##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-16783
 
 VCA ANTECH, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    95-4097995(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 o
 o þ




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##### Table of Contents



VCA ANTECH, INC.
FORM 10-Q
SEPTEMBER 30, 2006
 TABLE OF CONTENTS
 PageNumberPart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed, Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    1Condensed, Consolidated Income Statements for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    2Condensed, Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
    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
    
    
    29Item 4. Controls and Procedures
    
    
    29Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30Signature
    
    
    31Exhibit Index
    
    
    32EXHIBIT 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, 2006 and December 31, 2005
 (Unaudited)
 (In thousands, except par value)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,821
    
    
    $
    58,488Trade accounts receivable, less allowance for uncollectible accounts of $11,100
and $9,409 at September 30, 2006 and December 31, 2005, respectively
    
    
    41,091
    
    
    
    36,104Inventory
    
    
    20,483
    
    
    
    17,856Prepaid expenses and other
    
    
    12,315
    
    
    
    9,867Deferred income taxes
    
    
    11,850
    
    
    
    10,972Prepaid income taxes
    
    
    18,235
    
    
    
    12,337Total current assets
    
    
    136,795
    
    
    
    145,624Property and equipment, less accumulated depreciation and amortization of $106,551
and $93,305 at September 30, 2006 and December 31, 2005, respectively
    
    
    159,287
    
    
    
    143,781Other assets:Goodwill
    
    
    615,784
    
    
    
    586,444Other intangible assets, net
    
    
    15,006
    
    
    
    10,735Deferred financing costs, net
    
    
    1,041
    
    
    
    1,340Other
    
    
    10,459
    
    
    
    9,149Total assets
    
    $
    938,372
    
    
    $
    897,073LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term obligations
    
    $
    6,620
    
    
    $
    5,884Accounts payable
    
    
    18,021
    
    
    
    20,718Accrued payroll and related liabilities
    
    
    28,203
    
    
    
    30,131Accrued interest
    
    
    314
    
    
    
    306Other accrued liabilities
    
    
    28,778
    
    
    
    23,930Total current liabilities
    
    
    81,936
    
    
    
    80,969Long-term obligations, less current portion
    
    
    385,403
    
    
    
    446,828Deferred income taxes
    
    
    38,267
    
    
    
    30,803Other liabilities
    
    
    13,975
    
    
    
    19,775Minority interest
    
    
    10,181
    
    
    
    9,947Commitments 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, 83,460 and 82,759
shares outstanding as of September 30, 2006 and December 31, 2005, respectively
    
    
    83
    
    
    
    83Additional paid-in capital
    
    
    272,603
    
    
    
    258,402Retained earnings
    
    
    135,246
    
    
    
    49,057Accumulated other comprehensive income
    
    
    678
    
    
    
    1,209Total stockholders equity
    
    
    408,610
    
    
    
    308,751Total liabilities and stockholders equity
    
    $
    938,372
    
    
    $
    897,073
  1




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VCA ANTECH, INC. AND SUBSIDIARIES
 
 CONDENSED, CONSOLIDATED INCOME STATEMENTS
 For the Three and Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 (In thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    251,632
    
    
    $
    229,242
    
    
    $
    740,962
    
    
    $
    622,689Direct costs
    
    
    181,167
    
    
    
    166,598
    
    
    
    532,014
    
    
    
    448,783Gross profit
    
    
    70,465
    
    
    
    62,644
    
    
    
    208,948
    
    
    
    173,906Selling, general and administrative expense
    
    
    18,946
    
    
    
    18,394
    
    
    
    57,315
    
    
    
    47,943Loss (gain) on sale of assets
    
    
    3
    
    
    
    115
    
    
    
    (200
    )
    
    
    27Operating income
    
    
    51,516
    
    
    
    44,135
    
    
    
    151,833
    
    
    
    125,936Interest expense, net
    
    
    6,084
    
    
    
    6,034
    
    
    
    18,323
    
    
    
    18,782Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,282Other expense (income)
    
    
    73
    
    
    
    (130
    )
    
    
    (24
    )
    
    
    1Minority interest in income of subsidiaries
    
    
    846
    
    
    
    778
    
    
    
    2,520
    
    
    
    2,309Income before provision for income taxes
    
    
    44,513
    
    
    
    37,453
    
    
    
    131,014
    
    
    
    85,562Provision for income taxes
    
    
    17,536
    
    
    
    15,196
    
    
    
    44,825
    
    
    
    34,797Net income
    
    $
    26,977
    
    
    $
    22,257
    
    
    $
    86,189
    
    
    $
    50,765Basic earnings per common share
    
    $
    0.32
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.62Diluted earnings per common share
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    1.02
    
    
    $
    0.61Shares used for computing basic earnings per share
    
    
    83,339
    
    
    
    82,526
    
    
    
    83,092
    
    
    
    82,364Shares used for computing diluted earnings per share
    
    
    85,187
    
    
    
    84,019
    
    
    
    84,864
    
    
    
    83,818
  2




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VCA ANTECH, INC. AND SUBSIDIARIES
 
 CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2006 and 2005
 (Unaudited)
 (In thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    86,189
    
    
    $
    50,765Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    16,347
    
    
    
    13,947Amortization of debt costs
    
    
    299
    
    
    
    482Provision for uncollectible accounts
    
    
    4,174
    
    
    
    2,996Debt retirement costs
    
    
    
    
    
    
    19,282Loss (gain) on sale of assets
    
    
    (200
    )
    
    
    27Share-based compensation
    
    
    2,326
    
    
    
    Minority interest in income of subsidiaries
    
    
    2,520
    
    
    
    2,309Distributions to minority interest partners
    
    
    (2,439
    )
    
    
    (1,968
    )Deferred income taxes
    
    
    7,222
    
    
    
    4,029Excess tax benefit from exercise of stock options
    
    
    (5,774
    )
    
    
    Other
    
    
    (750
    )
    
    
    (337
    )Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (8,500
    )
    
    
    (7,009
    )Increase in inventory, prepaid expenses and other assets
    
    
    (6,816
    )
    
    
    (5,796
    )Increase (decrease) in accounts payable and other accrued liabilities
    
    
    (2,507
    )
    
    
    4,439Decrease in accrued payroll and related liabilities
    
    
    (1,928
    )
    
    
    (3,862
    )Increase (decrease) in accrued interest
    
    
    8
    
    
    
    (1,251
    )Decrease in prepaid income taxes
    
    
    567
    
    
    
    13,161Net cash provided by operating activities
    
    
    90,738
    
    
    
    91,214Cash flows from investing activities:Business acquisitions, net of cash acquired
    
    
    (37,612
    )
    
    
    (83,702
    )Real estate acquired in connection with business acquisitions
    
    
    (2,872
    )
    
    
    (2,929
    )Property and equipment additions
    
    
    (23,800
    )
    
    
    (22,725
    )Proceeds from sale of assets
    
    
    533
    
    
    
    368Other
    
    
    268
    
    
    
    3,540Net cash used in investing activities
    
    
    (63,483
    )
    
    
    (105,448
    )Cash flows from financing activities:Repayment of long-term obligations
    
    
    (64,106
    )
    
    
    (445,721
    )Proceeds from the issuance of long-term obligations
    
    
    
    
    
    
    475,000Payment of financing costs
    
    
    
    
    
    
    (3,257
    )Proceeds from issuance of common stock under stock option plans
    
    
    5,410
    
    
    
    1,749Excess tax benefit from exercise of stock options
    
    
    5,774
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (52,922
    )
    
    
    27,771Increase (decrease) in cash and cash equivalents
    
    
    (25,667
    )
    
    
    13,537Cash and cash equivalents at beginning of period
    
    
    58,488
    
    
    
    30,964Cash and cash equivalents at end of period
    
    $
    32,821
    
    
    $
    44,501
  3




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##### Table of Contents



VCA ANTECH, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006
 (Unaudited)
 1. General
   2. Acquisitions
  Consideration:Cash
    
    $
    35,812Notes payable and other liabilities assumed
    
    
    4,844Total
    
    $
    40,656Purchase Price Allocation:Tangible assets
    
    $
    4,371Identifiable intangible assets (1)
    
    
    6,932Goodwill (2)
    
    
    29,353Total
    
    $
    40,656
 
 (1)
    
    The acquired identifiable intangible assets have a weighted-average useful life of
approximately 19 years and are comprised of
non-contractual customer relationships of $4.9
million (25-year weighted-average useful life), covenants not-to-compete of $2.0 million
(five-year weighted-average
useful life) and client lists of $14,000 (three-year weighted-average
useful life).(2)
    
    We expect that $25.6 million of the goodwill recorded for these acquisitions will be fully
deductible for income tax purposes. Other Acquisition Payments
  4




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3. Goodwill and Other Intangible Assets
  Animal
    
    
    MedicalLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    TotalBalance as of December 31, 2005
    
    $
    94,246
    
    
    $
    473,038
    
    
    $
    19,160
    
    
    $
    586,444Goodwill acquired
    
    
    877
    
    
    
    28,476
    
    
    
    
    
    
    
    29,353Other (1)
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Goodwill related to sale of animal hospitals
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Balance as of September 30, 2006
    
    $
    95,123
    
    
    $
    501,501
    
    
    $
    19,160
    
    
    $
    615,784
 
 (1)
    
    Comprised of purchase price adjustments.  September 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    12,231
    
    
    $
    (5,761
    )
    
    $
    6,470
    
    
    $
    11,145
    
    
    $
    (4,970
    )
    
    $
    6,175Non-contractual customer
relationships
    
    
    8,313
    
    
    
    (1,346
    )
    
    
    6,967
    
    
    
    3,235
    
    
    
    (701
    )
    
    
    2,534Technology
    
    
    1,270
    
    
    
    (504
    )
    
    
    766
    
    
    
    1,270
    
    
    
    (314
    )
    
    
    956Trademarks
    
    
    569
    
    
    
    (113
    )
    
    
    456
    
    
    
    569
    
    
    
    (70
    )
    
    
    499Contracts
    
    
    397
    
    
    
    (207
    )
    
    
    190
    
    
    
    397
    
    
    
    (129
    )
    
    
    268Client lists
    
    
    464
    
    
    
    (307
    )
    
    
    157
    
    
    
    461
    
    
    
    (158
    )
    
    
    303Total
    
    $
    23,244
    
    
    $
    (8,238
    )
    
    $
    15,006
    
    
    $
    17,077
    
    
    $
    (6,342
    )
    
    $
    10,735
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Aggregate amortization expense
    
    $
    933
    
    
    $
    796
    
    
    $
    2,661
    
    
    $
    2,393
  Remainder of 2006
    
    $
    9062007
    
    
    3,3982008
    
    
    2,7772009
    
    
    1,7332010
    
    
    997Thereafter
    
    
    5,195Total
    
    $
    15,006
 5




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##### Table of Contents



4. Share-Based Compensation Plans
 Stock Incentive Plans
  Adoption of SFAS No. 123R
 Accounting for Stock
Issued to Employees.
 Share-Based Payment
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006Share-based compensation:Laboratory direct cost
    
    $
    172
    
    
    $
    492Laboratory selling, general and administrative expense
    
    
    128
    
    
    
    382Animal hospital selling, general and administrative expense
    
    
    376
    
    
    
    807Corporate selling, general and administrative expense
    
    
    205
    
    
    
    645881
    
    
    
    2,326Tax benefit
    
    
    (334
    )
    
    
    (878
    )Net decrease in net income
    
    $
    547
    
    
    $
    1,448Effect on:Basic earnings per common share
    
    $
    0.01
    
    
    $
    0.01Diluted earnings per common share
    
    $
    
    
    
    $
    0.01Effect on:Cash flows from operating activities
    
    
    
    
    
    $
    (5,774
    )Cash flows from financing activities
    
    
    
    
    
    $
    5,774
 6




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Net income, as reported
    
    $
    22,257
    
    
    $
    50,765Deduct: Total share-based compensation determined
under fair-value-based method for all awards, net of tax
    
    
    (503
    )
    
    
    (4,457
    )Pro forma net income
    
    $
    21,754
    
    
    $
    46,308Earnings per common share:Basic  as reported
    
    $
    0.27
    
    
    $
    0.62Basic  pro forma
    
    $
    0.26
    
    
    $
    0.56Diluted  as reported
    
    $
    0.26
    
    
    $
    0.61Diluted  pro forma
    
    $
    0.26
    
    
    $
    0.55
  Calculation of Fair Value
  Nine Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2005Expected volatility (1)
    
    
    35.5
    %
    
    39.1% to 39.6%Weighted-average volatility (1)
    
    
    35.5
    %
    
    
    39.5
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Expected term (2)
    
    4.3 years
    
    5 yearsRisk-free rate (3)
    
    
    4.99
    %
    
    3.9% to 4.2%
 
 (1)
    
    We estimate the volatility of our common stock on the date of grant based on historical
volatility.(2)
    
    The expected term represents the period of time that we expect the options to be outstanding.
We estimated the expected term based on the simplified method permitted under SEC Staff
Accounting Bulletin, or SAB, No. 107.(3)
    
    The risk-free interest rate is based on the implied yield in effect at the time of option
grant on U.S. Treasury zero-coupon issues with equivalent remaining terms.  7




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##### Table of Contents



Stock Option Activity
  Weighted-AverageWeighted-
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicShares
    
    
    Price
    
    
    (Years)
    
    
    ValueOptions outstanding at January 1, 2006
    
    
    6,090
    
    
    $
    14.58Granted
    
    
    39
    
    
    
    30.70Exercised
    
    
    (701
    )
    
    
    7.72Canceled
    
    
    (39
    )
    
    
    16.50Options outstanding at September 30, 2006
    
    
    5,389
    
    
    $
    15.58
    
    
    
    5.3
    
    
    $
    110,382Options exercisable at September 30, 2006
    
    
    4,372
    
    
    $
    15.58
    
    
    
    5.4
    
    
    $
    89,552Options expected to vest at September 30, 2006
    
    
    991
    
    
    $
    15.57
    
    
    
    4.5
    
    
    $
    20,300
   5. Long-Term Obligations and Interest Rate Hedging Agreements
    6. Income Taxes
  8




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##### Table of Contents



7. Calculation of Earnings per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    26,977
    
    
    $
    22,257
    
    
    $
    86,189
    
    
    $
    50,765Weighted-average common shares outstanding:Basic
    
    
    83,339
    
    
    
    82,526
    
    
    
    83,092
    
    
    
    82,364Effect of dilutive potential common shares:Stock options
    
    
    1,848
    
    
    
    1,493
    
    
    
    1,772
    
    
    
    1,454Diluted
    
    
    85,187
    
    
    
    84,019
    
    
    
    84,864
    
    
    
    83,818Basic earnings per common share
    
    $
    0.32
    
    
    $
    0.27
    
    
    $
    1.04
    
    
    $
    0.62Diluted earnings per common share
    
    $
    0.32
    
    
    $
    0.26
    
    
    $
    1.02
    
    
    $
    0.61
 8. Lines of Business
   9




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##### Table of Contents



Animal
    
    
    Medical
    
    
    
    
    
    
    IntercompanyLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalThree Months Ended September 30, 2006External revenue
    
    $
    60,261
    
    
    $
    183,592
    
    
    $
    7,779
    
    
    $
    
    
    
    $
    
    
    
    $
    251,632Intercompany revenue
    
    
    5,793
    
    
    
    
    
    
    
    1,177
    
    
    
    
    
    
    
    (6,970
    )
    
    
    Total revenue
    
    
    66,054
    
    
    
    183,592
    
    
    
    8,956
    
    
    
    
    
    
    
    (6,970
    )
    
    
    251,632Direct costs
    
    
    36,041
    
    
    
    146,132
    
    
    
    5,530
    
    
    
    
    
    
    
    (6,536
    )
    
    
    181,167Gross profit
    
    
    30,013
    
    
    
    37,460
    
    
    
    3,426
    
    
    
    
    
    
    
    (434
    )
    
    
    70,465Selling, general and administrative
expense
    
    
    4,350
    
    
    
    5,161
    
    
    
    2,534
    
    
    
    6,901
    
    
    
    
    
    
    
    18,946Loss (gain) on sale of assets
    
    
    6
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Operating income (loss)
    
    $
    25,657
    
    
    $
    32,302
    
    
    $
    892
    
    
    $
    (6,901
    )
    
    $
    (434
    )
    
    $
    51,516Depreciation and amortization
    
    $
    1,221
    
    
    $
    3,577
    
    
    $
    315
    
    
    $
    424
    
    
    $
    (41
    )
    
    $
    5,496Capital expenditures
    
    $
    2,388
    
    
    $
    4,747
    
    
    $
    404
    
    
    $
    1,354
    
    
    $
    (160
    )
    
    $
    8,733Three Months Ended September 30, 2005External revenue
    
    $
    51,600
    
    
    $
    167,815
    
    
    $
    9,827
    
    
    $
    
    
    
    $
    
    
    
    $
    229,242Intercompany revenue
    
    
    4,955
    
    
    
    
    
    
    
    768
    
    
    
    
    
    
    
    (5,723
    )
    
    
    Total revenue
    
    
    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
    
    
    
    
    
    
    
    18,394Loss 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
    )
    
    $
    8,044
 10




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##### Table of Contents



Animal
    
    
    Medical
    
    
    
    
    
    
    IntercompanyLaboratory
    
    
    Hospital
    
    
    Technology
    
    
    Corporate
    
    
    Eliminations
    
    
    TotalNine Months Ended September 30, 2006External revenue
    
    $
    177,964
    
    
    $
    540,117
    
    
    $
    22,881
    
    
    $
    
    
    
    $
    
    
    
    $
    740,962Intercompany revenue
    
    
    17,100
    
    
    
    
    
    
    
    2,467
    
    
    
    
    
    
    
    (19,567
    )
    
    
    Total revenue
    
    
    195,064
    
    
    
    540,117
    
    
    
    25,348
    
    
    
    
    
    
    
    (19,567
    )
    
    
    740,962Direct costs
    
    
    103,977
    
    
    
    430,409
    
    
    
    16,276
    
    
    
    
    
    
    
    (18,648
    )
    
    
    532,014Gross profit
    
    
    91,087
    
    
    
    109,708
    
    
    
    9,072
    
    
    
    
    
    
    
    (919
    )
    
    
    208,948Selling, general and administrative
expense
    
    
    12,793
    
    
    
    15,107
    
    
    
    7,734
    
    
    
    21,681
    
    
    
    
    
    
    
    57,315Loss (gain) on sale of assets
    
    
    14
    
    
    
    (214
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )Operating income (loss)
    
    $
    78,280
    
    
    $
    94,815
    
    
    $
    1,338
    
    
    $
    (21,681
    )
    
    $
    (919
    )
    
    $
    151,833Depreciation and amortization
    
    $
    3,373
    
    
    $
    10,674
    
    
    $
    1,089
    
    
    $
    1,320
    
    
    $
    (109
    )
    
    $
    16,347Capital expenditures
    
    $
    5,352
    
    
    $
    16,124
    
    
    $
    489
    
    
    $
    2,294
    
    
    $
    (459
    )
    
    $
    23,800Nine Months Ended September 30, 2005External revenue
    
    $
    154,532
    
    
    $
    449,128
    
    
    $
    19,029
    
    
    $
    
    
    
    $
    
    
    
    $
    622,689Intercompany revenue
    
    
    13,739
    
    
    
    
    
    
    
    1,408
    
    
    
    
    
    
    
    (15,147
    )
    
    
    Total revenue
    
    
    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
    
    
    
    
    
    
    
    47,943Loss 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
    )
    
    $
    22,725At September 30, 2006Total assets
    
    $
    165,740
    
    
    $
    655,457
    
    
    $
    47,158
    
    
    $
    74,308
    
    
    $
    (4,291
    )
    
    $
    938,372At December 31, 2005Total assets
    
    $
    146,902
    
    
    $
    614,492
    
    
    $
    47,114
    
    
    $
    90,977
    
    
    $
    (2,412
    )
    
    $
    897,073
 9. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
 11




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##### Table of Contents



10. Commitments and Contingencies
  a. Earn-out Payments
  b. Officers Compensation
       12




---



##### Table of Contents



c. Other Contingencies
  11. Reclassifications
  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
    
    
    23Critical Accounting Policies
    
    
    25Recent Accounting Pronouncements
    
    
    28Forward-Looking Statements
    
    
    28
 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 are described throughout this report including new
factors discussed in Risk Factors, Part II, Item 1A and in our annual report on Form 10-K ,
particularly in Risk Factors, Part I, Item 1A of that report.
 The forward-looking information set forth in this quarterly report on Form 10-Q is as of
November 7, 2006, and we undertake no duty to update this information. Shareholders and
prospective investors can find information filed with the SEC after November 7, 2006 at our website
at www.investor.vcaantech.com or at the SECs website at www.sec.gov .
       
 Executive Overview
  15




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##### Table of Contents



Share-Based Payment
 Acquisitions and Facilities
  Laboratories:Facilities at December 31, 2005
    
    
    31Acquisitions
    
    
    2Acquisitions relocated into a laboratory operated by us
    
    
    (1
    )New facilities
    
    
    1Facilities at September 30, 2006
    
    
    33
 Animal hospitals:Facilities at December 31, 2005
    
    
    367Acquisitions
    
    
    17Acquisitions relocated into hospitals operated by us
    
    
    (4
    )Sold or closed
    
    
    (4
    )Facilities at September 30, 2006
    
    
    376
 16




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Revenue:Laboratory
    
    
    26.3
    %
    
    
    24.7
    %
    
    
    26.3
    %
    
    
    27.0
    %Animal hospital
    
    
    73.0
    
    
    
    73.2
    
    
    
    72.9
    
    
    
    72.1Medical technology
    
    
    3.6
    
    
    
    4.6
    
    
    
    3.4
    
    
    
    3.3Intercompany
    
    
    (2.9
    )
    
    
    (2.5
    )
    
    
    (2.6
    )
    
    
    (2.4
    )Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Direct costs
    
    
    72.0
    
    
    
    72.7
    
    
    
    71.8
    
    
    
    72.1Gross profit
    
    
    28.0
    
    
    
    27.3
    
    
    
    28.2
    
    
    
    27.9Selling, general and administrative expense
    
    
    7.5
    
    
    
    8.0
    
    
    
    7.7
    
    
    
    7.7Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    20.5
    
    
    
    19.3
    
    
    
    20.5
    
    
    
    20.2Interest expense, net
    
    
    2.4
    
    
    
    2.7
    
    
    
    2.5
    
    
    
    3.0Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.1Other expense
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Minority interest in income of subsidiairies
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Income before provision for income taxes
    
    
    17.7
    
    
    
    16.3
    
    
    
    17.7
    
    
    
    13.7Provision for income taxes
    
    
    7.0
    
    
    
    6.6
    
    
    
    6.1
    
    
    
    5.5Net income
    
    
    10.7
    %
    
    
    9.7
    %
    
    
    11.6
    %
    
    
    8.2
    %
 Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeLaboratory
    
    $
    66,054
    
    
    $
    56,555
    
    
    
    16.8
    %
    
    $
    195,064
    
    
    $
    168,271
    
    
    
    15.9
    %Animal hospital
    
    
    183,592
    
    
    
    167,815
    
    
    
    9.4
    %
    
    
    540,117
    
    
    
    449,128
    
    
    
    20.3
    %Medical technology
    
    
    8,956
    
    
    
    10,595
    
    
    
    (15.5
    )%
    
    
    25,348
    
    
    
    20,437
    
    
    
    24.0
    %Intercompany
    
    
    (6,970
    )
    
    
    (5,723
    )
    
    
    21.8
    %
    
    
    (19,567
    )
    
    
    (15,147
    )
    
    
    29.2
    %Total revenue
    
    $
    251,632
    
    
    $
    229,242
    
    
    
    9.8
    %
    
    $
    740,962
    
    
    $
    622,689
    
    
    
    19.0
    %
 17




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##### Table of Contents



Laboratory Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeInternal growth:Number of requisitions (1)
    
    
    2,786
    
    
    
    2,397
    
    
    
    16.2
    %
    
    
    8,387
    
    
    
    7,232
    
    
    
    16.0
    %Average revenue per
requisition (2)
    
    $
    23.39
    
    
    $
    23.59
    
    
    
    (0.8
    )%
    
    $
    23.09
    
    
    $
    23.27
    
    
    
    (0.8
    )%Total internal revenue (1)
    
    $
    65,177
    
    
    $
    56,555
    
    
    
    15.2
    %
    
    $
    193,674
    
    
    $
    168,271
    
    
    
    15.1
    %Acquired revenue (3)
    
    
    877
    
    
    
    
    
    
    
    
    
    
    
    1,390
    
    
    
    Total
    
    $
    66,054
    
    
    $
    56,555
    
    
    
    16.8
    %
    
    $
    195,064
    
    
    $
    168,271
    
    
    
    15.9
    %
 
 (1)
    
    Internal revenue and requisitions were calculated using laboratory operating results,
adjusted to exclude the operating results of acquired laboratories for the comparable periods
that we did not own them in the prior year.(2)
    
    Computed by dividing internal revenue by the number of requisitions.(3)
    
    Acquired revenue represents the revenue of the laboratory acquired on May 1, 2006 and the
laboratory acquired on September 1, 2006.   18




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##### Table of Contents



Animal Hospital Revenue
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeSame-store facilities:Orders (1)(2)
    
    
    1,308
    
    
    
    1,345
    
    
    
    (2.8
    )%
    
    
    3,319
    
    
    
    3,411
    
    
    
    (2.7
    )%Average revenue per order (3)
    
    $
    133.28
    
    
    $
    123.65
    
    
    
    7.8
    %
    
    $
    130.81
    
    
    $
    120.78
    
    
    
    8.3
    %Same-store revenue (1)
    
    $
    174,297
    
    
    $
    166,321
    
    
    
    4.8
    %
    
    $
    434,238
    
    
    $
    411,981
    
    
    
    5.4
    %Business day adjustment (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,666
    
    
    
    Net acquired revenue (5)
    
    
    9,295
    
    
    
    1,494
    
    
    
    
    
    
    
    104,213
    
    
    
    37,147Total
    
    $
    183,592
    
    
    $
    167,815
    
    
    
    9.4
    %
    
    $
    540,117
    
    
    $
    449,128
    
    
    
    20.3
    %
 
 (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 a full 12 months from the beginning of the applicable period and adjusted for the
impact resulting from any differences in the number of business days in the periods presented.
Same-store revenue also includes revenue generated by customers referred from our relocated
or combined animal hospitals, including those merged upon acquisition.(2)
    
    The change in orders may not calculate exactly due to rounding.(3)
    
    Computed by dividing same-store revenue by same-store orders. The average revenue per order
may not calculate exactly due to rounding.(4)
    
    The business day adjustment reflects the impact of one additional business day for the nine
months ended September 30, 2006 as compared to the nine months ended September 30, 2005.(5)
    
    Net acquired revenue represents the revenue from those animal hospitals acquired, net of
revenue from those animal hospitals sold or closed, on or after the beginning of the
comparable period, which was July 1, 2005 for the three months ended September 30, 2006, and
January 1, 2005 for the nine months ended September 30, 2006. Fluctuations in net acquired
revenue occur due to the volume, size and timing of acquisitions and disposals during the
periods from this date through the end of the applicable period.   Medical Technology Revenue
  19




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##### Table of Contents



Intercompany Revenue
  Gross Profit
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    2005Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossProfit
    
    
    
    
    
    
    Profit
    
    
    %
    
    
    
    
    
    
    Profit
    
    
    
    
    
    
    Profit
    
    
    %$
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    Change
    
    
    $
    
    
    Margin
    
    
    $
    
    
    Margin
    
    
    ChangeLaboratory
    
    $
    30,013
    
    
    
    45.4
    %
    
    $
    25,077
    
    
    
    44.3
    %
    
    
    19.7
    %
    
    $
    91,087
    
    
    
    46.7
    %
    
    $
    76,324
    
    
    
    45.4
    %
    
    
    19.3
    %Animal hospital
    
    
    37,460
    
    
    
    20.4
    %
    
    
    34,244
    
    
    
    20.4
    %
    
    
    9.4
    %
    
    
    109,708
    
    
    
    20.3
    %
    
    
    91,796
    
    
    
    20.4
    %
    
    
    19.5
    %Medical technology
    
    
    3,426
    
    
    
    38.3
    %
    
    
    3,714
    
    
    
    35.1
    %
    
    
    (7.8
    )%
    
    
    9,072
    
    
    
    35.8
    %
    
    
    6,411
    
    
    
    31.4
    %
    
    
    41.5
    %Intercompany
    
    
    (434
    )
    
    
    
    
    
    
    (391
    )
    
    
    
    
    
    
    
    
    
    
    (919
    )
    
    
    
    
    
    
    (625
    )Total gross profit
    
    $
    70,465
    
    
    
    28.0
    %
    
    $
    62,644
    
    
    
    27.3
    %
    
    
    12.5
    %
    
    $
    208,948
    
    
    
    28.2
    %
    
    $
    173,906
    
    
    
    27.9
    %
    
    
    20.1
    %
 Laboratory Gross Profit
   Animal Hospital Gross Profit
  20




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##### Table of Contents



Medical Technology Gross Profit
    Selling, General and Administrative Expense
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    
    
    
    
    2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    %
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    %$
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    Change
    
    
    $
    
    
    Revenue
    
    
    $
    
    
    Revenue
    
    
    ChangeLaboratory
    
    $
    4,350
    
    
    
    6.6
    %
    
    $
    3,636
    
    
    
    6.4
    %
    
    
    19.6
    %
    
    $
    12,793
    
    
    
    6.6
    %
    
    $
    10,347
    
    
    
    6.1
    %
    
    
    23.6
    %Animal hospital
    
    
    5,161
    
    
    
    2.8
    %
    
    
    4,072
    
    
    
    2.4
    %
    
    
    26.7
    %
    
    
    15,107
    
    
    
    2.8
    %
    
    
    11,582
    
    
    
    2.6
    %
    
    
    30.4
    %Medical technology
    
    
    2,534
    
    
    
    28.3
    %
    
    
    2,806
    
    
    
    26.5
    %
    
    
    (9.7
    )%
    
    
    7,734
    
    
    
    30.5
    %
    
    
    6,295
    
    
    
    30.8
    %
    
    
    22.9
    %Corporate
    
    
    6,901
    
    
    
    2.7
    %
    
    
    7,880
    
    
    
    3.4
    %
    
    
    (12.4
    )%
    
    
    21,681
    
    
    
    2.9
    %
    
    
    19,719
    
    
    
    3.2
    %
    
    
    9.9
    %Total SG&A
    
    $
    18,946
    
    
    
    7.5
    %
    
    $
    18,394
    
    
    
    8.0
    %
    
    
    3.0
    %
    
    $
    57,315
    
    
    
    7.7
    %
    
    $
    47,943
    
    
    
    7.7
    %
    
    
    19.5
    %
 Laboratory SG&A
   Animal Hospital SG&A
  21




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##### Table of Contents



Medical Technology SG&A
   Corporate SG&A
    Interest Expense, Net
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest expense:Senior term
notes
    
    $
    6,597
    
    
    $
    5,847
    
    
    $
    19,515
    
    
    $
    12,4889.875% senior subordinated notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,342Interest rate hedging agreements
    
    
    (484
    )
    
    
    190
    
    
    
    (1,054
    )
    
    
    75Capital leases and
other
    
    
    432
    
    
    
    453
    
    
    
    1,041
    
    
    
    863Amortization of debt costs
    
    
    73
    
    
    
    132
    
    
    
    299
    
    
    
    4826,618
    
    
    
    6,622
    
    
    
    19,801
    
    
    
    20,250Interest income
    
    
    534
    
    
    
    588
    
    
    
    1,478
    
    
    
    1,468Total interest expense, net of interest income
    
    $
    6,084
    
    
    $
    6,034
    
    
    $
    18,323
    
    
    $
    18,782
 Liquidity and Capital Resources
 Provision for Income Taxes
  22




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##### Table of Contents



Liquidity and Capital Resources
  Nine Months EndedSeptember 30,2006
    
    
    2005Cash provided by (used in):Operating activities
    
    $
    90,738
    
    
    $
    91,214Investing activities
    
    
    (63,483
    )
    
    
    (105,448
    )Financing activities
    
    
    (52,922
    )
    
    
    27,771Increase (decrease) in cash and cash equivalents
    
    
    (25,667
    )
    
    
    13,537Cash and cash equivalents at beginning of year
    
    
    58,488
    
    
    
    30,964Cash and cash equivalents at end of period
    
    $
    32,821
    
    
    $
    44,501
 Cash Flows from Operating Activities
 .
  Cash Flows from Investing Activities
   Cash Flows from Financing Activities
 .
 23




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##### Table of Contents



Future Cash Requirements
  Total
    
    
    2006 (1)
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong-term
debt
    
    $
    376,544
    
    
    $
    1,282
    
    
    $
    5,377
    
    
    $
    4,181
    
    
    $
    3,879
    
    
    $
    3,880
    
    
    $
    357,945Capital lease obligations
    
    
    15,479
    
    
    
    255
    
    
    
    1,039
    
    
    
    1,070
    
    
    
    1,144
    
    
    
    1,283
    
    
    
    10,688Operating
leases
    
    
    500,500
    
    
    
    7,685
    
    
    
    30,650
    
    
    
    30,543
    
    
    
    30,297
    
    
    
    28,850
    
    
    
    372,475Fixed cash interest expense
    
    
    6,917
    
    
    
    351
    
    
    
    1,257
    
    
    
    1,329
    
    
    
    1,069
    
    
    
    767
    
    
    
    2,144Variable cash interest expense (2)
    
    
    122,651
    
    
    
    6,632
    
    
    
    26,265
    
    
    
    26,457
    
    
    
    26,547
    
    
    
    26,630
    
    
    
    10,120Swap agreements (2)
    
    
    (3,476
    )
    
    
    (613
    )
    
    
    (1,994
    )
    
    
    (795
    )
    
    
    (74
    )
    
    
    
    
    
    
    Purchase obligations
    
    
    54,548
    
    
    
    7,718
    
    
    
    13,759
    
    
    
    8,383
    
    
    
    8,942
    
    
    
    9,744
    
    
    
    6,002Other long-term liabilities (3)
    
    
    46,761
    
    
    
    
    
    
    
    65
    
    
    
    65
    
    
    
    65
    
    
    
    
    
    
    
    46,566Earn-out payments (4)
    
    
    413
    
    
    
    
    
    
    
    363
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    $
    1,120,337
    
    
    $
    23,310
    
    
    $
    76,781
    
    
    $
    71,283
    
    
    $
    71,869
    
    
    $
    71,154
    
    
    $
    805,940
 
 (1)
    
    Consists of the period from October 1, 2006 through December 31, 2006.(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
7.1%, 7.1%, 7.2%, 7.3%, 7.4% and 7.5% for years 2006 through thereafter, respectively. These
estimates are based on interest rate projections used to price our interest rate swap
agreements. Our consolidated financial statements included in our 2005 annual report on Form
10-K discuss these variable-rate notes in more detail.(3)
    
    Includes deferred income taxes of $38.3 million.(4)
    
    Represents contractual arrangements whereby additional cash may be paid to former owners of
acquired businesses upon attainment of specified performance targets.  Debt Related Covenants
   24




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##### Table of Contents



Interest Rate Hedging Agreements
  Fixed interest rate
    
    
    4.07%
    
    
    
    3.98%
    
    
    
    3.94%
    
    
    
    5.51%Notional amount
    
    $50.0 million
    
    $50.0 million
    
    $50.0 million
    
    $50.0 millionEffective date
    
    
    5/26/2005
    
    
    
    6/2/2005
    
    
    
    6/30/2005
    
    
    
    6/20/2006Expiration date
    
    
    5/26/2008
    
    
    
    5/31/2008
    
    
    
    6/30/2007
    
    
    
    6/30/2009Counterparties
    
    Goldman Sachs
    
    Wells Fargo
    
    Wells Fargo
    
    Goldman SachsQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
    
    Yes
  Description of Indebtedness
 Senior Credit Facility
    Other Debt
  
 Critical Accounting Policies
  Revenue
 Laboratory and Animal Hospital Revenue
  25




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##### Table of Contents




    
    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 Software 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. We consider delivery to have occurred when the digital radiography
imaging equipment is either accepted by the customer if installation is required, or
delivered. We consider delivery to have occurred with respect to 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 No. 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
 26




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##### Table of Contents



Ultrasound Imaging Equipment
  Digital Radiography Equipment
   Valuation of Goodwill
   Income Taxes
 Accounting for Income Taxes
   Recent
Accounting Pronouncements.
 27




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Payment. Share-Based
Compensation Plans,
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 
 Forward-Looking Statements
 Risk Factors
 28




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Fixed interest rate
    
    
    4.07%
    
    
    
    3.98%
    
    
    
    3.94%
    
    
    
    5.51%Notional amount
    
    $50.0 million
    
    $50.0 million
    
    $50.0 million
    
    $50.0 millionEffective date
    
    
    5/26/2005
    
    
    
    6/2/2005
    
    
    
    6/30/2005
    
    
    
    6/20/2006Expiration date
    
    
    5/26/2008
    
    
    
    5/31/2008
    
    
    
    6/30/2007
    
    
    
    6/30/2009Counterparties
    
    Goldman Sachs
    
    Wells Fargo
    
    Wells Fargo
    
    Goldman SachsQualifies for hedge accounting
    
    Yes
    
    Yes
    
    Yes
    
    Yes
   
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  29




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##### Table of Contents



We may have to write-off certain capitalized software development costs
  Failure to receive products and/or supplies in a timely manner will have a negative impact on our
operating results
  
 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.
 30




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##### Table of Contents



SIGNATURE
  Date:  November 7, 2006
    By:

/s/
Tomas W. FullerTomas W. FullerChief Financial Officer 31




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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.
 32