##### 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 June 30, 2005
 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)
 þ o
 þ o




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##### Table of Contents



VCA ANTECH, INC.
 FORM 10-Q
JUNE 30, 2005
 TABLE OF CONTENTS
 PageNumberPart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed, Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004
    
    
    1Condensed, Consolidated Income Statements for the Three and Six Months
Ended June 30, 2005 and 2004
    
    
    2Condensed, Consolidated Statements of Cash Flows for the Six Months
Ended June 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
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 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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Part I. Financial Information
 
 ITEM 1. FINANCIAL STATEMENTS
 VCA ANTECH, INC. AND SUBSIDIARIES
 
 CONDENSED, CONSOLIDATED BALANCE SHEETS
As of June 30, 2005 and December 31, 2004
(Unaudited)
(In thousands, except par value)
 June 30,
    
    December 31,2005
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    115,515
    
    
    $
    30,964Restricted cash
    
    
    
    
    
    
    1,250Trade accounts receivable, less allowance for uncollectible accounts of $8,416 and
$7,668 at June 30, 2005 and December 31, 2004, respectively
    
    
    33,268
    
    
    
    28,936Inventory
    
    
    14,676
    
    
    
    10,448Prepaid expenses and other
    
    
    6,034
    
    
    
    6,275Deferred income taxes
    
    
    12,190
    
    
    
    11,472Prepaid income taxes
    
    
    11,786
    
    
    
    10,830Total current assets
    
    
    193,469
    
    
    
    100,175Property and equipment, less accumulated depreciation and amortization of $86,029 and
$79,139 at June 30, 2005 and December 31, 2004, respectively
    
    
    127,777
    
    
    
    119,903Other assets:Goodwill
    
    
    519,135
    
    
    
    499,144Other intangible assets, net
    
    
    11,300
    
    
    
    11,660Deferred financing costs, net
    
    
    1,496
    
    
    
    4,052Other
    
    
    5,927
    
    
    
    7,166Total assets
    
    $
    859,104
    
    
    $
    742,100LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    5,538
    
    
    $
    6,043Accounts payable
    
    
    16,892
    
    
    
    15,566Accrued payroll and related liabilities
    
    
    17,951
    
    
    
    19,850Accrued interest
    
    
    3,122
    
    
    
    1,578Other accrued liabilities
    
    
    24,041
    
    
    
    21,874Total current liabilities
    
    
    67,544
    
    
    
    64,911Long-term obligations, less current portion
    
    
    471,026
    
    
    
    390,846Deferred income taxes
    
    
    34,533
    
    
    
    31,514Other liabilities
    
    
    12,254
    
    
    
    12,915Minority interest
    
    
    9,892
    
    
    
    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, 82,502 and 82,191 shares
outstanding as of June 30, 2005 and December 31, 2004, respectively
    
    
    83
    
    
    
    82Additional paid-in capital
    
    
    254,294
    
    
    
    251,412Retained earnings (deficit)
    
    
    9,749
    
    
    
    (18,759
    )Accumulated other comprehensive income (loss)
    
    
    (266
    )
    
    
    34Notes receivable from stockholders
    
    
    (5
    )
    
    
    (10
    )Total stockholders equity
    
    
    263,855
    
    
    
    232,759Total liabilities and stockholders equity
    
    $
    859,104
    
    
    $
    742,100
  1




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VCA ANTECH, INC. AND SUBSIDIARIES
 
 CONDENSED, CONSOLIDATED INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
(In thousands, except per share amounts)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue
    
    $
    206,584
    
    
    $
    169,947
    
    
    $
    393,447
    
    
    $
    314,297Direct costs
    
    
    145,849
    
    
    
    119,943
    
    
    
    282,185
    
    
    
    224,733Gross profit
    
    
    60,735
    
    
    
    50,004
    
    
    
    111,262
    
    
    
    89,564Selling, general and administrative expense
    
    
    15,417
    
    
    
    11,765
    
    
    
    29,549
    
    
    
    20,466Loss (gain) on sale of assets
    
    
    (78
    )
    
    
    4
    
    
    
    (88
    )
    
    
    66Operating income
    
    
    45,396
    
    
    
    38,235
    
    
    
    81,801
    
    
    
    69,032Interest expense, net
    
    
    6,081
    
    
    
    6,098
    
    
    
    12,748
    
    
    
    12,083Debt retirement costs
    
    
    19,282
    
    
    
    810
    
    
    
    19,282
    
    
    
    810Other (income) expense
    
    
    67
    
    
    
    (287
    )
    
    
    131
    
    
    
    (176
    )Minority interest in income of subsidiaries
    
    
    846
    
    
    
    755
    
    
    
    1,531
    
    
    
    1,171Income before provision for income taxes
    
    
    19,120
    
    
    
    30,859
    
    
    
    48,109
    
    
    
    55,144Provision for income taxes
    
    
    7,858
    
    
    
    12,692
    
    
    
    19,601
    
    
    
    22,233Net income
    
    $
    11,262
    
    
    $
    18,167
    
    
    $
    28,508
    
    
    $
    32,911Basic earnings per common share
    
    $
    0.14
    
    
    $
    0.22
    
    
    $
    0.35
    
    
    $
    0.40Diluted earnings per common share
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.40Shares used for computing basic earnings per share
    
    
    82,343
    
    
    
    81,674
    
    
    
    82,282
    
    
    
    81,578Shares used for computing diluted earnings per share
    
    
    83,874
    
    
    
    83,382
    
    
    
    83,709
    
    
    
    83,218
  2




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VCA ANTECH, INC. AND SUBSIDIARIES
 
 CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Unaudited)
(In thousands)
 Six Months EndedJune 30,2005
    
    2004Cash flows from operating activities:Net income
    
    $
    28,508
    
    
    $
    32,911Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    8,785
    
    
    
    7,435Amortization of debt costs
    
    
    351
    
    
    
    367Provision for uncollectible accounts
    
    
    2,025
    
    
    
    1,084Debt retirement costs
    
    
    19,282
    
    
    
    810Loss (gain) on sale of assets
    
    
    (88
    )
    
    
    66Other
    
    
    (377
    )
    
    
    (92
    )Tax benefit from stock options exercised
    
    
    1,655
    
    
    
    2,106Minority interest in income of subsidiaries
    
    
    1,531
    
    
    
    1,171Distributions to minority interest partners
    
    
    (1,145
    )
    
    
    (813
    )Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (6,265
    )
    
    
    (4,962
    )Increase in inventory, prepaid expenses and other assets
    
    
    (4,894
    )
    
    
    (522
    )Increase in accounts payable and other accrued liabilities
    
    
    3,425
    
    
    
    598Increase in accrued payroll and related liabilities
    
    
    (1,822
    )
    
    
    (2,596
    )Increase in accrued interest
    
    
    1,544
    
    
    
    10Decrease (increase) in prepaid income taxes
    
    
    (803
    )
    
    
    1,329Increase in deferred income tax assets
    
    
    (500
    )
    
    
    (574
    )Increase in deferred income tax liabilities
    
    
    3,213
    
    
    
    3,987Net cash provided by operating activities
    
    
    54,425
    
    
    
    42,315Cash flows used in investing activities:Business acquisitions, net of cash acquired
    
    
    (22,174
    )
    
    
    (92,931
    )Real estate acquired in connection with business acquisitions
    
    
    (221
    )
    
    
    (4,385
    )Property and equipment additions
    
    
    (14,681
    )
    
    
    (9,027
    )Proceeds from sale of assets
    
    
    338
    
    
    
    179Other
    
    
    3,039
    
    
    
    123Net cash used in investing activities
    
    
    (33,699
    )
    
    
    (106,041
    )Cash flows from financing activities:Repayment of long-term obligations, including tender fees
    
    
    (409,187
    )
    
    
    (146,842
    )Proceeds from the issuance of long-term obligations
    
    
    475,000
    
    
    
    225,000Payment of financing costs
    
    
    (3,216
    )
    
    
    (794
    )Proceeds from issuance of common stock under stock option plans
    
    
    1,228
    
    
    
    1,961Net cash provided by financing activities
    
    
    63,825
    
    
    
    79,325Increase in cash and cash equivalents
    
    
    84,551
    
    
    
    15,599Cash and cash equivalents at beginning of period
    
    
    30,964
    
    
    
    17,237Cash and cash equivalents at end of period
    
    $
    115,515
    
    
    $
    32,836
  3




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VCA ANTECH, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
 1. General
  2. Acquisitions
  Six Months EndedJune 30,2005
    
    2004Acquisitions, excluding NPC (1)
    
    
    11
    
    
    
    15NPC (1)
    
    
    
    
    
    
    67Acquisitions relocated into our existing animal hospitals
    
    
    (2
    )
    
    
    (3
    )Total
    
    
    9
    
    
    
    79
 
 (1)
    
    National PetCare Centers, Inc., or NPC, was acquired on June 1,
2004 and is discussed below. Animal Hospital Acquisitions, excluding NPC
  Six Months EndedJune 30,2005
    
    2004Consideration:Cash
    
    $
    19,621
    
    
    $
    26,509Obligations to sellers (1)
    
    
    1,090
    
    
    
    1,135Notes payable and other liabilities assumed
    
    
    37
    
    
    
    151Total
    
    $
    20,748
    
    
    $
    27,795Purchase Price Allocation:Goodwill (2)
    
    $
    18,593
    
    
    $
    24,938Identifiable intangible assets
    
    
    1,237
    
    
    
    1,523Tangible assets
    
    
    918
    
    
    
    1,334Total
    
    $
    20,748
    
    
    $
    27,795
 4




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##### Table of Contents



(1)
    
    Represents a portion of the purchase price withheld, or the holdback, as security for
indemnification obligations of the sellers under the acquisition agreement.(2)
    
    We expect that $13.8 million and $19.7 million of the goodwill recorded for these
acquisitions as of June 30, 2005 and 2004, respectively, will be fully deductible for income
tax purposes. Partnership Interests
  Six Months EndedJune 30,2005
    
    2004Consideration:Cash
    
    $
    568
    
    
    $
    572Notes payable and other liabilities assumed
    
    
    1,202
    
    
    
    155Total
    
    $
    1,770
    
    
    $
    727Goodwill recorded (1)
    
    $
    710
    
    
    $
    610
 
 (1)
    
    We expect that the goodwill recorded in the six months ended June 30, 2005 and 2004 will be fully
deductible for income tax purposes. Other Acquisition Payments
    Sound Technologies, Inc.
   National PetCare Centers, Inc.
  5




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3. Long-Term Obligations
 Senior Credit Facility Subsequent Events
 June 30,
    
    December 31,2005
    
    2004Revolver
    
    $
    
    
    
    $
    Senior term notes (LIBOR + 1.50%)
    
    
    473,813
    
    
    
    Senior term notes (LIBOR + 1.75%)
    
    
    
    
    
    
    223,3139.875% senior subordinated notes
    
    
    
    
    
    
    170,000Other debt and capital lease obligations
    
    
    2,751
    
    
    
    3,576Total debt obligations
    
    $
    476,564
    
    
    $
    396,889
  2005 (1)
    
    $
    2,8952006
    
    
    5,3042007
    
    
    5,4102008
    
    
    5,1452009
    
    
    4,836Thereafter
    
    
    452,974Total
    
    $
    476,564
 
 (1)
    
    Consists of the period from July 1 through December 31, 2005. Senior Credit Facility
  6




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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.
   Maturity and Principal Payments.
 2005
    
    $
    2,3752006
    
    
    4,7502007
    
    
    4,7502008
    
    
    4,7502009
    
    
    4,750Thereafter
    
    
    452,438Total
    
    $
    473,813
   Guarantees and Security.
 Debt Covenants.
 7




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4. Interest Rate Hedging Agreements
  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
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Cash paid (received) (1)
    
    $
    (21
    )
    
    $
    166
    
    
    $
    (115
    )
    
    $
    329Unrealized loss (gain) (2)
    
    $
    67
    
    
    $
    (287
    )
    
    $
    131
    
    
    $
    (176
    )
 
 (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
    
    
    
    
    
    
    18,593
    
    
    
    
    
    
    
    18,593Other (1)
    
    
    
    
    
    
    (552
    )
    
    
    1,579
    
    
    
    1,027Goodwill related to partnership interests
    
    
    
    
    
    
    577
    
    
    
    
    
    
    
    577Goodwill related to sale of animal hospitals
    
    
    
    
    
    
    (206
    )
    
    
    
    
    
    
    (206
    )Balance as of June 30, 2005
    
    $
    93,671
    
    
    $
    404,667
    
    
    $
    20,797
    
    
    $
    519,135
 
 (1)
    
    Other is the result of purchase price adjustments, purchasing the ownership interest of
partners and the payment of earnouts. 8




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As of June 30, 2005
    
    As of December 31, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountCovenants-not-to-compete
    
    $
    12,155
    
    
    $
    (5,680
    )
    
    $
    6,475
    
    
    $
    11,604
    
    
    $
    (5,290
    )
    
    $
    6,314Noncontractual-customer
relationships
    
    
    3,340
    
    
    
    (539
    )
    
    
    2,801
    
    
    
    3,340
    
    
    
    (246
    )
    
    
    3,094Technology
    
    
    1,250
    
    
    
    (187
    )
    
    
    1,063
    
    
    
    1,250
    
    
    
    (62
    )
    
    
    1,188Trademarks
    
    
    560
    
    
    
    (42
    )
    
    
    518
    
    
    
    560
    
    
    
    (14
    )
    
    
    546Contracts
    
    
    397
    
    
    
    (77
    )
    
    
    320
    
    
    
    397
    
    
    
    (26
    )
    
    
    371Client lists
    
    
    671
    
    
    
    (548
    )
    
    
    123
    
    
    
    665
    
    
    
    (518
    )
    
    
    147Total
    
    $
    18,373
    
    
    $
    (7,073
    )
    
    $
    11,300
    
    
    $
    17,816
    
    
    $
    (6,156
    )
    
    $
    11,660
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Aggregate amortization expense
    
    $
    793
    
    
    $
    553
    
    
    $
    1,596
    
    
    $
    993
  2005
    
    $
    3,1202006
    
    $
    2,8322007
    
    $
    2,5902008
    
    $
    2,0352009
    
    $
    997
 9




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6. Calculation of Earnings per Common Share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    11,262
    
    
    $
    18,167
    
    
    $
    28,508
    
    
    $
    32,911Weighted average common shares outstanding:Basic
    
    
    82,343
    
    
    
    81,674
    
    
    
    82,282
    
    
    
    81,578Effect of dilutive potential common shares:Stock options
    
    
    1,531
    
    
    
    1,628
    
    
    
    1,427
    
    
    
    1,530Contracts that may be settled in stock or cash
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    110Diluted
    
    
    83,874
    
    
    
    83,382
    
    
    
    83,709
    
    
    
    83,218Basic earnings per common share
    
    $
    0.14
    
    
    $
    0.22
    
    
    $
    0.35
    
    
    $
    0.40Diluted earnings per common share
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.40
 7. Lines of Business
  10




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Animal
    
    Medical
    
    
    
    
    
    IntercompanyLaboratory
    
    Hospital
    
    Technology
    
    Corporate
    
    Eliminations
    
    TotalThree Months Ended June 30, 2005Revenue
    
    $
    58,277
    
    
    $
    147,959
    
    
    $
    5,358
    
    
    $
    
    
    
    $
    (5,010
    )
    
    $
    206,584Direct costs
    
    
    30,899
    
    
    
    116,142
    
    
    
    3,700
    
    
    
    
    
    
    
    (4,892
    )
    
    
    145,849Gross profit
    
    
    27,378
    
    
    
    31,817
    
    
    
    1,658
    
    
    
    
    
    
    
    (118
    )
    
    
    60,735Selling, general and administrative
expense
    
    
    3,346
    
    
    
    3,807
    
    
    
    1,922
    
    
    
    6,342
    
    
    
    
    
    
    
    15,417Gain on sale of assets
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )Operating income (loss)
    
    $
    24,032
    
    
    $
    28,088
    
    
    $
    (264
    )
    
    $
    (6,342
    )
    
    $
    (118
    )
    
    $
    45,396Depreciation and amortization
    
    $
    878
    
    
    $
    2,907
    
    
    $
    302
    
    
    $
    372
    
    
    $
    (16
    )
    
    $
    4,443Capital expenditures
    
    $
    1,180
    
    
    $
    4,986
    
    
    $
    125
    
    
    $
    1,267
    
    
    $
    (86
    )
    
    $
    7,472Three Months Ended June 30, 2004Revenue
    
    $
    51,951
    
    
    $
    121,384
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,388
    )
    
    $
    169,947Direct costs
    
    
    27,983
    
    
    
    95,348
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )
    
    
    119,943Gross profit
    
    
    23,968
    
    
    
    26,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,004Selling, general and administrative
expense
    
    
    3,190
    
    
    
    3,056
    
    
    
    
    
    
    
    5,519
    
    
    
    
    
    
    
    11,765Loss on sale of assets
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Operating income (loss)
    
    $
    20,776
    
    
    $
    22,978
    
    
    $
    
    
    
    $
    (5,519
    )
    
    $
    
    
    
    $
    38,235Depreciation and amortization
    
    $
    897
    
    
    $
    2,536
    
    
    $
    
    
    
    $
    386
    
    
    $
    
    
    
    $
    3,819Capital expenditures
    
    $
    1,057
    
    
    $
    4,078
    
    
    $
    
    
    
    $
    427
    
    
    $
    
    
    
    $
    5,562Six Months Ended June 30, 2005Revenue
    
    $
    111,716
    
    
    $
    281,313
    
    
    $
    9,842
    
    
    $
    
    
    
    $
    (9,424
    )
    
    $
    393,447Direct costs
    
    
    60,469
    
    
    
    223,761
    
    
    
    7,145
    
    
    
    
    
    
    
    (9,190
    )
    
    
    282,185Gross profit
    
    
    51,247
    
    
    
    57,552
    
    
    
    2,697
    
    
    
    
    
    
    
    (234
    )
    
    
    111,262Selling, general and administrative
expense
    
    
    6,711
    
    
    
    7,510
    
    
    
    3,489
    
    
    
    11,839
    
    
    
    
    
    
    
    29,549Gain on sale of assets
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )Operating income (loss)
    
    $
    44,536
    
    
    $
    50,130
    
    
    $
    (792
    )
    
    $
    (11,839
    )
    
    $
    (234
    )
    
    $
    81,801Depreciation and amortization
    
    $
    1,780
    
    
    $
    5,651
    
    
    $
    601
    
    
    $
    769
    
    
    $
    (16
    )
    
    $
    8,785Capital expenditures
    
    $
    2,861
    
    
    $
    8,867
    
    
    $
    245
    
    
    $
    3,099
    
    
    $
    (391
    )
    
    $
    14,681Six Months Ended June 30, 2004Revenue
    
    $
    101,133
    
    
    $
    219,340
    
    
    $
    
    
    
    $
    
    
    
    $
    (6,176
    )
    
    $
    314,297Direct costs
    
    
    55,698
    
    
    
    175,211
    
    
    
    
    
    
    
    
    
    
    
    (6,176
    )
    
    
    224,733Gross profit
    
    
    45,435
    
    
    
    44,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,564Selling, general and administrative
expense
    
    
    6,363
    
    
    
    5,804
    
    
    
    
    
    
    
    8,299
    
    
    
    
    
    
    
    20,466Loss on sale of assets
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Operating income (loss)
    
    $
    39,071
    
    
    $
    38,260
    
    
    $
    
    
    
    $
    (8,299
    )
    
    $
    
    
    
    $
    69,032Depreciation and amortization
    
    $
    1,718
    
    
    $
    4,937
    
    
    $
    
    
    
    $
    780
    
    
    $
    
    
    
    $
    7,435Capital expenditures
    
    $
    1,803
    
    
    $
    6,531
    
    
    $
    
    
    
    $
    693
    
    
    $
    
    
    
    $
    9,027
 11




---



##### Table of Contents



Animal
    
    Medical
    
    
    
    
    
    IntercompanyLaboratory
    
    Hospital
    
    Technology
    
    Corporate
    
    Eliminations
    
    TotalAt June 30, 2005Total assets
    
    $
    143,753
    
    
    $
    528,743
    
    
    $
    39,640
    
    
    $
    149,078
    
    
    $
    (2,110
    )
    
    $
    859,104At 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
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004As reported
    
    $
    11,262
    
    
    $
    18,167
    
    
    $
    28,508
    
    
    $
    32,911Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects
    
    
    (1,309
    )
    
    
    (485
    )
    
    
    (3,954
    )
    
    
    (762
    )Pro forma net income available to common stockholders
    
    $
    9,953
    
    
    $
    17,682
    
    
    $
    24,554
    
    
    $
    32,149Earnings per common share:Basic  as reported
    
    $
    0.14
    
    
    $
    0.22
    
    
    $
    0.35
    
    
    $
    0.40Basic  pro forma
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.30
    
    
    $
    0.39Diluted  as reported
    
    $
    0.13
    
    
    $
    0.22
    
    
    $
    0.34
    
    
    $
    0.40Diluted  pro forma
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.29
    
    
    $
    0.39
 Share-Based Payment,
  9. Commitments and Contingencies
  a. Earnout Payments
  12




---



##### Table of Contents



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
August 5, 2005, and we undertake no duty to update this information. Shareholders and prospective
investors can find information filed with the SEC after August 5, 2005 at our website at www.investor.vcaantech.com or at the SECs website at www.sec.gov .
   Laboratory.
 Animal hospitals.
 Medical technology.
  
 Executive Overview
  15




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##### Table of Contents



Refinancing Transactions
 Subsequent Event
 Acquisitions
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Laboratories:Beginning of period
    
    
    28
    
    
    
    23
    
    
    
    27
    
    
    
    23New facilities
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    2End of period
    
    
    28
    
    
    
    25
    
    
    
    28
    
    
    
    25Animal hospitals:Beginning of period
    
    
    320
    
    
    
    247
    
    
    
    315
    
    
    
    241Acquisitions, excluding NPC(1)
    
    
    3
    
    
    
    6
    
    
    
    11
    
    
    
    15NPC(1)
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    67Acquisitions relocated into hospitals operated by us
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (3
    )Sold or closed
    
    
    (4
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (3
    )End of period
    
    
    318
    
    
    
    317
    
    
    
    318
    
    
    
    317
 
 (1)
    
    National PetCare Centers, Inc., or NPC, was acquired on June 1, 2004. Subsequent Event
   16




---



##### Table of Contents



Results of Operations
  Inter-Animal
    
    Medical
    
    
    
    
    
    companyLaboratory
    
    Hospital
    
    Technology
    
    Corporate
    
    Eliminations
    
    TotalThree Months Ended June 30, 2005Revenue
    
    $
    58,277
    
    
    $
    147,959
    
    
    $
    5,358
    
    
    $
    
    
    
    $
    (5,010
    )
    
    $
    206,584Direct costs
    
    
    30,899
    
    
    
    116,142
    
    
    
    3,700
    
    
    
    
    
    
    
    (4,892
    )
    
    
    145,849Gross profit
    
    
    27,378
    
    
    
    31,817
    
    
    
    1,658
    
    
    
    
    
    
    
    (118
    )
    
    
    60,735Selling, general and administrative
expense
    
    
    3,346
    
    
    
    3,807
    
    
    
    1,922
    
    
    
    6,342
    
    
    
    
    
    
    
    15,417Gain on sale of assets
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )Operating income (loss)
    
    $
    24,032
    
    
    $
    28,088
    
    
    $
    (264
    )
    
    $
    (6,342
    )
    
    $
    (118
    )
    
    $
    45,396Depreciation and amortization
    
    $
    878
    
    
    $
    2,907
    
    
    $
    302
    
    
    $
    372
    
    
    $
    (16
    )
    
    $
    4,443Three Months Ended June 30, 2004Revenue
    
    $
    51,951
    
    
    $
    121,384
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,388
    )
    
    $
    169,947Direct costs
    
    
    27,983
    
    
    
    95,348
    
    
    
    
    
    
    
    
    
    
    
    (3,388
    )
    
    
    119,943Gross profit
    
    
    23,968
    
    
    
    26,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,004Selling, general and administrative
expense
    
    
    3,190
    
    
    
    3,056
    
    
    
    
    
    
    
    5,519
    
    
    
    
    
    
    
    11,765Loss on sale of assets
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Operating income (loss)
    
    $
    20,776
    
    
    $
    22,978
    
    
    $
    
    
    
    $
    (5,519
    )
    
    $
    
    
    
    $
    38,235Depreciation and amortization
    
    $
    897
    
    
    $
    2,536
    
    
    $
    
    
    
    $
    386
    
    
    $
    
    
    
    $
    3,819Six Months Ended June 30, 2005Revenue
    
    $
    111,716
    
    
    $
    281,313
    
    
    $
    9,842
    
    
    $
    
    
    
    $
    (9,424
    )
    
    $
    393,447Direct costs
    
    
    60,469
    
    
    
    223,761
    
    
    
    7,145
    
    
    
    
    
    
    
    (9,190
    )
    
    
    282,185Gross profit
    
    
    51,247
    
    
    
    57,552
    
    
    
    2,697
    
    
    
    
    
    
    
    (234
    )
    
    
    111,262Selling, general and administrative
expense
    
    
    6,711
    
    
    
    7,510
    
    
    
    3,489
    
    
    
    11,839
    
    
    
    
    
    
    
    29,549Gain on sale of assets
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )Operating income (loss)
    
    $
    44,536
    
    
    $
    50,130
    
    
    $
    (792
    )
    
    $
    (11,839
    )
    
    $
    (234
    )
    
    $
    81,801Depreciation and amortization
    
    $
    1,780
    
    
    $
    5,651
    
    
    $
    601
    
    
    $
    769
    
    
    $
    (16
    )
    
    $
    8,785Six Months Ended June 30, 2004Revenue
    
    $
    101,133
    
    
    $
    219,340
    
    
    $
    
    
    
    $
    
    
    
    $
    (6,176
    )
    
    $
    314,297Direct costs
    
    
    55,698
    
    
    
    175,211
    
    
    
    
    
    
    
    
    
    
    
    (6,176
    )
    
    
    224,733Gross profit
    
    
    45,435
    
    
    
    44,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,564Selling, general and administrative
expense
    
    
    6,363
    
    
    
    5,804
    
    
    
    
    
    
    
    8,299
    
    
    
    
    
    
    
    20,466Loss on sale of assets
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Operating income (loss)
    
    $
    39,071
    
    
    $
    38,260
    
    
    $
    
    
    
    $
    (8,299
    )
    
    $
    
    
    
    $
    69,032Depreciation and amortization
    
    $
    1,718
    
    
    $
    4,937
    
    
    $
    
    
    
    $
    780
    
    
    $
    
    
    
    $
    7,435
 17




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Laboratory
    
    
    28.2
    %
    
    
    30.6
    %
    
    
    28.4
    %
    
    
    32.2
    %Animal hospital
    
    
    71.6
    
    
    
    71.4
    
    
    
    71.5
    
    
    
    69.8Medical technology
    
    
    2.6
    
    
    
    
    
    
    
    2.5
    
    
    
    Intercompany
    
    
    (2.4
    )
    
    
    (2.0
    )
    
    
    (2.4
    )
    
    
    (2.0
    )Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Direct costs
    
    
    70.6
    
    
    
    70.6
    
    
    
    71.7
    
    
    
    71.5Gross profit
    
    
    29.4
    
    
    
    29.4
    
    
    
    28.3
    
    
    
    28.5Selling, general and administrative expense
    
    
    7.5
    
    
    
    6.9
    
    
    
    7.5
    
    
    
    6.5Gain on sale of assets
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    22.0
    
    
    
    22.5
    
    
    
    20.8
    
    
    
    22.0Interest expense, net
    
    
    2.9
    
    
    
    3.6
    
    
    
    3.2
    
    
    
    3.8Debt retirement costs
    
    
    9.3
    
    
    
    0.5
    
    
    
    4.9
    
    
    
    0.3Other (income) expense
    
    
    0.1
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )Minority interest in income of subsidiaries
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.4Income before provision for income taxes
    
    
    9.3
    
    
    
    18.2
    
    
    
    12.2
    
    
    
    17.6Provision for income taxes
    
    
    3.8
    
    
    
    7.5
    
    
    
    5.0
    
    
    
    7.1Net income
    
    
    5.5
    %
    
    
    10.7
    %
    
    
    7.2
    %
    
    
    10.5
    %
 Revenue
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeLaboratory
    
    $
    58,277
    
    
    $
    51,951
    
    
    
    12.2
    %
    
    $
    111,716
    
    
    $
    101,133
    
    
    
    10.5
    %Animal hospital
    
    
    147,959
    
    
    
    121,384
    
    
    
    21.9
    %
    
    
    281,313
    
    
    
    219,340
    
    
    
    28.3
    %Medical technology
    
    
    5,358
    
    
    
    
    
    
    
    
    
    
    
    9,842
    
    
    
    Intercompany
    
    
    (5,010
    )
    
    
    (3,388
    )
    
    
    47.9
    %
    
    
    (9,424
    )
    
    
    (6,176
    )
    
    
    52.6
    %Total revenue
    
    $
    206,584
    
    
    $
    169,947
    
    
    
    21.6
    %
    
    $
    393,447
    
    
    $
    314,297
    
    
    
    25.2
    %
 Laboratory Revenue
  18




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,Laboratory Revenue:
    
    2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeInternal growth:Number of requisitions (2)
    
    
    2,572
    
    
    
    2,373
    
    
    
    8.4
    %
    
    
    4,835
    
    
    
    4,476
    
    
    
    8.0
    %Average revenue per requisition (1)
    
    $
    22.66
    
    
    $
    21.89
    
    
    
    3.5
    %
    
    $
    23.11
    
    
    $
    22.45
    
    
    
    2.9
    %Total internal revenue (2)
    
    $
    58,277
    
    
    $
    51,951
    
    
    
    12.2
    %
    
    $
    111,716
    
    
    $
    100,494
    
    
    
    11.2
    %Billing day adjustment (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    639Total
    
    $
    58,277
    
    
    $
    51,951
    
    
    
    12.2
    %
    
    $
    111,716
    
    
    $
    101,133
    
    
    
    10.5
    %
 
 (1)
    
    Computed by dividing total internal revenue by the number of requisitions.(2)
    
    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.(3)
    
    The 2004 billing day adjustment reflects the impact of one additional billing day for the six
months ended June 30, 2004 as compared to the six months ended June 30, 2005.   Animal Hospital Revenue
  Three Months Ended June 30,
    
    Six Months Ended June 30,Animal Hospital Revenue:
    
    2005
    
    2004
    
    % Change
    
    2005
    
    2004
    
    % ChangeSame-store facility:Orders (2)
    
    
    953
    
    
    
    978
    
    
    
    (2.5
    )%
    
    
    1,774
    
    
    
    1,803
    
    
    
    (1.6
    )%Average revenue per order (1)
    
    $
    121.73
    
    
    $
    111.58
    
    
    
    9.1
    %
    
    $
    120.55
    
    
    $
    110.92
    
    
    
    8.7
    %Same-store revenue (2)
    
    $
    116,030
    
    
    $
    109,100
    
    
    
    6.4
    %
    
    $
    213,814
    
    
    $
    200,047
    
    
    
    6.9
    %Business day adjustment (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,073Net acquired revenue (4)
    
    
    31,929
    
    
    
    12,284
    
    
    
    
    
    
    
    67,499
    
    
    
    18,220Total
    
    $
    147,959
    
    
    $
    121,384
    
    
    
    21.9
    %
    
    $
    281,313
    
    
    $
    219,340
    
    
    
    28.3
    %
 
 (1)
    
    Computed by dividing same-store revenue by same-store orders.(2)
    
    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.(3)
    
    The 2004 business day adjustment reflects the impact of one additional business day for the
six months ended June 30, 2004 as compared to the six months ended June 30, 2005.(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 April 1, 2004 19




---



##### Table of Contents



Medical Technology Revenue
  Three Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2005Medical Technology Revenue:Ultrasound equipment
    
    $
    2,698
    
    
    $
    4,907Digital radiography
    
    
    1,320
    
    
    
    2,331Education and installation services
    
    
    465
    
    
    
    800Consulting and mobile imaging services
    
    
    875
    
    
    
    1,804Total revenue
    
    $
    5,358
    
    
    $
    9,842
  Intercompany Revenue
  Gross Profit
  20




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004Gross
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    GrossProfit
    
    
    
    
    
    Profit
    
    %
    
    
    
    
    
    Profit
    
    
    
    
    
    Profit
    
    %$
    
    Margin
    
    $
    
    Margin
    
    Change
    
    $
    
    Margin
    
    $
    
    Margin
    
    ChangeLaboratory
    
    $
    27,378
    
    
    
    47.0
    %
    
    $
    23,968
    
    
    
    46.1
    %
    
    
    14.2
    %
    
    $
    51,247
    
    
    
    45.9
    %
    
    $
    45,435
    
    
    
    44.9
    %
    
    
    12.8
    %Animal hospital
    
    
    31,817
    
    
    
    21.5
    %
    
    
    26,036
    
    
    
    21.4
    %
    
    
    22.2
    %
    
    
    57,552
    
    
    
    20.5
    %
    
    
    44,129
    
    
    
    20.1
    %
    
    
    30.4
    %Medical technology
    
    
    1,658
    
    
    
    30.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,697
    
    
    
    27.4
    %
    
    
    Intercompany
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (234
    )
    
    
    
    
    
    
    Total gross profit
    
    $
    60,735
    
    
    
    29.4
    %
    
    $
    50,004
    
    
    
    29.4
    %
    
    
    21.5
    %
    
    $
    111,262
    
    
    
    28.3
    %
    
    $
    89,564
    
    
    
    28.5
    %
    
    
    24.2
    %
 Laboratory Gross Profit
   Animal Hospital Gross Profit
   Medical Technology Gross Profit
   21




---



##### Table of Contents



Selling, General and Administrative Expense
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeLaboratory
    
    $
    3,346
    
    
    
    5.7
    %
    
    $
    3,190
    
    
    
    6.1
    %
    
    
    4.9
    %
    
    $
    6,711
    
    
    
    6.0
    %
    
    $
    6,363
    
    
    
    6.3
    %
    
    
    5.5
    %Animal hospital
    
    
    3,807
    
    
    
    2.6
    %
    
    
    3,056
    
    
    
    2.5
    %
    
    
    24.6
    %
    
    
    7,510
    
    
    
    2.7
    %
    
    
    5,804
    
    
    
    2.6
    %
    
    
    29.4
    %Medical technology
    
    
    1,922
    
    
    
    35.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,489
    
    
    
    35.5
    %
    
    
    Corporate
    
    
    6,342
    
    
    
    3.1
    %
    
    
    5,519
    
    
    
    3.2
    %
    
    
    14.9
    %
    
    
    11,839
    
    
    
    3.0
    %
    
    
    8,299
    
    
    
    2.6
    %
    
    
    42.7
    %Total SG&A
    
    $
    15,417
    
    
    
    7.5
    %
    
    $
    11,765
    
    
    
    6.9
    %
    
    
    31.0
    %
    
    $
    29,549
    
    
    
    7.5
    %
    
    $
    20,466
    
    
    
    6.5
    %
    
    
    44.4
    %
 Laboratory SG&A
   Animal Hospital SG&A
   Medical Technology SG&A
   Corporate SG&A
   22




---



##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    
    
    
    
    2005
    
    2004% of
    
    
    
    
    
    % of
    
    %
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    %$
    
    Revenue
    
    $
    
    Revenue
    
    Change
    
    $
    
    Revenue
    
    $
    
    Revenue
    
    ChangeCorporate SG&A as reported
    
    $
    6,342
    
    
    
    3.1
    %
    
    $
    5,519
    
    
    
    3.2
    %
    
    
    14.9
    %
    
    $
    11,839
    
    
    
    3.0
    %
    
    $
    8,299
    
    
    
    2.6
    %
    
    
    42.7
    %Impact of certain items:Litigation settlement
reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,124Legal fees reimbursement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    801Corporate
SG&A excluding the impact of certain items
    
    $
    6,342
    
    
    
    3.1
    %
    
    $
    5,519
    
    
    
    3.2
    %
    
    
    14.9
    %
    
    $
    11,839
    
    
    
    3.0
    %
    
    $
    10,224
    
    
    
    3.3
    %
    
    
    15.8
    %
   Interest Expense, Net
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest expense:Senior term notes
    
    $
    4,221
    
    
    $
    1,527
    
    
    $
    6,641
    
    
    $
    2,8699.875% senior subordinated notes
    
    
    2,145
    
    
    
    4,197
    
    
    
    6,342
    
    
    
    8,394Interest rate hedging agreements
    
    
    (21
    )
    
    
    166
    
    
    
    (115
    )
    
    
    329Amortization of debt costs
    
    
    142
    
    
    
    183
    
    
    
    351
    
    
    
    367Secured and unsecured seller notes
    
    
    59
    
    
    
    50
    
    
    
    122
    
    
    
    83Capital leases and other
    
    
    141
    
    
    
    142
    
    
    
    287
    
    
    
    2986,687
    
    
    
    6,265
    
    
    
    13,628
    
    
    
    12,340Interest income
    
    
    606
    
    
    
    167
    
    
    
    880
    
    
    
    257Total interest expense, net of interest income
    
    $
    6,081
    
    
    $
    6,098
    
    
    $
    12,748
    
    
    $
    12,083
 Liquidity and Capital Resources
 Debt Retirement Costs
 Liquidity and Capital
Resources
 Provision for Income Taxes
  Corporate SG&A
 23




---



##### Table of Contents



Liquidity and Capital Resources
  Six Months EndedJune 30,2005
    
    2004Cash provided by (used in):Operating activities
    
    $
    54,425
    
    
    $
    42,315Investing activities
    
    
    (33,699
    )
    
    
    (106,041
    )Financing activities
    
    
    63,825
    
    
    
    79,325Increase in cash and cash equivalents
    
    
    84,551
    
    
    
    15,599Cash and cash equivalents at beginning of year
    
    
    30,964
    
    
    
    17,237Cash and cash equivalents at end of year
    
    $
    115,515
    
    
    $
    32,836
 Cash Flows from Operating Activities
   Cash Flows used in Investing Activities
   Cash Flows from Financing Activities
 Subsequent Event
 24




---



##### Table of Contents



Future Cash Requirements
  Total
    
    2005 (1)
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterLong-term debt
    
    $
    476,296
    
    
    $
    2,838
    
    
    $
    5,183
    
    
    $
    5,346
    
    
    $
    5,119
    
    
    $
    4,836
    
    
    $
    452,974Capital lease obligations
    
    
    268
    
    
    
    57
    
    
    
    121
    
    
    
    64
    
    
    
    26
    
    
    
    
    
    
    
    Operating leases
    
    
    356,100
    
    
    
    11,657
    
    
    
    23,198
    
    
    
    23,096
    
    
    
    22,879
    
    
    
    22,415
    
    
    
    252,855Fixed cash interest expense
    
    
    2,616
    
    
    
    299
    
    
    
    556
    
    
    
    501
    
    
    
    636
    
    
    
    427
    
    
    
    197Variable cash interest expense(2)
    
    
    180,480
    
    
    
    14,314
    
    
    
    30,528
    
    
    
    30,916
    
    
    
    30,830
    
    
    
    30,968
    
    
    
    42,924Swap agreements (2)
    
    
    (3,838
    )
    
    
    (415
    )
    
    
    (1,505
    )
    
    
    (1,428
    )
    
    
    (490
    )
    
    
    
    
    
    
    Purchase obligations
    
    
    10,468
    
    
    
    5,495
    
    
    
    4,258
    
    
    
    330
    
    
    
    330
    
    
    
    55
    
    
    
    Other long-term liabilities
    
    
    42,739
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,739$
    1,065,129
    
    
    $
    34,245
    
    
    $
    62,339
    
    
    $
    58,825
    
    
    $
    59,330
    
    
    $
    58,701
    
    
    $
    791,689
 
 (1)
    
    Consists of the period July 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%. Including the fixed 1.50%, we estimate that the
interest rate on our variable rate debt will be 6.05%, 6.50%, 6.65%, 6.70%, 6.80% and 6.95%
for years 2005 through thereafter, respectively. These estimates 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.   Debt Related Covenants
  25




---



##### Table of Contents



Interest Rate Hedging Agreements
  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
   Description of Indebtedness
 Senior Credit Facility
    Other Debt
  
 Critical Accounting Policies
  Revenue
 Laboratory and Animal Hospital Revenue
  
    
    there exists adequate evidence of the transaction;
 26




---



##### Table of Contents




    
    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 Software Revenue
Recognition,
 Applicability of AICPA Statement
of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental
Software,
     
    
    Evidence of an arrangement: We consider a non-cancelable agreement signed by
the customer and us to be evidence of an arrangement.
 27




---



##### Table of Contents




    
    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.
  Valuation of Goodwill
   Income Taxes
 Accounting for Income Taxes.
   28




---



##### Table of Contents



New Accounting Pronouncements
 Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections
 Accounting
Changes and Error Corrections,
   EITF 05-6, Determining the Amortization Period for Leasehold Improvements
 Determining the Amortization Period for Leasehold Improvements
   Share-Based Compensation
 Share-Based Payment,
  Inventory Costs
 Inventory Costs  An Amendment of ARB No. 43,
Chapter 4
 29




---



##### Table of Contents



Accounting for Preexisting Relationships between the Parties to a Business Combination
 Accounting for
Preexisting Relationships between the Parties to a Business Combination
  
 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.
  30




---



##### Table of Contents



Demand for certain products and services could decline.
  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.
  31




---



##### Table of Contents



We face numerous risks associated with our acquisition of our medical technology division.
   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.
   
    
    $473.8 million in principal amount outstanding under our senior term notes; and
    
    $2.8 million in principal amount outstanding under our other debt.
  32




---



##### Table of Contents



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;
    
    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
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  36




---



##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
    
    elected each of John Heil and John B. Chickering, Jr. as a Class III director; and
    
    ratified KPMG LLP as our independent auditor.
  Candidate
    
    Yes Votes
    
    
    No Votes
    
    
    Abstain
    
    
    Broker Non-VoteJohn Heil
    
    
    39,651,132
    
    

    
    -0-
    
    
    
    26,721,987
    
    
    
    -0-John B. Chickering, Jr.
    
    
    64,179,612
    
    
    
    -0-
    
    
    
    2,193,507
    
    
    
    -0-
  Proposal
    
    Yes Votes
    
    
    No Votes
    
    
    Abstain
    
    
    Broker Non-VoteRatify KPMG LLP as our
independent auditor
    
    
    66,255,454
    
    
    
    88,850
    
    
    
    28,815
    
    
    
    -0-
 
 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




---



##### Table of Contents



SIGNATURE
  Date: August 5, 2005
    
    By:
    
    /s/ Tomas W. FullerTomas W. FullerChief Financial Officer
 38




---



##### 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