 to 1.00. The senior credit facility defines the leverage ratio as that ratio which is calculated as total debt divided by pro forma earnings.

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Historical Cash Flows
     The following table summarizes our cash flows (in thousands):
                 
    Nine Months Ended  
    September 30,  
    2008     2007  
Cash provided by (used in):
               
Operating activities
  $ 142,765     $ 135,153  
Investing activities
    (157,852 )     (259,167 )
Financing activities
    (432 )     166,065  
Effect of exchange rate changes on cash and cash equivalents
    (44 )      
 
           
(Decrease) increase in cash and cash equivalents
    (15,563 )     42,051  
Cash and cash equivalents at beginning of period
    110,866       45,104  
 
           
Cash and cash equivalents at end of period
  $ 95,303     $ 87,155  
 
           
Cash Flows from Operating Activities
     Net cash provided by operating activities increased $7.6 million in the nine months ended September 30, 2008 as compared to the same period in the prior year. This increase was due primarily to additional cash generated from acquired businesses and improved operating performance, partially offset by changes in working capital and an increase in cash paid for taxes of $10.9 million.
Cash Flows from Investing Activities
     The table below presents the components of the changes in investing cash flows (in thousands):
                         
    Nine Months Ended        
    September 30,        
    2008     2007     Variance  
Investing Cash Flows:
                       
Acquisition of Healthy Pet
  $     $ (154,783 )   $ 154,783 (1)
Acquisition of independent animal hospitals and laboratories
    (88,136 )     (57,990 )     (30,146) (2)
Other
    (1,639 )     (1,985 )     346  
 
                 
Total cash used for acquisitions
    (89,775 )     (214,758 )     124,983  
Property and equipment additions
    (39,764 )     (38,033 )     (1,731 )
Real estate acquired with acquisitions
    (15,063 )     (7,962 )     (7,101) (3)
Proceeds from sale of assets
    1,774       1,774        
Other
    (15,024 )     (188 )     (14,836) (4)
 
                 
Net cash used in investing activities
  $ (157,852 )   $ (259,167 )   $ 101,315  
 
                 
 
(1)  
The decrease in cash used is primarily due to the acquisition of the Healthy Pet chain in June of 2007.
 
(2)  
The number of acquisitions will vary from year to year based upon the available pool of suitable candidates. A discussion of our acquisitions is provided above in the Executive Overview .
 
(3)  
The increase in cash used to acquire real estate was due primarily to a increase in the number of favorable opportunities presented.
 
(4)  
The increase in other investing cash flows was due primarily to certain investments in related businesses.

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Cash Flows from Financing Activities
     The table below presents the components of the changes in financing cash flows (in thousands):
                         
    Nine Months Ended        
    September 30,        
    2008     2007     Variance  
Financing Cash Flows:
                       
Repayment of long-term obligations
  $ (5,852 )   $ (6,282 )   $ 430  
Proceeds from issuance of long-term obligations
          160,000       (160,000 )(1)
Payment of debt issue costs
          (897 )     897  
Proceeds from stock options exercises
    3,574       6,668       (3,094 )(2)
Excess tax benefits from stock options
    1,846       6,576       (4,730 )(2)
 
                 
Net cash (used in) provided by financing activities
  $ (432 )   $ 166,065     $ (166,497 )
 
                 
 
(1)  
The decrease in proceeds from the issuance of long-term obligations is due to funds borrowed in 2007 related to the Healthy Pet acquisition.
 
(2)  
The number of stock option exercises has declined in comparison to the prior year. Accordingly, there has been a decline in the amount of excess tax benefits as well.
Future Contractual Cash Requirements
     The following table sets forth the scheduled principal, interest and other contractual cash obligations due by us for each of the years indicated as of September 30, 2008 (in thousands):
                                                         
    Payment due by period  
    Total     2008     2009     2010     2011     2012     Thereafter  
Contractual Obligations
                                                       
Long-term debt
  $ 560,648     $ 1,701     $ 5,890     $ 40,922     $ 512,019     $ 80     $ 36  
Capital lease obligations
    28,921       463       1,932       2,095       2,177       2,359       19,895  
Operating leases
    683,133       10,463       41,560       40,525       40,202       40,022       510,361  
Fixed cash interest expense
    12,152       524       1,980       1,702       1,448       1,300       5,198  
Variable cash interest expense term B (1)
    64,556       6,218       24,712       24,456       9,170              
Variable cash interest expense line of credit (1)
    2,849       438       1,750       661                    
Variable cash interest on swap agreements
    3,344       972       2,473       (101 )                  
Purchase obligations (2)
    34,863       8,809       10,308       9,744       6,002              
Other long-term liabilities
    1,920             65       65                   1,790  
Earn-out payments (3)
    1,120             545       575                    
 
                                         
 
  $ 1,393,506     $ 29,588     $ 91,215     $ 120,644     $ 571,018     $ 43,761     $ 537,280  
 
                                         
 
(1)  
We have variable-rate debt. The interest payments on our variable-rate debt are based on rates effective as of October 27, 2008.
 
(2)  
Our purchase obligations consist primarily of supply purchase agreements related to our Medical Technology business and construction contracts primarily for animal hospitals.
 
(3)  
Represents contractual arrangements whereby additional cash may be paid to former owners of acquired businesses upon attainment of specified performance targets.
Off-Balance Sheet Arrangements
     Other than operating leases as of September 30, 2008, we do not have any off-balance sheet financing arrangements.

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Interest Rate Swap Agreements
     We have interest rate swap agreements whereby we pay counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from the counterparties based on London Interbank Offer Rates (“LIBOR”) and the same set notional principal amounts. We entered into these interest rate swap agreements to hedge against the risk of increasing interest rates. The contracts effectively convert a certain amount of our variable-rate debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid for interest. That amount is equal to the notional principal amount of the interest rate swap agreements, and the fixed-rate conversion period is equal to the terms of the contract. All of our interest rate swap agreements at September 30, 2008 qualify for hedge accounting and are summarized as follows:
                 
Fixed interest rate
  5.51%   4.95%   5.34%   2.64%
Notional amount (in millions)
  $50.0   $75.0   $100.0   $100.0
Effective date
  6/20/2006   4/30/2007   6/11/2007   2/12/2008
Expiration date
  6/30/2009   4/30/2009   12/31/2009   2/26/2010
Counterparty
  Goldman Sachs   Wells Fargo   Goldman Sachs   Wells Fargo
     In the future, we may enter into additional interest rate strategies. However, we have not yet determined what those strategies will be or their possible impact.
Description of Indebtedness
      Senior Credit Facility
     At September 30, 2008, we had $523.6 million principal amount outstanding under our senior term notes and no borrowings outstanding under our revolving credit facility. As mentioned previously, on October 1, 2008 we borrowed $35.0 million under our revolving credit facility.
     We pay interest on our senior term notes based on the interest rate offered to our administrative agent on LIBOR plus a margin of 1.50% per annum. We pay interest on our revolving credit facility based upon Wells Fargo’s prime rate plus the margin of 0.50%.
     The senior term notes mature in May 2011 and the revolving credit facility matures in May 2010.
      Other Debt and Capital Lease Obligations
     At September 30, 2008, we had seller notes secured by assets of certain animal hospitals, unsecured debt and capital leases that totaled $30.9 million.
Recent Accounting Pronouncements
     In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS No. 162 will not change the accounting or disclosure requirement for the financial statements. The new standard identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. The provisions of SFAS No. 162 will be effective 60 days following SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Currently, we do not believe that SFAS No. 162 will have a material impact on our consolidated financial statements.
     In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends FASB Statement No. 142, Goodwill and Other Intangible Assets, to improve the consistency between the useful life of a recognized intangible asset under Statement No. 142 and the period of expected cash flows used to measure the fair value of the asset under Statement No 141, Business Combinations , and other U.S. generally accepted accounting principals (“GAAP”). The provisions of FSP FAS 142-3 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting FSP FAS 142-3 on our consolidated financial statements.

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     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133 (“SFAS No. 161”). SFAS No. 161 will change the disclosure requirement for derivative instruments and hedging activities to enhance the current disclosure framework in SFAS No. 133. The additional disclosures will require information about how derivatives and hedging activities affect an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 161 on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. This new standard will significantly change the accounting for transactions with minority interest holders. The provisions of SFAS No. 160 will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 160 on our consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”). SFAS No. 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS No. 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. The provisions of SFAS No. 141R will be effective for our company on January 1, 2009. We are currently evaluating the impact of adopting SFAS No. 141R on our consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits entities to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. We adopted SFAS No. 159 on January 1, 2008. Upon adoption, we did not elect the fair value option for any items within the scope of SFAS No. 159 and, therefore, the adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, it eliminates inconsistencies in the guidance provided in previous accounting pronouncements. In December 2007, the FASB provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis, at least annually. Accordingly, we adopted SFAS No. 157 on January 1, 2008, as required for our financial assets and financial liabilities, which did not have a material impact on our consolidated financial statements. The provisions of SFAS No. 157 as it related to our non-financial assets and liabilities will be effective for us on January 1, 2009. In accordance with the new standard, we have provided additional disclosures which are included in the discussion of our interest rate swap agreements included in our notes to consolidated financial statements. We are currently evaluating the impact of SFAS No. 157 with respect to our non-financial assets and liabilities on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     At September 30, 2008, we had borrowings of $523.6 million under our senior credit facility with fluctuating interest rates based on market benchmarks such as LIBOR. For our variable-rate debt, changes in interest rates generally do not affect the fair market value, but do impact earnings and cash flow. To reduce the risk of increasing interest rates, we entered into the following interest rate swap agreements:
                 
Fixed interest rate
  5.51%   4.95%   5.34%   2.64%
Notional amount (in millions)
  $50.0   $75.0   $100.0   $100.0
Effective date
  6/20/2006   4/30/2007   6/11/2007   2/12/2008
Expiration date
  6/30/2009   4/30/2009   12/31/2009   2/26/2010
Counterparty
  Goldman Sachs   Wells Fargo   Goldman Sachs   Wells Fargo
     These interest rate swap agreements have the effect of reducing the amount of our debt exposed to variable interest rates. During the nine months ended September 30, 2008 we entered into an additional $100.0 million

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notional amount interest rate swap agreement. As a result, for every 1.0% increase in LIBOR we will pay an additional $2.4 million in pre-tax interest expense on an annualized basis for the unhedged portion of our senior term notes. Conversely for every 1.0% decrease in LIBOR we will save $2.4 million in pre-tax interest expense on an annualized basis. This represents a reduction of $0.2 million in both additional interest payments and interest savings in comparison to our estimate included in Item 7A of our 2007 Form 10-K.
     In the future, we may enter into additional interest rate strategies. However, we have not yet determined what those strategies may be or their possible impact.
ITEM 4. CONTROLS AND PROCEDURES
     We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
     During our most recent fiscal quarter, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
     Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     We are not subject to any legal proceedings other than ordinarily routine litigation incidental to the conduct of our business.
ITEM 1A. RISK FACTORS
     The following should be considered in addition to the risk factors discussed under Part I, Item 1A in our Form 10-K for fiscal year ended December 31, 2007.
General economic conditions may continue to cause a decline in business and have a material adverse effect on our revenue and profitability.
     The continued financial crises and related economic uncertainty has had, and may continue to have, an impact on our revenue and our profitability. We have experienced a decline in the frequency of visits to our animal hospitals, the number of orders placed in our animal hospitals and the average revenue per requisition in our laboratories, each of which is due in part to present economic conditions. These factors have contributed to a decline in the rate of our Laboratory internal revenue growth and our Animal Hospital same-store revenue growth. While we continue to engage in cost control measures, a substantial amount of our expenses our fixed costs. If demand for our veterinary and laboratory services continues to decline, our operating results will be negatively impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None

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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
     
31.1
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Table of Contents

SIGNATURE
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 7, 2008.
         
     
Date: November 7, 2008  By:   /s/ Tomas W. Fuller    
    Tomas W. Fuller   
    Chief Financial Officer   

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Table of Contents

         
EXHIBIT INDEX
     
Exhibit No.   Description
 
   
31.1
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT 31.1
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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
  a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 7, 2008
         
     
/s/ Robert L. Antin      
Robert L. Antin     
Chief Executive Officer     

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EXHIBIT 31.2
Certification of
Chief Financial Officer
of VCA Antech, Inc.
I, Tomas W. Fuller, certify that:
1.  
I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
  a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 7, 2008
         
     
/s/ Tomas W. Fuller      
Tomas W. Fuller     
Chief Financial Officer     

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EXHIBIT 32.1
Certification of
Chief Executive Officer & Chief Financial Officer
of VCA Antech, Inc.
     This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies this quarterly report on
Form 10-Q (the “Report”) for the period ended September 30, 2008 of VCA Antech, Inc. (the “Issuer”).
     Each of the undersigned, who are the Chief Executive Officer and Chief Financial Officer, respectively, of VCA Antech, Inc., hereby certify that, to the best of each such officer’s knowledge:
  (i)  
the Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
 
  (ii)  
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Dated: November 7, 2008
         
     
  /s/ Robert L. Antin    
  Robert L. Antin   
  Chief Executive Officer   
 
     
  /s/ Tomas W. Fuller    
  Tomas W. Fuller    
  Chief Financial Officer   
 

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