VCA Inc.
VCA ANTECH INC (Form: 10-Q, Received: 08/09/2006 14:18:29)
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, 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
(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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ .
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: common stock, $0.001 par value 83,260,245 shares as of August 4, 2006.
 
 

 


 

VCA ANTECH, INC.
FORM 10-Q
JUNE 30, 2006
TABLE OF CONTENTS
         
    Page
    Number
       
 
       
       
 
       
    1  
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    13  
 
       
    27  
 
       
    27  
 
       
       
 
       
    27  
 
       
    28  
 
       
    28  
 
       
    28  
 
       
    28  
 
       
    28  
 
       
    28  
 
       
    29  
 
       
    30  
  EXHIBIT 31.1
  EXHIBIT 31.2
  EXHIBIT 32.1

 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
As of June 30, 2006 and December 31, 2005
(Unaudited)
(In thousands, except par value)
                 
    June 30,     December 31,  
    2006     2005  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 20,801     $ 58,488  
Trade accounts receivable, less allowance for uncollectible accounts of $10,818 and $9,409 at June 30, 2006 and December 31, 2005, respectively
    39,734       36,104  
Inventory
    18,851       17,856  
Prepaid expenses and other
    13,779       9,867  
Deferred income taxes
    11,952       10,972  
Prepaid income taxes
    9,913       12,337  
 
           
Total current assets
    115,030       145,624  
Property and equipment, less accumulated depreciation and amortization of $102,205 and $93,305 at June 30, 2006 and December 31, 2005, respectively
    154,188       143,781  
Other assets:
               
Goodwill
    610,658       586,444  
Other intangible assets, net
    14,495       10,735  
Deferred financing costs, net
    1,114       1,340  
Other
    10,357       9,149  
 
           
Total assets
  $ 905,842     $ 897,073  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term obligations
  $ 6,619     $ 5,884  
Accounts payable
    17,317       20,718  
Accrued payroll and related liabilities
    24,675       25,201  
Accrued interest
    246       306  
Other accrued liabilities
    31,349       28,860  
 
           
Total current liabilities
    80,206       80,969  
Long-term obligations, less current portion
    386,729       446,828  
Deferred income taxes
    36,734       30,803  
Other liabilities
    13,803       19,775  
Minority interest
    10,282       9,947  
Commitments and contingencies
               
Preferred stock, par value $0.001, 11,000 shares authorized, none outstanding
           
Stockholders’ equity:
               
Common stock, par value $0.001, 175,000 shares authorized, 83,254 and 82,759 shares outstanding as of June 30, 2006 and December 31, 2005, respectively
    83       83  
Additional paid-in capital
    267,840       258,402  
Retained earnings
    108,269       49,057  
Accumulated other comprehensive income
    1,896       1,209  
 
           
Total stockholders’ equity
    378,088       308,751  
 
           
Total liabilities and stockholders’ equity
  $ 905,842     $ 897,073  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

1


Table of Contents

VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
(In thousands, except per share amounts)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Revenue
  $ 255,150     $ 206,584     $ 489,330     $ 393,447  
Direct costs
    180,188       145,849       350,847       282,185  
 
                       
Gross profit
    74,962       60,735       138,483       111,262  
Selling, general and administrative expense
    19,484       15,417       38,369       29,549  
Gain on sale of assets
    (85 )     (78 )     (203 )     (88 )
 
                       
Operating income
    55,563       45,396       100,317       81,801  
Interest expense, net
    5,927       6,081       12,239       12,748  
Debt retirement costs
          19,282             19,282  
Other (income) expense
    (31 )     67       (97 )     131  
Minority interest in income of subsidiaries
    900       846       1,674       1,531  
 
                       
Income before provision for income taxes
    48,767       19,120       86,501       48,109  
Provision for income taxes
    19,214       7,858       27,289       19,601  
 
                       
Net income
  $ 29,553     $ 11,262     $ 59,212     $ 28,508  
 
                       
 
                               
Basic earnings per common share
  $ 0.36     $ 0.14     $ 0.71     $ 0.35  
 
                       
Diluted earnings per common share
  $ 0.35     $ 0.13     $ 0.70     $ 0.34  
 
                       
 
                               
Shares used for computing basic earnings per share
    83,118       82,343       82,966       82,282  
 
                       
Shares used for computing diluted earnings per share
    84,838       83,874       84,699       83,709  
 
                       
The accompanying notes are an integral part of these condensed, consolidated financial statements.

2


Table of Contents

VCA ANTECH, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
(In thousands)
                 
    Six Months Ended  
    June 30,  
    2006     2005  
Cash flows from operating activities:
               
Net income
  $ 59,212     $ 28,508  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    10,851       8,785  
Amortization of debt costs
    226       351  
Provision for uncollectible accounts
    2,976       2,025  
Debt retirement costs
          19,282  
Gain on sale of assets
    (203 )     (88 )
Share-based compensation
    1,445        
Minority interest in income of subsidiaries
    1,674       1,531  
Distributions to minority interest partners
    (1,339 )     (1,145 )
Deferred income taxes
    4,701       2,713  
Excess tax benefit from exercise of stock options
    (3,939 )      
Other
    (561 )     (377 )
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (6,182 )     (6,265 )
Increase in inventory, prepaid expenses and other assets
    (4,555 )     (4,894 )
Increase (decrease) in accounts payable and other accrued liabilities
    (6,420 )     3,425  
Decrease in accrued payroll and related liabilities
    (526 )     (1,822 )
Increase (decrease) in accrued interest
    (60 )     1,544  
Decrease in prepaid income taxes
    6,841       852  
 
           
Net cash provided by operating activities
    64,141       54,425  
 
           
Cash flows from investing activities:
               
Business acquisitions, net of cash acquired
    (30,172 )     (22,174 )
Real estate acquired in connection with business acquisitions
    (1,781 )     (221 )
Property and equipment additions
    (15,067 )     (14,681 )
Proceeds from sale of assets
    297       338  
Other
    161       3,039  
 
           
Net cash used in investing activities
    (46,562 )     (33,699 )
 
           
Cash flows from financing activities:
               
Repayment of long-term obligations
    (62,781 )     (409,187 )
Proceeds from the issuance of long-term obligations
          475,000  
Payment of financing costs
          (3,216 )
Proceeds from issuance of common stock under stock option plans
    3,576       1,228  
Excess tax benefit from exercise of stock options
    3,939        
 
           
Net cash provided by (used in) financing activities
    (55,266 )     63,825  
 
           
Increase (decrease) in cash and cash equivalents
    (37,687 )     84,551  
Cash and cash equivalents at beginning of period
    58,488       30,964  
 
           
Cash and cash equivalents at end of period
  $ 20,801     $ 115,515  
 
           
The accompanying notes are an integral part of these condensed, consolidated financial statements.

3


Table of Contents

VCA ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
1. General
     The accompanying unaudited condensed, consolidated financial statements of our company, VCA Antech, Inc. and subsidiaries, have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States for annual financial statements as permitted under applicable rules and regulations. In the opinion of our management, all normal recurring adjustments considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year. For further information, refer to our consolidated financial statements and notes thereto included in our 2005 annual report on Form 10-K.
     The preparation of our condensed, consolidated financial statements in accordance with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the amounts reported in our condensed, consolidated financial statements and notes thereto. Actual results could differ from those estimates.
2. Acquisitions
     During the six months ended June 30, 2006, we acquired 12 animal hospitals, one of which was merged into an existing animal hospital, one laboratory, which was merged into an existing laboratory, and a lab-related business that we will utilize in our laboratory operations. The following table summarizes the aggregate consideration, including acquisition costs, paid by us for those acquisitions that occurred during the six months ended June 30, 2006 and the allocation of the purchase price (in thousands):
         
Consideration:
       
Cash
  $ 28,977  
Notes payable and other liabilities assumed
    4,645  
 
     
Total
  $ 33,622  
 
     
 
       
Purchase Price Allocation:
       
Tangible assets
  $ 3,998  
Identifiable intangible assets (1)
    5,488  
Goodwill (2)
    24,136  
 
     
Total
  $ 33,622  
 
     
 
(1)   The acquired identifiable intangible assets have a weighted-average useful life of approximately 19.0 years and are comprised of non-contractual customer relationships of $3.9 million (25-year weighted-average useful life), covenants not-to-compete of $1.6 million (5-year weighted-average useful life) and client lists of $10,000 (3-year weighted average useful life).
 
(2)   We expect that $20.3 million of the goodwill recorded for these acquisitions as of June 30, 2006 will be fully deductible for income tax purposes.
   Other Acquisition Payments
     We paid $1.2 million to sellers for the unused portion of holdbacks during the six months ended June 30, 2006.

4


Table of Contents

3. Goodwill and Other Intangible Assets
     Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. The following table presents the changes in the carrying amount of our goodwill for the six months ended June 30, 2006 (in thousands):
                                 
            Animal     Medical        
    Laboratory     Hospital     Equipment     Total  
Balance as of December 31, 2005
  $ 94,246     $ 473,038     $ 19,160     $ 586,444  
Goodwill acquired
    851       23,285             24,136  
Other (1)
          99             99  
Goodwill related to sale of animal hospitals
          (21 )           (21 )
 
                       
Balance as of June 30, 2006
  $ 95,097     $ 496,401     $ 19,160     $ 610,658  
 
                       
 
(1)   Comprised of purchase price adjustments.
     In addition to goodwill, we have amortizable intangible assets at June 30, 2006 and December 31, 2005 as follows (in thousands):
                                                 
    As of June 30, 2006     As of December 31, 2005  
    Gross             Net     Gross             Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Covenants not-to-compete
  $ 12,098     $ (5,430 )   $ 6,668     $ 11,145     $ (4,970 )   $ 6,175  
Non-contractual customer relationships
    7,238       (1,130 )     6,108       3,235       (701 )     2,534  
Technology
    1,270       (441 )     829       1,270       (314 )     956  
Trademarks
    569       (99 )     470       569       (70 )     499  
Contracts
    397       (181 )     216       397       (129 )     268  
Client lists
    464       (260 )     204       461       (158 )     303  
 
                                   
Total
  $ 22,036     $ (7,541 )   $ 14,495     $ 17,077     $ (6,342 )   $ 10,735  
 
                                   
     The following table summarizes our aggregate amortization expense related to other intangible assets (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Aggregate amortization expense
  $ 868     $ 793     $ 1,728     $ 1,596  
 
                       
     The estimated amortization expense related to intangible assets for each of the five succeeding years and thereafter as of June 30, 2006 is as follows (in thousands):
         
Remainder of 2006
  $ 1,803  
2007
    3,280  
2008
    2,660  
2009
    1,617  
2010
    881  
Thereafter
    4,254  
 
     
Total
  $ 14,495  
 
     

5


Table of Contents

4. Share-Based Compensation Plans
   Stock Incentive Plans
     At June 30, 2006, there were 5,576,186 shares subject to outstanding options granted under our existing stock incentive plans. We maintain three plans, the 1996 Stock Incentive Plan, or the 1996 Plan, the 2001 Stock Incentive Plan, or the 2001 Plan and the 2006 Equity Incentive Plan, or the 2006 Plan. Under these plans, new options and other stock awards may only be granted under the 2006 Plan. The maximum aggregate number of shares of common stock that may be issued under the 2006 Plan to our employees, directors, consultants and those of our affiliates is (a) 6,383,000 shares of common stock; plus (b) any shares of common stock underlying prior outstanding options that expire, are forfeited, cancelled or terminate for any reason without having been exercised in full. At June 30, 2006, all of these shares were available for grant. Outstanding options granted under our plans typically vest over periods that range from two to four years and expire between seven and ten years from the date of grant.
   Adoption of SFAS No. 123R
     Prior to January 1, 2006, we accounted for our share-based payments under the intrinsic value method as prescribed in Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees. Under that method, when options are granted with a strike price equal to or greater than market price on date of issuance, there is no impact on earnings either on the date of grant or thereafter, absent modification to the options. Accordingly, we recognized no share-based compensation expense in periods prior to January 1, 2006.
     Effective January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment . SFAS No. 123R requires us to measure the cost of share-based payments to employees, including stock options, based on the grant date fair value and to recognize the cost over the requisite service period, which is typically the vesting period. We adopted SFAS No. 123R using the modified prospective transition method, which requires us to recognize compensation expense for share-based payments granted or modified on or after January 1, 2006. Additionally, we are required to recognize compensation expense for the fair value of unvested share-based awards at January 1, 2006 over the remaining requisite service period. Operating results from prior periods have not been restated.
     The effect of adopting SFAS No. 123R on our condensed, consolidated financial statements for the three and six months ended June 30, 2006 is as follows (in thousands, except per share amounts):
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30, 2006     June 30, 2006  
Share-based employee compensation:
               
Laboratory direct cost
  $ 160     $ 320  
Laboratory selling, general and administrative expense
    126       254  
Animal hospital selling, general and administrative expense
    216       431  
Corporate selling, general and administrative expense
    167       440  
 
           
 
    669       1,445  
Tax benefit
    (259 )     (544 )
 
           
Net decrease in net income
  $ 410     $ 901  
 
           
 
               
Effect on:
               
Basic earnings per common share
  $     $ 0.01  
 
           
Diluted earnings per common share
  $     $ 0.01  
 
           
 
               
Effect on:
               
Cash flows from operating activities
          $ (3,939 )
 
             
Cash flows from financing activities
          $ 3,939  
 
             

6


Table of Contents

     No share-based employee compensation was recognized during the three and six months ended June 30, 2005, however, the following table presents net income and earnings per common share as if we had recognized share-based employee compensation (in thousands, except per share amounts):
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30, 2005     June 30, 2005  
Net income, as reported
  $ 11,262     $ 28,508  
Deduct: Total share-based employee compensation determined under fair-value based method for all awards, net of tax
    (1,309 )     (3,954 )
 
           
Pro forma net income
  $ 9,953     $ 24,554  
 
           
 
               
Earnings per common share:
               
Basic — as reported
  $ 0.14     $ 0.35  
Basic — Pro forma
  $ 0.12     $ 0.30  
 
               
Diluted — as reported
  $ 0.13     $ 0.34  
Diluted — Pro forma
  $ 0.12     $ 0.29  
     Prior to the adoption of SFAS No. 123R, we reported all income tax benefits resulting from the exercise of stock options as cash provided by operating activities on our condensed, consolidated statements of cash flows. SFAS No. 123R requires the benefits of tax deductions from the exercise of options in excess of the compensation cost recognized for those options to be classified as cash provided by financing activities. As such, the $3.9 million excess tax benefit classified as a financing activity on our condensed, consolidated statement of cash flows for the six months ended June 30, 2006 would have been recognized as an operating activity if we had not adopted SFAS No. 123R.
   Calculation of Fair Value
     The fair value of our options is estimated on the date of grant using the Black-Scholes option-pricing model. We amortize the fair value of our options on a straight-line basis over the requisite service period. No options were granted during the six months ended June 30, 2006. The weighted-average fair value of options granted during the three and six months ended June 30, 2005 was $8.38 and $8.05, respectively. The following assumptions were used to determine the fair value of those options granted during the six months ended June 30, 2005:
         
    Three Months   Six Months
    Ended   Ended
    June 30, 2005   June 30, 2005
Expected volatility (1)
  39.1%   39.1% to 39.6%
Weighted-average volatility (1)
  39.1%   39.5%
Expected dividends
  0.0%   0.0%
Expected term (2)
  5 years   5 years
Risk-free rate (3)
  4.0%   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 history of grants and exercises.
 
(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.
     We use historical data to estimate pre-vesting option forfeitures. We recognize share-based employee compensation only for those awards that we expect to vest.

7


Table of Contents

   Stock Option Activity
     A summary of our stock option activity for all share-based compensation plans during the six months ended June 30, 2006 is as follows (in thousands, except weighted average exercise price and weighted average remaining contractual term):
                                 
                    Weighted        
                    Average        
            Weighted     Remaining        
            Average     Contractual     Aggregate  
            Exercise     Term     Intrinsic  
    Shares     Price     (Years)     Value  
Options outstanding at January 1, 2006
    6,090     $ 14.58                  
Granted
                           
Exercised
    (495 )     7.22                  
Canceled
    (19 )     12.15                  
 
                           
Options outstanding at June 30, 2006
    5,576     $ 15.24       5.6     $ 93,047  
 
                       
 
                               
Options exercisable at June 30, 2006
    4,315     $ 15.54       5.7     $ 70,735  
 
                       
 
                               
Options expected to vest at June 30, 2006
    1,218     $ 14.23       5.1     $ 21,555  
 
                       
     The total intrinsic value of options exercised during the six months ended June 30, 2006 was $11.3 million and the total tax benefit realized on the options exercised was $4.4 million.
     At June 30, 2006, there was $3.9 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock incentive plans. This cost is expected to be recognized over a weighted-average period of 1.9 years.
5. Long-Term Obligations and Interest Rate Hedging Agreements
     During the six months ended June 30, 2006, we prepaid $60.0 million of our senior term notes.
     In June 2006, we entered into a no-fee swap agreement with a fixed interest rate of 5.51% and a set notional amount of $50.0 million to hedge against the risk of increasing interest rates.
     At June 30, 2006, we had four no-fee swap agreements with an aggregate notional amount of $200.0 million, a weighted average fixed-interest rate of 4.4% and a fair market value of $3.5 million. At December 31, 2005, we had three no-fee swap agreements with an aggregate notional amount of $150.0 million, a weighted average fixed-interest rate of 4.0% and a fair market value of $2.2 million. The fair market value of these no-fee swap agreements are included in prepaid expenses and other in our condensed, consolidated balance sheets. As of June 30, 2006, all four of our no-fee swap agreements qualify for hedge accounting.
6. Income Taxes
     In prior periods we recognized contingent liabilities for differences between the probable tax bases and the as-filed tax bases of certain assets and liabilities. These amounts totaled $6.8 million and were recorded in other liabilities in our condensed, consolidated balance sheets at December 31, 2005. During the first quarter of 2006, we determined that these contingencies were no longer probable due to the outcome of an income tax audit and recognized a tax benefit of $6.8 million.

8


Table of Contents

7. Calculation of Earnings per Common Share
     Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding after giving effect to all potentially dilutive common shares outstanding during the period. Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Net income
  $ 29,553     $ 11,262     $ 59,212     $ 28,508  
 
                       
 
                               
Weighted average common shares outstanding:
                               
Basic
    83,118       82,343       82,966       82,282  
Effect of dilutive potential common shares:
                               
Stock options
    1,720       1,531       1,733       1,427  
 
                       
Diluted
    84,838       83,874       84,699       83,709  
 
                       
 
                               
Basic earnings per common share
  $ 0.36     $ 0.14     $ 0.71     $ 0.35  
 
                       
Diluted earnings per common share
  $ 0.35     $ 0.13     $ 0.70     $ 0.34  
 
                       
8. Lines of Business
     We have four reportable segments: Laboratory, Animal Hospital, Medical Technology and Corporate. These segments are strategic business units that have different products, services and/or functions. The segments are managed separately because each is a distinct and different business venture with unique challenges, risk and rewards. The Laboratory segment provides diagnostic laboratory testing services for veterinarians, both associated with our animal hospitals and those independent of us. The Animal Hospital segment provides veterinary services for companion animals and sells related retail and pharmaceutical products. The Medical Technology segment sells ultrasound and digital radiography equipment, related computer hardware, software and ancillary services to the veterinary market. The Corporate segment provides selling, general and administrative support services for the other segments.
     The accounting policies of our segments are the same as those described in the summary of significant accounting policies included in our 2005 annual report on Form 10-K. We evaluate the performance of our segments based on gross profit. For purposes of reviewing the operating performance of the segments, all intercompany sales and purchases are accounted for as if they were transactions with independent third parties at current market prices.

9


Table of Contents

     Below is a summary of certain financial data for each of our segments (in thousands):
                                                 
            Animal     Medical             Intercompany        
    Laboratory     Hospital     Technology     Corporate     Eliminations     Total  
Three Months Ended June 30, 2006
                                               
External revenue
  $ 61,577     $ 186,002     $ 7,571     $     $     $ 255,150  
Intersegment revenue
    5,896             829             (6,725 )      
 
                                   
Total revenue
    67,473       186,002       8,400             (6,725 )     255,150  
Direct costs
    34,949       146,351       5,256             (6,368 )     180,188  
 
                                   
Gross profit
    32,524       39,651       3,144             (357 )     74,962  
Selling, general and administrative expense
    4,349       5,123       2,549       7,463             19,484  
Gain on sale of assets
    (2 )     (83 )                       (85 )
 
                                   
Operating income (loss)
  $ 28,177     $ 34,611     $ 595     $ (7,463 )   $ (357 )   $ 55,563  
 
                                   
 
                                               
Depreciation and amortization
  $ 1,080     $ 3,569     $ 373     $ 444     $ (37 )   $ 5,429  
Capital expenditures
  $ 2,194     $ 4,647     $ 38     $ 500     $ (172 )   $ 7,207  
 
                                               
Three Months Ended June 30, 2005
                                               
External revenue
  $ 53,623     $ 147,959     $ 5,002     $     $     $ 206,584  
Intersegment revenue
    4,654             356             (5,010 )      
 
                                   
Total revenue
    58,277       147,959       5,358             (5,010 )     206,584  
Direct costs
    30,899       116,142       3,700             (4,892 )     145,849  
 
                                   
Gross profit
    27,378       31,817       1,658             (118 )     60,735  
Selling, general and administrative expense
    3,346       3,807       1,922       6,342             15,417  
Gain on sale of assets
          (78 )                       (78 )
 
                                   
Operating income (loss)
  $ 24,032     $ 28,088     $ (264 )   $ (6,342 )   $ (118 )   $ 45,396  
 
                                   
 
                                               
Depreciation and amortization
  $ 878     $ 2,907     $ 302     $ 372     $ (16 )   $ 4,443  
Capital expenditures
  $ 1,180     $ 4,986     $ 125     $ 1,267     $ (86 )   $ 7,472  

10


Table of Contents

                                                 
            Animal     Medical             Intercompany        
    Laboratory     Hospital     Technology     Corporate     Eliminations     Total  
Six Months Ended June 30, 2006
                                               
External revenue
  $ 117,703     $ 356,525     $ 15,102     $     $     $ 489,330  
Intersegment revenue
    11,307             1,290             (12,597 )      
 
                                   
Total revenue
    129,010       356,525       16,392             (12,597 )     489,330  
Direct costs
    67,936       284,277       10,746             (12,112 )     350,847  
 
                                   
Gross profit
    61,074       72,248       5,646             (485 )     138,483  
Selling, general and administrative expense
    8,443       9,946       5,200       14,780             38,369  
Loss (gain) on sale of assets
    8       (211 )                       (203 )
 
                                   
Operating income (loss)
  $ 52,623     $ 62,513     $ 446     $ (14,780 )   $ (485 )   $ 100,317  
 
                                   
 
                                               
Depreciation and amortization
  $ 2,152     $ 7,097     $ 774     $ 896     $ (68 )   $ 10,851  
Capital expenditures
  $ 2,964     $ 11,377     $ 85     $ 940     $ (299 )   $ 15,067  
 
                                               
Six Months Ended June 30, 2005
                                               
External revenue
  $ 102,933     $ 281,313     $ 9,201     $     $     $ 393,447  
Intersegment revenue
    8,783             641             (9,424 )      
 
                                   
Total revenue
    111,716       281,313       9,842             (9,424 )     393,447  
Direct costs
    60,469       223,761       7,145             (9,190 )     282,185  
 
                                   
Gross profit
    51,247       57,552       2,697             (234 )     111,262  
Selling, general and administrative expense
    6,711       7,510       3,489       11,839             29,549  
Loss (gain) on sale of assets
          (88 )                       (88 )
 
                                   
Operating income (loss)
  $ 44,536     $ 50,130     $ (792 )   $ (11,839 )   $ (234 )   $ 81,801  
 
                                   
 
                                               
Depreciation and amortization
  $ 1,780     $ 5,651     $ 601     $ 769     $ (16 )   $ 8,785  
Capital expenditures
  $ 2,861     $ 8,867     $ 245     $ 3,099     $ (391 )   $ 14,681  
 
                                               
At June 30, 2006
                                               
Total assets
  $ 159,532     $ 647,189     $ 47,602     $ 54,990     $ (3,471 )   $ 905,842  
 
                                   
At December 31, 2005
                                               
Total assets
  $ 146,902     $ 614,492     $ 47,114     $ 90,977     $ (2,412 )   $ 897,073  
 
                                   
9. Recent Accounting Pronouncements
     In June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 , which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FIN 48 will be effective for our company on January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.
10. Commitments and Contingencies
     We have certain commitments, including operating leases and supply purchase agreements, incidental to the ordinary course of our business. These items are discussed in detail in our consolidated financial statements and notes thereto included in our 2005 annual report on Form 10-K. We also have contingencies, which are discussed below.
   a. Earn-out Payments

11


Table of Contents

     We have contractual arrangements in connection with certain acquisitions, whereby additional cash may be paid to former owners of acquired companies upon attainment of specified financial criteria as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria are attained, we will be obligated to pay an additional $340,000.
   b. Officers’ Compensation
     Each of our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer has entered into employment agreements with our company. The agreements provide for a base salary and annual bonuses set by our Compensation Committee of the Board of Directors.
     As of any given date, unless any of those agreements are sooner terminated pursuant to their respective provisions, the Chief Executive Officer has five years remaining under the term of his employment agreement, the Chief Operating Officer has three years remaining under the term of his employment agreement, and the Chief Financial Officer has two years remaining under the term of his employment agreement. In addition, these employment agreements provide for certain payments in the event an officer’s employment with our company is terminated.
     In the event any of these officers’ employment is terminated due to death or disability, each officer, or their estate, is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement, the acceleration of the vesting of his options, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites.
     In the event any of these officers terminate their employment agreements for cause, we terminate any of their employment agreements without cause or a change of control occurs (in which case such employment agreements terminate automatically), each officer is entitled to receive the remaining base salary during the remaining scheduled term of his employment agreement, a bonus based on past amounts, the acceleration of the vesting of his options, which options shall remain exercisable for the full term, and the right to continue receiving specified benefits and perquisites.
     In the event of a change of control, in which case all of these employment agreements would terminate simultaneously, collective cash payments would be made to these officers. In addition, if any of the amounts payable to these officers under these provisions constitute “excess parachute payments” under the Internal Revenue Code, each officer is entitled to an additional payment to cover the tax consequences associated with excess parachute payments.
     Our Senior Vice President of Development’s employment agreement expired September 2004 and his employment with us continues at-will. Pursuant to a letter agreement between our Senior Vice President and our company, in the event our Senior Vice President’s employment is terminated for any reason other than cause, that officer is entitled to receive an amount equal to one year’s base salary in effect at the date of termination and the right to continue receiving specified benefits and perquisites. Our Senior Vice President’s base salary and annual bonus are set by our Compensation Committee of the Board of Directors.
   c. Other Contingencies
     We have certain contingent liabilities resulting from litigation and claims incidental to the ordinary course of our business. We believe that the probable resolution of such contingencies will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
11. Reclassifications
     Certain prior year balances have been reclassified to conform to the 2006 financial statement presentation.

12


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         
    Page
    Number
    14  
 
       
    14  
 
       
    16  
 
       
    21  
 
       
    24  
 
       
    26  
 
       
    26  

13


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 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 August 7, 2006, and we undertake no duty to update this information. Shareholders and prospective investors can find information filed with the SEC after August 7, 2006 at our website at www.investor.vcaantech.com or at the SEC’s website at www.sec.gov .
     We are a leading animal healthcare services company operating in the United States. We provide veterinary services and diagnostic testing to support veterinary care and we sell diagnostic imaging equipment and other medical technology products and related services to veterinarians. Our four reportable segments are discussed below.
     Our laboratory segment operates the largest network of veterinary diagnostic laboratories in the nation. Our laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. At June 30, 2006, our laboratory network consisted of 32 laboratories serving all 50 states.
     Our animal hospital segment operates the largest network of freestanding, full-service animal hospitals in the nation. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical products and perform a variety of pet wellness programs, including health examinations, diagnostic testing, routine vaccinations, spaying, neutering and dental care. At June 30, 2006, our animal hospital network consisted of 375 animal hospitals in 37 states.
     Our medical technology segment sells ultrasound and digital radiography imaging equipment, related computer hardware, software and ancillary services.
     Our corporate segment provides selling, general and administrative support for our other segments.
     The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of flea infestation, heartworms and ticks and the number of daylight hours.
Executive Overview
     Our operating results for the three and six months ended June 30, 2006 were marked by continued growth in each of our operating segments. During the three months ended June 30, 2006, our consolidated revenue increased 23.5% to $255.2 million, our consolidated gross profit margin of 29.4% remained unchanged from the comparable prior year quarter, and our consolidated operating income margin was 21.8% compared to 22.0% in the same prior year quarter. During the six months ended June 30, 2006, our consolidated revenue increased 24.4% to $489.3 million, our consolidated gross profit margin of 28.3% remained unchanged from the comparable prior year period, and our consolidated operating income margin was 20.5% compared to 20.8% in the same prior year period. As expected, our consolidated margins were impacted as a result of the stronger revenue growth on a percentage basis we have experienced in our animal hospital and medical technology segments compared to our laboratory segment.

14


Table of Contents

Our animal hospital and medical technology segments have lower gross profit margins than our laboratory segment. The increase in animal hospital revenue is attributed to recent acquisitions, including Pet’s Choice, Inc., or Pet’s Choice, on July 1, 2005, and same-store growth. Our consolidated margins were also impacted by the adoption of Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment , on January 1, 2006, which resulted in a pre-tax non-cash compensation charge of $669,000 and $1.4 million for the three and six months ended June 30, 2006, respectively.
Acquisitions and Facilities
     Our growth strategy includes the acquisition of 20 to 25 independent animal hospitals per year with aggregate annual revenues of approximately $30.0 million to $35.0 million. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. In accordance with our strategy, we acquired 12 independent animal hospitals, one laboratory and a lab-related business during the six months ended June 30, 2006. The following table summarizes the changes in the number of facilities operated by our laboratory and animal hospital segments:
         
Laboratories:
       
Facilities at December 31, 2005
    31  
Acquisitions
    1  
Acquisitions relocated into a laboratory operated by us
    (1 )
New facilities
    1  
 
       
Facilities at June 30, 2006
    32  
 
       
 
       
Animal hospitals:
       
Facilities at December 31, 2005
    367  
Acquisitions
    12  
Acquisitions relocated into hospitals operated by us
    (1 )
Sold or closed
    (3 )
 
       
Facilities at June 30, 2006
    375  
 
       

15


Table of Contents

      Results of Operations
     The following table sets forth components of our condensed, consolidated income statements expressed as a percentage of revenue:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2006   2005   2006   2005
Revenue:
                               
Laboratory
    26.4 %     28.2 %     26.4 %     28.4 %
Animal hospital
    72.9       71.6       72.9       71.5  
Medical technology
    3.3       2.6       3.3       2.5  
Intercompany
    (2.6 )     (2.4 )     (2.6 )     (2.4 )
 
                               
Total revenue
    100.0       100.0       100.0       100.0  
Direct costs
    70.6       70.6       71.7       71.7  
 
                               
Gross profit
    29.4       29.4       28.3       28.3  
Selling, general and administrative expense
    7.6       7.5       7.8       7.5  
Gain on sale of assets
          (0.1 )            
 
                               
Operating income
    21.8       22.0       20.5       20.8  
Interest expense, net
    2.3       2.9       2.5       3.2  
Debt retirement costs
          9.3             4.9  
Other expense
          0.1             0.1  
Minority interest in income of subsidiairies
    0.4       0.4       0.3       0.4  
 
                               
Income before provision for income taxes
    19.1       9.3       17.7       12.2  
Provision for income taxes
    7.5       3.8       5.6       5.0  
 
                               
Net income
    11.6 %     5.5 %     12.1 %     7.2 %
 
                               
Revenue
     The following table summarizes our revenue (in thousands, except percentages):
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     % Change     2006     2005     % Change  
Laboratory
  $ 67,473     $ 58,277       15.8 %   $ 129,010     $ 111,716       15.5 %
Animal hospital
    186,002       147,959       25.7 %     356,525       281,313       26.7 %
Medical technology
    8,400       5,358       56.8 %     16,392       9,842       66.6 %
Intercompany
    (6,725 )     (5,010 )     34.2 %     (12,597 )     (9,424 )     33.7 %
 
                                       
Total revenue
  $ 255,150     $ 206,584       23.5 %   $ 489,330     $ 393,447       24.4 %
 
                                       

16


Table of Contents

Laboratory Revenue
     Laboratory revenue increased $9.2 million for the three months ended June 30, 2006 and increased $17.3 million for the six months ended June 30, 2006 as compared to the same periods in the prior year. The components of the increase in laboratory revenue are detailed below (in thousands, except percentages and average price per requisition):
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     % Change     2006     2005     % Change  
Internal growth:
                                               
Number of requisitions (1)
    2,977       2,572       15.7 %     5,601       4,835       15.8 %
Average revenue per requisition (2)
  $ 22.49     $ 22.66       (0.8 )%   $ 22.94     $ 23.11       (0.7 )%
 
                                       
Total internal revenue (1)
  $ 66,959     $ 58,277       14.9 %   $ 128,496     $ 111,716       15.0 %
Net acquired revenue (3)
    514                     514                
 
                                       
Total
  $ 67,473     $ 58,277       15.8 %   $ 129,010     $ 111,716       15.5 %
 
                                       
 
(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.
     The increase in requisitions from internal growth is the result of a continued trend in veterinary medicine to focus on the importance of laboratory diagnostic testing in the diagnosis, early detection and treatment of diseases. This trend is driven by an increase in the number of specialists in the veterinary industry relying on diagnostic testing, the increased focus on diagnostic testing in veterinary schools and general increased awareness through ongoing marketing and continuing education programs provided by us, pharmaceutical companies and other service providers in the industry.
     The change in the average revenue per requisition is attributable to changes in the mix, type and number of tests performed per requisition and price increases. The price increases for most tests ranged from 3% to 5% in both February 2006 and February 2005.
Animal Hospital Revenue
     Animal hospital revenue increased $38.0 million for the three months ended June 30, 2006 and increased $75.2 million for the six months ended June 30, 2006 as compared to the same periods in the prior year. The components of the increase are summarized in the following table (in thousands, except percentages and average price per order):
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     % Change     2006     2005     % Change  
Same-store facilities:
                                               
Orders (1)(2)
    1,166       1,203       (3.0 )%     2,187       2,250       (2.8 )%
Average revenue per order (3)
  $ 131.99     $ 121.45       8.7 %   $ 131.02     $ 120.81       8.5 %
 
                                       
Same-store revenue (1)
  $ 153,946     $ 146,077       5.4 %   $ 286,720     $ 271,784       5.5 %
Business day adjustment (4)
                        1,664                
Net acquired revenue (5)
    32,056       1,882               68,141       9,529          
 
                                       
Total
  $ 186,002     $ 147,959       25.7 %   $ 356,525     $ 281,313       26.7 %
 
                                       

17


Table of Contents

 
(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 six months ended June 30, 2006 as compared to the six months ended June 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 April 1, 2005 for the three months ended June 30, 2006, and January 1, 2005 for the six months ended June 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.
     Over the last few years, some pet-related products traditionally sold at animal hospitals have become more widely available in retail stores and other distribution channels, and, as a result, we have fewer customers coming to our animal hospitals solely to purchase those items. In addition, there has been a decline in the number of vaccinations as some recent professional literature and research has suggested that vaccinations can be given to pets less frequently. Our business strategy continues to place a greater emphasis on comprehensive wellness visits and advanced medical procedures, which typically generate higher-priced orders. These trends have resulted in a decrease in the number of orders and an increase in the average revenue per order.
     Price increases, which approximated 5% to 6% on most services at most hospitals in February 2006 and February 2005, also contributed to the increase in the average revenue per order. Prices are reviewed on an annual basis for each hospital and adjustments are made based on market considerations, demographics and our costs.
Medical Technology Revenue
     Medical technology revenue was $8.4 million and $5.4 million for the three months ended June 30, 2006 and 2005, respectively, and $16.4 million and $9.8 million for the six months ended June 30, 2006 and 2005, respectively. The increase in medical technology revenue was attributable to sales of our digital radiography imaging equipment, which was first introduced by our medical technology segment in 2004. Also contributing to the increase in medical technology revenue was that effective July 1, 2005, we began recognizing revenue on sales of our digital radiography imaging equipment, computer hardware and software at the time of customer acceptance if installation is required, or delivery, as discussed under Critical Accounting Policies . Prior to July 1, 2005, we recognized all elements in sales of our digital radiography imaging equipment over the period of the post-contract customer support services, which was generally one year.
     At June 30, 2006, we had deferred revenue of $9.9 million, $9.5 million of which related to sales of our digital radiography imaging equipment.
Intercompany Revenue
     For the three and six months ended June 30, 2006, $5.9 million and $11.3 million of our laboratory revenue was intercompany revenue that was generated by providing laboratory services to our animal hospitals compared to $4.7 million and $8.8 million in the same periods of the prior year. For the three and six months ended June 30, 2006, $829,000 and $1.3 million, respectively, of our medical technology revenue was intercompany revenue that was generated by providing products and services to our animal hospitals compared to $356,000 and $641,000 in the same periods of the prior year. For purposes of reviewing the operating performance of our business segments, all intercompany transactions are accounted for as if they were conducted with an independent third party at current market prices. For financial reporting purposes, intercompany transactions are eliminated as part of our consolidation.

18


Table of Contents

Gross Profit
     The following table summarizes our gross profit and our gross profit as a percentage of applicable revenue, or gross profit margin (in thousands, except percentages):
                                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005             2006     2005        
            Gross             Gross                     Gross             Gross        
            Profit             Profit     %             Profit             Profit     %  
    $     Margin     $     Margin     Change     $     Margin     $     Margin     Change  
Laboratory
  $ 32,524       48.2 %   $ 27,378       47.0 %     18.8 %   $ 61,074       47.3 %   $ 51,247       45.9 %     19.2 %
Animal hospital
    39,651       21.3 %     31,817       21.5 %     24.6 %     72,248       20.3 %     57,552       20.5 %     25.5 %
Medical technology
    3,144       37.4 %     1,658       30.9 %     89.6 %     5,646       34.4 %     2,697       27.4 %     109.3 %
Intercompany
    (357 )             (118 )                     (485 )             (234 )                
 
                                                                       
Total gross profit
  $ 74,962       29.4 %   $ 60,735       29.4 %     23.4 %   $ 138,483       28.3 %   $ 111,262       28.3 %     24.5 %
 
                                                                       
Laboratory Gross Profit
     Laboratory gross profit is calculated as laboratory revenue less laboratory direct costs. Laboratory direct costs are comprised of all costs of laboratory services, including but not limited to, salaries of veterinarians, specialists, technicians and other laboratory-based personnel, facilities rent, occupancy costs, depreciation and amortization and supply costs.
     The increase in laboratory gross profit margin was primarily attributed to increases in laboratory revenue combined with operating leverage associated with our laboratory business. Our operating leverage comes from the incremental margins we realize on additional tests ordered by the same client, as well as when more comprehensive tests are ordered. We are able to benefit from these incremental margins due to the relative fixed cost nature of our laboratory business.
Animal Hospital Gross Profit
     Animal hospital gross profit is calculated as animal hospital revenue less animal hospital direct costs. Animal hospital direct costs are comprised of all costs of services and products at the animal hospitals, including, but not limited to, salaries of veterinarians, technicians and all other animal hospital-based personnel, facilities rent, occupancy costs, supply costs, depreciation and amortization, certain marketing and promotional expense, and costs of goods sold associated with the retail sales of pet food and pet supplies.
     Over the last several years we have acquired a significant number of animal hospitals, including 46 in connection with the acquisition of Pet’s Choice on July 1, 2005. Many of these newly acquired animal hospitals had lower gross profit margins at the time of acquisition than those previously operated by us. These lower gross profit margins were offset by improvements in animal hospital revenue, increased operating leverage and the favorable impact of our integration efforts.
Medical Technology Gross Profit
     Medical technology gross profit is calculated as medical technology revenue less medical technology direct costs. Medical technology direct costs are comprised of all product and service costs, including, but not limited to, all costs of equipment, related products and services, salaries of technicians, support personnel, trainers, consultants and other non-administrative personnel, depreciation and amortization and supply costs.
     The increase in medical technology gross profit margin was primarily the result of a change in the mix of products and services sold. Specifically, we have sold more units of our digital radiography imaging equipment, which has a higher gross profit margin than our other products and services.

19


Table of Contents

     At June 30, 2006, we had deferred revenue and costs of $9.9 million and $4.6 million, respectively. Included in these amounts at June 30, 2006 was $9.5 million of deferred revenue and $4.6 million of deferred costs related to sales of our digital radiography imaging equipment.
Selling, General and Administrative Expense
     The following table summarizes our selling, general and administrative expense, or SG&A, and our expense as a percentage of applicable revenue (in thousands, except percentages):
                                                                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005             2006     2005        
            % of             % of     %             % of             % of     %  
    $     Revenue     $     Revenue     Change     $     Revenue     $     Revenue     Change  
Laboratory
  $ 4,349       6.4 %   $ 3,346       5.7 %     30.0 %   $ 8,443       6.5 %   $ 6,711       6.0 %     25.8 %
Animal hospital
    5,123       2.8 %     3,807       2.6 %     34.6 %     9,946       2.8 %     7,510       2.7 %     32.4 %
Medical technology
    2,549       30.3 %     1,922       35.9 %     32.6 %     5,200       31.7 %     3,489       35.5 %     49.0 %
Corporate
    7,463       2.9 %     6,342       3.1 %     17.7 %     14,780       3.0 %     11,839       3.0 %     24.8 %
 
                                                                       
Total SG&A
  $ 19,484       7.6 %   $ 15,417       7.5 %     26.4 %   $ 38,369       7.8 %   $ 29,549       7.5 %     29.8 %
 
                                                                       
Laboratory SG&A
     Laboratory SG&A consists primarily of salaries of sales, customer support, administrative and accounting personnel, selling, marketing and promotional expense.
     The increase in laboratory SG&A was primarily attributed to increasing our sales force and marketing efforts, recognizing share-based compensation as a result of adopting SFAS No. 123R on January 1, 2006 and commission payments as a result of an increase in revenue.
Animal Hospital SG&A
     Animal hospital SG&A consists primarily of salaries of field management, certain administrative and accounting personnel, recruiting and certain marketing expense.
     The increase in animal hospital SG&A was primarily attributed to expanding the animal hospital administrative operations to absorb the recent acquisitions, including Pet’s Choice, and recognizing share-based compensation as a result of adopting SFAS No. 123R on January 1, 2006.
Medical Technology SG&A
     Medical technology SG&A consists primarily of salaries of sales, customer support, administrative and accounting personnel, selling, marketing and promotional expense and research and development costs.
     The increase in Medical Technology SG&A was primarily attributed to increasing our sales force and administrative support, and commission payments as a result of an increase in revenue.
Corporate SG&A
     Corporate SG&A consists of administrative expense at our headquarters, including the salaries of corporate officers, administrative and accounting personnel, rent, accounting, finance, legal and other professional expense, occupancy costs and corporate depreciation.
     The increase in Corporate SG&A was primarily attributed to expanding the corporate operations to absorb recent acquisitions, including Pet’s Choice, and recognizing share-based compensation as a result of adopting SFAS No. 123R on January 1, 2006.

20


Table of Contents

Interest Expense, Net
     The following table summarizes our interest expense, net of interest income (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Interest expense:
                               
Senior term notes
  $ 6,504     $ 4,221     $ 12,918     $ 6,641  
9.875% senior subordinated notes
          2,145             6,342  
Interest rate hedging agreements
    (370 )     (21 )     (571 )     (115 )
Capital leases and other
    197       200       609       409  
Amortization of debt costs
    94       142       227       351  
 
                       
 
    6,425       6,687       13,183       13,628  
Interest income
    498       606       944       880  
 
                       
Total interest expense, net of interest income
  $ 5,927     $ 6,081     $ 12,239     $ 12,748  
 
                       
     The change in interest expense was primarily attributed to our debt refinancing transactions, which we discuss in the Liquidity and Capital Resources section of our 2005 annual report on Form 10-K, and changes in LIBOR.
Provision for Income Taxes
     The effective tax rate for the three and six months ended June 30, 2006 was 39.4% and 31.5%, respectively, and reflects a lower weighted-average state statutory tax rate when compared to the comparable prior year periods due to a favorable shift in the number of facilities that we operated in states with lower tax rates or no state income tax. The effective tax rate for the six months ended June 30, 2006 also reflects a tax benefit in the amount of $6.8 million recognized during the first quarter of 2006 due to the outcome of an income tax audit that resulted in a change to our estimated tax liabilities. We estimate that our effective tax rate for the remaining quarters of 2006 will approximate 39.4%.
Liquidity and Capital Resources
     The following table summarizes our cash flows (in thousands):
                 
    Six Months Ended  
    June 30,  
    2006     2005  
Cash provided by (used in):
               
Operating activities
  $ 64,141     $ 54,425  
Investing activities
    (46,562 )     (33,699 )
Financing activities
    (55,266 )     63,825  
 
           
Increase (decrease) in cash and cash equivalents
    (37,687 )     84,551  
Cash and cash equivalents at beginning of year
    58,488       30,964  
 
           
Cash and cash equivalents at end of period
  $ 20,801     $ 115,515  
 
           
Cash Flows from Operating Activities
     Net cash provided by operating activities increased $9.7 million in the six months ended June 30, 2006 as compared to the same period in the prior year primarily due to improved operating performance and acquisitions. These factors contributing to an increase in operating cash flows were partially offset by an increase in interest and taxes paid of $1.3 million and $6.5 million, respectively.
     On a prospective basis, we anticipate cash flow from operating activities to continue growing in line with increases in operating income resulting from improved operating performance and acquisitions. However, we also anticipate that operating cash flow may be negatively impacted by an increase in cash paid for interest as a result of

21


Table of Contents

possible future increases in interest rates. Significant increases in interest rates may materially impact our operating cash flows because of the variable-rate nature of our senior term notes.
Cash Flows from Investing Activities
     Net cash used in investing activities primarily consisted of cash used for the acquisitions and expenditures for property and equipment.
     Depending upon the attractiveness of the candidates and the strategic fit with our existing operations, we intend to acquire approximately 20 to 25 independent animal hospitals per year for a total purchase price of approximately $30.0 million to $35.0 million. In addition, we also evaluate the acquisition of animal hospital chains, laboratories or related businesses if favorable opportunities are presented. In accordance with that strategy, we acquired a laboratory on May 1, 2006 and a lab-related business on June 30, 2006. We intend to primarily use cash in our acquisitions but, depending on the timing and amount of our acquisitions, we may use stock or debt. For the remaining six months of 2006, we intend to spend approximately $8.0 million to $12.0 million for animal hospital acquisitions and $20.0 million to $25.0 million for property and equipment.
Cash Flows from Financing Activities
     Net cash used in financing activities during the six months ended June 30, 2006 consisted primarily of cash used to repay our long-term obligations, including $60.0 million to prepay a portion of our senior term notes. Our financing activities during the six months ended June 30, 2005 reflects $475.0 million in borrowings used to retire our existing senior term notes and 9.875% senior subordinated notes, and to fund the acquisition of Pet’s Choice on July 1, 2005.
Future Cash Requirements
     The following table sets forth the scheduled principal, interest and other contractual cash obligations due by us for each of the years indicated (in thousands):
                                                         
    Total     2006 (1)     2007     2008     2009     2010     Thereafter  
Long-term debt
  $ 377,607     $ 3,332     $ 4,396     $ 4,181     $ 3,879     $ 3,880     $ 357,939  
Capital lease obligations
    15,741       515       1,040       1,070       1,144       1,283       10,689  
Operating leases
    521,019       15,099       30,059       28,055       27,978       27,863       391,965  
Fixed cash interest expense
    7,275       709       1,257       1,329       1,069       767       2,144  
Variable cash interest expense (2)
    133,497       13,561       27,101       27,191       27,274       27,710       10,660  
Swap agreements (2)
    (4,867 )     (1,376 )     (2,388 )     (979 )     (124 )            
Purchase obligations
    49,991       9,269       7,651       8,383       8,942       9,744       6,002  
Other long-term liabilities (3)
    44,779             65       65       65             44,584  
Earn-out payments (4)
    340       140       150       50                    
 
                                         
 
  $ 1,145,382     $ 41,249     $ 69,331     $ 69,345     $ 70,227     $ 71,247     $ 823,983  
 
                                         
 
(1)   Consists of the period from July 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 7.3%, 7.3%, 7.4%, 7.5%, 7.7% and 7.9% 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 $36.7 million.
 
(4)   Represents contractual arrangements whereby additional cash may be paid to former owners of acquired businesses upon attainment of specified performance targets.
     We anticipate that our cash on-hand, net cash provided by operations and, if needed, our revolving credit facility will provide sufficient cash resources to fund our operations for more than the next 12 months. If we

22


Table of Contents

consummate one or more significant acquisitions during this period we may need to seek additional debt or equity financing.
Debt Related Covenants
     Our senior credit facility contains certain financial covenants pertaining to fixed charge coverage and leverage ratios. In addition, the senior credit facility has restrictions pertaining to capital expenditures, acquisitions and the payment of cash dividends. As of June 30, 2006, we were in compliance with these covenants, including the two covenant ratios, the fixed charge coverage ratio and the leverage ratio.
     The senior credit facility defines the fixed charge coverage ratio as that ratio which is calculated on a last 12-month basis by dividing pro forma earnings before interest, taxes, depreciation and amortization, as defined by the agreement, by fixed charges. Pro forma earnings before interest, taxes, depreciation and amortization include 12 months of operating results for businesses acquired during the period. Fixed charges are defined as cash interest expense, scheduled principal payments on debt obligations, capital expenditures, and provision for income taxes. At June 30, 2006, we had a fixed charge coverage ratio of 1.82 to 1.00, which was in compliance with the required ratio of no less than 1.20 to 1.00.
     The senior credit facility defines the leverage ratio as that ratio which is calculated as total debt divided by pro forma earnings before interest, taxes, depreciation and amortization, as defined by the agreement. At June 30, 2006, we had a leverage ratio of 1.94 to 1.00, which was in compliance with the required ratio of no more than 3.00 to 1.00.
Interest Rate Hedging Agreements
     We have swap agreements whereby we pay counterparties amounts based on fixed interest rates and set notional principal amounts in exchange for the receipt of payments from the counterparties based on London Interbank Offer Rates, or LIBOR, and the same set notional principal amounts. We entered into these swap agreements to hedge against the risk of increasing interest rates. The contracts effectively convert a certain amount of our variable-rate debt under our senior credit facility to fixed-rate debt for purposes of controlling cash paid for interest. That amount is equal to the notional principal amount of the swap agreements, and the fixed-rate conversion period is equal to the terms of the contract. The impact of these swap agreements has been factored into our future contractual cash requirements table above. A summary of the swap agreements existing at June 30, 2006 is as follows:
                                 
Fixed interest rate
    4.07%       3.98%       3.94%       5.51%  
Notional amount
  $50.0 million   $50.0 million   $50.0 million   $50.0 million
Effective date
    5/26/2005       6/2/2005       6/30/2005       6/20/2006  
Expiration date
    5/26/2008       5/31/2008       6/30/2007       6/30/2009  
Counterparties
  Goldman Sachs   Wells Fargo   Wells Fargo   Goldman Sachs
Qualifies for hedge accounting
  Yes   Yes   Yes   Yes
     In the future, we may enter into additional interest rate strategies. We have not yet determined what those strategies will be or their possible impact.
Description of Indebtedness
Senior Credit Facility
     At June 30, 2006, we had $374.6 million principal amount outstanding under our senior term notes and no borrowings outstanding under our revolving credit facility.
     We pay interest on our senior term notes and our revolving credit facility based on the interest rate offered to our administrative agent on LIBOR plus a margin of 1.50% per annum.
     The senior term notes mature in May 2011 and the revolving credit facility matures in May 2010.
Other Debt

23


Table of Contents

     At June 30, 2006, we had seller notes secured by assets of certain animal hospitals, unsecured debt and capital leases that totaled $18.7 million.
Critical Accounting Policies
     We believe that the application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of our management. For a summary of all our accounting policies, including the accounting policies discussed below, see our consolidated financial statements included in our 2005 annual report on Form 10-K.
Revenue
Laboratory and Animal Hospital Revenue
We recognize laboratory and animal hospital revenue only after the following criteria are met:
    there exists adequate evidence of the transaction;
 
    delivery of goods has occurred or services have been rendered; and
 
    the price is not contingent on future activity and collectibility is reasonably assured.
Medical Technology Revenue
     The majority of our medical technology revenue is derived from the sale of ultrasound imaging equipment and digital radiography imaging equipment. We also derive revenue from: (i) licensing our software; (ii) providing technical support and product updates related to our software, otherwise known as maintenance; and (iii) providing professional services related to our equipment and software, including installations, on-site training and education services. We frequently sell equipment and license our software in multiple element arrangements in which the customer may choose a combination of one or more of the following elements: (i) ultrasound imaging equipment; (ii) digital radiography imaging equipment; (iii) software products; (iv) computer hardware; (v) maintenance; and (vi) professional services.
     The accounting for the sale of equipment is substantially governed by the requirements of Staff Accounting Bulletin, SAB, No. 104, Revenue Recognition , and the sale of software licenses and related items is governed by Statement of Position, SOP, No. 97-2, Software Revenue Recognition , as amended. The determination of the amount of software license, maintenance and professional service revenue to be recognized in each accounting period requires us to exercise judgment and use estimates. In determining whether or not to recognize revenue, we evaluate each of these criteria:
    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.

24


Table of Contents

     Under the residual method prescribed by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition, With Respect to Certain Transactions , in multiple element arrangements involving software, revenue is recognized when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., maintenance and professional services), but does not exist for one or more of the delivered elements in the arrangement (i.e., the equipment, computer hardware or the software product). Vendor-specific objective evidence of fair value is based on the price for those products and services when sold separately by us and customer renewal rates for post-contract customer support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those elements occurs. Each transaction requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each element.
Ultrasound Imaging Equipment
     We sell our ultrasound imaging equipment with and without related computer hardware and software. We account for the sale of ultrasound imaging equipment on a stand-alone basis under the requirements of SAB No. 104, and recognize revenue upon delivery. We account for the sale of ultrasound imaging equipment with related computer hardware and software by bifurcating the transaction into separate elements. We account for the ultrasound imaging equipment under the requirements of SAB No. 104, as the software is not deemed to be essential to the functionality of the equipment, and account for the computer hardware and software under the requirements of SOP No. 97-2, as amended. For those sales of our ultrasound imaging equipment that include computer hardware and software, we recognize revenue on the ultrasound imaging equipment, computer hardware and software upon delivery, which occurs simultaneously.
Digital Radiography Equipment
     We sell our digital radiography imaging equipment with related computer hardware and software. The digital radiography equipment requires the computer hardware and software to function. As a result, we account for digital radiography imaging equipment sales under SOP No. 97-2.
     In the third quarter of 2005, we established vendor-specific objective evidence of the fair value of post-contract customer support services by including renewal rates in the sales contracts. As a result, we began recognizing revenue on the sales of digital radiography imaging equipment, computer hardware and software at the time of customer acceptance if installation is required, or delivery, and revenue from post-contract customer support services on a straight-line basis over the term of the support period. Prior to the third quarter of 2005, we recognized revenue on all elements in these arrangements ratably over the period of the post-contract customer support services, which was generally one year.
Valuation of Goodwill
     Our goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. The total amount of our goodwill at June 30, 2006 was $610.7 million, consisting of $95.1 million for our laboratory segment, $496.4 million for our animal hospital segment and $19.2 million for our medical technology segment.
     Annually, and upon material changes in our operating environment, we test our goodwill for impairment by comparing the fair market value of our reporting units, laboratory, animal hospital and medical technology, to their respective net book value. At December 31, 2005 and 2004, the estimated fair market value of each of our reporting units exceeded their respective net book value, resulting in a conclusion that our goodwill was not impaired.
Income Taxes
     We account for income taxes under SFAS No. 109, Accounting for Income Taxes . In accordance with SFAS No. 109, we record deferred tax liabilities and deferred tax assets, which represent taxes to be recovered or settled in the future. We adjust our deferred tax assets and deferred tax liabilities to reflect changes in tax rates or other

25


Table of Contents

statutory tax provisions. Changes in tax rates or other statutory provisions are recognized in the period the change occurs.
     We make judgments in assessing our ability to realize future benefits from our deferred tax assets, which include operating and capital loss carryforwards. As such, we have a valuation allowance to reduce our deferred tax assets for the portion we believe will not be realized.
     We also assess differences between our probable tax bases and the as-filed tax bases of certain assets and liabilities. At December 31, 2005, we had contingent liabilities of $6.8 million recorded in other liabilities in our condensed, consolidated balance sheet related to such differences. During the first quarter of 2006, we determined that these contingencies were no longer probable due to the outcome of an income tax audit and recognized a tax benefit of $6.8 million. In addition, there are certain tax positions that represent a possible future payment but not a probable one. While we have not recognized a liability for these possible future payments, they may result in future cash payments and increase our tax provision.
     Effective January 1, 2007, we will be required to assess our tax positions using the recognition threshold and measurement attribute prescribed by the Financial Accounting Standards Board, or FASB, Interpretation No. 48, or FIN 48. See discussion of FIN 48 below under Recent Accounting Pronouncements.
Recent Accounting Pronouncements
     Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires us to measure the cost of share-based payments to employees including stock options, based on the grant date fair value and to recognize the cost over the requisite service period, which is typically the vesting period. Although the cost recognized as a result of adopting SFAS No. 123R is non-cash, our operating results, including our margins, net income, earnings per common share and operating cash flows, will be negatively impacted in future periods. See Note 4, Share-Based Compensation Plans, of our condensed, consolidated financial statements for a detailed discussion of our adoption of SFAS No. 123R.
     In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 , which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. FIN 48 will be effective for our company on January 1, 2007. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.
Forward-Looking Statements
     This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, as well as assumptions that, if they materialize or prove incorrect, could cause our results and the results of our consolidated subsidiaries to differ materially from those expressed or implied by these forward-looking statements. 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 in this report. These forward-looking statements are not historical facts and are inherently uncertain and outside of our control. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Factors that may cause our plans, expectations, future financial condition and results to change are described throughout this report and in our annual report on Form 10-K, particularly in Risk Factors , Part I, Item 1A of that report.

26


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     At June 30, 2006, we had borrowings of $374.6 million under our senior credit facility with fluctuating interest rates based on market benchmarks such as LIBOR. For our variable-rate debt, changes in interest rates generally do not affect the fair market value, but do impact earnings and cash flow. To reduce the risk of increasing interest rates, we enter into interest rate swap agreements. Currently, we are engaged in the following interest rate swap 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 million
Effective date
    5/26/2005       6/2/2005       6/30/2005       6/20/2006  
Expiration date
    5/26/2008       5/31/2008       6/30/2007       6/30/2009  
Counterparties
  Goldman Sachs   Wells Fargo   Wells Fargo   Goldman Sachs
Qualifies for hedge accounting
  Yes   Yes   Yes   Yes
     These swap agreements have the effect of reducing the amount of our debt exposed to variable interest rates. For the 12-month period ending June 30, 2007, for every 1.0% increase in LIBOR we will pay an additional $1.8 million in interest expense and for every 1.0% decrease in LIBOR we will save $1.8 million in interest expense.
     We may consider entering into additional interest rate strategies. We have not yet determined what those strategies may be or their possible impact.
ITEM 4. CONTROLS AND PROCEDURES
     As of the end of the period covered by this report, we have carried out an evaluation, under the supervision and participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports filed with the SEC.
     During our most recent fiscal quarter, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     We are not subject to any legal proceedings other than ordinarily routine litigation incidental to the conduct of our business.

27


Table of Contents

ITEM 1A. RISK FACTORS
     There have been no material changes in our risk factors from those disclosed in our 2005 annual report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     On June 5, 2006, we held our annual meeting of stockholders at which our stockholders:
    elected each of John M. Baumer and Frank Reddick as a Class I director;
 
    ratified KPMG LLP as our independent auditors; and
 
    approved the VCA Antech, Inc. 2006 Equity Incentive Plan.
     The results of the election of two Class I directors were as follows:
                                 
Candidate   Yes Votes   No Votes   Abstain   Broker Non-Vote
John M. Baumer
    65,057,980             9,129,038        
Frank Reddick
    41,101,066             33,085,952        
     The results of the other matters upon which our stockholders voted were as follows:
                                 
Proposal   Yes Votes   No Votes   Abstain   Broker Non-Vote
Ratify KPMG LLP as our independent auditors
    73,805,087       358,710       23,221        
Approve the VCA Antech, Inc. 2006 Equity Incentive Plan
    55,190,570       12,613,352       43,010       6,340,086  
ITEM 5. OTHER INFORMATION
     None
ITEM 6. EXHIBITS
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  32.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

28


Table of Contents

SIGNATURE
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 7, 2006.
         
Date: August 7, 2006
  By:   /s/ Tomas W. Fuller 
 
       
    Tomas W. Fuller
    Chief Financial Officer

29


Table of Contents

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

30


 

EXHIBIT 31.1
Certification of
Chief Executive Officer
of VCA Antech, Inc.
I, Robert L. Antin, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: August 7, 2006
   
 
   
/s/ Robert L. Antin
   
 
   
Robert L. Antin
   
Chief Executive Officer
   

31


 

EXHIBIT 31.2
Certification of
Chief Financial Officer
of VCA Antech, Inc.
I, Tomas W. Fuller, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of VCA Antech, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
Date: August 7, 2006
   
 
   
/s/ Tomas W. Fuller
   
 
   
Tomas W. Fuller
   
Chief Financial Officer
   

32


 

EXHIBIT 32.1
Certification of
Chief Executive Officer & Chief Financial Officer
of VCA Antech, Inc.
     This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies this quarterly report on Form 10-Q (the “Report”) for the period ended June 30, 2006 of VCA Antech, Inc. (the “Issuer”).
     Each of the undersigned, who are the Chief Executive Officer and Chief Financial Officer, respectively, of VCA Antech, Inc., hereby certify that, to the best of each such officer’s knowledge:
  (i)   the Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
 
  (ii)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Dated: August 7, 2006
     
 
   
 
  /s/ Robert L. Antin
 
   
 
  Robert L. Antin
 
  Chief Executive Officer
 
   
 
   
 
  /s/ Tomas W. Fuller
 
   
 
  Tomas W. Fuller
 
  Chief Financial Officer

33