##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-16783
 
 VCA ANTECH, INC.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    95-4097995(I.R.S. Employer
Identification No.)
 12401 West Olympic Boulevard
Los Angeles, California 90064-1022  (Address of principal executive offices)
 (310) 571-6500  (Registrants telephone number, including area code)
 x o
 x o
 o x




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##### Table of Contents



VCA ANTECH, INC.
FORM 10-Q
SEPTEMBER 30, 2005
 TABLE OF CONTENTS
 PageNumberPart I.
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed, Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004
    
    
    1Condensed, Consolidated Income Statements for the Three and Nine Months
Ended September 30, 2005 and 2004
    
    
    2Condensed, Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2005 and 2004
    
    
    3Notes to Condensed, Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    37Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3.
    
    Defaults Upon Senior Securities
    
    
    37Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6.
    
    Exhibits
    
    
    37Signature
    
    
    38Exhibit Index
    
    
    39Exhibit 31.1Exhibit 31.2Exhibit 32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 and December 31, 2004
(Unaudited)
(In thousands, except par value)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    44,501
    
    
    $
    30,964Restricted cash
    
    
    
    
    
    
    1,250Trade accounts receivable, less allowance for uncollectible accounts of $8,817 and
$7,668 at September 30, 2005 and December 31, 2004, respectively
    
    
    33,764
    
    
    
    28,936Inventory
    
    
    17,407
    
    
    
    10,448Prepaid expenses and other
    
    
    7,673
    
    
    
    6,275Deferred income taxes
    
    
    12,847
    
    
    
    11,472Prepaid income taxes
    
    
    2
    
    
    
    10,830Total current assets
    
    
    116,194
    
    
    
    100,175Property and equipment, less accumulated depreciation and amortization of $89,956 and
$79,139 at September 30, 2005 and December 31, 2004, respectively
    
    
    146,970
    
    
    
    119,903Other assets:Goodwill
    
    
    579,637
    
    
    
    499,144Other intangible assets, net
    
    
    11,328
    
    
    
    11,660Deferred financing costs, net
    
    
    1,405
    
    
    
    4,052Other
    
    
    7,404
    
    
    
    7,166Total assets
    
    $
    862,938
    
    
    $
    742,100LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    5,826
    
    
    $
    6,043Accounts payable
    
    
    19,294
    
    
    
    15,566Accrued payroll and related liabilities
    
    
    18,389
    
    
    
    19,850Accrued interest
    
    
    327
    
    
    
    1,578Other accrued liabilities
    
    
    30,350
    
    
    
    21,874Total current liabilities
    
    
    74,186
    
    
    
    64,911Long-term obligations, less current portion
    
    
    448,254
    
    
    
    390,846Deferred income taxes
    
    
    27,425
    
    
    
    31,514Other liabilities
    
    
    13,761
    
    
    
    12,915Minority interest
    
    
    10,257
    
    
    
    9,155Commitments and contingenciesPreferred stock, par value $0.001, 11,000 shares authorized, none outstanding
    
    
    
    
    
    
    Stockholders equity:Common stock, par value $0.001, 175,000 shares authorized, 82,576 and 82,191 shares
outstanding as of September 30, 2005 and December 31, 2004, respectively
    
    
    83
    
    
    
    82Additional paid-in capital
    
    
    255,493
    
    
    
    251,412Retained earnings (deficit)
    
    
    32,006
    
    
    
    (18,759
    )Accumulated other comprehensive income
    
    
    1,474
    
    
    
    34Notes receivable from stockholders
    
    
    (1
    )
    
    
    (10
    )Total stockholders equity
    
    
    289,055
    
    
    
    232,759Total liabilities and stockholders equity
    
    $
    862,938
    
    
    $
    742,100
  1




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    229,242
    
    
    $
    183,352
    
    
    $
    622,689
    
    
    $
    497,649Direct costs
    
    
    166,598
    
    
    
    133,571
    
    
    
    448,783
    
    
    
    358,304Gross profit
    
    
    62,644
    
    
    
    49,781
    
    
    
    173,906
    
    
    
    139,345Selling, general and administrative expense
    
    
    18,394
    
    
    
    13,037
    
    
    
    47,943
    
    
    
    33,503Loss (gain) on sale of assets
    
    
    115
    
    
    
    (12
    )
    
    
    27
    
    
    
    54Operating income
    
    
    44,135
    
    
    
    36,756
    
    
    
    125,936
    
    
    
    105,788Interest expense, net
    
    
    6,034
    
    
    
    6,629
    
    
    
    18,782
    
    
    
    18,712Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    19,282
    
    
    
    810Other (income) expense
    
    
    (130
    )
    
    
    (9
    )
    
    
    1
    
    
    
    (185
    )Minority interest in income of subsidiaries
    
    
    778
    
    
    
    746
    
    
    
    2,309
    
    
    
    1,917Income before provision for income taxes
    
    
    37,453
    
    
    
    29,390
    
    
    
    85,562
    
    
    
    84,534Provision for income taxes
    
    
    15,196
    
    
    
    12,046
    
    
    
    34,797
    
    
    
    34,279Net income
    
    $
    22,257
    
    
    $
    17,344
    
    
    $
    50,765
    
    
    $
    50,255Basic earnings per common share
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.62
    
    
    $
    0.62Diluted earnings per common share
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.61
    
    
    $
    0.60Shares used for computing basic earnings per share
    
    
    82,526
    
    
    
    81,944
    
    
    
    82,364
    
    
    
    81,701Shares used for computing diluted earnings per share
    
    
    84,019
    
    
    
    83,455
    
    
    
    83,818
    
    
    
    83,300
  2




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VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)
(In thousands)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    50,765
    
    
    $
    50,255Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    13,947
    
    
    
    11,407Amortization of debt costs
    
    
    482
    
    
    
    552Provision for uncollectible accounts
    
    
    2,996
    
    
    
    2,190Debt retirement costs
    
    
    19,282
    
    
    
    810Loss on sale of assets and other
    
    
    (310
    )
    
    
    (296
    )Tax benefit from stock options exercised
    
    
    2,333
    
    
    
    3,542Minority interest in income of subsidiaries
    
    
    2,309
    
    
    
    1,917Distributions to minority interest partners
    
    
    (1,968
    )
    
    
    (1,505
    )Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (7,009
    )
    
    
    (5,075
    )Increase in inventory, prepaid expenses and other assets
    
    
    (5,796
    )
    
    
    (909
    )Increase in accounts payable and other accrued liabilities
    
    
    6,311
    
    
    
    1,759Decrease in accrued payroll and related liabilities
    
    
    (5,734
    )
    
    
    (677
    )Increase (decrease) in accrued interest
    
    
    (1,251
    )
    
    
    4,107Decrease (increase) in prepaid income taxes
    
    
    10,828
    
    
    
    (1,173
    )Increase in deferred income tax assets
    
    
    (1,375
    )
    
    
    (823
    )Increase in deferred income tax liabilities
    
    
    5,404
    
    
    
    5,654Net cash provided by operating activities
    
    
    91,214
    
    
    
    71,735Cash flows used in investing activities:Business acquisitions, net of cash acquired
    
    
    (83,702
    )
    
    
    (97,152
    )Real estate acquired in connection with business acquisitions
    
    
    (2,929
    )
    
    
    (5,565
    )Property and equipment additions
    
    
    (22,725
    )
    
    
    (16,035
    )Proceeds from sale of assets
    
    
    368
    
    
    
    184Other
    
    
    3,540
    
    
    
    1,553Net cash used in investing activities
    
    
    (105,448
    )
    
    
    (117,015
    )Cash flows from financing activities:Repayment of long-term obligations, including tender fees
    
    
    (445,721
    )
    
    
    (147,691
    )Proceeds from the issuance of long-term obligations
    
    
    475,000
    
    
    
    225,000Payment of financing costs
    
    
    (3,257
    )
    
    
    (794
    )Proceeds from issuance of common stock under stock option plans
    
    
    1,749
    
    
    
    2,362Net cash provided by financing activities
    
    
    27,771
    
    
    
    78,877Increase in cash and cash equivalents
    
    
    13,537
    
    
    
    33,597Cash and cash equivalents at beginning of period
    
    
    30,964
    
    
    
    17,237Cash and cash equivalents at end of period
    
    $
    44,501
    
    
    $
    50,834
  3




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
 1. General
  2. Acquisitions
  Nine Months EndedSeptember 30,2005
    
    
    2004Acquisitions, excluding NPC and Pets Choice (1)(2)
    
    
    19
    
    
    
    17Pets Choice (1)
    
    
    46
    
    
    
    NPC (2)
    
    
    
    
    
    
    67Acquisitions relocated into our existing animal hospitals
    
    
    (5
    )
    
    
    (4
    )Total
    
    
    60
    
    
    
    80
 
 (1)
    
    Pets Choice, Inc., or Pets Choice, was acquired on July 1, 2005.(2)
    
    National PetCare Centers, Inc., or NPC, was acquired on June 1, 2004. 4




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##### Table of Contents



Animal Hospital Acquisitions, excluding NPC and Pets Choice
  Nine Months EndedSeptember 30,2005
    
    
    2004Consideration:Cash
    
    $
    28,466
    
    
    $
    28,063Notes payable and other liabilities assumed
    
    
    1,706
    
    
    
    1,457Total
    
    $
    30,172
    
    
    $
    29,520Purchase Price Allocation:Goodwill (1)
    
    $
    27,178
    
    
    $
    26,439Identifiable intangible assets
    
    
    1,755
    
    
    
    1,645Tangible assets
    
    
    1,239
    
    
    
    1,436Total
    
    $
    30,172
    
    
    $
    29,520
 
 (1)
    
    We expect that $20.3 million of the goodwill
recorded during the nine months ended September 30, 2005, will be fully deductible for
income tax purposes. Pets Choice, Inc.
    National PetCare Centers, Inc.
   5




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##### Table of Contents



Partnership Interests
  Nine Months EndedSeptember 30,2005
    
    
    2004Consideration:Cash
    
    $
    568
    
    
    $
    1,106Notes payable and other liabilities assumed
    
    
    399
    
    
    
    221Total
    
    $
    967
    
    
    $
    1,327Goodwill recorded (1)
    
    $
    709
    
    
    $
    846
 
 (1)
    
    We expect that the goodwill recorded in the nine months ended September 30, 2005
will be fully deductible for income tax purposes. Other Acquisition Payments
  Commitments and Contingencies.
  Sound Technologies, Inc.
   3. Long-Term Obligations
 Senior Credit Facility
 6




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##### Table of Contents



Acquisitions
 September 30,
    
    
    December 31,2005
    
    
    2004Revolver
    
    $
    
    
    
    $
    Senior term notes (LIBOR + 1.50%)
    
    
    437,713
    
    
    
    Senior term notes (LIBOR + 1.75%)
    
    
    
    
    
    
    223,3139.875% senior subordinated notes
    
    
    
    
    
    
    170,000Other debt and capital lease obligations
    
    
    16,367
    
    
    
    3,576Total debt obligations
    
    $
    454,080
    
    
    $
    396,889
  Remainder of 2005
    
    $
    1,6262006
    
    
    5,6502007
    
    
    6,7912008
    
    
    5,5842009
    
    
    5,349Thereafter
    
    
    429,080Total
    
    $
    454,080
 Senior Credit Facility
   Interest Rate.
 
    
    the base rate (as defined below) plus a margin of 0.50% per annum; or
    
    the adjusted Eurodollar rate (as defined below) plus a margin of 1.50% per annum.
   7




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Maturity and Principal Payments.
 Remainder of 2005
    
    $
    1,1002006
    
    
    4,3992007
    
    
    4,3992008
    
    
    4,3992009
    
    
    4,399Thereafter
    
    
    419,017Total
    
    $
    437,713
   Guarantees and Security.
 Debt Covenants.
 4. Interest Rate Hedging Agreements
  Fixed interest rate
    
    4.07%
    
    3.98%
    
    3.94%Notional principal amount
    
    $50.0 million
    
    $50.0 million
    
    $50.0 millionEffective date
    
    5/26/2005
    
    6/2/2005
    
    6/30/2005Expiration date
    
    5/26/2008
    
    5/31/2008
    
    6/30/2007Counterparties
    
    Goldman Sachs
    
    Wells Fargo Bank
    
    Wells Fargo BankQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
  8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Cash paid (received) (1)
    
    $
    190
    
    
    $
    90
    
    
    $
    75
    
    
    $
    419Unrealized loss (gain) (2)
    
    $
    (130
    )
    
    $
    (9
    )
    
    $
    1
    
    
    $
    (185
    )
 
 (1)
    
    These payments are included in interest expense in our condensed, consolidated income
statements.(2)
    
    These recognized losses (gains) are included in other (income) expense in our condensed,
consolidated income statements.  5. Goodwill and Other Intangible Assets
   Animal
    
    
    MedicalLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    TotalBalance as of January 1, 2005
    
    $
    93,671
    
    
    $
    386,255
    
    
    $
    19,218
    
    
    $
    499,144Goodwill acquired
    
    
    
    
    
    
    78,974
    
    
    
    
    
    
    
    78,974Other (1)
    
    
    500
    
    
    
    (328
    )
    
    
    976
    
    
    
    1,148Goodwill related to partnership interests
    
    
    
    
    
    
    577
    
    
    
    
    
    
    
    577Goodwill related to sale of animal hospitals
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Balance as of September 30, 2005
    
    $
    94,171
    
    
    $
    465,272
    
    
    $
    20,194
    
    
    $
    579,637
 
 (1)
    
    Other is the result of purchase price adjustments, purchasing ownership interest in
non-wholly-owned subsidiaries and earnout payments.  As of September 30, 2005
    
    
    As of December 31, 2004Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants-not-to-compete
    
    $
    12,020
    
    
    $
    (5,523
    )
    
    $
    6,497
    
    
    $
    11,604
    
    
    $
    (5,290
    )
    
    $
    6,314Noncontractual-customer
relationships
    
    
    3,340
    
    
    
    (685
    )
    
    
    2,655
    
    
    
    3,340
    
    
    
    (246
    )
    
    
    3,094Technology
    
    
    1,250
    
    
    
    (250
    )
    
    
    1,000
    
    
    
    1,250
    
    
    
    (62
    )
    
    
    1,188Trademarks
    
    
    560
    
    
    
    (56
    )
    
    
    504
    
    
    
    560
    
    
    
    (14
    )
    
    
    546Contracts
    
    
    397
    
    
    
    (103
    )
    
    
    294
    
    
    
    397
    
    
    
    (26
    )
    
    
    371Client lists
    
    
    962
    
    
    
    (584
    )
    
    
    378
    
    
    
    665
    
    
    
    (518
    )
    
    
    147Total
    
    $
    18,529
    
    
    $
    (7,201
    )
    
    $
    11,328
    
    
    $
    17,816
    
    
    $
    (6,156
    )
    
    $
    11,660
 9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Aggregate amortization expense
    
    $
    796
    
    
    $
    583
    
    
    $
    2,393
    
    
    $
    1,576
  Remainder of 2005
    
    $
    8162006
    
    
    3,0732007
    
    
    2,7822008
    
    
    2,1512009
    
    
    1,107Thereafter
    
    
    1,399Total
    
    $
    11,328
 6. Calculation of Earnings per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    22,257
    
    
    $
    17,344
    
    
    $
    50,765
    
    
    $
    50,255Weighted average common shares outstanding:Basic
    
    
    82,526
    
    
    
    81,944
    
    
    
    82,364
    
    
    
    81,701Effect of dilutive potential common shares:Stock options
    
    
    1,493
    
    
    
    1,511
    
    
    
    1,454
    
    
    
    1,526Contracts that may be settled in stock or cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Diluted
    
    
    84,019
    
    
    
    83,455
    
    
    
    83,818
    
    
    
    83,300Basic earnings per common share
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.62
    
    
    $
    0.62Diluted earnings per common share
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.61
    
    
    $
    0.60
 7. Lines of Business
  10




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Animal
    
    
    Medical
    
    
    
    
    
    
    IntercompanyLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalThree Months Ended September 30, 2005Revenue
    
    $
    56,555
    
    
    $
    167,815
    
    
    $
    10,595
    
    
    $
    
    
    
    $
    (5,723
    )
    
    $
    229,242Direct costs
    
    
    31,478
    
    
    
    133,571
    
    
    
    6,881
    
    
    
    
    
    
    
    (5,332
    )
    
    
    166,598Gross profit
    
    
    25,077
    
    
    
    34,244
    
    
    
    3,714
    
    
    
    
    
    
    
    (391
    )
    
    
    62,644Selling, general and administrative
expense
    
    
    3,636
    
    
    
    4,072
    
    
    
    2,806
    
    
    
    7,880
    
    
    
    
    
    
    
    18,394Gain on sale of assets
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Operating income (loss)
    
    $
    21,441
    
    
    $
    30,057
    
    
    $
    908
    
    
    $
    (7,880
    )
    
    $
    (391
    )
    
    $
    44,135Depreciation and amortization
    
    $
    1,025
    
    
    $
    3,383
    
    
    $
    320
    
    
    $
    454
    
    
    $
    (20
    )
    
    $
    5,162Capital expenditures
    
    $
    3,080
    
    
    $
    4,214
    
    
    $
    191
    
    
    $
    915
    
    
    $
    (356
    )
    
    $
    8,044Three Months Ended September 30, 2004Revenue
    
    $
    50,685
    
    
    $
    136,399
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,732
    )
    
    $
    183,352Direct costs
    
    
    28,470
    
    
    
    108,833
    
    
    
    
    
    
    
    
    
    
    
    (3,732
    )
    
    
    133,571Gross profit
    
    
    22,215
    
    
    
    27,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,781Selling, general and administrative
expense
    
    
    3,136
    
    
    
    3,423
    
    
    
    
    
    
    
    6,478
    
    
    
    
    
    
    
    13,037Loss on sale of assets
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Operating income (loss)
    
    $
    19,079
    
    
    $
    24,155
    
    
    $
    
    
    
    $
    (6,478
    )
    
    $
    
    
    
    $
    36,756Depreciation and amortization
    
    $
    850
    
    
    $
    2,722
    
    
    $
    
    
    
    $
    400
    
    
    $
    
    
    
    $
    3,972Capital expenditures
    
    $
    2,108
    
    
    $
    4,451
    
    
    $
    
    
    
    $
    449
    
    
    $
    
    
    
    $
    7,008Nine Months Ended September 30, 2005Revenue
    
    $
    168,271
    
    
    $
    449,128
    
    
    $
    20,437
    
    
    $
    
    
    
    $
    (15,147
    )
    
    $
    622,689Direct costs
    
    
    91,947
    
    
    
    357,332
    
    
    
    14,026
    
    
    
    
    
    
    
    (14,522
    )
    
    
    448,783Gross profit
    
    
    76,324
    
    
    
    91,796
    
    
    
    6,411
    
    
    
    
    
    
    
    (625
    )
    
    
    173,906Selling, general and administrative
expense
    
    
    10,347
    
    
    
    11,582
    
    
    
    6,295
    
    
    
    19,719
    
    
    
    
    
    
    
    47,943Gain on sale of assets
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Operating income (loss)
    
    $
    65,977
    
    
    $
    80,187
    
    
    $
    116
    
    
    $
    (19,719
    )
    
    $
    (625
    )
    
    $
    125,936Depreciation and amortization
    
    $
    2,805
    
    
    $
    9,034
    
    
    $
    921
    
    
    $
    1,223
    
    
    $
    (36
    )
    
    $
    13,947Capital expenditures
    
    $
    5,941
    
    
    $
    13,081
    
    
    $
    436
    
    
    $
    4,014
    
    
    $
    (747
    )
    
    $
    22,725Nine Months Ended September 30, 2004Revenue
    
    $
    151,818
    
    
    $
    355,739
    
    
    $
    
    
    
    $
    
    
    
    $
    (9,908
    )
    
    $
    497,649Direct costs
    
    
    84,168
    
    
    
    284,044
    
    
    
    
    
    
    
    
    
    
    
    (9,908
    )
    
    
    358,304Gross profit
    
    
    67,650
    
    
    
    71,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,345Selling, general and administrative
expense
    
    
    9,499
    
    
    
    9,227
    
    
    
    
    
    
    
    14,777
    
    
    
    
    
    
    
    33,503Loss on sale of assets
    
    
    1
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Operating income (loss)
    
    $
    58,150
    
    
    $
    62,415
    
    
    $
    
    
    
    $
    (14,777
    )
    
    $
    
    
    
    $
    105,788Depreciation and amortization
    
    $
    2,568
    
    
    $
    7,659
    
    
    $
    
    
    
    $
    1,180
    
    
    $
    
    
    
    $
    11,407Capital expenditures
    
    $
    3,911
    
    
    $
    10,982
    
    
    $
    
    
    
    $
    1,142
    
    
    $
    
    
    
    $
    16,035
 11




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##### Table of Contents



Animal
    
    
    Medical
    
    
    
    
    
    
    IntercompanyLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalAt September 30, 2005Total assets
    
    $
    149,379
    
    
    $
    609,975
    
    
    $
    40,446
    
    
    $
    65,690
    
    
    $
    (2,552
    )
    
    $
    862,938At December 31, 2004Total assets
    
    $
    136,810
    
    
    $
    503,485
    
    
    $
    35,198
    
    
    $
    67,817
    
    
    $
    (1,210
    )
    
    $
    742,100
 8. Stock-Based Compensation
 Accounting for Stock Issued to Employees. Accounting for Stock-Based
Compensation
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004As reported
    
    $
    22,257
    
    
    $
    17,344
    
    
    $
    50,765
    
    
    $
    50,255Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects
    
    
    (503
    )
    
    
    (484
    )
    
    
    (4,457
    )
    
    
    (1,246
    )Pro forma net income available to common stockholders
    
    $
    21,754
    
    
    $
    16,860
    
    
    $
    46,308
    
    
    $
    49,009Earnings per common share:Basic  as reported
    
    $
    0.27
    
    
    $
    0.21
    
    
    $
    0.62
    
    
    $
    0.62Basic  pro forma
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.56
    
    
    $
    0.60Diluted  as reported
    
    $
    0.26
    
    
    $
    0.21
    
    
    $
    0.61
    
    
    $
    0.60Diluted  pro forma
    
    $
    0.26
    
    
    $
    0.20
    
    
    $
    0.55
    
    
    $
    0.59
 Share-Based Payment,
 9. Commitments and Contingencies
  12




---



##### Table of Contents



a. Earnout Payments
  b. Officers Compensation
  c. Other Contingencies
  10. Reclassifications
  11. Subsequent Events
  13




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 PageNumberIntroduction
    
    
    15Executive Overview
    
    
    15Results of Operations
    
    
    17Liquidity and Capital Resources
    
    
    24Critical Accounting Policies
    
    
    26New Accounting Pronouncements
    
    
    29Forward-Looking Statements
    
    
    30Risk Factors
    
    
    30
 14




---



##### Table of Contents



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 include those summarized in the section of this report
captioned Risk Factors.
 The forward-looking information set forth in this quarterly report on Form 10-Q is as of
November 4, 2005, and we undertake no duty to update this information. Shareholders and
prospective investors can find information filed with the SEC after November 4, 2005, at our
website at www.investor.vcaantech.com or at the SECs website at www.sec.gov .
   Laboratory.
 Animal hospitals.
 Medical technology.
 Corporate.
  Executive Overview
  15




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##### Table of Contents



Refinancing Transactions
 Acquisitions,
 Acquisitions
  Nine Months EndedSeptember 30,2005
    
    
    2004Laboratories:Beginning of period
    
    
    27
    
    
    
    23New facilities
    
    
    3
    
    
    
    3End of period
    
    
    30
    
    
    
    26Animal hospitals:Beginning of period
    
    
    315
    
    
    
    241Acquisitions, excluding Pets Choice and NPC (1)(2)
    
    
    19
    
    
    
    17Pets Choice (1)
    
    
    46
    
    
    
    NPC (2)
    
    
    
    
    
    
    67New facilities
    
    
    
    
    
    
    1Acquisitions relocated into hospitals operated by us
    
    
    (5
    )
    
    
    (4
    )Sold or closed
    
    
    (10
    )
    
    
    (4
    )End of period
    
    
    365
    
    
    
    318
 
 (1)
    
    Pets Choice was acquired on July 1, 2005.(2)
    
    National PetCare Centers, Inc., or NPC, was acquired on June 1, 2004. 16




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##### Table of Contents



Results of Operations
  Animal
    
    
    Medical
    
    
    
    
    
    
    IntercompanyLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalThree Months Ended September 30, 2005Revenue
    
    $
    56,555
    
    
    $
    167,815
    
    
    $
    10,595
    
    
    $
    
    
    
    $
    (5,723
    )
    
    $
    229,242Direct costs
    
    
    31,478
    
    
    
    133,571
    
    
    
    6,881
    
    
    
    
    
    
    
    (5,332
    )
    
    
    166,598Gross profit
    
    
    25,077
    
    
    
    34,244
    
    
    
    3,714
    
    
    
    
    
    
    
    (391
    )
    
    
    62,644Selling, general and administrative
expense
    
    
    3,636
    
    
    
    4,072
    
    
    
    2,806
    
    
    
    7,880
    
    
    
    
    
    
    
    18,394Gain on sale of assets
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Operating income (loss)
    
    $
    21,441
    
    
    $
    30,057
    
    
    $
    908
    
    
    $
    (7,880
    )
    
    $
    (391
    )
    
    $
    44,135Depreciation and amortization
    
    $
    1,025
    
    
    $
    3,383
    
    
    $
    320
    
    
    $
    454
    
    
    $
    (20
    )
    
    $
    5,162Three Months Ended September 30, 2004Revenue
    
    $
    50,685
    
    
    $
    136,399
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,732
    )
    
    $
    183,352Direct costs
    
    
    28,470
    
    
    
    108,833
    
    
    
    
    
    
    
    
    
    
    
    (3,732
    )
    
    
    133,571Gross profit
    
    
    22,215
    
    
    
    27,566
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,781Selling, general and administrative
expense
    
    
    3,136
    
    
    
    3,423
    
    
    
    
    
    
    
    6,478
    
    
    
    
    
    
    
    13,037Loss on sale of assets
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Operating income (loss)
    
    $
    19,079
    
    
    $
    24,155
    
    
    $
    
    
    
    $
    (6,478
    )
    
    $
    
    
    
    $
    36,756Depreciation and amortization
    
    $
    850
    
    
    $
    2,722
    
    
    $
    
    
    
    $
    400
    
    
    $
    
    
    
    $
    3,972Nine Months Ended September 30, 2005Revenue
    
    $
    168,271
    
    
    $
    449,128
    
    
    $
    20,437
    
    
    $
    
    
    
    $
    (15,147
    )
    
    $
    622,689Direct costs
    
    
    91,947
    
    
    
    357,332
    
    
    
    14,026
    
    
    
    
    
    
    
    (14,522
    )
    
    
    448,783Gross profit
    
    
    76,324
    
    
    
    91,796
    
    
    
    6,411
    
    
    
    
    
    
    
    (625
    )
    
    
    173,906Selling, general and administrative
expense
    
    
    10,347
    
    
    
    11,582
    
    
    
    6,295
    
    
    
    19,719
    
    
    
    
    
    
    
    47,943Gain on sale of assets
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27Operating income (loss)
    
    $
    65,977
    
    
    $
    80,187
    
    
    $
    116
    
    
    $
    (19,719
    )
    
    $
    (625
    )
    
    $
    125,936Depreciation and amortization
    
    $
    2,805
    
    
    $
    9,034
    
    
    $
    921
    
    
    $
    1,223
    
    
    $
    (36
    )
    
    $
    13,947Nine Months Ended September 30, 2004Revenue
    
    $
    151,818
    
    
    $
    355,739
    
    
    $
    
    
    
    $
    
    
    
    $
    (9,908
    )
    
    $
    497,649Direct costs
    
    
    84,168
    
    
    
    284,044
    
    
    
    
    
    
    
    
    
    
    
    (9,908
    )
    
    
    358,304Gross profit
    
    
    67,650
    
    
    
    71,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,345Selling, general and administrative
expense
    
    
    9,499
    
    
    
    9,227
    
    
    
    
    
    
    
    14,777
    
    
    
    
    
    
    
    33,503Loss on sale of assets
    
    
    1
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Operating income (loss)
    
    $
    58,150
    
    
    $
    62,415
    
    
    $
    
    
    
    $
    (14,777
    )
    
    $
    
    
    
    $
    105,788Depreciation and amortization
    
    $
    2,568
    
    
    $
    7,659
    
    
    $
    
    
    
    $
    1,180
    
    
    $
    
    
    
    $
    11,407
 17




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Laboratory
    
    
    24.7
    %
    
    
    27.6
    %
    
    
    27.0
    %
    
    
    30.5
    %Animal hospital
    
    
    73.2
    
    
    
    74.4
    
    
    
    72.1
    
    
    
    71.5Medical technology
    
    
    4.6
    
    
    
    
    
    
    
    3.3
    
    
    
    Intercompany
    
    
    (2.5
    )
    
    
    (2.0
    )
    
    
    (2.4
    )
    
    
    (2.0
    )Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Direct costs
    
    
    72.7
    
    
    
    72.8
    
    
    
    72.1
    
    
    
    72.0Gross profit
    
    
    27.3
    
    
    
    27.2
    
    
    
    27.9
    
    
    
    28.0Selling, general and administrative expense
    
    
    8.0
    
    
    
    7.1
    
    
    
    7.7
    
    
    
    6.7Gain on sale of assets
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    Operating income
    
    
    19.3
    
    
    
    20.0
    
    
    
    20.2
    
    
    
    21.3Interest expense, net
    
    
    2.7
    
    
    
    3.6
    
    
    
    3.0
    
    
    
    3.8Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    3.1
    
    
    
    0.2Other (income) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Minority interest in income of subsidiaries
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4Income before provision for income taxes
    
    
    16.3
    
    
    
    16.0
    
    
    
    13.7
    
    
    
    17.0Provision for income taxes
    
    
    6.6
    
    
    
    6.5
    
    
    
    5.5
    
    
    
    6.9Net income
    
    
    9.7
    %
    
    
    9.5
    %
    
    
    8.2
    %
    
    
    10.1
    %
 Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeLaboratory
    
    $
    56,555
    
    
    $
    50,685
    
    
    
    11.6
    %
    
    $
    168,271
    
    
    $
    151,818
    
    
    
    10.8
    %Animal hospital
    
    
    167,815
    
    
    
    136,399
    
    
    
    23.0
    %
    
    
    449,128
    
    
    
    355,739
    
    
    
    26.3
    %Medical technology
    
    
    10,595
    
    
    
    
    
    
    
    
    
    
    
    20,437
    
    
    
    Intercompany
    
    
    (5,723
    )
    
    
    (3,732
    )
    
    
    53.3
    %
    
    
    (15,147
    )
    
    
    (9,908
    )
    
    
    52.9
    %Total revenue
    
    $
    229,242
    
    
    $
    183,352
    
    
    
    25.0
    %
    
    $
    622,689
    
    
    $
    497,649
    
    
    
    25.1
    %
 18




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##### Table of Contents



Laboratory Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Laboratory Revenue:
    
    2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeInternal growth:Number of requisitions (1)
    
    
    2,396
    
    
    
    2,137
    
    
    
    12.1
    %
    
    
    7,232
    
    
    
    6,613
    
    
    
    9.4
    %Average revenue per
requisition (2)
    
    $
    23.60
    
    
    $
    23.72
    
    
    
    (0.5
    )%
    
    $
    23.27
    
    
    $
    22.86
    
    
    
    1.8
    %Total internal revenue (1)
    
    $
    56,555
    
    
    $
    50,685
    
    
    
    11.6
    %
    
    $
    168,271
    
    
    $
    151,179
    
    
    
    11.3
    %Billing day adjustment (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    639Total
    
    $
    56,555
    
    
    $
    50,685
    
    
    
    11.6
    %
    
    $
    168,271
    
    
    $
    151,818
    
    
    
    10.8
    %
 
 (1)
    
    Internal revenue and requisitions were calculated using laboratory operating results adjusted
for the impact resulting from any differences in the number of billing days in comparable
periods.(2)
    
    Computed by dividing total internal revenue by the number of requisitions.(3)
    
    The 2004 billing day adjustment reflects the impact of one additional billing day for the
nine months ended September 30, 2004, as compared to the comparable 2005 period.   Animal Hospital Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,Animal Hospital Revenue:
    
    2005
    
    
    2004
    
    
    % Change
    
    
    2005
    
    
    2004
    
    
    % ChangeSame-store facility:Orders (1)
    
    
    1,158
    
    
    
    1,178
    
    
    
    (1.7
    )%
    
    
    2,691
    
    
    
    2,730
    
    
    
    (1.4
    )%Average revenue per order (2)
    
    $
    121.81
    
    
    $
    112.44
    
    
    
    8.3
    %
    
    $
    120.40
    
    
    $
    110.76
    
    
    
    8.7
    %Same-store revenue (1)
    
    $
    141,072
    
    
    $
    132,421
    
    
    
    6.5
    %
    
    $
    323,992
    
    
    $
    302,500
    
    
    
    7.1
    %Business day adjustment (3)
    
    
    
    
    
    
    1,730
    
    
    
    
    
    
    
    
    
    
    
    2,454Net acquired revenue (4)
    
    
    26,743
    
    
    
    2,248
    
    
    
    
    
    
    
    125,136
    
    
    
    50,785Total
    
    $
    167,815
    
    
    $
    136,399
    
    
    
    23.0
    %
    
    $
    449,128
    
    
    $
    355,739
    
    
    
    26.3
    %
 
 (1)
    
    Same-store revenue and orders were calculated using animal hospital operating results,
adjusted to exclude the operating results for the newly acquired animal hospitals that we did
not own for the entire period presented and adjusted for the impact resulting from any
differences in the number of business days in comparable periods. 19




---



##### Table of Contents



(2)
    
    Computed by dividing same-store revenue by same-store orders.(3)
    
    The 2004 business day adjustment reflects the impact of one additional business day for the
three months ended September 30, 2004, and the impact of two additional business days for the
nine months ended September 30, 2004, as compared to the comparable 2005 periods.(4)
    
    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
comparative period, which was July 1, 2004, for the three months ended September 30, 2005, and
January 1, 2004, for the nine months ended September 30, 2005. Fluctuations in net acquired
revenue occur due to the volume, size and timing of acquisitions and disposals during the
periods compared.   Medical Technology Revenue
   Intercompany Revenue
  20




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##### Table of Contents



Gross Profit
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    
    
    
    
    2005
    
    
    2004Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossProfit
    
    
    
    
    
    
    Profit
    
    
    %
    
    
    
    
    
    
    Profit
    
    
    
    
    
    
    Profit
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    Change
    
    
    $
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    ChangeLaboratory
    
    $
    25,077
    
    
    
    44.3
    %
    
    $
    22,215
    
    
    
    43.8
    %
    
    
    12.9
    %
    
    $
    76,324
    
    
    
    45.4
    %
    
    $
    67,650
    
    
    
    44.6
    %
    
    
    12.8
    %Animal hospital
    
    
    34,244
    
    
    
    20.4
    %
    
    
    27,566
    
    
    
    20.2
    %
    
    
    24.2
    %
    
    
    91,796
    
    
    
    20.4
    %
    
    
    71,695
    
    
    
    20.2
    %
    
    
    28.0
    %Medical technology
    
    
    3,714
    
    
    
    35.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,411
    
    
    
    31.4
    %
    
    
    Intercompany
    
    
    (391
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (625
    )
    
    
    
    
    
    
    Total gross profit
    
    $
    62,644
    
    
    
    27.3
    %
    
    $
    49,781
    
    
    
    27.2
    %
    
    
    25.8
    %
    
    $
    173,906
    
    
    
    27.9
    %
    
    $
    139,345
    
    
    
    28.0
    %
    
    
    24.8
    %
 Laboratory Gross Profit
   Animal Hospital Gross Profit
   Medical Technology Gross Profit
    21




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##### Table of Contents



Selling, General and Administrative Expense
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    
    
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    Change
    
    
    $
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeLaboratory
    
    $
    3,636
    
    
    
    6.4
    %
    
    $
    3,136
    
    
    
    6.2
    %
    
    
    15.9
    %
    
    $
    10,347
    
    
    
    6.1
    %
    
    $
    9,499
    
    
    
    6.3
    %
    
    
    8.9
    %Animal hospital
    
    
    4,072
    
    
    
    2.4
    %
    
    
    3,423
    
    
    
    2.5
    %
    
    
    19.0
    %
    
    
    11,582
    
    
    
    2.6
    %
    
    
    9,227
    
    
    
    2.6
    %
    
    
    25.5
    %Medical technology
    
    
    2,806
    
    
    
    26.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,295
    
    
    
    30.8
    %
    
    
    Corporate
    
    
    7,880
    
    
    
    3.4
    %
    
    
    6,478
    
    
    
    3.5
    %
    
    
    21.6
    %
    
    
    19,719
    
    
    
    3.2
    %
    
    
    14,777
    
    
    
    3.0
    %
    
    
    33.4
    %Total SG&A
    
    $
    18,394
    
    
    
    8.0
    %
    
    $
    13,037
    
    
    
    7.1
    %
    
    
    41.1
    %
    
    $
    47,943
    
    
    
    7.7
    %
    
    $
    33,503
    
    
    
    6.7
    %
    
    
    43.1
    %
 Laboratory SG&A
   Animal Hospital SG&A
   Medical Technology SG&A
   Corporate SG&A
   22




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    
    
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    Change
    
    
    $
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeCorporate SG&A as
reported
    
    $
    7,880
    
    
    
    3.4
    %
    
    $
    6,478
    
    
    
    3.5
    %
    
    
    21.6
    %
    
    $
    19,719
    
    
    
    3.2
    %
    
    $
    14,777
    
    
    
    3.0
    %
    
    
    33.4
    %Impact of certain items:Litigation settlement
reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,124Legal fees reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    801Integration costs
    
    
    (809
    )
    
    
    
    
    
    
    (668
    )
    
    
    
    
    
    
    
    
    
    
    (933
    )
    
    
    
    
    
    
    (1,238
    )Corporate SG&A excluding the
impact of certain items
    
    $
    7,071
    
    
    
    3.1
    %
    
    $
    5,810
    
    
    
    3.2
    %
    
    
    21.7
    %
    
    $
    18,786
    
    
    
    3.0
    %
    
    $
    15,464
    
    
    
    3.1
    %
    
    
    21.5
    %
  Interest Expense, Net
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest expense:Senior term notes
    
    $
    5,847
    
    
    $
    2,166
    
    
    $
    12,488
    
    
    $
    5,0359.875% senior subordinated notes
    
    
    
    
    
    
    4,197
    
    
    
    6,342
    
    
    
    12,591Interest rate hedging agreements
    
    
    190
    
    
    
    90
    
    
    
    75
    
    
    
    419Amortization of debt costs
    
    
    132
    
    
    
    185
    
    
    
    482
    
    
    
    552Capital leases and other
    
    
    453
    
    
    
    214
    
    
    
    863
    
    
    
    5956,622
    
    
    
    6,852
    
    
    
    20,250
    
    
    
    19,192Interest income.
    
    
    588
    
    
    
    223
    
    
    
    1,468
    
    
    
    480Total interest expense, net of interest income
    
    $
    6,034
    
    
    $
    6,629
    
    
    $
    18,782
    
    
    $
    18,712
 Liquidity and Capital Resources
 Debt Retirement Costs
 Liquidity and Capital Resources
 Provision for Income Taxes
  Corporate SG&A
 23




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##### Table of Contents



Liquidity and Capital Resources
  Nine Months EndedSeptember 30,2005
    
    
    2004Cash provided by (used in):Operating activities
    
    $
    91,214
    
    
    $
    71,735Investing activities
    
    
    (105,448
    )
    
    
    (117,015
    )Financing activities
    
    
    27,771
    
    
    
    78,877Increase in cash and cash equivalents
    
    
    13,537
    
    
    
    33,597Cash and cash equivalents at beginning of year
    
    
    30,964
    
    
    
    17,237Cash and cash equivalents at end of year
    
    $
    44,501
    
    
    $
    50,834
 Cash Flows from Operating Activities
   Cash Flows used in Investing Activities
   Cash Flows from Financing Activities
 Acquisitions,
 24




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##### Table of Contents



Future Cash Requirements
  Total
    
    
    2005 (1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong-term debt
    
    $
    441,094
    
    
    $
    1,445
    
    
    $
    4,850
    
    
    $
    5,986
    
    
    $
    4,768
    
    
    $
    4,485
    
    
    $
    419,560Capital lease obligations
    
    
    12,986
    
    
    
    181
    
    
    
    800
    
    
    
    805
    
    
    
    816
    
    
    
    864
    
    
    
    9,520Operating leases
    
    
    366,882
    
    
    
    6,816
    
    
    
    27,018
    
    
    
    26,458
    
    
    
    25,924
    
    
    
    25,235
    
    
    
    255,431Purchase Obligations
    
    
    8,732
    
    
    
    3,759
    
    
    
    4,258
    
    
    
    330
    
    
    
    330
    
    
    
    55
    
    
    
    Fixed cash interest expense (1)
    
    
    7,026
    
    
    
    301
    
    
    
    1,155
    
    
    
    1,066
    
    
    
    1,163
    
    
    
    914
    
    
    
    2,427Variable cash interest expense (2)
    
    
    166,716
    
    
    
    6,675
    
    
    
    28,924
    
    
    
    29,709
    
    
    
    29,832
    
    
    
    29,945
    
    
    
    41,631Swap agreements (1)
    
    
    (4,311
    )
    
    
    (226
    )
    
    
    (1,730
    )
    
    
    (1,740
    )
    
    
    (615
    )
    
    
    
    
    
    
    Other long-term liabilities(3)
    
    
    36,748
    
    
    
    65
    
    
    
    65
    
    
    
    65
    
    
    
    65
    
    
    
    
    
    
    
    36,488Total Contractual Obligations
    
    $
    1,035,873
    
    
    $
    19,016
    
    
    $
    65,340
    
    
    $
    62,679
    
    
    $
    62,283
    
    
    $
    61,498
    
    
    $
    765,057
 
 (1)
    
    Consists of the period October 1 through December 31, 2005.(2)
    
    We have variable-rate debt. The interest payments on our variable-rate debt are based on a
variable-rate component plus a fixed 1.50%. For purposes of this computation, we have assumed
that the interest rate on our variable-rate debt (including the fixed rate portion) will be
6.10%, 6.65%, 6.90%, 7.00%, 7.10% and 7.25% for years 2005 through thereafter, respectively.
These assumptions are based on interest rate projections used to price our interest rate swap
agreements. Our condensed, consolidated financial statements included in this quarterly
report on Form 10-Q discuss these variable-rate notes in more detail.(3)
    
    Includes deferred income taxes of $27.4 million.   Debt Related Covenants
   25




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##### Table of Contents



Interest Rate Hedging Agreements
  Fixed interest rate
    
    4.07%
    
    3.98%
    
    3.94%Notional principal amount
    
    $50.0 million
    
    $50.0 million
    
    $50.0 millionEffective date
    
    5/26/2005
    
    6/2/2005
    
    6/30/2005Expiration date
    
    5/26/2008
    
    5/31/2008
    
    6/30/2007Counterparties
    
    Goldman Sachs
    
    Wells Fargo Bank
    
    Wells Fargo BankQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
   Description of Indebtedness
 Senior Credit Facility
    Other Debt
  Critical Accounting Policies
  26




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##### Table of Contents



Revenue
 Laboratory and Animal Hospital Revenue
  
    
    there exists adequate evidence of the transaction;
    
    delivery of goods has occurred or services have been rendered; and
    
    the price is not contingent on future activity and collectibility is reasonably assured.
 Medical Technology Revenue
  Revenue Recognition oftware Revenue
Recognition,
 
    
    Evidence of an arrangement: We consider a non-cancelable agreement signed by
the customer and us to be evidence of an arrangement.
    
    Delivery: We consider delivery to have occurred when the ultrasound imaging
equipment is delivered and the digital radiography equipment is installed. We recognize
revenue for professional services when those services are provided or on a straight-line
basis over the service contract term, based on the nature of the service or the terms of
the contract.
    
    Fixed or determinable fee: We assess whether fees are fixed or determinable at
the time of sale and recognize revenue if all other revenue recognition requirements are
met. We generally consider payments that are due within six months to be fixed or
determinable based upon our successful collection history. We only consider fees to be
fixed or determinable if they are not subject to refund or adjustment.
    
    Collection is deemed probable: We conduct a credit review for all significant
transactions at the time of the arrangement to determine the credit worthiness of the
customer. Collection is deemed probable if we expect that the customer will be able to pay
amounts under the arrangement as payments become due. If we determine that collection is
not probable, we defer the revenue and recognize the revenue upon cash collection.
 Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
 27




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##### Table of Contents



Ultrasound Imaging Solution
  Digital Radiography Solution
   Valuation of Goodwill
   Income Taxes
 Accounting for Income Taxes.
   28




---



##### Table of Contents



New Accounting Pronouncements
 Accounting for Rental Costs Incurred During a Construction Period
 Accounting for Rental Costs Incurred During a Construction Period. Accounting for Leases
 Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections
 Accounting
Changes and Error Corrections,
   Share-Based Compensation
 Share-Based Payment,
 Inventory Costs
 Inventory Costs  An Amendment of ARB No. 43,
Chapter 4
 29




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##### Table of Contents



Forward-Looking Statements
 Risk Factors
 Risk Factors
  If we are unable to effectively execute our growth strategy, we may not achieve our desired
economies of scale and our margins and profitability may decline.
  Demand for certain products and services could decline.
  30




---



##### Table of Contents



Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect
our operating income.
  Difficulties integrating new acquisitions may impose substantial costs and cause other problems
for us.
   
    
    negative effects on our operating results;
    
    impairments of goodwill and other intangible assets;
    
    dependence on retention, hiring and training of key personnel, including specialists; and
    
    contingent and latent risks associated with the past operations of, and other
unanticipated problems arising in, an acquired business.
  We face numerous risks associated with our acquisition of our medical technology division.
  31




---



##### Table of Contents



The carrying value of our goodwill could be subject to impairment write-down.
  We require a significant amount of cash to service our debt and expand our business as planned.
   
    
    $437.7 million in principal amount outstanding under our senior term notes; and
    
    $16.4 million in principal amount outstanding under our other debt.
  Our debt instruments may adversely affect our ability to run our business.
  
    
    limit our ability to borrow additional funds or to obtain other financing in the future
for working capital, capital expenditures, acquisitions, investments and general corporate
purposes;
    
    limit our ability to dispose of our assets, create liens on our assets or to extend
credit;
 32




---



##### Table of Contents




    
    make us more vulnerable to economic downturns and reduce our flexibility in responding
to changing business and economic conditions;
    
    limit our flexibility in planning for, or reacting to, changes in our business or industry;
    
    place us at a competitive disadvantage to our competitors with less debt; and
    
    restrict our ability to pay dividends, repurchase or redeem our capital stock or debt,
or merge or consolidate with another entity.
  Our failure to satisfy covenants in our debt instruments will cause a default under those
instruments.
  The significant competition in the companion animal healthcare services industry could cause us to
reduce prices or lose market share.
     33




---



##### Table of Contents



We may experience difficulties hiring skilled veterinarians due to shortages that could disrupt
our business.
  If we fail to comply with governmental regulations applicable to our business, various
governmental agencies may impose fines, institute litigation or preclude us from operating in
certain states.
   Any failure in our information technology systems, disruption in our transportation network
(including disruption resulting from terrorist activities) or failure to receive products could
significantly increase testing turn-around time, reduce our production capacity and otherwise
disrupt our operations.
     34




---



##### Table of Contents



Our use of a self-insurance program and a large-deductible insurance program to cover certain
claims for losses suffered and costs or expenses incurred could negatively impact our business
upon the occurrence of an uninsured and/or significant event.
  The loss of Mr. Robert Antin, our Chairman, President and Chief Executive Officer, could
materially and adversely affect our business.
  35




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Fixed interest rate
    
    4.07%
    
    3.98%
    
    3.94%Notional amount
    
    $50.0 million
    
    $50.0 million
    
    $50.0 millionEffective date
    
    5/26/2005
    
    6/2/2005
    
    6/30/2005Expiration date
    
    5/26/2008
    
    5/31/2008
    
    6/30/2007Counterparties
    
    Goldman Sachs
    
    Wells Fargo Bank
    
    Wells Fargo BankQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
   
 ITEM 4. CONTROLS AND PROCEDURES
    36




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   
 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.
 37




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##### Table of Contents



SIGNATURE
  Date:  November 7, 2005
    By:
    /s/ TOMAS W. FULLERTomas W. FullerChief Financial Officer
Principal Financial Officer 38




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    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.
 39