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

VCA ANTECH, INC.

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
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed, Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005			1
Condensed, Consolidated Income Statements for the Three and Six Months Ended June 30, 2006 and 2005			2
Condensed, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005			3
Notes to Condensed, Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
Part II. Other Information
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3. Defaults Upon Senior Securities			28
Item 4. Submission of Matters to a Vote of Security Holders			28
Item 5. Other Information			28
Item 6. Exhibits			28
Signature			29
Exhibit Index			30
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VCA ANTECH, INC. AND SUBSIDIARIES

		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.

VCA ANTECH, INC. AND SUBSIDIARIES

		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.

VCA ANTECH, INC. AND SUBSIDIARIES

		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.

VCA ANTECH, INC. AND SUBSIDIARIES

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

  Other Acquisition Payments

     We paid $1.2 million to sellers for the unused portion of holdbacks during the six months ended June 30, 2006.

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

     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

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

     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%

     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.

  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.

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.

     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

						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

     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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		Page
		Number
Introduction			14
Executive Overview			14
Results of Operations			16
Liquidity and Capital Resources			21
Critical Accounting Policies			24
Recent Accounting Pronouncements			26
Forward-Looking Statements			26

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.

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

     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	%

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	%

     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	%