e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
|
|
|
|
|
For the fiscal year ended
December 31, 2007
|
or
|
|
|
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
Commission file number
001-16783
VCA Antech, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
95-4097995
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. employer
identification no.)
|
12401 West Olympic Boulevard,
Los Angeles, California
|
|
90064-1022
(Zip code)
|
(Address of principal executive
offices)
|
|
|
(310) 571-6500
Registrants telephone
number, including area code:
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
Common Stock, par value $0.001 per share
|
|
Nasdaq Global Select Market
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ.
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated
filer þ
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
(Do not check if a
smaller reporting company)
|
|
Smaller reporting
company 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.
The aggregate market value of the voting common equity held by
non-affiliates as of June 30, 2007, was approximately
$3.1 billion, computed by reference to the price of $37.69
per share, the price at which the common equity was last sold on
such date as reported on the NASDAQ Global Select Market. For
purposes of this computation, it is assumed that the shares
beneficially held by directors and officers of the registrant
would be deemed to be stock held by affiliates. Non-affiliated
common stock outstanding at June 30, 2007 was
81,635,716 shares.
Total common stock outstanding at February 27, 2008 was
84,703,529 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement to be delivered to
stockholders in connection with the 2008 Annual Meeting of
Stockholders are incorporated by reference into Items 10,
11, 12, 13 and 14 hereof.
VCA
ANTECH, INC. AND SUBSIDIARIES
TABLE OF
CONTENTS
Forward-Looking
Statements
This annual report on
Form 10-K
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, seek, expect,
estimate, may, plan,
should plan, project,
contemplate, anticipate,
predict, potential,
continue, or similar expressions. You may find some
of these statements below and elsewhere in this report. These
forward-looking statements are not historical facts and are
inherently uncertain and outside of our control. Any or all of
our forward-looking statements in this report may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in our discussion in this report will be
important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future
results may vary materially. Factors that may cause our plans,
expectations, future financial condition and results to change
include those items discussed in Risk Factors in
Item 1A of this annual report.
PART I
Company
Overview
We are a leading national animal healthcare 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 the veterinary market.
Our network of veterinary diagnostic laboratories provides
sophisticated testing and consulting services used by
veterinarians in the detection, diagnosis, evaluation,
monitoring, treatment and prevention of diseases and other
conditions affecting animals. Our network of veterinary
diagnostic laboratories provides diagnostic testing for over
16,000 clients, which includes standard animal hospitals, large
animal practices, universities and other government
organizations. Our animal hospitals offer a full range of
general medical and surgical services for companion animals, as
well as specialized treatments including advanced diagnostic
services, internal medicine, oncology, ophthalmology,
dermatology and cardiology. In addition, we provide
pharmaceutical products and perform a variety of pet wellness
programs including health examinations, diagnostic testing,
routine vaccinations, spaying, neutering and dental care. Our
network of animal hospitals is supported by more than 1,500
veterinarians and had over 6.1 million patient visits in
2007. Our medical technology business sells digital radiography
and ultrasound imaging equipment, provides education and
training on the use of that equipment, and provides consulting
and mobile imaging services.
Our principal executive offices are located at 12401 West
Olympic Boulevard, Los Angeles, California. We can be contacted
at
(310) 571-6500.
Company
History
Our company was formed in 1986 as a Delaware corporation and
during the 1990s established a position in the veterinary
diagnostic laboratory and animal hospital markets through both
internal growth and acquisitions. By December 31, 1999, our
company had built a laboratory network of 13 laboratories
servicing animal hospitals in all 50 states and operated a
total of 194 animal hospitals. Subsequent to 1999, our company
continued its growth by adding additional laboratories and
through the acquisition of individually owned animal hospitals
and the following animal hospital chains:
|
|
|
|
|
On June 1, 2004, we acquired National PetCare Centers, Inc.
(NPC), which operated 67 animal hospitals as of the
acquisition date. This acquisition allowed us to expand our
animal hospital operations, particularly in California and Texas.
|
1
|
|
|
|
|
On July 1, 2005, we acquired Pets Choice, Inc.
(Pets Choice), which operated 46 animal
hospitals as of the acquisition date. This acquisition allowed
us to expand our animal hospital operations, particularly in
Texas and Washington.
|
|
|
|
On June 1, 2007, we acquired Healthy Pet Corp.
(Healthy Pet), which operated 44 animal hospitals
and a small laboratory, which primarily serviced its own animal
hospitals, as of the acquisition date. This acquisition allowed
us to expand our animal hospital operations, particularly in
Massachusetts, Connecticut, Virginia and Georgia.
|
Subsequent to 1999, we also acquired and opened additional
laboratories that service locations with a high level of demand
(i.e., large metropolitan areas). In addition, on
October 1, 2004, we acquired Sound Technologies, Inc.
(STI), which is a supplier of digital radiography
and ultrasound imaging equipment and related computer hardware,
software and services to the veterinary industry. The
acquisition of STI provided us the opportunity to sell digital
imaging equipment, which we believe is an emerging and dynamic
segment within the animal healthcare industry.
Industry
Overview
According to American Pet Products Manufacturers Association,
Inc. (APPMA), the United States population of
companion animals in 2006 reached approximately
215 million, including about 163 million dogs and
cats. APPMA estimates that over $21 billion was spent in
the United States on pets in 2006 for veterinary care, supplies,
medicine and boarding and grooming. The APPMA National Pet
Owners Survey indicated that the ownership of pets is
widespread and growing with over 71 million, or 63%, of
U.S. households owning at least one pet, including
companion and other animals. Specifically, 45 million
households owned at least one dog and 38 million households
owned at least one cat.
We believe that among the expanding number of pet owners is a
growing awareness of pet health and wellness, including the
benefits of preventive care and specialized services. As
technology continues to migrate from the human healthcare sector
into the practice of veterinary medicine, more sophisticated
treatments, diagnostic tests and equipment are becoming
available to treat companion animals. These new and increasingly
complex procedures, diagnostic tests, including laboratory
testing and advanced imaging, and pharmaceuticals are gaining
wider acceptance as pet owners are exposed to these previously
unconsidered treatment programs through their exposure with this
technology in human healthcare, and through literature and
marketing programs sponsored by large pharmaceutical and pet
nutrition companies.
Even as treatments available in veterinary medicine become more
complex, prices for veterinary services typically remain a low
percentage of a pet owners income, facilitating payment at
the time of service. Unlike the human healthcare industry,
providers of veterinary services are not dependent on
third-party payers in order to collect fees. As such, providers
of veterinary services typically do not have the problems of
extended payment collection cycles or pricing pressures from
third-party payers faced by human healthcare providers.
Outsourced laboratory testing and diagnostic equipment sales are
wholesale businesses that collect payments directly from animal
hospitals under standard industry payment terms. Fees for
services provided in our animal hospitals are due at the time of
service. For example, in 2007 over 95% of our animal hospital
services were paid at the time of service. In addition, over the
past three fiscal years our bad debt expense has averaged only
1% of total revenue.
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 infestation of fleas, heartworm and ticks, and the number of
daylight hours.
Diagnostic
Laboratory Industry
Veterinarians use laboratory tests to treat animals by
diagnosing and monitoring illnesses and conditions through the
detection of substances in urine, tissue, fecal and blood
samples, and other specimens. As is the
2
case with the physician treating a human patient, laboratory
diagnostic testing is becoming a routine diagnostic tool used by
the veterinarian.
Veterinary laboratory tests are performed primarily at
veterinary diagnostic laboratories, universities or animal
hospitals using
on-site
diagnostic equipment. For particular types of tests,
on-site
diagnostic equipment can provide more timely results than
outside laboratories, but this in-house testing requires the
animal hospital or veterinarian to purchase or lease the
equipment, maintain and calibrate the equipment periodically to
avoid testing errors, and employ trained personnel to operate
it. Conversely, veterinary diagnostic laboratories can provide a
wider range of tests than generally are available
on-site at
most animal hospitals and do not require any up-front investment
on the part of the animal hospital or veterinarian. Leading
veterinary diagnostic laboratories also employ highly trained
individuals who specialize in the detection and diagnosis of
diseases and thus are a valuable resource for the veterinarian.
Our laboratories offer a broad spectrum of standard and
customized tests to the veterinary market, convenient sample
pick-up
times, rapid test reporting and access to professional
consulting services provided by trained specialists. Providing
the customer with this level of service at competitive prices
requires high throughput volumes due to the operating leverage
associated with the laboratory business. As a result, larger
laboratories are likely to have a competitive advantage relative
to smaller laboratories.
We believe that the outsourced laboratory testing market is
among the faster growing segments of the animal healthcare
industry as a result of:
|
|
|
|
|
the increased focus on wellness, early detection and monitoring
programs in veterinary medicine, which is increasing the overall
number of tests being performed;
|
|
|
|
the emphasis in veterinary education on diagnostic tests and the
trend toward specialization in veterinary medicine, which are
causing veterinarians to increasingly rely on tests for more
accurate diagnoses; and
|
|
|
|
the continued technological developments in veterinary medicine,
which are increasing the breadth of tests offered.
|
Animal
Hospital Industry
Animal healthcare is provided predominately by the veterinarian
practicing as a sole practitioner, or as part of a larger group
practice or hospital. Veterinarians diagnose and treat animal
illnesses and injuries, perform surgeries, provide routine
medical exams and prescribe medication. Some veterinarians
specialize by type of medicine, such as orthopedics, dentistry,
ophthalmology or dermatology. Others focus on a particular type
of animal. The principal factors in a pet owners decision
as to which veterinarian to use include convenient location and
hours, recommendation of friends, reasonable fees and quality of
care.
According to the American Veterinary Medical Association, the
U.S. market for veterinary services is highly fragmented
with more than 49,000 veterinarians practicing at over
22,000 companion animal hospitals at the end of 2006.
Although most animal hospitals are single-site,
sole-practitioner facilities, we believe veterinarians are
gravitating toward larger, multi-doctor animal hospitals that
provide
state-of-the-art
facilities, treatments, methods and pharmaceuticals to enhance
the services they can provide their clients.
Well-capitalized animal hospital operators have the opportunity
to supplement their internal growth with selective acquisitions.
We believe the extremely fragmented animal hospital industry is
consolidating due to:
|
|
|
|
|
the purchasing, marketing and administrative cost advantages
that can be realized by a large, multiple location, multi-doctor
veterinary provider;
|
|
|
|
the cost of financing equipment purchases and upgrading
technology necessary for a successful practice;
|
|
|
|
the desire of veterinarians to focus on practicing veterinary
medicine, rather than spending large portions of their time
performing the administrative tasks necessary to operate an
animal hospital;
|
3
|
|
|
|
|
the choice of some owners of animal hospitals to diversify their
investment portfolio by selling all or a portion of their
investment in the animal hospital; and
|
|
|
|
the appeal to many veterinarians of the benefits and flexible
work schedule that is not typically available to a sole
practitioner or single-site provider.
|
Medical
Technology Industry
Veterinarians use radiography and ultrasound imaging equipment
to capture and view anatomical images to aid in the diagnosis
and treatment of a broad range of diseases and injuries in
animals. Digital radiography imaging equipment utilizes high
frequency electromagnetic waves to capture x-ray images that are
then digitized and stored in digital format. Ultrasound imaging
equipment utilizes high frequency sound waves and echoes to
display a two-dimensional image of the tissue being examined.
Veterinarians can display images created by digital radiography
and ultrasound imaging equipment on computer monitors,
manipulate the images, store them electronically and transmit
them in digital format over the Internet with additional
computer hardware and software.
We believe that the use of digital radiography and ultrasound
imaging equipment provides advantages to veterinarians when
compared to other imaging equipment for the following reasons:
|
|
|
|
|
the ability to see greater detail and manipulate images, which
assists in the diagnosis of illnesses and injuries and improves
the quality of care;
|
|
|
|
the ability to transmit images over the Internet to facilitate
consultation with a specialist;
|
|
|
|
improved efficiencies, including the ability to easily store and
retrieve images electronically; and
|
|
|
|
the reduction of costs associated with the purchasing,
processing, storing, filing and retrieving of conventional film
used by traditional x-ray equipment.
|
Business
Strategy
Our business strategy is to continue expanding our market
leadership in animal healthcare through our diagnostic
laboratory, animal hospital and medical technology segments. Key
elements to our strategy include:
|
|
|
|
|
Capitalizing on our Leading Market Position to Generate
Revenue Growth. Our leading market position in
the veterinary laboratory and animal hospital markets positions
us to capitalize on favorable growth trends in the animal
healthcare industry. In our laboratories, we seek to generate
revenue growth by taking advantage of the growing number of
outsourced diagnostic tests, the opportunities to expand the
testing that we provide and by increasing our market share. We
continually educate veterinarians on new and existing
technologies and tests available to diagnose medical conditions.
Further, we leverage the knowledge of our specialists by
providing veterinarians with extensive client support in
utilizing and understanding these diagnostic tests. In our
animal hospitals, we seek to generate revenue growth by
capitalizing on the growing emphasis on pet health and wellness.
Our medical technology segment seeks to leverage our strengths
in the broader veterinary markets by introducing technologies,
products and services to the veterinary market. We seek to
generate revenue growth by increasing our market share and
educating veterinarians on new and existing technologies.
|
|
|
|
Leveraging Established Infrastructure to Improve
Margins. We intend to leverage our established
laboratory and animal hospital infrastructure to continue to
increase our operating margins. Due to our established networks
and the fixed cost nature of our business model, we are able to
realize high margins on incremental revenue from laboratory and
animal hospital customers. For example, given that our
nationwide transportation network servicing our laboratory
customers is a relatively fixed cost, we are able to achieve
significantly higher margins on most incremental tests ordered
by the same customer when picked up by our couriers at the same
time.
|
|
|
|
Utilizing Enterprise-Wide Information Systems to Improve
Operating Efficiencies. Our laboratory and the
majority of our animal hospital operations utilize
enterprise-wide management information
|
4
systems. We believe that these common systems enable us to more
effectively manage the key operating metrics that drive our
business. With the aid of these systems, we seek to standardize
pricing, expand the services our veterinarians provide, capture
unbilled services and increase volume through targeted marketing
programs.
|
|
|
|
|
Pursuing Selected Acquisitions. The
fragmentation of the animal hospital industry provides us with
significant expansion opportunities in our animal hospital
segment. Depending upon the attractiveness of the candidates and
the strategic fit with our existing operations, we intend to
acquire independent animal hospitals each year with aggregate
annual revenues of approximately $50.0 million to
$60.0 million. Our overall acquisition strategy involves
the identification of high-quality practices where we can create
additional value through the services and scale we can provide.
Our typical candidate mirrors the profile of our existing
hospital base. These acquisitions will be used to both expand
existing markets and to enter into new geographic areas. In
addition, we also evaluate the acquisition of animal hospital
chains, laboratories or related businesses if favorable
opportunities are presented. We intend primarily to use cash in
our acquisitions but, depending on the timing and amount of our
acquisitions, we may use stock or debt.
|
Business
Segments
We report our results of operations through three segments:
Laboratory, Animal Hospital and Medical Technology.
Information regarding revenue and operating income, attributable
to each of our segments, is included in the Segment
Results section within Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and within Note 2.c, Revenue and Related Cost
Recognition, of our Notes to Consolidated Financial
Statements, which are incorporated herein by reference.
Laboratories
We operate a full-service, veterinary diagnostic laboratory
network serving all 50 states. Our laboratory revenue
accounted for 26% of total consolidated revenue in 2007, 2006,
and 2005. We service a diverse customer base of over 16,000
clients including animal hospitals we operate, which accounted
for 9% of total laboratory revenue in both 2007 and 2006 and 8%
in 2005.
Services
Our diagnostic spectrum includes over 300 different tests in the
area of chemistry, pathology, endocrinology, serology,
hematology and microbiology, as well as tests specific to
particular diseases. We do not conduct experiments on animals.
Although modified to address the particular requirements of the
species tested, the tests performed in our veterinary
laboratories are similar to those performed in human clinical
laboratories and utilize similar laboratory equipment and
technologies. We believe that the growing concern for animal
health, combined with the movement of veterinary medicine toward
increasing specialization, may result in the migration of
additional areas of human testing into the veterinary field.
Given the recent advancements in veterinary-medical technology
and the increased breadth and depth of knowledge required for
the practice of veterinary medicine, many veterinarians solicit
the knowledge and experience of our specialists to interpret
test results to aid in the diagnosis of illnesses and to suggest
possible treatment alternatives. Our diagnostic experts include
veterinarians, chemists and other scientists with expertise in
pathology, internal medicine, oncology, cardiology, dermatology,
neurology and endocrinology. Because of our specialist support,
we believe the quality of our service further distinguishes our
laboratory services as a premiere service provider.
5
Laboratory
Network
At December 31, 2007, we operated 36 veterinary diagnostic
laboratories. Our laboratory network includes:
|
|
|
|
|
primary hubs that are open 24 hours per day and offer a
full-testing menu;
|
|
|
|
secondary laboratories that are open 24 hours per day and
offer a wide-testing menu servicing large metropolitan
areas; and
|
|
|
|
STAT laboratories that service other locations with demand
sufficient to warrant nearby laboratory facilities and are open
primarily during daytime hours.
|
We connect our laboratories to our customers with what we
believe is the industrys largest transportation network,
picking up requisitions daily through an extensive network of
drivers and independent couriers. Customers outside our
transportation network use FedEx to send specimens to our
laboratory just outside of Memphis, Tennessee, which permits
rapid and cost-efficient testing because of the proximity to the
primary sorting facility of FedEx.
In 2007, we derived 70% of our laboratory revenue from major
metropolitan areas, where we offer
twice-a-day
pick-up
service and
same-day
results. In addition, in these areas we generally offer to
report results within three hours of
pick-up.
Outside of these areas, we typically provide test results to
veterinarians before 8:00 a.m. the day following
pick-up.
Sales,
Marketing and Client Service
Our full-time sales and field-service representatives market
laboratory services and maintain relationships with existing
customers. Our sales force is commission-based and organized
along geographic regions. We support our sales efforts by
strengthening our industry-leading team of specialists,
developing marketing literature, attending trade shows,
participating in trade associations and providing educational
services to veterinarians. Our client-service representatives
respond to customer inquiries, provide test results and, when
appropriate, introduce the customer to other services offered by
the laboratory.
Personnel
Each of our primary and secondary laboratory locations includes
a manager, supervisors for each department and personnel for
laboratory testing. In addition, we employ or contract with
specialists to interpret test results to assist veterinarians in
the diagnosis of illnesses and to suggest possible treatment
alternatives.
We actively recruit qualified personnel and are committed to
supporting continuing education for our professional staff. We
have internal training programs for routine testing procedures
to improve the skill level of our technicians and to improve the
overall capacity of our existing staff. We sponsor various
internship and certain other educational programs. These
programs serve to build awareness of our company with respect to
students, whom after graduation may seek employment with our
company.
Animal
Hospitals
At December 31, 2007, we operated 438 animal hospitals
serving 38 states. Our animal hospital revenue accounted
for approximately 73% of total consolidated revenue in 2007,
2006, and 2005.
Services
In addition to general medical and surgical services, we offer
specialized treatments for companion animals, including advanced
diagnostic services, internal medicine, oncology, ophthalmology,
dermatology and cardiology. We also provide pharmaceutical
products for use in the delivery of treatments by our
veterinarians and pet owners. Many of our animal hospitals offer
additional services, including grooming, bathing and boarding.
We also sell specialty pet products at our hospitals, including
pet food, vitamins, therapeutic shampoos and conditioners, flea
collars and sprays, and other accessory products.
6
Animal
Hospital Network
We seek to provide quality care in clean, attractive facilities
that are generally open between 10 to 15 hours per day, six
to seven days per week. Our typical animal hospital:
|
|
|
|
|
is located in a 4,000 to 6,000 square-foot, freestanding
facility in an attractive location;
|
|
|
|
has annual revenue between $1.0 million and
$2.5 million;
|
|
|
|
is supported by three to five veterinarians; and
|
|
|
|
has an operating history of over ten years.
|
As of December 31, 2007, our nationwide network of
freestanding, full-service animal hospitals had facilities
located in the following states:
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
77
|
|
|
Ohio*
|
|
|
7
|
|
Texas*
|
|
|
43
|
|
|
Alaska
|
|
|
5
|
|
Washington*
|
|
|
31
|
|
|
Georgia
|
|
|
5
|
|
Florida
|
|
|
28
|
|
|
New Mexico
|
|
|
5
|
|
Massachusetts
|
|
|
24
|
|
|
North Carolina*
|
|
|
5
|
|
New York*
|
|
|
22
|
|
|
Minnesota*
|
|
|
5
|
|
Illinois
|
|
|
17
|
|
|
Delaware
|
|
|
4
|
|
Pennsylvania
|
|
|
17
|
|
|
Hawaii
|
|
|
3
|
|
Virginia
|
|
|
16
|
|
|
Nebraska*
|
|
|
3
|
|
Arizona
|
|
|
15
|
|
|
Wisconsin
|
|
|
3
|
|
Connecticut
|
|
|
13
|
|
|
Louisiana*
|
|
|
2
|
|
Colorado
|
|
|
11
|
|
|
Missouri
|
|
|
2
|
|
New Jersey*
|
|
|
11
|
|
|
South Carolina
|
|
|
2
|
|
Indiana
|
|
|
10
|
|
|
Vermont
|
|
|
2
|
|
Michigan
|
|
|
10
|
|
|
Alabama*
|
|
|
1
|
|
Oregon*
|
|
|
10
|
|
|
New Hampshire*
|
|
|
1
|
|
Maryland
|
|
|
9
|
|
|
Rhode Island*
|
|
|
1
|
|
Nevada
|
|
|
8
|
|
|
Utah
|
|
|
1
|
|
Oklahoma
|
|
|
8
|
|
|
West Virginia*
|
|
|
1
|
|
|
|
|
* |
|
States with laws that prohibit corporations from providing
veterinary-medical care. In these states we provide
administrative and support services to veterinary-medical groups
pursuant to management agreements. |
Marketing
We primarily direct our marketing efforts toward our existing
clients through customer education efforts. We inform and
educate our clients about pet wellness and quality care through
mailings of Healthy Pet Magazine, which focuses on pet care and
wellness. We also market through targeted demographic mailings
regarding specific pet health issues and collateral health
material available at each animal hospital. With these internal
marketing programs, we seek to leverage our existing customer
base by increasing the number and intensity of the services
received during each visit. We send reminder notices to increase
awareness of the advantages of regular, comprehensive
veterinary-medical care, including preventive care such as
wellness exams, vaccinations, dental screening and geriatric
care. We also enter into referral arrangements with local pet
shops, humane societies and veterinarians to increase our client
base. We seek to obtain referrals from veterinarians by
promoting our specialized diagnostic and treatment capabilities
to veterinarians and veterinary practices that cannot offer
their clients these services.
7
Personnel
Our animal hospitals generally employ a staff of between 10 and
30 full-time-equivalent employees, depending upon the
facilitys size and customer base. The staff includes
administrative and technical-support personnel, three to five
veterinarians, a hospital manager who supervises the
day-to-day
activities of the facility, and a small office staff.
We actively recruit qualified veterinarians and technicians and
are committed to supporting continuing education for our
professional staff. We operate post-graduate teaching programs
for veterinarians at 14 of our facilities, which train
approximately 110 veterinarians each year. We believe that these
programs enhance our reputation in the veterinary profession and
further our ability to continue to recruit the most talented
veterinarians.
We seek to establish an environment that supports the
veterinarian in the delivery of quality medicine and fosters
professional growth through increased patient flow and a diverse
case mix, continuing education,
state-of-the-art
equipment and access to specialists. We believe our hospitals
offer attractive employment opportunities to veterinarians
because of our professional environment, competitive
compensation, management opportunities, employee benefits not
generally available to a sole practitioner, flexible work
schedules that accommodate personal lifestyles and the ability
to relocate to different regions of the country.
We have established a medical advisory board to support our
operations. Our advisory board, under the direction of our Chief
Medical Officer, recommends medical standards for our network of
animal hospitals and is comprised of veterinarians recognized
for their outstanding knowledge and reputations in the
veterinary field. Our advisory board members represent both the
different geographic regions in which we operate and the medical
specialties practiced by our veterinarians; and three members
are faculty members at highly-ranked veterinary colleges.
Additionally, our regional medical directors, a group of highly
experienced clinicians, are also closely involved in the
development and implementation of our medical programs.
Medical
Technology
Our medical technology segment sells digital radiography and
ultrasound imaging equipment and related computer hardware,
software and services, including consulting services and
training, to the veterinary market. Our digital radiography and
ultrasound imaging equipment are used by veterinarians to
capture and view anatomical images to aid in the diagnosis and
treatment of a broad range of diseases and injuries in animals.
We also have developed and license VetPACS, our proprietary
software package that allows for the archival and communication
of digital images, image manipulation, networking, case
reporting and image and case transmission over the Internet. In
addition, we have mobile imaging units that provide mobile
diagnostic ultrasound imaging services to veterinarians who do
not own their own ultrasound imaging equipment. Medical
technology revenue accounted for 4% of our consolidated revenue
in 2007, 2006 and 2005.
Products &
Services
We sell digital radiography imaging equipment, which is
comprised of a network of various components that we acquire
from third-party manufacturers and developers. A key component
is the amorphous silicon flat-panel x-ray detector, which we
acquire from Varian Medical Systems pursuant to a distribution
agreement entered into in February 2008, granting us worldwide
rights to incorporate these detectors into veterinary digital
imaging equipment for sale to the veterinary community, and the
exclusive right to do so in North America.
We sell General Electric ultrasound imaging equipment pursuant
to an agreement entered into with General Electric in July 2001
granting us exclusive rights to sell this equipment to members
and institutions in the North American veterinary community.
We license our proprietary software, VetPACS and TruDR. VetPACS
enables the archival and communication of digital images, image
manipulation, networking, case reporting and image and case
transmission over the Internet. TruDR allows for the capture of
digital x-ray images and transmits those images to a computer
containing VetPACS. TruDR, or similar software, is a required
component for our digital radiography imaging
8
equipment to function. TruDR is not applicable to ultrasound
imaging equipment sales. Our ultrasound imaging equipment is
functional without VetPACS; however, without VetPACS, or similar
software, there is no digital capability, such as electronic
storage or transmission.
We also provide mobile imaging, consulting, education and
training services to our customers. In addition, we sell
extended service agreements to our customers that include
technical support, product updates for software and extended
warranty coverage for a period of up to five years. The products
included in our warranty programs are generally covered by the
original equipment manufacturer and we coordinate the warranty
support between our customer and the manufacturer.
Sales
and Marketing
Our sales agents market and sell our products and services to
veterinary hospitals and universities. Our sales agents receive
a base salary and commissions based on sales. We market our
products and services through direct mail, advertisements in
trade magazines, trade shows and direct sales calls to our
intended customers.
Systems
Laboratory
We use an enterprise-wide management information system to
support our veterinary laboratories. All of our financial,
customer records and laboratory results are stored in computer
databases. Laboratory technicians and specialists are able to
electronically access test results from remote testing sites.
Our software gathers data in a data warehouse enabling us to
provide expedient results via fax or through our Internet online
resulting system.
Animal
Hospital
We use an enterprise-wide management information system to
support our animal hospital operations. We decide whether or not
to place newly acquired animal hospitals on this network based
on a cost-benefit analysis. In addition, a majority of our
animal hospitals utilize consistent patient
accounting/point-of-sale software and we are able to track
performance of hospitals on a per-service, per-veterinarian and
per-client basis.
Competition
Among veterinary diagnostic laboratories, we believe that
quality, price, specialist support and the time required to
deliver results are the major competitive factors. There are
many clinical laboratories that provide a broad range of
diagnostic testing services in the same markets serviced by us,
and we also face competition from several providers of
on-site
diagnostic equipment that allows veterinarians to perform
various testing. Our principal competitor in most geographic
locations in the United States is IDEXX Laboratories.
The companion animal healthcare industry is highly competitive
and subject to continual change in the manner in which services
are delivered and providers are selected. We believe that the
primary factors influencing a customers selection of an
animal hospital are convenient location and hours,
recommendation of friends, reasonable fees and quality of care.
Our primary competitors for our animal hospitals in most markets
are individual practitioners or small, regional multi-clinic
practices. In addition, some national companies in the pet care
industry, including the operators of super-stores, are
developing networks of animal hospitals in markets that include
our animal hospitals.
The primary competitive factors in the medical imaging equipment
industry are quality, technical capability, breadth of product
line, distribution capabilities, price and the ability to
provide quality service and support. There are many companies
that manufacture and sell digital radiography and ultrasound
imaging equipment.
9
Government
Regulation
Certain states have laws that prohibit business corporations
from providing, or holding themselves out as providers of,
veterinary-medical care. In these states we do not provide
veterinary services or own veterinary practices. We provide
management and other administrative services to veterinary
practices located in these states. At December 31, 2007, we
provided management services to 143 animal hospitals in
14 states under management agreements with the veterinary
practices. In one of these states, we operated a mobile imaging
service. Although we seek to structure our operations to comply
with veterinary medicine laws of each state in which we operate,
given the varying and uncertain interpretations of these laws,
we may not be in compliance with restrictions on the corporate
practice of veterinary medicine in all states. A determination
that we are in violation of applicable restrictions on the
practice of veterinary medicine in any state in which we operate
could have a material adverse effect on our operations,
particularly if we were unable to restructure our operations to
comply with the requirements of that state.
In addition, all of the states in which we operate impose
various registration requirements. To fulfill these
requirements, we have registered each of our facilities with
appropriate governmental agencies and, where required, have
appointed a licensed veterinarian to act on behalf of each
facility. All veterinarians practicing in our clinics are
required to maintain valid state licenses to practice.
Our acquisitions may be subject to pre-merger or post-merger
review by governmental authorities for anti-trust and other
legal compliance. Adverse regulatory action could negatively
affect our operations through the assessment of fines or
penalties against us or the possible requirement of divestiture
of one or more of our operations.
Employees
At December 31, 2007, we employed or managed on behalf of
our professional corporations 8,600 full-time-equivalent
employees. At that date, none of these employees were a party to
a collective bargaining agreement.
Website
Availability of Our Reports Filed with the Securities and
Exchange Commission
We maintain a website with the address
http://investor.vcaantech.com. We are not including the
information contained on our website as a part of, or
incorporating it by reference into, this annual report on
Form 10-K.
We make available free of charge through our website our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and amendments to these reports, as soon as reasonably
practicable after we electronically file that material with, or
furnish that material to, the SEC.
Various sections of this annual report contain forward-looking
statements, all of which are based on current expectations and
could be affected by the uncertainties and risk factors
described below and through this annual report. Our actual
results may differ materially from these forward-looking
statements.
If we
are unable to effectively execute our growth strategy, we may
not achieve our desired economies of scale and our profitability
may decline.
Our success depends in part on our ability to increase our
revenues and operating income through a balanced program of
internal growth initiatives and selective acquisitions of
established animal hospitals, laboratories and related
businesses. If we cannot implement or effectively execute on
this strategy, our results of operations will be adversely
affected. Even if we effectively implement our growth strategy,
we may not achieve the economies of scale that we have
experienced in the past or that we anticipate having in the
future. Our internal growth rate may decline and could become
negative. Our laboratory internal revenue growth, adjusted for
differences in billing days, has fluctuated between 9.8% and
15.2% for 2003 through 2007. Our animal hospital same-store
revenue growth, adjusted for differences in business days, has
fluctuated between 3.6% and 6.6% over the same years. Our
internal growth may continue to fluctuate and may be below our
10
historical rates. Any reduction in the rate of our internal
growth may cause our revenues and operating income to decrease.
Investors should not assume that our historical growth rates are
reliable indicators of results in future periods.
Changes
in the demand for our products and services could negatively
affect our operating results.
Client visits may be negatively impacted as a result of
preventative care and better pet nutrition. Demand for
vaccinations will be impacted in the future as protocols for
vaccinations change. Our veterinarians establish their own
vaccine protocols. Some of our veterinarians have changed their
protocols and others may change their protocols in light of
recent
and/or
future literature. The demand for our products and services may
also decline as a result of the eradication or substantial
declines in the prevalence of certain diseases.
The frequency of visits to our animal hospitals has declined and
may continue to decline. We believe that the frequency of visits
is impacted by several trends in the industry. Demand for
pet-related products traditionally sold at animal hospitals have
become more widely available in retail stores and other channels
of distribution, including the Internet. Some professionals in
the industry have recommended that vaccinations be given less
frequently. We believe that, historically, the animal healthcare
industry and our business have been relatively resistant to
changes in the general economy, but not immune to them. However,
our fourth quarter results appear to indicate that we were
marginally impacted by the uncertainty in the economy. As a
result of these factors, during the fourth quarter, and
particularly the second half of the quarter, our internal
revenue growth slowed. If demand for our products, vaccinations
or other veterinary and laboratory services continue to decline,
our operating results will be negatively impacted.
Due to
the fixed cost nature of our business, fluctuations in our
revenue could adversely affect our gross profit, operating
income and margins.
A substantial portion of our expenses, particularly rent and
personnel costs, are fixed costs and are based in part on
expectations of revenue. We may be unable to reduce spending in
a timely manner to compensate for any significant fluctuations
in our revenue. Accordingly, shortfalls in revenue may adversely
affect our gross profit, operating income and margins.
Any
failure in our information technology systems, disruption in our
transportation network or failure to receive supplies could
significantly increase testing turn-around time, reduce our
production capacity and otherwise disrupt our
operations.
Our laboratory operations depend on the continued and
uninterrupted performance of our information technology systems
and transportation network, including overnight delivery
services provided by FedEx. Sustained system failures or
interruption in our transportation network could disrupt our
ability to process laboratory requisitions, perform testing,
provide test results in a timely manner
and/or bill
the appropriate party. We could lose customers and revenue as a
result of a system or transportation network failure. In
addition, any change in government regulation related to
transportation samples or specimens could also have an impact on
our business.
Our computer systems are vulnerable to damage or interruption
from a variety of sources, including telecommunications
failures, electricity brownouts or blackouts, malicious human
acts and natural disasters. Moreover, despite network security
measures, some of our servers are potentially vulnerable to
physical or electrical break-ins, computer viruses and similar
disruptive problems. Despite the precautions we have taken,
unanticipated problems affecting our systems could cause
interruptions in our information technology systems. Our
insurance policies may not adequately compensate us for any
losses that may occur due to any failures in our systems.
Our laboratory operations depend on a limited number of
employees to upgrade and maintain its customized computer
systems. If we were to lose the services of some or all of these
employees, it may be time-consuming for new employees to become
familiar with our systems, and we may experience disruptions in
service during these periods.
11
Our operations depend, in some cases, on the ability of single
source suppliers or a limited number of suppliers, to deliver
products and supplies on a timely basis. Some of the products
that we purchase from these suppliers are proprietary, and,
therefore, cannot be readily or easily replaced by alternative
suppliers. We have in the past experienced, and may in the
future experience, shortages of or difficulties in acquiring
products
and/or
supplies in the quantities and of the quality needed. Shortages
in the availability of products
and/or
supplies for an extended period of time will disrupt our ability
to deliver products and provide services in a timely manner,
could result in the loss of customers, and could have a material
adverse impact on our results of operations.
Difficulties
integrating new acquisitions may impose substantial costs and
cause other problems for us.
Our success depends on our ability to timely and
cost-effectively acquire, and integrate into our business,
additional animal hospitals and in some instances laboratories
and related businesses. In 2007, we acquired 73 animal hospitals
and two laboratories, including 44 animal hospitals as part of
the acquisition of Healthy Pet Corp. In 2006, we acquired 22
animal hospitals and three laboratories. In 2005, we acquired 68
animal hospitals, including 46 animal hospitals as part of the
acquisition of Pets Choice, Inc. We expect to continue our
animal hospital acquisition program and if presented with
favorable opportunities, we may acquire animal hospital chains,
laboratories or related businesses. Our expansion into new
territories and new business segments creates the risk that we
will be unsuccessful in the integration of the acquired
businesses that are new to our operations. Any difficulties in
the integration process could result in increased expense, loss
of customers and a decline in profitability. In some cases, we
have experienced delays and increased costs in integrating
acquired businesses, particularly where we acquire a large
number of animal hospitals in a single region at or about the
same time. We also could experience delays in converting the
systems of acquired businesses into our systems, which could
result in increased staff and payroll expense to collect our
results as well as delays in reporting our results, both for a
particular region and on a consolidated basis. Further, the
legal and business environment prevalent in new territories and
with respect to new businesses may pose risks that we do not
anticipate and adversely impact our ability to integrate newly
acquired operations. In addition, our field management may spend
a greater amount of time integrating these new businesses and
less time managing our existing businesses. During these
periods, there may be less attention directed to marketing
efforts or staffing issues, which could affect our revenues and
expenses. For all of these reasons, our historical success in
integrating acquired businesses is not a reliable indicator of
our ability to do so in the future. If we are not successful in
timely and cost-effectively integrating future acquisitions, it
could result in decreased revenue, increased costs and lower
margins.
We continue to face risks in connection with our acquisitions
including:
|
|
|
|
|
negative effects on our operating results;
|
|
|
|
impairments of goodwill and other intangible assets;
|
|
|
|
dependence on retention, hiring and training of key personnel,
including specialists; and
|
|
|
|
contingent and latent risks associated with the past operations
of, and other unanticipated problems arising in, an acquired
business.
|
The process of integration may require a disproportionate amount
of the time and attention of our management, which may distract
managements attention from its
day-to-day
responsibilities. In addition, any interruption or deterioration
in service resulting from an acquisition may result in a
customers decision to stop using us. For these reasons, we
may not realize the anticipated benefits of an acquisition,
either at all or in a timely manner. If that happens and we
incur significant costs, it could have a material adverse impact
on our business.
12
The
significant competition in the companion animal healthcare
industry could result in a decrease in our prices, an increase
in our acquisition costs, a loss of market share and could
materially affect our revenue and profitability.
The companion animal healthcare industry is highly competitive
with few barriers to entry. To compete successfully, we may be
required to reduce prices, increase our acquisition and
operating costs or take other measures that could have an
adverse effect on our financial condition, results of
operations, margins and cash flow. In addition, if we are unable
to compete successfully, we may lose market share.
There are many clinical laboratory companies that provide a
broad range of laboratory testing services in the same markets
we service. These companies have acquired additional
laboratories in the markets in which we operate and may continue
their expansion, and aggressively bundle their
products and services to compete with us. Increased competition
may adversely affect our laboratory revenues and margins.
Several other national companies develop and sell
on-site
diagnostic equipment that allows veterinarians to perform their
own laboratory tests. Growth of the
on-site
diagnostic testing market may have an adverse effect on our
laboratory revenue.
Our primary competitors for our animal hospitals in most markets
are individual practitioners or small, regional, multi-clinic
practices. Also, regional pet care companies and some national
companies, including operators of super-stores, are developing
multi-regional networks of animal hospitals in markets in which
we operate. Historically, when a competing animal hospital opens
in proximity to one of our hospitals, we have reduced prices,
expanded our facility, retained additional qualified personnel,
increased our marketing efforts or taken other actions designed
to retain and expand our client base. As a result, our revenue
may decline and our costs may increase. In addition, shifts in
the purchasing habits of networks of hospitals could result in
limiting or discontinuing the use of our laboratories.
A significant component of our annual growth strategy includes
the acquisition of independent animal hospitals with aggregate
annual revenues of $50.0 million to $60.0 million. The
competition for animal hospital acquisitions from small national
and regional multi-clinic companies may cause us to increase the
amount we pay to acquire additional animal hospitals and may
result in fewer acquisitions than anticipated by our growth
strategy. If we are unable to acquire a requisite number of
animal hospitals annually or if our acquisition costs increase,
we may be unable to effectively implement our growth strategy
and realize anticipated economies of scale.
Our medical technology division is a relatively new entrant in
the market for medical imaging equipment in the animal
healthcare industry. Our primary competitors are companies that
are much larger than us and have substantially greater capital,
manufacturing, marketing and research and development resources
than we do, including companies such as Siemens Medical Systems,
Philips Medical Systems and Canon Medical Systems. The success
of our medical technology division, in part, is due to its focus
on the veterinary market, which allows it to differentiate its
products and services to meet the unique needs of this market.
If this market receives more focused attention from these larger
competitors, we may find it difficult to compete and as a result
our revenues and operating margins could decline. If we fail to
compete successfully in this market, the demand for our products
and services would decrease. Any reduction in demand could lead
to fewer customer orders, pricing pressures, reduced revenues,
reduced margins, reduced levels of profitability and loss of
market share. These competitive pressures could adversely affect
our business and operating results.
The
carrying value of our goodwill and other intangible assets could
be subject to an impairment write-down.
At December 31, 2007, our consolidated balance sheet
reflected $822.0 million of goodwill and $22.4 million
of other intangible assets, constituting a substantial portion
of our total assets of $1.3 billion at that date. We expect
that the aggregate amount of goodwill and other intangible
assets on our consolidated balance sheet will increase as a
result of future acquisitions. We continually evaluate whether
events or circumstances have occurred that suggest that the fair
value of our other intangible assets or each of our reporting
units are below their respective carrying values. The
determination that the fair value of our intangible assets or
one of our reporting units is less than its carrying value may
result in an impairment write-
13
down. The impairment write-down would be reflected as expense
and could have a material adverse effect on our results of
operations during the period in which we recognize the expense.
Upon completion of our annual review in 2007, we concluded that
the fair values of our reporting units exceeded their respective
carrying values and accordingly, as of that date, our goodwill
as reflected in our consolidated financial statements was not
impaired. However, in the future we may incur impairment charges
related to the goodwill and other intangible assets already
recorded or arising out of future acquisitions.
We
require a significant amount of cash to service our debt and
expand our business as planned.
We have, and will continue to have, a substantial amount of
debt. Our substantial amount of debt requires us to dedicate a
significant portion of our cash flow from operations to pay down
our indebtedness and related interest, thereby reducing the
funds available to use for capital expenditures, acquisitions
and general corporate purposes.
At December 31, 2007, our debt consisted of:
|
|
|
|
|
$527.7 million in principal amount outstanding under our
senior term notes; and
|
|
|
|
$32.5 million in principal amount outstanding under capital
leases and other debt.
|
Our ability to make payments on our debt, and to fund
acquisitions, will depend upon our ability to generate cash in
the future. Insufficient cash flow could place us at risk of
default under our debt agreements or could prevent us from
expanding our business as planned. Our ability to generate cash
is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. Our business may not generate sufficient cash flow from
operations, our strategy to increase operating efficiencies may
not be realized and future borrowings may not be available to us
under our senior credit facility in an amount sufficient to
enable us to service our debt or to fund our other liquidity
needs. A substantial portion of our debt is variable-rate debt
that is exposed to interest rate fluctuations. In order to meet
our debt obligations, we may need to refinance all or a portion
of our debt. We may not be able to refinance any of our debt on
commercially reasonable terms or at all.
Our
failure to satisfy covenants in our debt instruments will cause
a default under those instruments.
In addition to imposing restrictions on our business and
operations, our debt instruments include a number of covenants
relating to financial ratios and tests. Our ability to comply
with these covenants may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. The breach of any of these covenants would result in
a default under these instruments. An event of default would
permit our lenders and other debtholders to declare all amounts
borrowed from them to be due and payable, together with accrued
and unpaid interest. Moreover, these lenders and other
debtholders would have the option to terminate any obligation to
make further extensions of credit under these instruments. If we
are unable to repay debt to our senior lenders, these lenders
and other debtholders could proceed against our assets.
Our
debt instruments may adversely affect our ability to run our
business.
Our substantial amount of debt, as well as the guarantees of our
subsidiaries and the security interests in our assets and those
of our subsidiaries, could impair our ability to operate our
business effectively and may limit our ability to take advantage
of business opportunities. For example, our senior credit
facility may:
|
|
|
|
|
limit our ability to borrow additional funds or to obtain other
financing in the future for working capital, capital
expenditures, acquisitions, investments and general corporate
purposes;
|
|
|
|
limit our ability to dispose of our assets, create liens on our
assets or to extend credit;
|
|
|
|
make us more vulnerable to economic downturns and reduce our
flexibility in responding to changing business and economic
conditions;
|
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our business or industry;
|
|
|
|
place us at a competitive disadvantage to our competitors with
less debt; and
|
14
|
|
|
|
|
restrict our ability to pay dividends, repurchase or redeem our
capital stock or debt, or merge or consolidate with another
entity.
|
The terms of our senior credit facility allow us, under
specified conditions, to incur further indebtedness, which would
heighten the foregoing risks. If compliance with our debt
obligations materially hinders our ability to operate our
business and adapt to changing industry conditions, we may lose
market share, our revenue may decline and our operating results
may suffer.
Any
failure by the manufacturers of our medical imaging equipment,
failure in our ability to develop functional and cost-effective
software for our products, or any product malfunctions could
result in a decline in customer purchases and a reduction in our
revenue and profitability.
We do not develop or manufacture the medical imaging equipment
that we distribute, except for the software component of our
digital radiography machines. Our business in large part is
dependent upon distribution agreements with the manufacturers of
the equipment, the ability of those manufacturers to produce
desirable equipment and to keep pace with advances in
technology, our ability to develop cost-effective, functional,
and user-friendly software for the digital radiography machines,
and the overall rate of new development within the industry. If
the distribution agreements terminate or are not renewed, if the
manufacturers breach their covenants under these agreements, if
the equipment manufactured by these manufacturers or our
software becomes less competitive or if there is a general
decrease in the rate of new development within the industry,
demand for our products and services would decrease. In
addition, because the products represent a significant capital
investment for our customers, an adverse change in the economy
or the current tax law could also negatively impact the demand
for these products and services. Any reduction in demand could
lead to fewer customer orders, pricing pressures, reduced
revenues, reduced margins, reduced levels of profitability and
loss of market share.
Manufacturing flaws, component failures, design defects, or
inadequate disclosure of product-related information could
result in an unsafe condition or injury. These problems could
result in product liability claims and lawsuits alleging that
our products have resulted or could result in an unsafe
condition or injury. In addition, an adverse event involving one
of our products could result in reduced market acceptance and
demand for all of our products, and could harm our reputation
and our ability to market our products in the future. Any of the
foregoing problems could disrupt our business and have a
material adverse effect on our business, results of operations,
financial condition and cash flows.
Our
use of self-insurance, self-insured retention and
high-deductible insurance programs to cover certain claims for
losses suffered and costs or expenses incurred could negatively
impact our business upon the occurrence of an uninsured and/or
significant event.
We self-insure and use high retention or high deductible
insurance programs with regard to property risks, general,
professional and employment practice liabilities, health
benefits, including executive post-retirement health benefits,
and workers compensation when the lack of availability
and/or the
high cost of commercially available insurance products do not
render the transfer of this risk economically feasible. In the
event that the frequency of losses experienced by us increased
unexpectedly, the aggregate of such losses could materially
increase our liability and adversely affect our financial
condition, liquidity, cash flows and results of operations. In
addition, while the insurance market continues to limit the
availability of certain insurance products while increasing the
costs of such products, we will continue to evaluate the levels
of claims we include in our self-insured, self-insured retention
and/or
high-deductible insurance programs. Any increases to these
programs increase our risk of exposure and therefore increases
the risk of a possible material adverse effect on our financial
condition, liquidity, cash flows and results of operations. In
addition, we have made certain judgments as to the limits on our
existing insurance coverage that we believe are in line with
industry standards, as well as in light of economic and
availability considerations. Unforeseen catastrophic loss
scenarios could prove our limits to be inadequate, and losses
incurred in connection with the known claims we self-insure
could be substantial. Either of these circumstances could
materially adversely affect our financial and business condition.
15
We may
experience difficulties hiring skilled veterinarians due to
shortages that could disrupt our business.
As the pet population continues to grow, the need for skilled
veterinarians continues to increase. If we are unable to retain
an adequate number of skilled veterinarians, we may lose
customers, our revenue may decline and we may need to sell or
close animal hospitals. At December 31, 2007, there were 28
veterinary schools in the country accredited by the American
Veterinary Medical Association. These schools graduate
approximately 2,100 veterinarians per year. There is a shortage
of skilled veterinarians in some regional markets in which we
operate animal hospitals. During shortages in these regions, we
may be unable to hire enough qualified veterinarians to
adequately staff our animal hospitals, in which event we may
lose market share and our revenues and profitability may decline.
If we
fail to comply with governmental regulations applicable to our
business, various governmental agencies may impose fines,
institute litigation or preclude us from operating in certain
states.
The laws of many states prohibit business corporations from
providing, or holding themselves out as providers of,
veterinary-medical care. At December 31, 2007, we operated
143 animal hospitals in 14 states with these laws,
including 43 in Texas, 31 in Washington and 22 in New York. In
addition, our mobile imaging service also operates in states
with these laws. We may experience difficulty in expanding our
operations into other states with similar laws. Given varying
and uncertain interpretations of the veterinary laws of each
state, we may not be in compliance with restrictions on the
corporate practice of veterinary medicine in all states. A
determination that we are in violation of applicable
restrictions on the practice of veterinary medicine in any state
in which we operate could have a material adverse effect on us,
particularly if we are unable to restructure our operations to
comply with the requirements of that state.
All of the states in which we operate impose various
registration requirements. To fulfill these requirements, we
have registered each of our facilities with appropriate
governmental agencies and, where required, have appointed a
licensed veterinarian to act on behalf of each facility. All
veterinarians practicing in our clinics are required to maintain
valid state licenses to practice.
We may
have to write-off certain capitalized software development
costs.
If we are unable to realize the benefits of internally developed
software, we may be required to write-off a portion or all of
the associated capitalized costs, which may have an adverse
effect on our operating results in the period in which we incur
the write-off. We are currently in the process of internally
developing software that will be used in our animal hospitals.
Costs related directly to the software design, coding, testing
and installation are capitalized and will be amortized over the
expected life of the software when it is deployed.
The
loss of Mr. Robert Antin, our Chairman, President and Chief
Executive Officer, could materially and adversely affect our
business.
We are dependent upon the management and leadership of our
Chairman, President and Chief Executive Officer, Robert Antin.
We have an employment contract with Mr. Antin that may be
terminated at the option of Mr. Antin. We do not maintain
any key man life insurance coverage for Mr. Antin. The loss
of Mr. Antin could materially adversely affect our business.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our corporate headquarters and principal executive offices are
located in Los Angeles, California, in approximately
50,000 square feet of leased space. At February 27,
2008, we leased or owned facilities at 509 other locations that
house our animal hospitals, laboratories and medical technology
group. We own
16
92 facilities and the remainder are leased. We believe that
our real property facilities are adequate for our current needs.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are not subject to any legal proceedings other than
ordinarily routine litigation incidental to the conduct of our
business.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our security holders
during the fourth quarter of 2007.
17
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our common stock trades on the NASDAQ Global Select Market under
the symbol WOOF. The following table sets forth the
range of high and low sales prices per share for our common
stock as quoted on the NASDAQ Global Select Market for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007 by Quarter
|
|
|
|
|
|
|
|
|
Fourth
|
|
$
|
46.23
|
|
|
$
|
40.34
|
|
Third
|
|
$
|
42.90
|
|
|
$
|
36.22
|
|
Second
|
|
$
|
42.00
|
|
|
$
|
35.96
|
|
First
|
|
$
|
39.98
|
|
|
$
|
31.54
|
|
Fiscal 2006 by Quarter
|
|
|
|
|
|
|
|
|
Fourth
|
|
$
|
36.48
|
|
|
$
|
30.65
|
|
Third
|
|
$
|
36.57
|
|
|
$
|
30.30
|
|
Second
|
|
$
|
33.34
|
|
|
$
|
26.74
|
|
First
|
|
$
|
29.94
|
|
|
$
|
26.62
|
|
At February 27, 2008, there were 206 holders of record
of our common stock.
18
The following graph sets forth the percentage change in
cumulative total stockholder return of our common stock from
December 31, 2002 to December 31, 2007. These periods
are compared with the cumulative returns of the NASDAQ Stock
Market (U.S. Companies) Index and the Russell 2000 Index.
The comparison assumes $100 was invested on December 31,
2002 in our common stock and in each of the foregoing indices.
The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
VCA Antech, Inc., The NASDAQ Composite Index
and The Russell 2000 Index
|
|
|
*
|
|
$100 invested on 12/31/02 in stock
or index-including reinvestment of dividends. Fiscal year ending
December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
VCA Antech, Inc.
|
|
|
100.00
|
|
|
|
206.53
|
|
|
|
260.53
|
|
|
|
376.00
|
|
|
|
429.20
|
|
|
|
589.73
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
149.75
|
|
|
|
164.64
|
|
|
|
168.60
|
|
|
|
187.83
|
|
|
|
205.22
|
|
Russell 2000
|
|
|
100.00
|
|
|
|
147.25
|
|
|
|
174.24
|
|
|
|
182.18
|
|
|
|
215.64
|
|
|
|
212.26
|
|
Dividends
We have not paid cash dividends on our common stock, and we do
not anticipate paying cash dividends in the foreseeable future.
In addition, our senior credit facility places limitations on
our ability to pay cash dividends in respect of our common
stock. Any future determination as to the payment of dividends
on our common stock will be restricted by these limitations,
will be at the discretion of our Board of Directors and will
depend on our results of operations, financial condition,
capital requirements and other factors deemed relevant by the
Board of Directors, including the General Corporation Law of the
State of Delaware, which provides that dividends are only
payable out of surplus or current net profits.
Transactions
in Our Equity Securities
For the period covered by this report, we have not engaged in
any transactions involving the sale of our unregistered equity
securities that were not disclosed in a quarterly report on
Form 10-Q
or a current report on
Form 8-K,
and neither we, nor our affiliated purchasers have purchased any
of our equity securities. We have not engaged in any sales of
registered securities for which the use of proceeds is required
to be disclosed.
19
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table provides our selected consolidated financial
data as of and for each of the years in the five- year period
ended December 31, 2007. The statements of operations and
cash flows data and the other data for each of the three years
ended December 31, 2007, and the balance sheet data as of
December 31, 2007 and 2006 has been derived from our
audited financial statements included elsewhere in this
Form 10-K.
The other periods presented were derived from our audited
financial statements that are not included in this
Form 10-K.
The selected financial data presented below is not necessarily
indicative of results of future operations and should be read in
conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section and our consolidated financial statements and
related notes included elsewhere in this
10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory revenue
|
|
$
|
295,695
|
|
|
$
|
258,345
|
|
|
$
|
222,064
|
|
|
$
|
200,441
|
|
|
$
|
178,812
|
|
Animal hospital revenue
|
|
|
844,344
|
|
|
|
711,997
|
|
|
|
607,565
|
|
|
|
481,023
|
|
|
|
376,040
|
|
Medical technology revenue(1)
|
|
|
46,823
|
|
|
|
39,305
|
|
|
|
30,330
|
|
|
|
6,090
|
|
|
|
|
|
Intercompany
|
|
|
(30,717
|
)
|
|
|
(26,334
|
)
|
|
|
(20,293
|
)
|
|
|
(13,465
|
)
|
|
|
(10,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,156,145
|
|
|
|
983,313
|
|
|
|
839,666
|
|
|
|
674,089
|
|
|
|
544,665
|
|
Direct costs
|
|
|
834,724
|
|
|
|
712,749
|
|
|
|
613,799
|
|
|
|
490,558
|
|
|
|
394,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit(3)
|
|
|
321,421
|
|
|
|
270,564
|
|
|
|
225,867
|
|
|
|
183,531
|
|
|
|
149,812
|
|
Selling, general and administrative expense
|
|
|
86,877
|
|
|
|
78,020
|
|
|
|
66,185
|
|
|
|
48,257
|
|
|
|
38,702
|
|
Write-down and loss on sale of assets
|
|
|
1,323
|
|
|
|
17
|
|
|
|
441
|
|
|
|
59
|
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income(4)
|
|
|
233,221
|
|
|
|
192,527
|
|
|
|
159,241
|
|
|
|
135,215
|
|
|
|
110,520
|
|
Interest expense, net
|
|
|
29,503
|
|
|
|
24,240
|
|
|
|
25,043
|
|
|
|
25,492
|
|
|
|
26,087
|
|
Debt retirement costs
|
|
|
|
|
|
|
|
|
|
|
19,282
|
|
|
|
880
|
|
|
|
9,118
|
|
Other expense (income)
|
|
|
315
|
|
|
|
8
|
|
|
|
(122
|
)
|
|
|
(338
|
)
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
203,403
|
|
|
|
168,279
|
|
|
|
115,038
|
|
|
|
109,181
|
|
|
|
75,433
|
|
Minority interest in income of subsidiaries
|
|
|
3,755
|
|
|
|
3,100
|
|
|
|
3,109
|
|
|
|
2,558
|
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
199,648
|
|
|
|
165,179
|
|
|
|
111,929
|
|
|
|
106,623
|
|
|
|
73,800
|
|
Provision for income taxes(2)
|
|
|
78,636
|
|
|
|
59,650
|
|
|
|
44,113
|
|
|
|
43,051
|
|
|
|
30,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
|
$
|
63,572
|
|
|
$
|
43,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.44
|
|
|
$
|
1.27
|
|
|
$
|
0.82
|
|
|
$
|
0.78
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.41
|
|
|
$
|
1.24
|
|
|
$
|
0.81
|
|
|
$
|
0.76
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
|
|
83,893
|
|
|
|
83,198
|
|
|
|
82,439
|
|
|
|
81,794
|
|
|
|
80,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for diluted earnings per
share
|
|
|
85,716
|
|
|
|
84,882
|
|
|
|
83,996
|
|
|
|
83,361
|
|
|
|
81,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross margin(3)
|
|
|
27.8
|
%
|
|
|
27.5
|
%
|
|
|
26.9
|
%
|
|
|
27.2
|
%
|
|
|
27.5
|
%
|
Laboratory gross margin(3)
|
|
|
48.4
|
%
|
|
|
46.2
|
%
|
|
|
44.5
|
%
|
|
|
43.8
|
%
|
|
|
42.4
|
%
|
Animal hospital gross margin(3)
|
|
|
19.3
|
%
|
|
|
19.4
|
%
|
|
|
19.5
|
%
|
|
|
19.4
|
%
|
|
|
19.7
|
%
|
Medical technology gross margin(1)(3)
|
|
|
33.9
|
%
|
|
|
36.2
|
%
|
|
|
31.1
|
%
|
|
|
36.2
|
%
|
|
|
|
|
Consolidated operating margin(4)
|
|
|
20.2
|
%
|
|
|
19.6
|
%
|
|
|
19.0
|
%
|
|
|
20.1
|
%
|
|
|
20.3
|
%
|
Laboratory operating margin(4)
|
|
|
41.7
|
%
|
|
|
39.5
|
%
|
|
|
38.2
|
%
|
|
|
37.5
|
%
|
|
|
35.9
|
%
|
Animal hospital operating margin(4)
|
|
|
16.6
|
%
|
|
|
16.6
|
%
|
|
|
16.7
|
%
|
|
|
16.8
|
%
|
|
|
16.9
|
%
|
Medical technology operating margin(1)(4)
|
|
|
9.1
|
%
|
|
|
8.8
|
%
|
|
|
1.3
|
%
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
170,376
|
|
|
$
|
126,890
|
|
|
$
|
115,100
|
|
|
$
|
86,359
|
|
|
$
|
76,107
|
|
Net cash used in investing activities
|
|
$
|
(271,305
|
)
|
|
$
|
(87,732
|
)
|
|
$
|
(115,431
|
)
|
|
$
|
(149,869
|
)
|
|
$
|
(47,162
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
166,691
|
|
|
$
|
(52,542
|
)
|
|
$
|
27,855
|
|
|
$
|
77,237
|
|
|
$
|
(18,170
|
)
|
Capital expenditures
|
|
$
|
48,714
|
|
|
$
|
35,316
|
|
|
$
|
29,209
|
|
|
$
|
23,954
|
|
|
$
|
15,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
110,866
|
|
|
$
|
45,104
|
|
|
$
|
58,488
|
|
|
$
|
30,964
|
|
|
$
|
17,237
|
|
Goodwill
|
|
$
|
821,967
|
|
|
$
|
625,748
|
|
|
$
|
586,444
|
|
|
$
|
499,144
|
|
|
$
|
373,238
|
|
Total assets
|
|
$
|
1,286,711
|
|
|
$
|
971,957
|
|
|
$
|
898,405
|
|
|
$
|
742,100
|
|
|
$
|
554,803
|
|
Long-term debt
|
|
$
|
560,180
|
|
|
$
|
390,715
|
|
|
$
|
452,712
|
|
|
$
|
396,889
|
|
|
$
|
317,469
|
|
Total stockholders equity
|
|
$
|
568,384
|
|
|
$
|
430,305
|
|
|
$
|
308,751
|
|
|
$
|
232,759
|
|
|
$
|
161,923
|
|
|
|
|
(1) |
|
On October 1, 2004, we acquired Sound Technologies Inc.
(STI), a supplier of digital radiography and
ultrasound imaging equipment to the veterinary industry. |
|
(2) |
|
The 2006 provision for income taxes includes a $6.8 million
tax benefit recognized in the first quarter due to the outcome
of an income tax audit that resulted in a reduction in our
estimated tax liabilities. |
|
(3) |
|
In 2007, our gross profit was favorably impacted by a
$3.2 million decrease in our estimated workers
compensation insurance liability for policy periods prior to
2007. This benefit impacted our consolidated gross margin,
laboratory gross margin, animal hospital gross margin and
medical technology gross margin by 0.3%, 0.2%, 0.3% and 0.1%,
respectively. |
|
(4) |
|
In 2007, our operating income was favorably impacted by
$3.5 million for a decrease in our estimated workers
compensation insurance liability for policy periods prior to
2007. This benefit impacted our consolidated operating margin,
laboratory operating margin, animal hospital operating margin
and medical technology operating margin by 0.3%, 0.2%, 0.3% and
0.1%, respectively. |
21
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with
our consolidated financial statements provided under
Part II, Item 8 of this annual report on
Form 10-K.
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, seek,
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 annual report and particularly in
Risk Factors Part I, Item 1A of this
annual report on
Form 10-K.
The forward-looking information set forth in this annual
report on
Form 10-K
is as of February 27, 2008, and we undertake no duty to
update this information. Shareholders and prospective investors
can find information filed with the SEC after February 27,
2008, at our website at
http://investor.vcaantech.com or at the SECs
website at www.sec.gov.
Overview
We are a leading national animal healthcare company. We provide
veterinary services and diagnostic testing services to support
veterinary care and we sell diagnostic imaging equipment and
other medical technology products and related services to
veterinarians. Our reportable segments are as follows:
|
|
|
|
|
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 December 31, 2007,
our laboratory network consisted of 36 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 and retail products and perform a
variety of pet wellness programs, including health examinations,
diagnostic testing, routine vaccinations, spaying, neutering and
dental care. At December 31, 2007, our animal hospital
network consisted of 438 animal hospitals in 38 states.
|
|
|
|
Our medical technology segment sells digital radiography and
ultrasound imaging equipment, related computer hardware,
software and ancillary services.
|
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, heartworm and ticks, and the number of
daylight hours.
Executive
Overview
The last several years have been marked by continued growth in
our operating segments achieved through a combination of organic
growth and acquisitions. Our laboratory internal revenue growth,
adjusted for differences in billing days, was 13.5% and 15.2% in
2007 and 2006, respectively. Our animal hospital same-store
revenue growth, adjusted for differences in business days, was
5.2% and 5.8% in 2007 and 2006,
22
respectively. Our medical technology segment also experienced
growth through the sale of its digital radiography imaging
equipment.
Our acquisition of independent animal hospitals for the last
three years was augmented by the acquisition of two animal
hospital chains including: Healthy Pet Corp. (Healthy
Pet) in 2007 and Pets Choice, Inc. (Pets
Choice) in 2005, both of which are discussed in greater
detail below.
Acquisitions
and Facilities
Our annual growth strategy includes the acquisition of
independent animal hospitals. In 2007, we acquired 29
independent animal hospitals with annual revenue of
$57.0 million. In addition, we also evaluate the
acquisition of animal hospital chains, laboratories or related
businesses if favorable opportunities are presented. The
following table summarizes the changes in the number of
facilities operated by our laboratory and animal hospital
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Laboratories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
33
|
|
|
|
31
|
|
|
|
27
|
|
Acquisitions
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
Acquisitions relocated into our existing laboratories
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
New facilities
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
36
|
|
|
|
33
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospitals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
379
|
|
|
|
367
|
|
|
|
315
|
|
Acquisitions, excluding Healthy Pet and Pets Choice(1)(2)
|
|
|
29
|
|
|
|
22
|
|
|
|
22
|
|
Healthy Pet(1)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Pets Choice(2)
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Acquisitions relocated into our existing animal hospitals
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Sold or closed
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
438
|
|
|
|
379
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Healthy Pet was acquired on June 1, 2007. |
|
(2) |
|
Pets Choice was acquired on July 1, 2005. |
Acquisition
of Healthy Pet
On June 1, 2007, we acquired Healthy Pet, which operated at
the time of its acquisition, 44 animal hospitals and a small
laboratory, which primarily serviced its own animal hospitals.
At the time of the acquisition, Healthy Pet had estimated
annualized revenue of approximately $80.0 million. This
acquisition allowed us to expand our animal hospital operations,
particularly in Massachusetts, Connecticut, Virginia and
Georgia. Our consolidated financial statements reflect the
operating results of Healthy Pet since June 1, 2007.
The total purchase price for this acquisition was
$185.0 million, consisting of: $153.7 million in cash
paid to holders of Healthy Pets stock and debt;
$17.7 million in assumed debt; $12.3 million in
assumed liabilities; and $1.3 million paid for professional
and other outside services.
In addition, we incurred integration costs of $1.6 million
in 2007, primarily to operate Healthy Pets corporate
office, which was closed in November 2007. These costs were
expensed as incurred and are included in corporate selling,
general and administrative expense.
23
Acquisition
of Pets Choice
On July 1, 2005, we acquired Pets Choice, which
operated 46 animal hospitals as of the acquisition date. This
acquisition allowed us to expand our animal hospital operations,
particularly in Texas and Washington. At the time of the
acquisition, Pets Choice had estimated annualized revenue
of approximately $70.0 million. Our consolidated financial
statements include the operating results of Pets Choice
since July 1, 2005.
The total purchase price for this acquisition was
$78.8 million, consisting of: $51.1 million in cash
paid to holders of Pets Choice stock and debt;
$14.1 million in assumed debt; $12.8 million in
assumed liabilities; and $833,000 paid for professional and
other outside services.
In addition, we incurred integration costs of $1.2 million
in 2005 primarily to operate Pets Choices corporate
office, which was closed in October 2005. These costs were
expensed as incurred and are included in corporate selling,
general and administrative expense.
Critical
Accounting Policies
We believe that the application of the following accounting
policies, which are important to our financial position and
results of operations, require significant judgments and
estimates on the part of management. For a summary of all our
accounting policies, including the accounting policies discussed
below, see Note 2., Summary of Significant Accounting
Policies, in our consolidated financial statements of this
annual report on
Form 10-K.
Revenue
Laboratory
and Animal Hospital Revenue
We recognize revenue when persuasive evidence of a sales
arrangement exists, delivery of goods has occurred or services
have been rendered, the sales price or fee is fixed or
determinable and collectibility is reasonably assured.
Medical
Technology Revenue
Our medical technology segment generates a majority of its
revenue from the sale of digital radiography and ultrasound
imaging equipment. We also generate revenue from:
(i) licensing software; (ii) providing technical
support and product updates related to our software, otherwise
known as maintenance; (iii) providing professional services
related to our equipment and software, including installations,
on-site
training, education services and extended warranty programs; and
(iv) providing mobile imaging services. We frequently sell
equipment and license our software in multiple element
arrangements in which the customer may choose a combination of
our products and services.
The accounting for the sale of equipment is substantially
governed by the requirements of Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition
(SAB No. 104), and the sale of
software licenses and related items is governed by Statement of
Position (SOP)
No. 97-2,
Software Revenue Recognition
(SOP No. 97-2),
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 delivered or accepted by the customer if
installation is required. 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.
|
24
|
|
|
|
|
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.
|
Under the residual method prescribed by
SOP No. 98-9,
Modification of
SOP No. 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions
(SOP No. 98-9),
in multiple element arrangements involving software that is more
than incidental to the products and services as a whole, revenue
may be recognized when vendor-specific objective evidence
(VSOE) 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). VSOE of
fair value is based on the price for those products and services
when sold separately by us or the contractual renewal rates for
the post-contract customer support services that we provide.
Under the residual method, the fair value of the undelivered
elements is deferred and recognized as revenue upon delivery,
provided that other revenue recognition criteria are met.
If VSOE of fair value of one or more undelivered elements does
not exist, the revenue for the entire transaction, including
revenue related to the delivered elements, is deferred and
recognized, based on the facts and circumstances, either:
i) on a straight-line basis over the life of the
post-contract service period if this is the only undelivered
element, or ii) when the last undelivered element is
delivered. Each transaction requires careful analysis to
determine whether all of the individual elements in the license
transaction have been identified, along with the fair value of
each element and that the transaction is accounted for correctly.
Digital
Radiography Imaging Equipment
We sell our digital radiography imaging equipment with multiple
elements, including hardware, software, licenses
and/or
services. We have determined that the software included in these
sales arrangements is more than incidental to the products and
services as a whole. As a result, we account for digital
radiography imaging equipment sales under
SOP No. 97-2,
as amended.
For those sales arrangements where we have determined VSOE of
fair value for all undelivered elements, we allocate revenue to
the undelivered items based on the VSOE of value independent of
any discounts given. We then recognize the revenue for
undelivered elements when elements are delivered. We recognize
the remaining or residual revenue for the delivered elements at
the time of delivery or installation and customer acceptance.
Generally, at the time of delivery and installation of equipment
the only undelivered item is the post-contract customer support
(PCS). This obligation is contractually defined in
both terms of scope and period. When we have established VSOE of
fair value for the PCS, we recognize the revenue for these
services on a straight-line basis over the period of support and
recognize revenue for the delivered elements under the residual
method. When we have not established VSOE of fair value for the
PCS, we defer all revenue, including revenue for the delivered
elements, recognizing it on a straight-line basis over the
period of support.
In the third quarter of 2005, we established VSOE of fair value
for the undelivered elements for a majority of our sales
arrangements by including renewal rates in the sales contracts
for PCS. As a result, for transactions with defined renewal
rates for PCS, we began recognizing revenue on the sale of our
digital radiography imaging equipment, computer hardware and
software at the time of delivery or installation and customer
acceptance if required per the sale arrangement, and revenue
from the PCS 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 sales arrangements
ratably over the period of the PCS.
25
Ultrasound
Imaging Equipment
We sell our ultrasound imaging equipment on a stand-alone basis
and with multiple elements, including hardware, software,
licenses
and/or
services. 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 separating the
transaction into individual 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 we 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 And Ultrasound Imaging Equipment Sold
Together
In certain transactions we sell our ultrasound imaging equipment
and related services together with our digital radiography
imaging equipment and related services. In these transactions,
we allocate total invoice dollars to each element using a
relative fair value basis. Each element is then accounted for
pursuant to either SAB No. 104 or
SOP No. 97-2.
Other
Services
We recognize revenue on mobile imaging, consulting and education
services at the time the services have been rendered. We also
generate revenue from extended service agreements related to our
digital radiography imaging and ultrasound imaging equipment.
These extended service agreements include technical support,
product updates for software and extended warranty coverage. The
revenue for these extended service agreements is recognized on a
straight-line basis over the term of the agreement.
Valuation
of Goodwill and Other Intangible Assets
Goodwill
We allocate a significant portion of the purchase price for our
acquired businesses to 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 December 31,
2007 was $822.0 million, consisting of $95.3 million
for our laboratory segment, $707.5 million for our animal
hospital segment and $19.2 million for our medical
technology segment.
We test our goodwill for impairment annually, or sooner if
circumstances indicate an impairment may exist, in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). When
SFAS No. 142 was issued in 2001, we adopted the end of
December as our annual impairment testing date. During the
current year, we elected to change our date to the end of
October. An October 31st testing date allowed us
additional time to accurately complete our impairment testing
process in order to incorporate the results in our annual
financial statements and timely file those statements with the
Securities Exchange Commission in accordance with our
accelerated filing requirements. There were no impairment
charges resulting from either the October 31, 2007 or
December 31, 2006 impairment tests. In addition, no events
have occurred subsequent to the 2007 testing date which would
indicate any impairment may have occurred.
The recognition and measurement of a goodwill impairment loss
involves a two-step process:
First we identify potential impairment by comparing the
estimated fair value of our reporting units with the carrying
value of our reporting units per our accounting books, with
carrying value defined as the reporting units net assets,
including goodwill, less liabilities. If the estimated fair
value of our reporting units is greater than our carrying value,
there is no impairment and the second step is not needed.
We use independent valuation experts to advise and assist us in
determining the estimated fair value of our reporting units. Our
estimated fair values are based on generally accepted valuation
techniques consisting
26
primarily of market comparables and discounted cash flow
techniques. These valuation methods involve the use of
significant assumptions and estimates.
If we identify a potential impairment in the first step, we are
then required to measure the amount of impairment. The amount of
the impairment is determined by allocating the estimated fair
value of the reporting unit as determined in step one to the
reporting units net assets based on fair value as would be
done in an acquisition. In this hypothetical acquisition, the
residual estimated fair value after allocation to the reporting
units identifiable net assets is the estimated fair value
of goodwill. If the estimated fair value of goodwill is less
than the carrying amount of goodwill, goodwill is considered
impaired and written down to the estimated fair value with a
corresponding charge to earnings. However, if the estimated fair
value of goodwill is greater than the carrying amount of
goodwill, goodwill is not considered impaired and is not
adjusted to the estimated fair value.
Determining the fair value of the net assets of our reporting
units under this step would require significant estimates.
In 2007, 2006 and 2005, we determined at the end of our annual
review that the estimated fair value of each of our reporting
units exceeded their respective net book value, resulting in a
conclusion that none of our goodwill for our reporting units was
impaired. However, changes in our estimates, such as forecasted
cash flows, would have affected the estimated fair value of our
reporting units and could have resulted in a goodwill impairment
charge particularly for our medical technology reporting unit as
the fair value of our laboratory and animal hospital reporting
units significantly exceeded their respective book value.
Other
Intangible Assets
In addition to goodwill, we acquire other identifiable
intangible assets in our acquisitions, including but not limited
to covenants-not-to-compete, client lists, lease related assets
and customer relationships. We value these identifiable
intangible assets at estimated fair value. We use independent
valuation experts to advise and assist us in determining what
identifiable intangible assets we have acquired in an
acquisition as well as how to estimate the fair value of those
assets. Our estimated fair values are based on generally
accepted valuation techniques such as market comparables,
discounted cash flow techniques or costs to replace. These
valuation methods involve the use of significant assumptions
such as the timing and amount of future cash flows, risks,
appropriate discount rates, and the useful lives of intangible
assets.
Subsequent to acquisition, we test our identifiable intangible
assets for impairment as part of a broader test for impairment
of long-lived assets under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets
(SFAS No. 144), whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. The recognition and measurement of an
impairment loss under SFAS No. 144 also involves a
two-step process:
First we identify potential impairment by estimating the
aggregate projected undiscounted future cash flows associated
with an asset or asset pool and compare that amount with the
carrying value of those assets. If the aggregate projected cash
flow is greater than our carrying amount, there is no impairment
and the second step is not needed.
When we test for impairment, the cash flows that are used
contain our best estimates, which include appropriate and
customary assumptions.
If we identify a potential impairment in the first step, we are
then required to write the assets down to fair value with a
corresponding charge to earnings. If the fair value is greater
than carrying value, there is no adjustment. We may be required
to make significant estimates in determining the fair value of
some of our assets.
Income
Taxes
We account for income taxes under SFAS No. 109,
Accounting for Income Taxes
(SFAS No. 109). In accordance with
SFAS No. 109, we record deferred tax liabilities and
deferred tax assets, which represent taxes to be settled or
recovered in the future. We adjust our deferred tax assets and
deferred tax liabilities to
27
reflect changes in tax rates or other 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. We believe that our earnings
during the periods when the temporary differences become
deductible will be sufficient to realize the related future tax
benefits. Should we determine that we would not be able to
realize all or a portion of our deferred tax assets, an
adjustment would be made to the carrying amount through a
valuation allowance.
Also, our net deductible temporary differences and tax
carryforwards are recorded using the enacted tax rates expected
to apply to taxable income in the periods in which the deferred
tax liability or asset is expected to be settled or realized. At
December 31, 2007, we have a net deferred tax liability of
$13.8 million. Should the expected applicable tax rates
change in the future, an adjustment to the net deferred tax
liability would be credited or charged, as appropriate, to
income in the period such determination was made. For example,
an increase of 1.0% in our anticipated income tax rate would
cause us to increase our net deferred tax liability balance by
$336,000 with a corresponding charge to earnings.
We also assess differences between our tax bases, which are more
likely than not to be realized, 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 consolidated balance sheet related to
such differences. During the first quarter of 2006, we
determined that these contingencies no longer existed due to the
outcome of an income tax audit and recognized a tax benefit of
$6.8 million.
Effective January 1, 2007, we adopted the provisions of
Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
prescribes recognition thresholds and measurement attributes for
the financial statement recognition of income tax positions. We
did not have any unrecognized tax benefits on either the
effective date of the pronouncement or December 31, 2007.
Self-Insured
Liabilities
We self-insure and use high retention or high deductible
insurance programs for certain losses related to workers
compensation and employee health claims. Our self insured
liabilities contain uncertainties because we are required to
make assumptions and to apply judgment to estimate the ultimate
cost to settle reported claims and claims incurred but not
reported as of the balance sheet date. We have not made any
material changes in the accounting methodology used to establish
our self-insured liabilities during the past three years.
Workers
Compensation Insurance
A majority of our workers compensation insurance policies
are self-insured retention annual policies that begin on
October 1. The policies cover specific annual periods and
are normally open for no longer than seven years after the
period allowing claims for incidents occurring during the
covered period to be submitted after the end of the policy year.
Under our workers compensation insurance policies, we are
responsible for the first $250,000 in claim liability per
individual occurrence and we are also subject to an aggregate
limit. We use both an internal review process and an independent
third-party actuarial review to estimate claim liability based
on actual and expected claims incurred and the estimated
ultimate cost to settle the claims. Periodically, we review our
assumptions and the valuations provided by independent
third-party actuaries to determine the adequacy of our
self-insured liabilities. During the fourth quarter of 2007,
based upon information received from our actuaries, combined
with our own internal review, we revised our estimate of our
claims liability resulting in a $2.2 million favorable
impact to our net earnings for the period.
28
Health
Insurance
With the exception of California employees enrolled in HMO
plans, we are effectively self-insuring our employee health care
benefit by retaining claims liability risk up to $150,000 per
incident and an aggregate claim limit based on the number of
employees enrolled in the plan per month. We estimate our
liability for the uninsured portion of employee health care
obligations that have been incurred but not reported based on
our claims experience, the number of employees enrolled in the
program and the average time from when a claim is incurred to
the time it is paid. In addition, we retain an independent
third-party actuary to provide an analysis of potential
liability for open claims.
Consolidated
Results of Operations
The following table sets forth components of our income
statements expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory
|
|
|
25.6
|
%
|
|
|
26.3
|
%
|
|
|
26.4
|
%
|
Animal hospital
|
|
|
73.0
|
|
|
|
72.4
|
|
|
|
72.4
|
|
Medical technology
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
3.6
|
|
Intercompany
|
|
|
(2.6
|
)
|
|
|
(2.7
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Direct costs
|
|
|
72.2
|
|
|
|
72.5
|
|
|
|
73.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27.8
|
|
|
|
27.5
|
|
|
|
26.9
|
|
Selling, general and administrative expense
|
|
|
7.5
|
|
|
|
7.9
|
|
|
|
7.9
|
|
Write-down and loss on sale of assets
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20.2
|
|
|
|
19.6
|
|
|
|
19.0
|
|
Interest expense, net
|
|
|
2.6
|
|
|
|
2.5
|
|
|
|
3.0
|
|
Debt retirement costs
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
Minority interest in income of subsidiaries
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
17.3
|
|
|
|
16.8
|
|
|
|
13.3
|
|
Provision for income taxes
|
|
|
6.8
|
|
|
|
6.1
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10.5
|
%
|
|
|
10.7
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
The following table summarizes our revenue (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Total
|
|
|
$
|
|
|
Total
|
|
|
$
|
|
|
Total
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory
|
|
$
|
295,695
|
|
|
|
25.6
|
%
|
|
$
|
258,345
|
|
|
|
26.3
|
%
|
|
$
|
222,064
|
|
|
|
26.4
|
%
|
|
|
14.5
|
%
|
|
|
16.3
|
%
|
Animal hospital
|
|
|
844,344
|
|
|
|
73.0
|
%
|
|
|
711,997
|
|
|
|
72.4
|
%
|
|
|
607,565
|
|
|
|
72.4
|
%
|
|
|
18.6
|
%
|
|
|
17.2
|
%
|
Medical technology
|
|
|
46,823
|
|
|
|
4.0
|
%
|
|
|
39,305
|
|
|
|
4.0
|
%
|
|
|
30,330
|
|
|
|
3.6
|
%
|
|
|
19.1
|
%
|
|
|
29.6
|
%
|
Intercompany
|
|
|
(30,717
|
)
|
|
|
(2.6
|
)%
|
|
|
(26,334
|
)
|
|
|
(2.7
|
)%
|
|
|
(20,293
|
)
|
|
|
(2.4
|
)%
|
|
|
16.6
|
%
|
|
|
29.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
1,156,145
|
|
|
|
100.0
|
%
|
|
$
|
983,313
|
|
|
|
100.0
|
%
|
|
$
|
839,666
|
|
|
|
100.0
|
%
|
|
|
17.6
|
%
|
|
|
17.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Consolidated revenue increased $172.8 million in 2007 as
compared to 2006, and $143.6 million in 2006 as compared to
2005. The increases in revenue were attributable to the
combination of revenue from acquired animal hospitals, including
Healthy Pet acquired on June 1, 2007 and Pets Choice
acquired on July 1, 2005, and organic growth. Our
laboratory internal revenue growth, adjusted for differences in
billing days, was 13.5% and 15.2%, in 2007 and 2006,
respectively. Our animal hospital same-store revenue growth,
adjusted for differences in business days, was 5.2% and 5.8% in
2007 and 2006, respectively.
Historically, the animal healthcare industry and our business
have been relatively resistant to changes in the general
economy. Our fourth quarter results appear to indicate that we
were marginally impacted by the uncertainty in the economy.
During this quarter, our laboratory internal revenue growth,
adjusted for differences in billing days, was 9.1% and our
animal hospital same-store revenue growth, adjusted for
differences in business days, was 2.5%.
Gross
Profit
The following table summarizes our gross profit and our gross
profit as a percentage of applicable revenue, or gross margin
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory
|
|
$
|
143,072
|
|
|
|
48.4
|
%
|
|
$
|
119,449
|
|
|
|
46.2
|
%
|
|
$
|
98,926
|
|
|
|
44.5
|
%
|
|
|
19.8
|
%
|
|
|
20.7
|
%
|
Animal hospital
|
|
|
163,053
|
|
|
|
19.3
|
%
|
|
|
138,358
|
|
|
|
19.4
|
%
|
|
|
118,239
|
|
|
|
19.5
|
%
|
|
|
17.8
|
%
|
|
|
17.0
|
%
|
Medical technology
|
|
|
15,879
|
|
|
|
33.9
|
%
|
|
|
14,213
|
|
|
|
36.2
|
%
|
|
|
9,433
|
|
|
|
31.1
|
%
|
|
|
11.7
|
%
|
|
|
50.7
|
%
|
Intercompany
|
|
|
(583
|
)
|
|
|
(1.9
|
)%
|
|
|
(1,456
|
)
|
|
|
(5.5
|
)%
|
|
|
(731
|
)
|
|
|
(3.6
|
)%
|
|
|
(60.0
|
)%
|
|
|
99.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
321,421
|
|
|
|
27.8
|
%
|
|
$
|
270,564
|
|
|
|
27.5
|
%
|
|
$
|
225,867
|
|
|
|
26.9
|
%
|
|
|
18.8
|
%
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated gross profit increased $50.9 million in 2007
as compared to 2006, and $44.7 million in 2006 as compared
to 2005. The increases in both periods were primarily due to the
increase in consolidated revenue discussed above and
improvements in consolidated gross margins as compared to the
previous year. The improvement in our consolidated gross margin
in 2007 as compared to 2006 was primarily attributable to an
increase in our laboratory gross margin, partially offset by a
decrease in our animal hospital and medical technology gross
margins. Consolidated gross margins in 2007 also benefited from
a decrease in workers compensation insurance expense of
$3.2 million, or 0.3% of revenue, due to a reduction in our
estimated workers compensation insurance liability for
policy periods prior to 2007. An increase in animal hospital
revenue, which had a lower gross margin than our other operating
segments, as a percentage of our total consolidated revenue had
a partially offsetting impact to our consolidated gross margin.
The improvement in our consolidated gross margin in 2006 as
compared to 2005 was primarily attributable to an increase in
our laboratory and medical technology gross margins, partially
offset by a decrease in our animal hospital gross margin.
30
Selling,
General and Administrative Expense
The following table summarizes our selling, general and
administrative expense (SG&A) and our expense
as a percentage of applicable revenue (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory
|
|
$
|
19,648
|
|
|
|
6.6
|
%
|
|
$
|
17,460
|
|
|
|
6.8
|
%
|
|
$
|
13,993
|
|
|
|
6.3
|
%
|
|
|
12.5
|
%
|
|
|
24.8
|
%
|
Animal hospital
|
|
|
21,562
|
|
|
|
2.6
|
%
|
|
|
20,232
|
|
|
|
2.8
|
%
|
|
|
16,224
|
|
|
|
2.7
|
%
|
|
|
6.6
|
%
|
|
|
24.7
|
%
|
Medical technology
|
|
|
11,528
|
|
|
|
24.6
|
%
|
|
|
10,762
|
|
|
|
27.4
|
%
|
|
|
9,033
|
|
|
|
29.8
|
%
|
|
|
7.1
|
%
|
|
|
19.1
|
%
|
Corporate
|
|
|
34,139
|
|
|
|
3.0
|
%
|
|
|
29,566
|
|
|
|
3.0
|
%
|
|
|
26,935
|
|
|
|
3.2
|
%
|
|
|
15.5
|
%
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
86,877
|
|
|
|
7.5
|
%
|
|
$
|
78,020
|
|
|
|
7.9
|
%
|
|
$
|
66,185
|
|
|
|
7.9
|
%
|
|
|
11.4
|
%
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated selling, general and administrative expense
increased $8.9 million in 2007 as compared to 2006
primarily due to growth in the size of our company as a result
of acquisitions. Our selling, general and administrative expense
as a percentage of revenue declined due to the aforementioned
increase in revenue combined with leverage. In addition to
normal increases in selling, general and administrative expense
to support the growth of our company, we incurred
$1.6 million, or 0.1% of consolidated revenue in 2007, for
integration costs in connection with operating Healthy
Pets corporate office, which was closed in November 2007.
These integration costs are included in corporate selling,
general and administrative expense.
Consolidated selling, general and administrative expense
increased $11.8 million in 2006 as compared to 2005
primarily due to an increase in the size of our company. In
addition to normal increases in selling, general and
administrative expense to support the growth of our company, we
recognized $2.4 million, or 0.2% of consolidated revenue in
2006, for share-based compensation as a result of adopting
SFAS No. 123 (revised 2004), Share-Based Payment,
on January 1, 2006. In addition, in 2005, we recognized
$1.2 million, or 0.1% of consolidated revenue, for
integration costs primarily to operate Pets Choices
corporate office, which was closed in October 2005. These
integration costs are included in Corporate selling, general and
administrative expense.
Write-down
and Loss on Sale of Assets
In 2007, 2006 and 2005, we sold assets, including real estate,
and wrote down certain assets, for net losses of
$1.3 million, $17,000 and $441,000, respectively.
Operating
Income
The following table summarizes our operating income (in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
2007
|
|
|
2006
|
|
|
Laboratory
|
|
$
|
123,344
|
|
|
|
41.7
|
%
|
|
$
|
101,981
|
|
|
|
39.5
|
%
|
|
$
|
84,928
|
|
|
|
38.2
|
%
|
|
|
20.9
|
%
|
|
|
20.1
|
%
|
Animal hospital
|
|
|
140,344
|
|
|
|
16.6
|
%
|
|
|
118,138
|
|
|
|
16.6
|
%
|
|
|
101,581
|
|
|
|
16.7
|
%
|
|
|
18.8
|
%
|
|
|
16.3
|
%
|
Medical technology
|
|
|
4,256
|
|
|
|
9.1
|
%
|
|
|
3,451
|
|
|
|
8.8
|
%
|
|
|
400
|
|
|
|
1.3
|
%
|
|
|
23.3
|
%
|
|
|
762.8
|
%
|
Corporate
|
|
|
(34,140
|
)
|
|
|
(3.0
|
)%
|
|
|
(29,587
|
)
|
|
|
(3.0
|
)%
|
|
|
(26,937
|
)
|
|
|
(3.2
|
)%
|
|
|
15.4
|
%
|
|
|
9.8
|
%
|
Eliminations
|
|
|
(583
|
)
|
|
|
(1.9
|
)%
|
|
|
(1,456
|
)
|
|
|
(5.5
|
)%
|
|
|
(731
|
)
|
|
|
(3.6
|
)%
|
|
|
(60.0
|
)%
|
|
|
99.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
233,221
|
|
|
|
20.2
|
%
|
|
$
|
192,527
|
|
|
|
19.6
|
%
|
|
$
|
159,241
|
|
|
|
19.0
|
%
|
|
|
21.1
|
%
|
|
|
20.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our operating margin over the past three years
was primarily due to both increasing revenues and our ability to
leverage our existing cost structure as discussed above under
gross profit.
31
Interest
Expense, Net
The following table summarizes our interest expense, net of
interest income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term notes
|
|
$
|
31,915
|
|
|
$
|
26,078
|
|
|
$
|
18,746
|
|
9.875% senior subordinated notes
|
|
|
|
|
|
|
|
|
|
|
6,342
|
|
Interest rate swap agreements
|
|
|
(1,536
|
)
|
|
|
(1,542
|
)
|
|
|
57
|
|
Capital leases and other
|
|
|
2,158
|
|
|
|
1,414
|
|
|
|
1,385
|
|
Amortization of debt costs
|
|
|
368
|
|
|
|
361
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,905
|
|
|
|
26,311
|
|
|
|
27,077
|
|
Interest income
|
|
|
3,402
|
|
|
|
2,071
|
|
|
|
2,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense, net of interest income
|
|
$
|
29,503
|
|
|
$
|
24,240
|
|
|
$
|
25,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense in 2007 as compared to 2006 was
primarily attributable to additional senior term notes in the
amount of $160.0 million borrowed under our senior credit
facility on June 1, 2007, and increases in LIBOR. These
factors were partially offset by principal repayments, including
$60.0 million of voluntary debt repayments throughout 2006.
The decrease in interest expense in 2006 as compared to 2005 was
primarily attributable to our debt refinancing transaction,
which is discussed below in the Liquidity and Capital
Resources section, and changes in LIBOR.
Debt
Retirement Costs
In connection with a debt refinancing transaction, we incurred
debt retirement costs of $19.3 million in 2005, which is
discussed below in the Liquidity and Capital Resources
section.
Other
(Income) Expense
Other (income) expense relates primarily to non-cash gains or
losses pertaining to the changes in the time value of our
interest rate swap agreements.
Minority
Interest in Income of Subsidiaries
Minority interest in income of subsidiaries represents our
partners proportionate share of income generated by those
subsidiaries that we do not wholly own.
Provision
for Income Taxes
Our effective tax rate was 39.4%, 36.1% and 39.4% in 2007, 2006
and 2005, respectively. The effective tax rate for 2006 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 reduction in our estimated tax
liabilities.
32
Segment
Results
Laboratory
Segment
The following table summarizes revenue and gross profit for our
laboratory segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
295,695
|
|
|
|
|
|
|
$
|
258,345
|
|
|
|
|
|
|
$
|
222,064
|
|
|
|
|
|
|
|
14.5
|
%
|
|
|
16.3
|
%
|
Gross profit
|
|
$
|
143,072
|
|
|
|
48.4
|
%
|
|
$
|
119,449
|
|
|
|
46.2
|
%
|
|
$
|
98,926
|
|
|
|
44.5
|
%
|
|
|
19.8
|
%
|
|
|
20.7
|
%
|
Laboratory revenue increased $37.4 million in 2007 as
compared to 2006, and $36.3 million in 2006 as compared to
2005. The components of the increase in laboratory revenue are
detailed below (in thousands, except percentages and average
price per requisition):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Comparative Analysis
|
|
|
2006 Comparative Analysis
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
Laboratory Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal growth:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of requisitions(1)
|
|
|
12,448
|
|
|
|
11,061
|
|
|
|
12.5
|
%
|
|
|
10,993
|
|
|
|
9,453
|
|
|
|
16.3
|
%
|
Average revenue per requisition(2)
|
|
$
|
23.48
|
|
|
$
|
23.28
|
|
|
|
0.9
|
%
|
|
$
|
23.27
|
|
|
$
|
23.49
|
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total internal revenue(1)
|
|
$
|
292,249
|
|
|
$
|
257,522
|
|
|
|
13.5
|
%
|
|
$
|
255,767
|
|
|
$
|
222,064
|
|
|
|
15.2
|
%
|
Billing day adjustment(3)
|
|
|
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired revenue(4)
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
2,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295,695
|
|
|
$
|
258,345
|
|
|
|
14.5
|
%
|
|
$
|
258,345
|
|
|
$
|
222,064
|
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and adjusted for the
impact resulting from any differences in the number of billing
days in comparable periods. |
|
(2) |
|
Computed by dividing internal revenue by the number of
requisitions. |
|
(3) |
|
The 2006 billing day adjustment in the 2007 Comparative Analysis
reflects the impact of one additional billing day in 2006 as
compared to 2007. |
|
(4) |
|
Acquired revenue in both the 2007 and 2006 Comparative Analyses
represents the revenue of the laboratories acquired in each of
those respective years. |
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, and the migration of
certain tests to outside laboratories that have historically
been performed in veterinary hospitals. 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. Also contributing to the
year-over-year
increase in the number of requisitions was testing related to
the pet food recall that occurred in March and April of 2007.
We derive our laboratory revenue from services provided to over
16,000 independently owned animal hospitals and shifts in the
purchasing habits of any individual animal hospital or small
group of animal hospitals is not material to our laboratory
revenues. Other companies are developing networks of animal
33
hospitals, however, and shifts in the purchasing habits of these
networks have the potential of a greater impact on our
laboratory revenues.
The change in the average revenue per requisition is
attributable to changes in the mix, including performing
lower-priced tests historically performed at the veterinary
hospitals, and the 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 2007 and February
2006.
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, transportation and delivery
costs, facilities rent, occupancy costs, depreciation and
amortization and supply costs.
The increase in laboratory gross margins were primarily
attributable 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 Segment
The following table summarizes revenue and gross profit for the
animal hospital segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
844,344
|
|
|
|
|
|
|
$
|
711,997
|
|
|
|
|
|
|
$
|
607,565
|
|
|
|
|
|
|
|
18.6
|
%
|
|
|
17.2
|
%
|
Gross profit
|
|
$
|
163,053
|
|
|
|
19.3
|
%
|
|
$
|
138,358
|
|
|
|
19.4
|
%
|
|
$
|
118,239
|
|
|
|
19.5
|
%
|
|
|
17.8
|
%
|
|
|
17.0
|
%
|
Animal hospital revenue increased $132.3 million in 2007 as
compared to 2006, and $104.4 million in 2006 as compared to
2005. The components of the increases are summarized in the
following table (in thousands, except percentages and average
price per order):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Comparative Analysis
|
|
|
2006 Comparative Analysis
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Animal Hospital
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-store facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders(1)(2)
|
|
|
5,138
|
|
|
|
5,164
|
|
|
|
(0.5
|
)%
|
|
|
4,391
|
|
|
|
4,457
|
|
|
|
(1.5
|
)%
|
Average revenue per order(3)
|
|
$
|
139.80
|
|
|
$
|
132.26
|
|
|
|
5.7
|
%
|
|
$
|
130.17
|
|
|
$
|
121.20
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-store revenue(1)
|
|
$
|
718,224
|
|
|
$
|
683,012
|
|
|
|
5.2
|
%
|
|
$
|
571,577
|
|
|
$
|
540,209
|
|
|
|
5.8
|
%
|
Business day adjustment(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,454
|
|
|
|
|
|
Net acquired revenue(5)
|
|
|
126,120
|
|
|
|
28,985
|
|
|
|
|
|
|
|
140,420
|
|
|
|
65,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
844,344
|
|
|
$
|
711,997
|
|
|
|
18.6
|
%
|
|
$
|
711,997
|
|
|
$
|
607,565
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Same-store revenue and orders were calculated using animal
hospital operating results, adjusted to exclude the operating
results for newly acquired animal hospitals that we did not own
as of the beginning of the comparable period in the prior year
and adjusted for the impact resulting from any differences in
the number of business days in the comparable periods.
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. |
34
|
|
|
(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 2005 business day adjustment reflects the impact of one
additional business day in 2005 as compared to 2006. |
|
(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 January 1, 2006 for the 2007 Comparative
Analysis and January 1, 2005 for the 2006 Comparative
Analysis. Fluctuations in net acquired revenue occur due to the
volume, size and timing of acquisitions and dispositions during
the periods from this date through the end of the applicable
period. |
Our business strategy continues to emphasize comprehensive
wellness visits and advanced medical procedures, which typically
generate higher-priced orders.
Price increases, which approximated 5% to 6% on most services at
most hospitals in February 2007 and February 2006, 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. Over the last few years, we have
experienced a decline in animal hospital revenue from the sale
of pet-related products, which we believe are now widely
available in retail stores and other distribution channels.
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 expenses 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. Many of these newly acquired animal
hospitals had lower gross margins at the time of acquisition
than those previously operated by us. Historically, these lower
gross margins, in the aggregate, have been favorably impacted
subsequent to the acquisition by improvements in animal hospital
revenue, increased operating leverage and our integration
efforts. However, due to the substantial amount of acquisition
activity that has occurred in a relatively short period of time,
our gross margins have declined. Our animal hospital gross
margin in 2007, 2006 and 2005 was 19.3% to 19.4% and 19.5%,
respectively.
Our animal hospital same-store gross margin improved to 19.8% in
2007 as compared to 19.6% in 2006. In 2007, our same-store
animal hospitals benefited from a $2.6 million, or 0.3% of
same-store revenue, decrease in our estimated workers
compensation insurance liability recognized during the fourth
quarter of 2007. Excluding the impact related to the
workers compensation insurance benefit, our same-store
gross margin declined in 2007 as compared to 2006 primarily as a
result of an increase in labor and health insurance costs. Our
animal hospital same-store gross margin in 2006 and 2005 was
20.1%.
Medical
Technology Segment
The following table summarizes revenue and gross profit for the
medical technology segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
% Change
|
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
$
|
46,823
|
|
|
|
|
|
|
$
|
39,305
|
|
|
|
|
|
|
$
|
30,330
|
|
|
|
|
|
|
|
19.1
|
%
|
|
|
29.6
|
%
|
Gross profit
|
|
$
|
15,879
|
|
|
|
33.9
|
%
|
|
$
|
14,213
|
|
|
|
36.2
|
%
|
|
$
|
9,433
|
|
|
|
31.1
|
%
|
|
|
11.7
|
%
|
|
|
50.7
|
%
|
Medical technology revenue increased $7.5 million in 2007
as compared to 2006, which was primarily attributable to revenue
recognized on sales our digital radiography and ultrasound
imaging equipment. The increase in revenue from our digital
radiography imaging equipment was primarily due to the structure
of certain sales agreements in the prior year that resulted in
more revenue being deferred in 2006 as compared to
35
2007. We recognize revenue on deferred sales ratably over a
period ranging from one to five years. These deferred
transactions are further discussed above in Critical
Accounting Policies. Although we recognized an increase in
ultrasound revenue, we believe the business life cycle for this
equipment is maturing and accordingly, the demand for these
types of products and related services may decline in the near
term.
Medical technology revenue increased $9.0 million in 2006
as compared to 2005, which was primarily attributable to revenue
recognized on sales of our digital radiography imaging
equipment. Our digital radiography imaging equipment was first
introduced to the veterinary industry at the end of 2004. Also
contributing to the increase was that effective July 1,
2005, we began recognizing revenue on the sale of a majority of
our digital radiography imaging equipment, computer hardware and
software at the time of delivery or installation and customer
acceptance, if required, as discussed above in Critical
Accounting Policies. Prior to July 1, 2005, we
recognized all elements in the sale of our digital radiography
imaging equipment ratably over the period of the post-contract
customer support services.
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.
Medical technology gross profit increased $1.7 million in
2007 as compared to 2006, which was attributable to an increase
in revenue as discussed above. Our medical technology gross
margin declined to 33.9% in 2007 as compared to 36.2% in 2006,
which was primarily the result of an increase in material costs
related to the sale of our digital radiography imaging
equipment. In 2007, we implemented a strategic shift in our
pricing model in an effort to mitigate the effects of increasing
competition by providing better value to our customers through
additional functionality.
Medical technology gross profit increased $4.8 million in
2006 as compared to 2005, which was attributable to an increase
in revenue as discussed above and an increase in gross margin.
Our medical technology gross margin improved to 36.2% in 2006 as
compared to 31.1% in 2005, which was primarily the result of a
change in the mix of products and services sold. Specifically,
revenue from the sale of our digital radiography imaging
equipment, which generally has a higher gross margin than our
other products and services, increased as a percentage of our
total medical technology revenue.
Intercompany
Revenue
Laboratory revenue in 2007, 2006 and 2005 included intercompany
revenue of $27.6 million, $22.6 million and
$18.5 million, respectively, that was generated by
providing laboratory services to our animal hospitals. Medical
technology revenue in 2007, 2006, and 2005 included intercompany
revenue of $3.2 million, $3.8 million, and
$1.8 million, respectively, that was generated by providing
products and services to our animal hospitals. For purposes of
reviewing the operating performance of our business segments,
all intercompany transactions are accounted for as if the
transaction was with an independent third party at current
market prices. For financial reporting purposes, intercompany
transactions are eliminated as part of our consolidation.
Inflation
Historically, our operations have not been materially affected
by inflation. We cannot assure that our operations will not be
affected by inflation in the future.
Related
Party Transactions
Transactions
with Zoasis Corporation
We incurred marketing expense for vaccine reminders and other
direct mail services provided by Zoasis, a company that is
majority owned by Robert Antin, our Chief Executive Officer and
Chairman. Art Antin, our Chief Operating Officer, owns a 10%
interest in Zoasis. We purchased services of $1.8 million,
$1.9 million and $1.1 million in 2007, 2006, and 2005,
respectively. The pricing of these services is comparable to
prices
36
paid by us to independent third parties for similar services.
Beginning in late 2006, in connection with a sublease for office
space located in the Zoasis corporate office, we paid rent to
Zoasis of $54,000 and $18,000 in 2007 and 2006, respectively.
The lease expired in August 2007 and continues on a
month-to-month
basis until the completion of a software development project.
The rent under this sublease is comparable to the rent we pay
for similar spaces.
Liquidity
and Capital Resources
Introduction
We generate cash primarily from payments made by customers for
our veterinary services, payments from animal hospitals and
other clients for our laboratory services, and from proceeds
received from the sale of our imaging equipment and other
related services. Our business historically has experienced
strong liquidity, as fees for services provided in our animal
hospitals are due at the time of service and fees for laboratory
services are collected under standard industry terms. Our cash
disbursements are primarily for payments related to the
compensation of our employees, supplies and inventory purchases
for our operating segments, occupancy and other administrative
costs, interest expense, payments on long-term borrowings,
capital expenditures and animal hospital acquisitions. Cash
outflows fluctuate with the amount and timing of the settlement
of these transactions.
We manage our cash, investments and capital structure so we are
able to meet the short-term and long-term obligations of our
business while maintaining financial flexibility and liquidity.
We forecast, analyze and monitor our cash flows to enable
investment and financing within the overall constraints of our
financial strategy.
At December 31, 2007, our consolidated cash and cash
equivalents totaled $110.9 million, representing an
increase of $65.8 million as compared to the prior year. In
addition, cash flows generated from operating activities totaled
$170.4 million in 2007, representing an increase of
$43.5 million as compared to the prior year.
We also have access to a revolving credit facility, which allows
us to maintain further operating and financial flexibility, and
historically we have been able to obtain cash from other
borrowings. The availability of financing in the form of debt or
equity however is influenced by many factors including our
profitability, operating cash flows, debt levels, debt ratings,
contractual restrictions, and market conditions. Although in the
past we have been able to obtain financing for material
transactions on terms that we believe to be reasonable, there is
a possibility that we may not be able to obtain financing on
favorable terms in the future.
Future
Cash Flows
Short-term
In 2007, we borrowed $160.0 million in senior term notes
under our senior credit facility to fund our acquisition of
Healthy Pet. Other than our acquisitions of hospital chains, we
historically have funded our working capital requirements,
capital expenditures and investments in animal hospital
acquisitions from internally generated cash flow and our
revolving credit facility. We anticipate that our cash on hand,
net cash provided by operations and our revolving credit
facility will be sufficient to meet our anticipated cash
requirements for the next 12 months. If we consummate one
or more significant acquisitions during this period, we may seek
additional debt or equity financing.
In 2008, we expect to spend $50.0 million to
$60.0 million related to the acquisition of independent
animal hospitals. The ultimate number of acquisitions is largely
dependent upon the attractiveness of the candidates and the
strategic fit with our existing operations. From January 1,
2008 through February 27, 2008, we spent $35.4 million
in connection with the acquisition of 16 animal hospitals. In
addition, we expect to spend approximately $50.0 million in
2008 for both property and equipment additions and capital costs
necessary to maintain our existing facilities.
37
Long-term
Our long-term liquidity needs, other than those related to the
day-to-day
operations of our business, including commitments for operating
leases, generally are comprised of scheduled principal and
interest payments for our outstanding long-term indebtedness,
capital expenditures related to the expansion of our business
and acquisitions in accordance with our growth strategy. The
scheduled payments on our long-term obligations are included in
our contractual obligations table below. In addition to the
scheduled payments on our senior term notes, we are required to
make mandatory prepayments in the event we have excess cash
flow. Pursuant to the terms of our senior credit facility,
mandatory prepayments are due on our senior term notes equal to
75% of any excess cash flow at the end of 2008, 2009 and 2010.
Excess cash flow is defined as earnings before interest, taxes,
depreciation and amortization less voluntary and scheduled debt
repayments, capital expenditures, interest payable in cash,
taxes payable in cash and cash paid for acquisitions. These
payments reduce on a pro rata basis the remaining scheduled
principal payments.
We are unable to project with certainty whether our long-term
cash flow from operations will be sufficient to repay our
long-term debt when it comes due. If this cash flow is
insufficient, we expect that we will need to refinance such
indebtedness, amend its terms to extend the maturity dates, or
issue common stock in our company. Our management cannot make
any assurances that such refinancing or amendments, if
necessary, will be available on attractive terms, if at all.
Debt
Related Covenants
Our senior credit facility contains certain financial covenants
pertaining to fixed charge coverage and leverage ratios. In
addition, our senior credit facility has restrictions pertaining
to capital expenditures, acquisitions and the payment of cash
dividends. As of December 31, 2007, we were in compliance
with these covenants, including the two covenant ratios, the
fixed charge coverage ratio and the leverage ratio.
At December 31, 2007, we had a fixed charge coverage ratio
of 1.57 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 fixed charge coverage ratio as that ratio that is calculated
on a last
12-month
basis by dividing pro forma earnings before interest, taxes,
depreciation and amortization, as defined by the senior credit
facility (pro forma earnings), by fixed charges.
Fixed charges are defined as cash interest expense, scheduled
principal payments on debt obligations, capital expenditures,
and provision for income taxes. Pro forma earnings include
12 months of operating results for businesses acquired
during the period.
At December 31, 2007, we had a leverage ratio of 2.07 to
1.00, which was in compliance with the required ratio of no more
than 3.25 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.
Historical
Cash Flows
The following table summarizes our cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
170,376
|
|
|
$
|
126,890
|
|
|
$
|
115,100
|
|
Investing activities
|
|
|
(271,305
|
)
|
|
|
(87,732
|
)
|
|
|
(115,431
|
)
|
Financing activities
|
|
|
166,691
|
|
|
|
(52,542
|
)
|
|
|
27,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
65,762
|
|
|
|
(13,384
|
)
|
|
|
27,524
|
|
Cash and cash equivalents at beginning of year
|
|
|
45,104
|
|
|
|
58,488
|
|
|
|
30,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
110,866
|
|
|
$
|
45,104
|
|
|
$
|
58,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Cash
Flows from Operating Activities
Net cash provided by operating activities increased
$43.5 million in 2007 as compared to 2006. This increase
was due primarily to improved operating performance, additional
cash generated from acquired businesses, and changes in working
capital, partially offset by an increase in cash paid for
interest of $6.8 million.
Net cash provided by operating activities increased
$11.8 million in 2006 as compared to 2005. This increase
was due primarily to improved operating performance and
additional cash generated from acquired businesses, which was
partially offset by an increase in taxes paid of
$24.5 million, changes in working capital and the adoption
of SFAS No. 123R. The increase in taxes paid was
attributable to an increase in income before provision for
income taxes due primarily to improved operating performance,
acquisitions and debt retirement costs incurred in 2005. Also
contributing to the increase in taxes paid was a decrease in net
operating loss carryforwards realized in 2006 as compared to
2005. SFAS No. 123R, which we adopted on
January 1, 2006, requires the benefits of tax deductions
from the exercise of options in excess of the compensation cost
for those options to be classified as cash provided by financing
activities. As a result, we classified $6.6 million in
excess tax benefits in 2006 as a financing activity. Excess tax
benefits in periods prior to 2006 were classified as an
operating activity.
Cash
Flows from Investing Activities
The table below presents the components of the changes in
investing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
Variance
|
|
Investing Cash Flows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
Acquisition of Healthy Pet
|
|
$
|
(154,871
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(154,871
|
)
|
|
$
|
|
|
Acquisition of Pets Choice
|
|
|
|
|
|
|
|
|
|
|
(51,149
|
)
|
|
|
|
|
|
|
51,149
|
|
Acquisition of independent animal hospitals
|
|
|
(57,990
|
)
|
|
|
(48,388
|
)
|
|
|
(34,199
|
)
|
|
|
(9,602
|
)
|
|
|
(14,189
|
)
|
Other
|
|
|
(2,662
|
)
|
|
|
(2,096
|
)
|
|
|
(3,801
|
)
|
|
|
(566
|
)
|
|
|
1,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used for acquisitions(1)
|
|
|
(215,523
|
)
|
|
|
(50,484
|
)
|
|
|
(89,149
|
)
|
|
|
(165,039
|
)
|
|
|
38,665
|
|
Property and equipment additions(2)
|
|
|
(48,714
|
)
|
|
|
(35,316
|
)
|
|
|
(29,209
|
)
|
|
|
(13,398
|
)
|
|
|
(6,107
|
)
|
Real estate acquired with acquisitions(3)
|
|
|
(7,962
|
)
|
|
|
(2,872
|
)
|
|
|
(2,405
|
)
|
|
|
(5,090
|
)
|
|
|
(467
|
)
|
Proceeds from sale of assets
|
|
|
1,674
|
|
|
|
598
|
|
|
|
1,702
|
|
|
|
1,076
|
|
|
|
(1,104
|
)
|
Other
|
|
|
(780
|
)
|
|
|
342
|
|
|
|
3,630
|
|
|
|
(1,122
|
)
|
|
|
(3,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(271,305
|
)
|
|
$
|
(87,732
|
)
|
|
$
|
(115,431
|
)
|
|
$
|
(183,573
|
)
|
|
$
|
27,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of acquisitions will vary from year to year based
upon the available pool of suitable candidates. A detailed
discussion of our acquisitions is provided above in the
Executive Overview. |
|
(2) |
|
The increases in cash used to acquire property and equipment was
primarily due to costs related to maintaining the quality or
expanding our existing animal hospital and laboratory
facilities, including certain technology related initiatives
aimed at creating operational efficiencies. |
|
(3) |
|
The increase in cash used to acquire real estate was due
primarily to an increase in the number of favorable
opportunities presented. |
Cash
Flows from Financing Activities
The table below presents the components of the changes in
financing cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
Variance
|
|
Financing Cash Flows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from long-term obligations
|
|
$
|
160,000
|
|
|
$
|
|
|
|
$
|
475,000
|
(1)
|
|
|
|
|
|
$
|
160,000
|
(2)
|
|
$
|
(475,000
|
)
|
Repayment of long-term obligations
|
|
|
(8,238
|
)
|
|
|
(65,414
|
)
|
|
|
(447,100
|
)(3)
|
|
|
|
|
|
|
57,176
|
(2)
|
|
|
381,686
|
|
Payment of financing costs
|
|
|
(926
|
)
|
|
|
|
|
|
|
(3,257
|
)
|
|
|
|
|
|
|
(926
|
)
|
|
|
3,257
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
Variance
|
|
Financing Cash Flows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from stock options exercises
|
|
|
7,989
|
|
|
|
6,227
|
|
|
|
3,212
|
|
|
|
|
|
|
|
1,762
|
|
|
|
3,015
|
|
Excess tax benefits from stock options
|
|
|
7,866
|
|
|
|
6,645
|
|
|
|
|
(4)
|
|
|
|
|
|
|
1,221
|
(4)
|
|
|
6,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
|
|
$
|
166,691
|
|
|
$
|
(52,542
|
)
|
|
$
|
27,855
|
|
|
|
|
|
|
$
|
219,233
|
|
|
$
|
(80,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The increase in proceeds from the issuance of long-term
obligations was primarily due to borrowings made under our
senior credit facility in the form of additional senior term
notes, which were used to finance the acquisition of Healthy Pet
on June 1, 2007. |
|
(2) |
|
In May 2005, we entered into a new senior credit facility which
provided $475.0 million of senior term notes and a
$75.0 million revolving credit facility. The proceeds from
the new senior term notes were used to retire our existing
senior term notes in the principal amount of $220.3 million
and repurchase our 9.875% senior subordinated notes in the
principal amount of $170.0 million. The new senior term
notes also provided the necessary financing to acquire
Pets Choice on July 1, 2005. In connection with the
refinancing transactions, we paid financing costs of
approximately $3.3 million and paid an aggregate tender fee
of $13.8 million to purchase the 9.875% senior
subordinated notes. In addition, during August 2005, we used
$35.0 million in cash to prepay a portion of our senior
term notes. |
|
(3) |
|
During 2006, we prepaid of a portion of our senior term notes in
the amount of $60.0 million. |
|
(4) |
|
On January 1, 2006, we adopted SFAS No. 123R
which requires the benefits of tax deductions from the exercise
of options in excess of the compensation cost for those options
to be classified as cash provided by financing activities.
Excess tax benefits in periods prior to 2006 were classified as
operating activities. |
Future
Contractual 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual
Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt
|
|
$
|
529,965
|
|
|
$
|
6,157
|
|
|
$
|
11,863
|
|
|
$
|
511,945
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
30,215
|
|
|
|
1,729
|
|
|
|
4,037
|
|
|
|
4,554
|
|
|
|
19,895
|
|
Operating leases
|
|
|
640,645
|
|
|
|
37,668
|
|
|
|
75,022
|
|
|
|
73,669
|
|
|
|
454,286
|
|
Fixed cash interest expense
|
|
|
14,269
|
|
|
|
2,468
|
|
|
|
3,877
|
|
|
|
2,727
|
|
|
|
5,197
|
|
Variable cash interest expense(1)
|
|
|
111,808
|
|
|
|
33,510
|
|
|
|
65,990
|
|
|
|
12,308
|
|
|
|
|
|
Swap agreements(1)
|
|
|
1,126
|
|
|
|
483
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
42,800
|
|
|
|
18,155
|
|
|
|
18,643
|
|
|
|
6,002
|
|
|
|
|
|
Other long-term liabilities(3)
|
|
|
30,117
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
29,987
|
|
Earn-out payments(4)
|
|
|
938
|
|
|
|
588
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,401,883
|
|
|
$
|
100,758
|
|
|
$
|
180,555
|
|
|
$
|
611,205
|
|
|
$
|
509,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have variable-rate debt. The interest payments on our
variable-rate debt are based on rates effective as of
December 31, 2007. |
|
(2) |
|
Our purchase obligations consist primarily of supply purchase
agreements related to our medical technology business and
construction contracts primarily for animal hospitals. |
|
(3) |
|
Includes deferred income taxes of $28.2 million. |
|
(4) |
|
Represents contractual arrangements whereby additional cash may
be paid to former owners of acquired businesses upon attainment
of specified performance targets. |
40
Off-Balance
Sheet Arrangements
Other than operating leases, which are included in the
Contractual Obligations table listed above as of
December 31, 2007, we do not have any off-balance sheet
financing arrangements.
Interest
Rate Swap Agreements
We have interest rate 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 (LIBOR) and the same set notional principal
amounts. We entered into these interest rate 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 interest rate swap agreements, and the fixed-rate
conversion period is equal to the terms of the contract. The
impact of these interest rate swap agreements has been factored
into our future contractual cash requirements table above. All
of our interest rate swap agreements at December 31, 2007
qualify for hedge accounting and are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate
|
|
4.07%
|
|
3.98%
|
|
5.51%
|
|
4.95%
|
|
5.34%
|
Notional amount (in millions)
|
|
$50.0
|
|
$50.0
|
|
$50.0
|
|
$75.0
|
|
$100.0
|
Effective date
|
|
5/26/2005
|
|
6/2/2005
|
|
6/20/2006
|
|
4/30/2007
|
|
6/11/2007
|
Expiration date
|
|
5/26/2008
|
|
5/31/2008
|
|
6/30/2009
|
|
4/30/2009
|
|
12/31/2009
|
Counterparties
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Goldman Sachs
|
In the future, we may enter into additional interest rate
strategies. However, we have not yet determined what those
strategies will be or their possible impact.
Description
of Indebtedness
Senior
Credit Facility
At December 31, 2007, we had $527.7 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 and Capital Lease Obligations
At December 31, 2007, we had seller notes secured by assets
of certain animal hospitals, unsecured debt and capital leases
that totaled $32.5 million.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements. However, it eliminates inconsistencies in the
guidance provided in previous accounting pronouncements. Certain
provisions of SFAS No. 157 will be effective for our
company on January 1, 2008.
Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal
year, including financial statements for an interim period
within that fiscal year. All valuation adjustments will be
recognized as cumulative-effect adjustments to the opening
balance of retained earnings for the fiscal year in which
SFAS No. 157 is initially applied. In December 2007,
the FASB provided a one-year deferral of SFAS No. 157
for non-financial assets and non-financial liabilities, except
those that are
41
recognized or disclosed at fair value on a recurring basis, at
least annually. We will adopt SFAS No. 157 on
January 1, 2008, for our financial assets and liabilities,
which primarily consists of derivatives we record in accordance
with SFAS No. 133, and on January 1, 2009, for
our non-financial assets and liabilities. For our financial
assets and liabilities, we expect that our adoption of
SFAS No. 157 will primarily impact our disclosures and
not have a material impact on our consolidated results of
operations, cash flows and financial position. We are currently
evaluating the impact with respect to our non-financial assets
and liabilities.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments
and certain other items at fair value. The provisions of
SFAS No. 159 will be effective for our company on
January 1, 2008. We do not believe that the adoption of
this standard will have a material impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R).
SFAS No. 141R will significantly change the accounting
for business combinations in a number of areas including the
treatment of contingent consideration, contingencies,
acquisition costs, in-process research and development and
restructuring costs. In addition, under SFAS No. 141R,
changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the
measurement period will impact income tax expense. The
provisions of SFAS No. 141R will be effective for our
company on January 1, 2009. We are currently evaluating the
impact of adopting SFAS No. 141R on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
will change the accounting and reporting for minority interests,
which will be re-characterized as non-controlling interests and
classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions
with minority interest holders. The provisions of
SFAS No. 160 will be effective for our company on
January 1, 2009. We are currently evaluating the impact of
adopting SFAS No. 160 on our consolidated financial
statements.
Quarterly
Results
The following table sets forth selected unaudited quarterly
results for the eight quarters commencing January 1, 2006
and ending December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended
|
|
|
2006 Quarter Ended
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Revenue
|
|
$
|
284,158
|
|
|
$
|
306,537
|
|
|
$
|
300,305
|
|
|
$
|
265,145
|
|
|
$
|
242,351
|
|
|
$
|
251,632
|
|
|
$
|
255,150
|
|
|
$
|
234,180
|
|
Gross profit
|
|
$
|
69,321
|
|
|
$
|
86,302
|
|
|
$
|
89,878
|
|
|
$
|
75,920
|
|
|
$
|
61,616
|
|
|
$
|
70,465
|
|
|
$
|
74,962
|
|
|
$
|
63,521
|
|
Operating income
|
|
$
|
47,807
|
|
|
$
|
63,674
|
|
|
$
|
67,415
|
|
|
$
|
54,325
|
|
|
$
|
40,694
|
|
|
$
|
51,516
|
|
|
$
|
55,563
|
|
|
$
|
44,754
|
|
Net income
|
|
$
|
24,623
|
|
|
$
|
32,229
|
|
|
$
|
35,847
|
|
|
$
|
28,313
|
|
|
$
|
19,340
|
|
|
$
|
26,977
|
|
|
$
|
29,553
|
|
|
$
|
29,659
|
|
Basic earnings per common share
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
$
|
0.43
|
|
|
$
|
0.34
|
|
|
$
|
0.23
|
|
|
$
|
0.32
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
Diluted earnings per common share
|
|
$
|
0.29
|
|
|
$
|
0.38
|
|
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
|
$
|
0.32
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
The quarter ended March 31, 2006 includes a
$6.8 million tax benefit due to the outcome of an income
tax audit that resulted in a reduction in our estimated tax
liabilities.
The quarter ended December 31, 2006 includes a
$1.3 million tax expense adjustment related primarily to an
increase in our estimated current tax liabilities as of
December 31, 2006.
The quarter ended December 31, 2007 includes the benefit of
a $3.5 million decrease to our estimated workers
compensation insurance liability and a $927,000 adjustment
related primarily to a change in our statutory tax rates. The
decrease in our workers compensation liability had a
$3.2 million impact on our gross profit, and a
$2.2 million impact on net income.
42
Although not readily detectable because of the impact of
acquisitions, our operations are subject to seasonal
fluctuation. In particular, our laboratory and animal hospital
revenue historically has been greater in the second and third
quarters than in the first and fourth quarters.
The demand for our veterinary services is significantly higher
during 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 infestation of
fleas, heartworms and ticks, and the number of daylight hours. A
substantial portion of our costs for our veterinary services are
fixed and do not vary with the level of demand. Consequently,
our operating income and operating margins generally have been
higher for the second and third quarters than that experienced
in the first and fourth quarters.
43
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
At December 31, 2007, we had borrowings of
$527.7 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 value, but do impact earnings
and cash flow. To reduce the risk of increasing interest rates,
we entered into the following interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate
|
|
4.07%
|
|
3.98%
|
|
5.51%
|
|
4.95%
|
|
5.34%
|
Notional amount (in millions)
|
|
$50.0
|
|
$50.0
|
|
$50.0
|
|
$75.0
|
|
$100.0
|
Effective date
|
|
5/26/2005
|
|
6/2/2005
|
|
6/20/2006
|
|
4/30/2007
|
|
6/11/2007
|
Expiration date
|
|
5/26/2008
|
|
5/31/2008
|
|
6/30/2009
|
|
4/30/2009
|
|
12/31/2009
|
Counterparties
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Goldman Sachs
|
These interest rate swap agreements have the effect of reducing
the amount of our debt exposed to variable interest rates. For
the 12-month
period ending December 31, 2008, for every 1.0% increase in
LIBOR we will pay an additional $2.6 million in interest
expense and for every 1.0% decrease in LIBOR we will save
$2.6 million in interest expense.
In the future, we may enter into additional interest rate
strategies. However, we have not yet determined what those
strategies will be or their possible impact.
44
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
VCA
ANTECH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
56
|
|
|
|
|
82
|
|
|
|
|
86
|
|
45
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal
control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of our consolidated financial
statements for external reporting purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management has carried out an evaluation, under the
supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
internal control over financial reporting as of
December 31, 2007. In performing this evaluation,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework. Based
on our assessment of internal control over financial reporting,
our management has concluded that, as of December 31, 2007,
our internal control over financial reporting was effective 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.
Management excluded Healthy Pet Corp. from its assessment of the
effectiveness of the companys internal control over
financial reporting as of December 31, 2007. Healthy Pet
Corp., acquired June 1, 2007, accounted for
$183.7 million, or 14.3%, of our total assets as of
December 31, 2007, and contributed approximately
$46.8 million, or 4.0%, of our total revenue in 2007.
KPMG LLP, the independent registered public accounting firm that
audited the consolidated financial statements included in this
annual report on
Form 10-K,
has issued an audit report on managements assessment of
our internal control over financial reporting.
February 27, 2008
Robert L. Antin
Chairman of the Board, President and
Chief Executive Officer
Tomas W. Fuller
Chief Financial Officer,
Vice President and Secretary
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of VCA Antech, Inc.:
We have audited the accompanying consolidated balance sheets of
VCA Antech, Inc. and subsidiaries as of December 31, 2007
and 2006, and the related consolidated statements of income,
stockholders equity, comprehensive income, and cash flows
for each of the years in the three-year period ended
December 31, 2007. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules of condensed financial information
of registrant and valuation and qualifying accounts as listed in
the index under Item 8. These consolidated financial
statements and financial statement schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of VCA Antech, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in note 2 to the consolidated financial
statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment, in 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), VCA
Antech, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 27, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Los Angeles, California
February 27, 2008
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of VCA Antech, Inc.:
We have audited VCA Antech, Inc. and subsidiaries internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an
opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, VCA Antech, Inc. and its subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Management excluded Healthy Pet Corp. from its assessment of the
effectiveness of VCA Antech, Inc.s internal control over
financial reporting as of December 31, 2007. Healthy Pet
Corp., acquired June 1, 2007, accounted for
$183.7 million, or 14.3%, of the Companys total
assets as of December 31, 2007, and contributed
approximately $46.8 million, or 4.0%, of the Companys
total revenue for the year ended December 31, 2007. Our
audit of internal control over financial reporting of VCA
Antech, Inc. also excluded an evaluation of the internal control
over financial reporting of Healthy Pet Corp.
48
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of VCA Antech, Inc. and subsidiaries
as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders equity,
comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2007, and our
report dated February 27, 2008 expressed an unqualified
opinion on those consolidated financial statements.
Los Angeles, California
February 27, 2008
49
VCA
ANTECH, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
110,866
|
|
|
$
|
45,104
|
|
Trade accounts receivable, less allowance for uncollectible
accounts of $10,940 and $11,195 at December 31, 2007 and
2006, respectively
|
|
|
42,650
|
|
|
|
44,491
|
|
Inventory
|
|
|
25,517
|
|
|
|
21,420
|
|
Prepaid expenses and other
|
|
|
15,307
|
|
|
|
13,492
|
|
Deferred income taxes
|
|
|
14,402
|
|
|
|
14,935
|
|
Prepaid income taxes
|
|
|
8,160
|
|
|
|
13,523
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
216,902
|
|
|
|
152,965
|
|
Property and equipment, net
|
|
|
214,020
|
|
|
|
166,033
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
821,967
|
|
|
|
625,748
|
|
Other intangible assets, net
|
|
|
22,373
|
|
|
|
18,337
|
|
Notes receivable, net
|
|
|
3,493
|
|
|
|
2,675
|
|
Deferred financing costs, net
|
|
|
1,537
|
|
|
|
979
|
|
Other
|
|
|
6,419
|
|
|
|
5,220
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,286,711
|
|
|
$
|
971,957
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term obligations
|
|
$
|
7,886
|
|
|
$
|
6,648
|
|
Accounts payable
|
|
|
28,092
|
|
|
|
23,328
|
|
Accrued payroll and related liabilities
|
|
|
38,341
|
|
|
|
33,864
|
|
Other accrued liabilities
|
|
|
42,074
|
|
|
|
30,961
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
116,393
|
|
|
|
94,801
|
|
Long-term obligations, less current portion
|
|
|
552,294
|
|
|
|
384,067
|
|
Deferred income taxes
|
|
|
28,197
|
|
|
|
39,804
|
|
Other liabilities
|
|
|
11,236
|
|
|
|
13,294
|
|
Minority interest
|
|
|
10,207
|
|
|
|
9,686
|
|
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,
84,335 and 83,560 shares outstanding as of
December 31, 2007 and 2006, respectively
|
|
|
84
|
|
|
|
84
|
|
Additional paid-in capital
|
|
|
296,037
|
|
|
|
275,013
|
|
Accumulated earnings
|
|
|
275,598
|
|
|
|
154,586
|
|
Accumulated other comprehensive (loss) income
|
|
|
(3,335
|
)
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
568,384
|
|
|
|
430,305
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,286,711
|
|
|
$
|
971,957
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
VCA
ANTECH, INC. AND SUBSIDIARIES
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
1,156,145
|
|
|
$
|
983,313
|
|
|
$
|
839,666
|
|
Direct costs
|
|
|
834,724
|
|
|
|
712,749
|
|
|
|
613,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
321,421
|
|
|
|
270,564
|
|
|
|
225,867
|
|
Selling, general and administrative expense
|
|
|
86,877
|
|
|
|
78,020
|
|
|
|
66,185
|
|
Write-down and loss on sale of assets
|
|
|
1,323
|
|
|
|
17
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
233,221
|
|
|
|
192,527
|
|
|
|
159,241
|
|
Interest expense
|
|
|
32,905
|
|
|
|
26,311
|
|
|
|
27,077
|
|
Interest income
|
|
|
3,402
|
|
|
|
2,071
|
|
|
|
2,034
|
|
Debt retirement costs
|
|
|
|
|
|
|
|
|
|
|
19,282
|
|
Other expense (income)
|
|
|
315
|
|
|
|
8
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
203,403
|
|
|
|
168,279
|
|
|
|
115,038
|
|
Minority interest in income of subsidiaries
|
|
|
3,755
|
|
|
|
3,100
|
|
|
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
199,648
|
|
|
|
165,179
|
|
|
|
111,929
|
|
Provision for income taxes
|
|
|
78,636
|
|
|
|
59,650
|
|
|
|
44,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.44
|
|
|
$
|
1.27
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.41
|
|
|
$
|
1.24
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for basic earnings per share
|
|
|
83,893
|
|
|
|
83,198
|
|
|
|
82,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding for diluted earnings per
share
|
|
|
85,716
|
|
|
|
84,882
|
|
|
|
83,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
VCA
ANTECH, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
From
|
|
|
Earnings
|
|
|
Income
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
(Deficit)
|
|
|
(Loss)
|
|
|
Total
|
|
|
Balances, December 31, 2004
|
|
|
82,191
|
|
|
$
|
82
|
|
|
$
|
251,412
|
|
|
$
|
(10
|
)
|
|
$
|
(18,759
|
)
|
|
$
|
34
|
|
|
$
|
232,759
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,816
|
|
|
|
|
|
|
|
67,816
|
|
Unrealized gain on hedging instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,249
|
|
|
|
1,249
|
|
Gains on hedging instruments reclassified to income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
(74
|
)
|
Repayment of notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Exercise of stock options
|
|
|
568
|
|
|
|
1
|
|
|
|
3,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,212
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
82,759
|
|
|
|
83
|
|
|
|
258,402
|
|
|
|
|
|
|
|
49,057
|
|
|
|
1,209
|
|
|
|
308,751
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,529
|
|
|
|
|
|
|
|
105,529
|
|
Unrealized loss on hedging instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(592
|
)
|
|
|
(592
|
)
|
Losses on hedging instruments reclassified to income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,071
|
|
Exercise of stock options
|
|
|
801
|
|
|
|
1
|
|
|
|
6,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,227
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
7,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
83,560
|
|
|
|
84
|
|
|
|
275,013
|
|
|
|
|
|
|
|
154,586
|
|
|
|
622
|
|
|
|
430,305
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,012
|
|
|
|
|
|
|
|
121,012
|
|
Unrealized loss on hedging instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,215
|
)
|
|
|
(4,215
|
)
|
Losses on hedging instruments reclassified to income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258
|
|
|
|
258
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,586
|
|
Exercise of stock options
|
|
|
775
|
|
|
|
|
|
|
|
7,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,989
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
8,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
84,335
|
|
|
$
|
84
|
|
|
$
|
296,037
|
|
|
$
|
|
|
|
$
|
275,598
|
|
|
$
|
(3,335
|
)
|
|
$
|
568,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
VCA
ANTECH, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on interest rate swaps, net of tax
benefit of $2,689 in 2007, $383 in 2006, and net of tax expense
of $786 in 2005
|
|
|
(4,215
|
)
|
|
|
(592
|
)
|
|
|
1,249
|
|
Losses (gains) on hedging instruments reclassifed to income, net
of tax benefit of $167 and $3 in 2007 and 2006, respectively,
and net of tax expense of $48 in 2005
|
|
|
258
|
|
|
|
5
|
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(3,957
|
)
|
|
|
(587
|
)
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
117,055
|
|
|
$
|
104,942
|
|
|
$
|
68,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
VCA
ANTECH, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,049
|
|
|
|
22,242
|
|
|
|
19,335
|
|
Amortization of debt costs
|
|
|
368
|
|
|
|
361
|
|
|
|
547
|
|
Provision for uncollectible accounts
|
|
|
5,053
|
|
|
|
5,923
|
|
|
|
4,766
|
|
Debt retirement costs
|
|
|
|
|
|
|
|
|
|
|
19,282
|
|
Write-down and loss on sale of assets
|
|
|
1,323
|
|
|
|
17
|
|
|
|
441
|
|
Share-based compensation
|
|
|
4,586
|
|
|
|
3,071
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
(7,866
|
)
|
|
|
(6,645
|
)
|
|
|
|
|
Other
|
|
|
(115
|
)
|
|
|
(949
|
)
|
|
|
(223
|
)
|
Minority interest in income of subsidiaries
|
|
|
3,755
|
|
|
|
3,100
|
|
|
|
3,109
|
|
Distributions to minority interest partners
|
|
|
(3,388
|
)
|
|
|
(3,514
|
)
|
|
|
(3,078
|
)
|
Deferred income taxes
|
|
|
10,940
|
|
|
|
7,688
|
|
|
|
8,975
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(2,687
|
)
|
|
|
(12,308
|
)
|
|
|
(11,335
|
)
|
Inventory, prepaid expenses and other assets
|
|
|
(4,712
|
)
|
|
|
(8,594
|
)
|
|
|
(9,092
|
)
|
Accounts payable and other accrued liabilities
|
|
|
7
|
|
|
|
2,989
|
|
|
|
7,132
|
|
Accrued payroll and related liabilities
|
|
|
1,154
|
|
|
|
3,733
|
|
|
|
2,660
|
|
Income taxes
|
|
|
13,897
|
|
|
|
4,247
|
|
|
|
4,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
170,376
|
|
|
|
126,890
|
|
|
|
115,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(215,523
|
)
|
|
|
(50,484
|
)
|
|
|
(89,149
|
)
|
Real estate acquired in connection with business acquisitions
|
|
|
(7,962
|
)
|
|
|
(2,872
|
)
|
|
|
(2,405
|
)
|
Property and equipment additions
|
|
|
(48,714
|
)
|
|
|
(35,316
|
)
|
|
|
(29,209
|
)
|
Proceeds from sale of assets
|
|
|
1,674
|
|
|
|
598
|
|
|
|
1,702
|
|
Other
|
|
|
(780
|
)
|
|
|
342
|
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(271,305
|
)
|
|
|
(87,732
|
)
|
|
|
(115,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
VCA
ANTECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term obligations, including redemption fees
|
|
|
(8,238
|
)
|
|
|
(65,414
|
)
|
|
|
(447,100
|
)
|
Proceeds from the issuance of long-term obligations
|
|
|
160,000
|
|
|
|
|
|
|
|
475,000
|
|
Payment of financing costs
|
|
|
(926
|
)
|
|
|
|
|
|
|
(3,257
|
)
|
Proceeds from issuance of common stock under stock option plans
|
|
|
7,989
|
|
|
|
6,227
|
|
|
|
3,212
|
|
Excess tax benefits from exercise of stock options
|
|
|
7,866
|
|
|
|
6,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
166,691
|
|
|
|
(52,542
|
)
|
|
|
27,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
65,762
|
|
|
|
(13,384
|
)
|
|
|
27,524
|
|
Cash and cash equivalents at beginning of year
|
|
|
45,104
|
|
|
|
58,488
|
|
|
|
30,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
110,866
|
|
|
$
|
45,104
|
|
|
$
|
58,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
32,632
|
|
|
$
|
25,868
|
|
|
$
|
27,802
|
|
Income taxes paid
|
|
$
|
53,800
|
|
|
$
|
54,521
|
|
|
$
|
30,050
|
|
Supplemental schedule of non-cash investing and financing
activites:
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
246,368
|
|
|
$
|
53,900
|
|
|
$
|
118,069
|
|
Cash paid for acquisitions
|
|
|
215,523
|
|
|
|
(50,484
|
)
|
|
|
(89,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
$
|
30,845
|
|
|
$
|
3,416
|
|
|
$
|
28,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
VCA
ANTECH, INC. AND SUBSIDIARIES
Our company, VCA Antech, Inc. (VCA) is a Delaware
corporation formed in 1986 and is based in Los Angeles,
California. We are an animal healthcare company with three
strategic segments: veterinary diagnostic laboratories
(Laboratory), animal hospitals (Animal
Hospital) and veterinary medical technology (Medical
Technology).
We operate a full-service veterinary diagnostic laboratory
network serving all 50 states. Our laboratory network
provides 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 December 31, 2007, we
operated 36 laboratories of various sizes located strategically
throughout the United States.
Our animal hospitals offer a full range of general medical and
surgical services for companion animals. Our animal hospitals
treat diseases and injuries, provide pharmaceutical products and
perform a variety of pet-wellness programs, including health
examinations, diagnostic testing, vaccinations, spaying,
neutering and dental care. At December 31, 2007, we
operated 438 animal hospitals throughout 38 states.
Our medical technology segment sells digital radiography and
ultrasound imaging equipment, provides education and training on
the use of that equipment, and provides consulting and mobile
imaging services.
|
|
2.
|
Summary
of Significant Accounting Policies
|
|
|
a.
|
Principles
of Consolidation
|
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States, and include the accounts of our parent company,
all majority-owned subsidiaries where we have control and
certain veterinary-medical groups to which we provide services
as discussed below. We have eliminated all intercompany
transactions and balances.
We provide management services to certain veterinary-medical
groups in states with laws that prohibit business corporations
from providing or holding themselves out as providers of
veterinary services. At December 31, 2007, we operated 143
animal hospitals in 14 of these states. In these states, we
provide administrative and support services to the
veterinary-medical groups. Pursuant to the management
agreements, the veterinary-medical groups are each solely
responsible for all aspects of the practice of veterinary
medicine, as defined by their respective state.
We have determined that the veterinary-medical groups are
variable interest entities as defined by Financial Accounting
Standards Board (FASB) Interpretation
No. 46(R), Consolidation of Variable Interest
Entities, and that we have a variable interest in those
entities through our management agreements. We also determined
that our variable interests, in aggregate with the variable
interests held by our related parties, absorbed the majority of
the expected losses and residual returns of the
veterinary-medical groups. Based on these determinations, we
consolidated the veterinary-medical groups in our consolidated
financial statements. The result of the consolidation is an
increase in both revenue and direct costs by an equal amount,
thus there is no impact on our operating income, net income,
earnings per share or cash flows.
|
|
b.
|
Use of
Estimates in Preparation of Financial Statements
|
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at
the date of our consolidated financial statements and our
reported amounts of revenue and expense during the reporting
period. Actual results could differ from our estimates.
56
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
c.
|
Revenue
and Related Cost Recognition
|
We recognize revenue, barring other facts, when the following
revenue recognition criteria are met:
|
|
|
|
|
persuasive evidence of a sales arrangement exists;
|
|
|
|
delivery of goods has occurred or services have been rendered;
|
|
|
|
the sales price or fee is fixed or determinable; and,
|
|
|
|
collectibility is reasonably assured or probable for certain
medical technology revenues.
|
Revenue is reported net of sales discounts and excludes sales
taxes.
We generally recognize revenue and costs as follows:
|
|
|
|
|
For non-contractual services provided by our laboratory, animal
hospital and medical technology business units, at the time
services are rendered.
|
|
|
|
For services provided by our medical technology business unit
under defined support and maintenance contracts, on a
straight-line basis over the contract period, recognizing costs
as incurred; these services include, but are not limited to,
technical support, product updates for software and extended
warranty coverage.
|
|
|
|
For the sale of merchandise at our animal hospitals, when
delivery of the goods has occurred.
|
|
|
|
For the sale of our digital radiography imaging equipment,
ultrasound imaging equipment, software and hardware systems at
the time title and risk of loss transfers to the customer, which
is generally upon delivery or upon installation and customer
acceptance if required per the sale arrangement. However, in
certain circumstances, we defer this revenue as discussed below.
|
We account for revenue in our medical technology business as
follows, depending upon the item sold:
|
|
|
|
|
Digital radiography imaging equipment and all of its related
computer equipment, our proprietary software and services in
addition to any other computers sold with our proprietary
software are accounted for under the rules of software
accounting, Statement of Position
No. 97-2,
Software Revenue Recognition, as amended. Our digital
radiography imaging equipment is accounted for under this
literature because our proprietary software is more than
incidental to the functionality of the equipment.
|
|
|
|
All other items, including the accounting for ultrasound imaging
equipment, are accounted for pursuant the general revenue
recognition rules of Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition.
|
In certain transactions we sell our ultrasound imaging equipment
and related services together with our digital radiography
imaging equipment and related services. In these transactions,
we account for each item under its respective literature and
allocate revenue using a relative fair value basis.
We defer revenue for certain transactions in our medical
technology business as follows:
|
|
|
|
|
We defer revenue for pre-paid services such as our consulting,
education services or post-contract customer support
(PCS) and recognize that revenue on a straight-line
basis over the contract period or as the services are provided
depending on the nature of the service.
|
|
|
|
We defer revenue for PCS provided as part of the purchase of
equipment and software and recognize that revenue on a
straight-line basis over the PCS period.
|
|
|
|
We defer revenue for equipment sales when we lack vendor
specific objective evidence of fair value for PCS elements and
recognize that revenue on a straight-line basis over the PCS
period.
|
57
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
We defer revenue when we lack persuasive evidence of a sales
agreement and recognize that revenue only when that evidence
exists.
|
|
|
|
We defer revenue on transactions where we participated in the
buyers leasing and recognize that revenue over the lease term.
|
As a result, we have deferred revenue and costs at
December 31, 2007 and 2006 consisting of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred equipment revenue(1)
|
|
$
|
7,475
|
|
|
$
|
9,460
|
|
Deferred fixed-priced support or maintance contract revenue
|
|
|
1,231
|
|
|
|
853
|
|
Other deferred revenue(2)
|
|
|
2,296
|
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
|
11,002
|
|
|
|
12,374
|
|
Less current portion included in other accrued liabilities
|
|
|
7,018
|
|
|
|
6,305
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of deferred revenue included in other
liabilities
|
|
$
|
3,984
|
|
|
$
|
6,069
|
|
|
|
|
|
|
|
|
|
|
Current portion of deferred costs included in prepaid expenses
and other
|
|
$
|
1,864
|
|
|
$
|
1,916
|
|
Long-term portion of deferred costs included in other assets
|
|
|
1,988
|
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
Total deferred costs(3)
|
|
$
|
3,852
|
|
|
$
|
4,959
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents amounts billed or received for sales arrangements
that include equipment, hardware, software and PCS.
|
|
(2)
|
Represents amounts billed or received in advance for services.
|
|
(3)
|
Represents costs related to equipment, hardware and software
included in deferred equipment revenue.
|
|
|
d.
|
Cash and
Cash Equivalents
|
We consider only highly liquid investments with original
maturities of less than 90 days to be cash equivalents. We
maintain balances in our bank accounts that are in excess of
FDIC insured levels.
Inventory is valued at the lower of cost or market using the
first-in,
first-out method.
|
|
f.
|
Property
and Equipment
|
Property and equipment is recorded at cost. Equipment held under
capital leases is recorded at the lower of the present value of
the minimum lease payments or the fair value of the equipment at
the beginning of the lease term.
We develop and implement new software to be used internally, or
enhance our existing internal software. We develop the software
using our own employees
and/or
outside consultants. Costs associated with the development of
new software are expensed as incurred. Costs related directly to
the software design, coding, testing and installation are
capitalized and amortized over the expected life of the
software. Costs related to upgrades or enhancements of existing
systems are capitalized if the modifications result in
additional functionality.
58
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation and amortization are recognized on the
straight-line method over the following estimated useful lives:
|
|
|
Buildings and improvements
|
|
5 to 40 years
|
Leasehold improvements
|
|
Lesser of lease term or 15 years
|
Furniture and equipment
|
|
5 to 7 years
|
Software
|
|
3 years
|
Equipment held under capital leases
|
|
5 to 10 years
|
Depreciation and amortization expense, including the
amortization of property under capital leases, in 2007, 2006 and
2005 was $22.7 million, $18.6 million and
$16.1 million, respectively.
Property and equipment at December 31, 2007 and 2006
consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
30,155
|
|
|
$
|
26,992
|
|
Building and improvements
|
|
|
71,395
|
|
|
|
58,345
|
|
Leasehold improvements
|
|
|
68,147
|
|
|
|
51,688
|
|
Furniture and equipment
|
|
|
122,811
|
|
|
|
108,520
|
|
Software
|
|
|
11,954
|
|
|
|
10,651
|
|
Buildings held under capital leases
|
|
|
19,954
|
|
|
|
7,790
|
|
Equipment held under capital leases
|
|
|
782
|
|
|
|
318
|
|
Construction in progress
|
|
|
13,706
|
|
|
|
12,894
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
338,904
|
|
|
|
277,198
|
|
Less accumulated depreciation and amortization
|
|
|
(124,884
|
)
|
|
|
(111,165
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
214,020
|
|
|
$
|
166,033
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization on buildings held under capital leases
amounted to $913,000 and $695,000 at December 31, 2007 and
2006, respectively, and accumulated amortization on equipment
held under capital leases amounted to $138,000 and $128,000 at
December 31, 2007 and 2006, respectively.
Most of our facilities are under operating leases. The minimum
lease payments, including predetermined fixed escalations of the
minimum rent, are recognized as rent expense on a straight-line
basis over the lease term as defined in Statement of Financial
Accounting Standards (SFAS) No. 13,
Accounting for Leases. The lease term includes
contractual renewal options that are reasonably assured based on
significant leasehold improvements acquired. Any leasehold
improvement incentives paid to us by a landlord are recorded as
a reduction of rent expense over the lease term. No individual
lease is material to our operations.
Goodwill represents the excess of the cost of an acquired entity
over the net of the fair value of identifiable assets acquired
and liabilities assumed.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, we have determined that we have three
reporting units, Laboratory, Animal Hospital and Medical
Technology, and we estimate annually, or sooner if circumstances
indicate an impairment may exist, the fair value of each of our
reporting units and compare their estimated fair value against
the net book value of those reporting units to determine if our
goodwill is impaired.
59
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When SFAS No. 142 was issued in 2001, we adopted the
end of December as our annual impairment testing date. During
the current year, we elected to change our date to the end of
October. An October 31st testing date will allow us
additional time to accurately complete our impairment testing
process in order to incorporate the results in our annual
financial statements and timely file those statements with the
Securities Exchange Commission in accordance with our
accelerated filing requirements. There were no impairment
charges resulting from either the October 31, 2007 or
December 31, 2006 impairment tests. In addition, no events
have occurred subsequent to the 2007 testing date which would
indicate any impairment may have occurred.
The following table presents the changes in the carrying amount
of our goodwill for 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory
|
|
|
Animal Hospital
|
|
|
Medical Equipment
|
|
|
Total
|
|
|
Balance as of January 1, 2006
|
|
$
|
94,246
|
|
|
$
|
473,038
|
|
|
$
|
19,160
|
|
|
$
|
586,444
|
|
Goodwill acquired
|
|
|
1,064
|
|
|
|
38,531
|
|
|
|
|
|
|
|
39,595
|
|
Other(1)
|
|
|
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
(270
|
)
|
Goodwill related to sale of animal hospitals
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
95,310
|
|
|
|
511,278
|
|
|
|
19,160
|
|
|
|
625,748
|
|
Goodwill acquired
|
|
|
34
|
|
|
|
200,904
|
|
|
|
|
|
|
|
200,938
|
|
Goodwill related to partnership interests
|
|
|
|
|
|
|
753
|
|
|
|
|
|
|
|
753
|
|
Other(1)
|
|
|
|
|
|
|
(5,472
|
)
|
|
|
|
|
|
|
(5,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
95,344
|
|
|
$
|
707,463
|
|
|
$
|
19,160
|
|
|
$
|
821,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other includes purchase price adjustments, earn-out payments and
the contribution of assets in return for a minority interest in
a partially-owned subsidiary. |
|
|
i.
|
Other
Intangible Assets
|
In addition to goodwill, we have amortizable intangible assets
at December 31, 2007 and 2006, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Covenants
not-to-compete
|
|
$
|
13,487
|
|
|
$
|
(6,928
|
)
|
|
$
|
6,559
|
|
|
$
|
12,687
|
|
|
$
|
(6,169
|
)
|
|
$
|
6,518
|
|
Non-contractual customer relationships
|
|
|
12,992
|
|
|
|
(2,755
|
)
|
|
|
10,237
|
|
|
|
9,869
|
|
|
|
(1,553
|
)
|
|
|
8,316
|
|
Favorable lease asset
|
|
|
5,594
|
|
|
|
(1,019
|
)
|
|
|
4,575
|
|
|
|
2,389
|
|
|
|
(346
|
)
|
|
|
2,043
|
|
Technology
|
|
|
1,270
|
|
|
|
(822
|
)
|
|
|
448
|
|
|
|
1,270
|
|
|
|
(568
|
)
|
|
|
702
|
|
Trademarks
|
|
|
582
|
|
|
|
(185
|
)
|
|
|
397
|
|
|
|
569
|
|
|
|
(127
|
)
|
|
|
442
|
|
Contracts
|
|
|
380
|
|
|
|
(309
|
)
|
|
|
71
|
|
|
|
397
|
|
|
|
(231
|
)
|
|
|
166
|
|
Client lists
|
|
|
137
|
|
|
|
(51
|
)
|
|
|
86
|
|
|
|
506
|
|
|
|
(356
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,442
|
|
|
$
|
(12,069
|
)
|
|
$
|
22,373
|
|
|
$
|
27,687
|
|
|
$
|
(9,350
|
)
|
|
$
|
18,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization is recognized on the straight-line method over the
following estimated useful lives:
|
|
|
Covenants
not-to-compete
|
|
3 to 10 years
|
Non-contractual customer relationships
|
|
4 to 25 years
|
Favorable lease asset
|
|
1 to 14 years
|
Technology
|
|
5 years
|
Trademarks
|
|
10 years
|
Contracts
|
|
2 to 4 years
|
Client lists
|
|
3 years
|
The following table summarizes our aggregate amortization
expense related to other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Aggregate amortization expense
|
|
$
|
4,318
|
|
|
$
|
3,597
|
|
|
$
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense related to intangible assets
for each of the five succeeding years and thereafter at
December 31, 2007 is as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
4,725
|
|
2009
|
|
|
3,601
|
|
2010
|
|
|
2,791
|
|
2011
|
|
|
1,983
|
|
2012
|
|
|
1,160
|
|
Thereafter
|
|
|
8,113
|
|
|
|
|
|
|
Total
|
|
$
|
22,373
|
|
|
|
|
|
|
We account for income taxes under SFAS No. 109,
Accounting for Income Taxes
(SFAS No. 109). 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 statutory tax provisions. 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.
Changes in tax rates or other statutory provisions are
recognized in the period the change occurs.
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
consolidated balance sheet related to such differences. During
the first quarter of 2006, we determined that these
contingencies no longer existed due to the outcome of an income
tax audit and recognized a tax benefit of $6.8 million.
Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement
No. 109 (FIN 48). We did not have any
unrecognized tax benefits on either the effective date of the
pronouncement or December 31, 2007. FIN 48 prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
61
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Notes receivable are financial instruments issued in the normal
course of business and are not market traded. The amounts
recorded approximate fair value and are shown net of valuation
allowances of $77,000 and $58,000 at December 31, 2007 and
2006, respectively. The notes bear interest at rates varying
from 5% to 9% per annum.
|
|
l.
|
Deferred
Financing Costs
|
Deferred financing costs are amortized using the effective
interest method over the life of the related debt. Accumulated
amortization of deferred financing costs was $947,000 and
$579,000 at December 31, 2007 and 2006, respectively.
|
|
m.
|
Fair
Value of Financial Instruments and Concentration of
Risk
|
The carrying amount reported in our consolidated balance sheets
for cash, cash equivalents, trade accounts receivable, accounts
payable and accrued liabilities approximates fair value because
of the immediate or short-term maturity of these financial
instruments. Our policy is to place our cash and cash
equivalents in highly-rated financial instruments and
institutions, which we believe mitigates our credit risk.
Concentration of credit risk with respect to accounts receivable
is limited due to the diversity of our customer base. We
routinely review the collection of our accounts receivable and
maintain an allowance for potential credit losses, but
historically have not experienced any significant losses related
to an individual customer or groups of customers in a geographic
area.
Our operations depend, in some cases, on the ability of single
source suppliers or a limited number of suppliers, to deliver
products and supplies on a timely basis. We have in the past
experienced, and may in the future experience, shortages of or
difficulties in acquiring products
and/or
supplies in the quantities and of the quality needed. Shortages
in the availability of products
and/or
supplies for an extended period of time will have a negative
impact on our operating results.
|
|
n.
|
Derivative
Instruments
|
In accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, all
investments in derivatives are recorded at fair value. A
derivative is typically defined as an instrument whose value is
derived from an underlying instrument, index or
rate, has a notional amount, requires little or no initial
investment and can be net settled. Our derivatives are reported
as current assets and liabilities or other non-current assets or
liabilities as appropriate.
We use interest rate swap agreements to mitigate our exposure to
increasing interest rates as well as to maintain an appropriate
mix of fixed-rate and variable-rate debt. Our senior credit
facility requires us to maintain one or more interest rate
agreements to ensure that no less than 25% of the aggregate
principal amount of our total indebtedness is subject to such
interest rate agreements.
If we determine that contracts are effective at meeting our risk
reduction and correlation criteria, we account for them using
hedge accounting. Under hedge accounting, we recognize the
effective portion of changes in the fair value of the contracts
in other comprehensive income and the ineffective portion in
earnings. If we determine that contracts do not, or no longer
meet our risk reduction and correlation criteria, we account for
them under a fair-value method recognizing changes in the fair
value in earnings in the period of change. If we determine that
a contract no longer meets our risk reduction and correlation
criteria or if the derivative expires, we recognize in earnings
any accumulated balance in other comprehensive income related to
this contract in the period of determination. For interest rate
swap agreements accounted for under hedge accounting, we assess
the effectiveness based on changes in their intrinsic value with
changes in the time value
62
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
portion of the contract reflected in earnings. All cash payments
made or received under the contracts are recognized in interest
expense.
Credit exposure associated with non-performance by the
counterparties to derivative instruments is generally limited to
the uncollateralized fair value of the asset related to
instruments recognized in the consolidated balance sheets. We
attempt to mitigate the risk of non-performance by selecting
counterparties with high credit ratings and monitoring their
creditworthiness and by diversifying derivative amounts with
multiple counterparties.
The contractual or notional amounts for derivatives are used to
calculate the exchange of contractual payments under the
agreements and are not representative of the potential for gain
or loss on these instruments. Interest rates affect the fair
value of derivatives. The fair values generally represent the
estimated amounts that we would expect to receive or pay upon
termination of the contracts at the reporting date. The fair
values are based upon dealer quotes when available or an
estimate using values obtained from independent pricing
services, costs to settle or quoted market prices of comparable
instruments.
|
|
o.
|
Marketing
and Advertising
|
Marketing and advertising costs are expensed as incurred. Total
marketing and advertising expense amounted to
$16.2 million, $13.5 million and $11.2 million
for 2007, 2006 and 2005, respectively.
|
|
p.
|
Insurance
and Self-Insurance
|
We use a combination of insurance and self-insurance with high
retention or high deductible provisions for a number of risks,
including workers compensation, general liability,
property insurance and our health benefits. Liabilities
associated with these risks are estimated at fair value on an
undiscounted basis by considering historical claims experience,
demographic factors, severity factors and other actuarial
assumptions.
We completed a debt refinancing transaction in 2005 and as a
result we incurred debt retirement costs of $19.3 million.
See Note 6., Long-Term Obligations, for additional
information related to this transaction. These costs have been
included as a component of income from operations in the
consolidated income statements.
We accrue the cost of basic product warranties included with the
sale of our digital radiography imaging equipment and our
ultrasound imaging equipment at the time we sell these units to
our customers. Our warranty costs are primarily for our
assistance in helping our customers resolve issues with the
warranties they have with the original equipment manufacturers.
We estimate our warranty costs based on historical warranty
claim experience. Accrued warranty costs at December 31,
2007 and 2006 were $95,000 and $97,000, respectively.
|
|
s.
|
Calculation
of Earnings per Share
|
Basic earnings per share is calculated by dividing net income by
the weighted-average number of shares outstanding during the
period. Diluted earnings per share is calculated by dividing net
income by the weighted-average number of common shares
outstanding after giving effect to all potentially dilutive
common
63
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares outstanding during the period. Basic and diluted earnings
per share were calculated as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
83,893
|
|
|
|
83,198
|
|
|
|
82,439
|
|
Effect of dilutive potential common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested shares
|
|
|
1,823
|
|
|
|
1,684
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
85,716
|
|
|
|
84,882
|
|
|
|
83,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.44
|
|
|
$
|
1.27
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
1.41
|
|
|
$
|
1.24
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, and 2006, potential
common shares of 4,400 and 39,341, respectively, were excluded
from the computation of diluted earnings per share because their
inclusion would have had an anti-dilutive effect. There were no
anti-dilutive shares for the year ended December 31, 2005.
|
|
t.
|
Share-Based
Compensation
|
Prior to January 1, 2006, we accounted for our share-based
payments under the intrinsic value method as prescribed in
Accounting Principles Board 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 was 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
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), which requires us to
measure the cost of share-based payments granted to our
employees and directors, 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.
Prior to the adoption of SFAS No. 123R, we reported
all income tax benefits resulting from the exercise of stock
options as a component of cash provided by operating activities
on our 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
for those options to be classified as cash provided by financing
activities.
64
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No share-based compensation was recognized in 2005, however, the
following table presents net income and earnings per share as if
we had recognized share-based compensation using the
fair-value-based method in 2005 (in thousands, except per share
amounts):
|
|
|
|
|
Net income, as reported
|
|
$
|
67,816
|
|
Deduct: Total share-based compensation determined under
fair-value-based method for all awards, net of tax
|
|
|
(12,667
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
55,149
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.82
|
|
Basic pro forma
|
|
$
|
0.67
|
|
Diluted as reported
|
|
$
|
0.81
|
|
Diluted pro forma
|
|
$
|
0.66
|
|
Our companys share-based employee compensation plans are
described further in Note 9, Share-Based
Compensation.
|
|
u.
|
New
Accounting Standards
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements. However, it eliminates inconsistencies in the
guidance provided in previous accounting pronouncements. Certain
provisions of SFAS No. 157 will be effective for our
company on January 1, 2008.
Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal
year, including financial statements for an interim period
within that fiscal year. All valuation adjustments will be
recognized as cumulative-effect adjustments to the opening
balance of retained earnings for the fiscal year in which
SFAS No. 157 is initially applied. In December 2007,
the FASB provided a one-year deferral of SFAS No. 157
for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value on a
recurring basis, at least annually. We will adopt
SFAS No. 157 on January 1, 2008, for our
financial assets and liabilities, which primarily consists of
derivatives we record in accordance with SFAS No. 133,
and on January 1, 2009, for our non-financial assets and
liabilities. For our financial assets and liabilities, we expect
that our adoption of SFAS No. 157 will primarily
impact our disclosures and not have a material impact on our
consolidated results of operations, cash flows and financial
position. We are currently evaluating the impact with respect to
our non-financial assets and liabilities.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS No. 159), which
permits entities to choose to measure many financial instruments
and certain other items at fair value. The provisions of
SFAS No. 159 will be effective for our company on
January 1, 2008. We do not believe that the adoption of
this standard will have a material impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R).
SFAS No. 141R will significantly change the accounting
for business combinations in a number of areas including the
treatment of contingent consideration, contingencies,
acquisition costs, IPR&D and restructuring costs. In
addition, under SFAS No. 141R, changes in deferred tax
asset valuation allowances and acquired income tax uncertainties
in a business combination after the measurement period will
impact income tax expense. The provisions of
SFAS No. 141R will be effective for our company on
January 1, 2009. We are currently evaluating the impact of
SFAS No. 141R on our consolidated financial statements.
65
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160
will change the accounting and reporting for minority interests,
which will be re-characterized as non-controlling interests and
classified as a component of equity. This new consolidation
method will significantly change the accounting for transactions
with minority interest holders. The provisions of
SFAS No. 160 will be effective for our company on
January 1, 2009. We are currently evaluating the impact of
SFAS No. 160 on our consolidated financial statements.
Certain prior year balances have been reclassified to conform to
the 2007 financial statement presentation.
|
|
3.
|
Related
Party Transactions
|
|
|
a.
|
Transactions
with Zoasis
|
We incurred marketing expense for vaccine reminders and other
direct mail services provided by Zoasis, a company that is
majority owned by Robert Antin, our Chief Executive Officer and
Chairman. We purchased services of $1.8 million,
$1.9 million and $1.1 million for 2007, 2006 and 2005,
respectively. Art Antin, our Chief Operating Officer, owns a 10%
interest in Zoasis. We believe the pricing of these services is
comparable to prices paid by us to independent third parties for
similar services. Beginning in late 2006, in connection with a
sublease for office space located in the Zoasis corporate
office, we paid rent to Zoasis of $54,000 and $18,000 in 2007
and 2006, respectively. The lease expired in August 2007 and
continues on a
month-to-month
basis until the completion of a software development project.
The rent under this sublease is comparable to the rent we pay
for similar spaces. The rental payments were included in the
total expenditures mentioned above.
In 2003, we entered into an agreement with Zoasis pursuant to
which we acquired all of Zoasis right, title and interest
in and to certain software in exchange for all our preferred
stock of Zoasis then held by us. Concurrent with the purchase of
the software, we granted to Zoasis a limited royalty-free,
non-exclusive license to this software in exchange for Zoasis
providing certain support for the software. Both we and Zoasis
have a right to make modifications to the software, but all
modifications and derivative works are owned by us. The software
is hosted at our expense at a third-party hosting facility for
the benefit of both parties.
Frank Reddick joined our company as a director in February 2002
and is a partner in the law firm of Akin Gump Strauss
Hauer & Feld, LLP, or Akin. Akin provided legal
services to us during 2007, 2006 and 2005. The amount paid by
our company to Akin for these legal services was
$1.2 million, $550,000 and $1.3 million in 2007, 2006
and 2005, respectively.
66
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our acquisition strategy includes the acquisition of animal
hospitals. If favorable opportunities are presented, we may
pursue the acquisition of animal hospital chains, laboratories
or related businesses. In accordance with that strategy, we
acquired the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Laboratories:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
Acquisitions relocated into our existing laboratories
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospitals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, excluding Healthy Pet(1)(2)
|
|
|
29
|
|
|
|
22
|
|
|
|
22
|
|
Healthy Pet(1)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Pets Choice(2)
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Acquisitions relocated into our existing animal hospitals
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
17
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Healthy Pet Corp. (Healthy Pet) was acquired on
June 1, 2007. |
|
(2) |
|
Pets Choice, Inc. (Pets Choice) was
acquired on July 1, 2005. |
Animal
Hospital and Laboratory Acquisitions, excluding Healthy Pet and
Pets Choice
The following table summarizes the aggregate consideration,
including acquisition costs, paid by us for our acquired animal
hospitals and laboratories, excluding Healthy Pet and Pets
Choice, and the allocation of the purchase price (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
57,990
|
|
|
$
|
48,388
|
|
|
$
|
34,199
|
|
Notes payable and other liabilities assumed
|
|
|
2,849
|
|
|
|
5,327
|
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,839
|
|
|
$
|
53,715
|
|
|
$
|
37,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
$
|
2,662
|
|
|
$
|
4,944
|
|
|
$
|
2,023
|
|
Identifiable intangible assets
|
|
|
2,906
|
|
|
|
9,176
|
|
|
|
2,138
|
|
Goodwill(1)
|
|
|
55,271
|
|
|
|
39,595
|
|
|
|
32,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,839
|
|
|
$
|
53,715
|
|
|
$
|
37,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We expect that $45.7 million, $34.1 million and
$25.3 million of the goodwill recognized in 2007, 2006 and
2005, respectively, will be fully deductible for income tax
purposes. |
67
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Healthy
Pet Corp.
On June 1, 2007, we acquired Healthy Pet, which operated at
the time of its acquisition, 44 animal hospitals and a small
laboratory, which primarily serviced its own animal hospitals.
This acquisition allowed us to expand our animal hospital
operations, particularly in Massachusetts, Connecticut,
Virginia, Rhode Island and Georgia. Our condensed, consolidated
financial statements reflect the operating results of Healthy
Pet since June 1, 2007.
We acquired Healthy Pet for a preliminary purchase price of
$185.0 million. The following table summarizes the
preliminary purchase price and the preliminary allocation of the
purchase price (in thousands):
|
|
|
|
|
Preliminary Purchase Price:
|
|
|
|
|
Cash paid to holders of Healthy Pet stock and debt, net of cash
acquired
|
|
$
|
153,704
|
|
Cash paid for professional services
|
|
|
1,303
|
|
Debt and capital leases assumed
|
|
|
17,696
|
|
Other liabilities assumed(1)
|
|
|
12,343
|
|
|
|
|
|
|
Total
|
|
$
|
185,046
|
|
|
|
|
|
|
Preliminary Allocation of the Purchase Price:
|
|
|
|
|
Tangible assets
|
|
$
|
33,444
|
|
Identifiable intangible assets(2)
|
|
|
5,935
|
|
Goodwill(3)
|
|
|
145,667
|
|
|
|
|
|
|
Total
|
|
$
|
185,046
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes liabilities for our plan to eliminate duplicate
functions and to close certain animal hospitals (net of cash
received from the closure plan of $136,000). |
|
(2) |
|
Includes customer relationships, covenants not to compete,
client lists and favorable lease assets. |
|
(3) |
|
We expect that $58.4 million of goodwill will be fully
deductible for income tax purposes. |
The final purchase price and the valuation of the net assets
acquired is expected to be completed as soon as practicable, but
no later than one year from the date of acquisition. The final
purchase price allocation is still under review specifically
related to the determination of the fair value of certain assets
and liabilities acquired, primarily fixed and intangible assets,
lease obligations, the 2007 tax liability and deferred tax
balances. We believe that any adjustments would not be material
to the consolidated financial statements and we expect this
review to be completed by the end of second quarter of 2008.
In addition, we incurred integration costs of $1.6 million
primarily to operate Healthy Pets corporate office, which
was closed in 2007. These costs were expensed as incurred and
are included in corporate selling, general and administrative
expense.
Pets
Choice, Inc.
On July 1, 2005, we acquired Pets Choice, which
operated 46 animal hospitals located in five states as of the
acquisition date. This acquisition allowed us to expand our
animal hospital operations, particularly Texas and Washington.
Our consolidated financial statements reflect the operating
results of Pets Choice since July 1, 2005.
68
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We acquired Pets Choice for a purchase price of
$78.8 million. The following table summarizes the purchase
price and the allocation of the purchase price (in thousands):
|
|
|
|
|
Purchase Price:
|
|
|
|
|
Cash paid to holders of Pets Choice stock and debt, net of
cash acquired
|
|
$
|
51,051
|
|
Cash paid for professional services
|
|
|
833
|
|
Debt and capital leases assumed
|
|
|
14,061
|
|
Other liabilities assumed(1)
|
|
|
12,848
|
|
|
|
|
|
|
Total
|
|
$
|
78,793
|
|
|
|
|
|
|
Allocation of the Purchase Price:
|
|
|
|
|
Tangible assets(2)
|
|
$
|
18,455
|
|
Identifiable intangible assets
|
|
|
2,643
|
|
Goodwill(3)
|
|
|
57,695
|
|
|
|
|
|
|
Total
|
|
$
|
78,793
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes cash paid for closure plan of $464,000. |
|
(2) |
|
Includes cash paid for real estate of $1.2 million. |
|
(3) |
|
We expect that $21.8 million of goodwill will be fully
deductible for income tax purposes. |
Other
Acquisition Payments
We paid $1.9 million, $2.0 million and
$1.2 million in 2007, 2006 and 2005, respectively, to
sellers for the unused portion of holdbacks. See
Note 10.d., Holdbacks, for additional information.
We paid $50,000, $135,000 and $665,000 million in 2007,
2006 and 2005, respectively, for earn-out payments. We recorded
goodwill in the same amount as the earn-out payments, which we
expect will be fully deductible for tax purposes. See
Note 10.c., Earn-out Payments, for additional
information.
Pro
Forma Information
The following unaudited pro forma financial information presents
the combined results of operations for our company and the
companies we acquired in 2007 as if those acquisitions had
occurred as of the beginning of the years presented. The
unaudited pro forma financial information is not necessarily
indicative of what our consolidated results of operations would
have been had we completed the acquisitions at the beginning of
each year. In addition, the unaudited pro forma financial
information does not attempt to project the future results of
operations of our company.
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
(Unaudited)
|
|
|
Revenue
|
|
$
|
1,204,378
|
|
|
$
|
1,102,196
|
|
Net income
|
|
$
|
120,683
|
|
|
$
|
107,742
|
|
Basic earnings per share
|
|
$
|
1.44
|
|
|
$
|
1.30
|
|
Diluted earnings per share
|
|
$
|
1.41
|
|
|
$
|
1.27
|
|
Shares used for computing basic earnings per share
|
|
|
83,893
|
|
|
|
83,198
|
|
Shares used for computing diluted earnings per share
|
|
|
85,716
|
|
|
|
84,882
|
|
69
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Other
Accrued Liabilities
|
Other accrued liabilities consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued workers compensation insurance
|
|
$
|
6,051
|
|
|
$
|
6,363
|
|
Deferred revenue
|
|
|
7,018
|
|
|
|
6,305
|
|
Interest rate swap liability
|
|
|
5,827
|
|
|
|
603
|
|
Other
|
|
|
23,178
|
|
|
|
17,690
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,074
|
|
|
$
|
30,961
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations consisted of the following at
December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revolving credit
|
|
Revolving line of credit, maturing in 2010, secured by assets,
variable interest rate
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior term notes
|
|
Notes payable, maturing in 2011, secured by assets, variable
interest rate (weighted-average interest rate of 6.8% and 6.6%
in 2007 and 2006, respectively)
|
|
|
527,675
|
|
|
|
372,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured seller notes
|
|
Notes payable, various maturities through 2011, secured by
assets and stock of certain subsidiaries, various interest rates
ranging from 9.0% to 10.0%
|
|
|
1,195
|
|
|
|
2,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured debt
|
|
Notes payable, various maturities through 2009, various interest
rates ranging from 2.0% to 9.7%
|
|
|
1,095
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt obligations
|
|
|
529,965
|
|
|
|
375,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
30,215
|
|
|
|
15,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560,180
|
|
|
|
390,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(7,886
|
)
|
|
|
(6,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
552,294
|
|
|
$
|
384,067
|
|
|
|
|
|
|
|
|
|
|
|
|
70
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The annual aggregate scheduled maturities of our long-term
obligations for the five years subsequent to December 31,
2007 are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
Capital Lease
|
|
|
|
|
|
|
Obligations
|
|
|
Obligations
|
|
|
Total
|
|
|
2008
|
|
$
|
6,157
|
|
|
$
|
1,729
|
|
|
$
|
7,886
|
|
2009
|
|
|
6,008
|
|
|
|
1,975
|
|
|
|
7,983
|
|
2010
|
|
|
5,855
|
|
|
|
2,062
|
|
|
|
7,917
|
|
2011
|
|
|
511,945
|
|
|
|
2,177
|
|
|
|
514,122
|
|
2012
|
|
|
|
|
|
|
2,377
|
|
|
|
2,377
|
|
Thereafter
|
|
|
|
|
|
|
19,895
|
|
|
|
19,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
529,965
|
|
|
$
|
30,215
|
|
|
$
|
560,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Credit Facility
In May 2005, we entered into a new senior credit facility with
various lenders for $550.0 million of senior secured credit
facilities with Goldman Sachs Credit Partners, L.P. as the
syndication agent and Wells Fargo Bank, N.A. as the
administrative agent. At the time of entering into the new
senior credit facility, it included $475.0 million of
senior term notes and a $75.0 million revolving credit
facility. The funds borrowed under the new senior term notes
were used to retire our existing senior term notes in the
principal amount of $220.3 million and our
9.875% senior subordinated notes in the principal amount of
$170.0 million. The new senior term notes also provided the
necessary financing to acquire Pets Choice on July 1,
2005. In connection with entering into the new senior credit
facility and repaying our existing senior term notes, we paid
financing costs of $2.8 million and recognized debt
retirement costs of $2.0 million.
In June 2007, we amended our senior credit facility to allow for
additional senior term notes in the amount of
$160.0 million. The funds borrowed from the additional
senior term notes were primarily used to fund the acquisition of
Healthy Pet on June 1, 2007. The terms, including the
interest rate, of these additional senior term notes are the
same as the senior term notes existing prior to the amendment.
In connection with this amendment, we paid financing costs in
the amount of $926,000.
The revolving credit facility allows us to borrow up to an
aggregate principal amount of $75.0 million and may be used
to borrow, on a
same-day
notice under a swing line, the lesser of $5.0 million or
the aggregate unused amount of the revolving credit facility
then in effect. At December 31, 2007, we had no borrowings
outstanding under our revolving credit facility.
Since entering into our senior credit facility in May 2005, we
have prepaid a portion of our senior term notes in 2005 and 2006
in the amount of $35.0 million and $60.0 million,
respectively. We did not prepay any portion of our senior term
notes in 2007.
Interest Rate on Senior Term Notes. In
general, borrowings under our senior credit facility bear
interest, at our option, on either:
|
|
|
|
|
the base rate (as defined below) plus a margin of 0.75% per
annum for the senior term notes existing from January 2005 to
May 2005 and a margin of 0.50% per annum for the senior term
notes existing since May 2005; or
|
|
|
|
the adjusted Eurodollar rate (as defined below) plus a margin of
1.75% per annum for the senior term notes existing from January
2005 to May 2005 and a margin of 1.50% per annum for the senior
term notes existing since May 2005.
|
71
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest Rate on Revolving Credit Facility. In
general, borrowings under our revolving credit facility bear
interest, at our option, on either:
|
|
|
|
|
the base rate (as defined below) plus a margin of 0.50% per
annum; or
|
|
|
|
the adjusted Eurodollar rate (as defined below) plus a margin of
1.50% per annum.
|
Swing line borrowings bear interest at the base rate (as defined
below), plus the same margin applicable to the revolving credit
facility (as detailed above).
The base rate is the higher of (a) Wells Fargos prime
rate or (b) the Federal funds rate plus 0.5%. The adjusted
Eurodollar rate is defined as the rate per annum obtained by
dividing (1) the rate of interest offered to Wells Fargo on
the London interbank market by (2) a percentage equal to
100% minus the stated maximum rate of all reserve requirements
applicable to any member bank of the Federal Reserve System in
respect of Eurocurrency liabilities.
The revolving credit facility has a commitment fee equal to
0.50% per annum on the unused portion of the commitment or
0.375% per annum when the unused commitment is less than or
equal to 50.0%.
Maturity and Principal Payments. The revolving
credit facility matures on May 16, 2010. The senior term
notes mature on May 16, 2011. Principal payments on the
revolving credit facility are made at our discretion with the
entire unpaid amount due at maturity. The remaining principal
payments on the senior term notes are paid quarterly with the
annual aggregate scheduled maturities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ending December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Senior term notes
|
|
$
|
5,393
|
|
|
$
|
5,393
|
|
|
$
|
5,393
|
|
|
$
|
511,496
|
|
|
$
|
|
|
Pursuant to the terms of the senior credit facility, mandatory
prepayments are due on the senior term notes equal to 75% of any
excess cash flow at the end of 2008, 2009 and 2010. Excess cash
flow is defined as earnings before interest, taxes, depreciation
and amortization less voluntary and scheduled debt repayments,
capital expenditures, interest payable in cash, taxes payable in
cash and cash paid for acquisitions. These payments reduce on a
pro rata basis the remaining scheduled principal payments. All
outstanding indebtedness under the senior credit facility may be
voluntarily prepaid in whole or in part without premium or
penalty.
Guarantees and Security. We and each of our
wholly-owned subsidiaries guarantee the outstanding debt under
the senior credit facility. These borrowings, along with the
guarantees of the subsidiaries, are further secured by
substantially all of our consolidated assets. In addition, these
borrowings are secured by a pledge of substantially all of the
capital stock, or similar equity interests, of our wholly-owned
subsidiaries.
Debt Covenants. The 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 on all classes of
stock. At December 31, 2007, we had a fixed charge coverage
ratio of 1.57 to 1.00, which was in compliance with the required
ratio of no less than 1.20 to 1.00, and a leverage ratio of 2.07
to 1.00, which was in compliance with the required ratio of no
more than 3.25 to 1.00.
9.875% Senior
Subordinated Notes
At January 1, 2004, we had $170.0 million in principal
amount of 9.875% senior subordinated notes due 2009 with
Chase Manhattan Bank and Trust Company, N.A., as trustee.
In May 2005, we redeemed $170.0 million, the entire
principal amount, of our 9.875% senior subordinated notes.
In connection with prepaying our 9.875% senior subordinated
notes, we paid financing costs and a tender fee of $505,000 and
$13.8 million, respectively, and recognized debt retirement
costs of $17.3 million.
72
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Interest Rate. Interest was payable
semi-annually in arrears on June 1 and December 1. Interest
was computed on the basis of a
360-day year
comprised of twelve
30-day
months at the rate of 9.875% per annum.
Interest
Rate Swap Agreements
We have entered into interest rate swap agreements whereby we
pay to the counterparties amounts based on fixed interest rates
and set notional principal amounts in exchange for the receipt
of payments from counterparties based on current LIBOR and the
same set notional principal amounts. The purpose of these hedges
is to offset the variability of cash flows due to our
outstanding variable rate debt under our senior term notes. A
summary of these agreements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Agreements
|
|
Fixed interest rate
|
|
4.07%
|
|
3.98%
|
|
3.94%
|
|
5.51%
|
|
4.95%
|
|
5.34%
|
Notional amount
|
|
$50 million
|
|
$50 million
|
|
$50 million
|
|
$50 million
|
|
$75 million
|
|
$100 million
|
Effective date
|
|
5/26/2005
|
|
6/2/2005
|
|
6/30/2005
|
|
6/20/2006
|
|
4/30/2007
|
|
6/11/2007
|
Expiration date
|
|
5/26/2008
|
|
5/31/2008
|
|
6/30/2007
|
|
6/30/2009
|
|
4/30/2009
|
|
12/31/2009
|
Counterparties
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Wells Fargo
|
|
Goldman Sachs
|
|
Wells Fargo
|
|
Goldman Sachs
|
Qualifies for hedge accounting
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
The following table summarizes cash received or cash paid and
unrealized gains or losses recognized as a result of our
interest rate swap agreements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash (received) paid(1)
|
|
$
|
(1,536
|
)
|
|
$
|
(1,542
|
)
|
|
$
|
57
|
|
Recognized (gain) loss(2)
|
|
$
|
425
|
|
|
$
|
8
|
|
|
$
|
(122
|
)
|
|
|
|
(1) |
|
These amounts are included in interest expense in our
consolidated income statements. |
|
(2) |
|
These recognized gains or losses are included in other expense
(income) in our consolidated income statements. |
|
|
7.
|
Fair
Value of Financial Instruments
|
SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not
recognized in the accompanying consolidated balance sheets. Fair
value is defined as the amount at which an instrument could be
exchanged in a current transaction between willing parties other
than in a forced or liquidation sale. The fair value estimates
of financial instruments are not necessarily indicative of the
amounts we might pay or receive in actual market transactions.
The use of different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents. These balances
include cash and cash equivalents with maturities of less than
three months. The carrying amount approximates fair value due to
the short-term maturities of these instruments.
Receivables, Less Allowance for Doubtful
Accounts. Due to their short-term nature, fair
value approximates carrying value.
Long-Term Debt. We believe the carrying value
of our variable-rate debt at December 31, 2007 is not a
reasonable estimate of fair value due to changes in the credit
markets during 2007. We have estimated the fair value of our
variable-rate debt using discounted cash flow techniques
utilizing current market rates. The
73
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated fair value of our variable-rate debt at
December 31, 2006 approximates its carrying value because
there were no significant changes in the credit markets from the
time we borrowed these funds in May 2005.
Interest Rate Swap Agreements. The valuation
of our interest rate swap agreements was determined by the
counterparties based on fair market valuations for similar
agreements.
The following table reflects the carrying value and fair values
of both our long-term debt and interest rate swap agreements (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Variable-rate long-term debt
|
|
$
|
527,675
|
|
|
$
|
513,749
|
|
|
$
|
372,668
|
|
|
$
|
372,668
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
$
|
185
|
|
|
$
|
185
|
|
|
$
|
1,863
|
|
|
$
|
1,863
|
|
Other accrued liabilities
|
|
|
(5,827
|
)
|
|
|
(5,827
|
)
|
|
|
(603
|
)
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,642
|
)
|
|
$
|
(5,642
|
)
|
|
$
|
1,260
|
|
|
$
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not paid cash dividends on our common stock and we do
not anticipate paying cash dividends in the foreseeable future.
In addition, our senior credit facility places limitations on
our ability to pay cash dividends or make other distributions in
respect of our common stock. Specifically, our senior credit
facility dated May 16, 2005, as amended, prohibits us from
declaring, ordering, paying, or setting apart any sum for any
dividends or other distributions on account of any shares of any
class of stock, other than dividends payable solely in shares of
stock to holders of such class of stock. Any future
determination as to the payment of dividends will depend on our
results of operations, financial condition, capital requirements
and other factors deemed relevant by our Board of Directors,
including the General Corporation Law of the State of Delaware,
which provides that dividends are only payable out of surplus or
current net profits.
|
|
9.
|
Share-Based
Compensation
|
Stock
Incentive Plans
At December 31, 2007, there were stock options and
non-vested shares outstanding under our existing stock incentive
plans. We maintain three plans, the 1996 Stock Incentive Plan,
the 2001 Stock Incentive Plan and the 2006 Equity Incentive Plan
(2006 Plan). 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) 6,490,412 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 December 31, 2007, all of these shares were available
for grant. Outstanding options and non-vested shares 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.
74
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Activity
A summary of our stock option activity for 2007 is as follows
(in thousands, except weighted-average exercise price and
weighted-average remaining contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2007
|
|
|
5,290
|
|
|
$
|
15.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(775
|
)
|
|
|
10.31
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(83
|
)
|
|
|
20.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,432
|
|
|
$
|
16.57
|
|
|
|
4.0
|
|
|
$
|
122,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
3,890
|
|
|
$
|
16.52
|
|
|
|
4.1
|
|
|
$
|
107,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2007
|
|
|
522
|
|
|
$
|
16.99
|
|
|
|
3.2
|
|
|
$
|
14,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of our stock options
granted during 2006 and 2005 was $10.97 and $9.46, respectively.
There were no stock options granted during 2007. The aggregate
intrinsic value of our stock options exercised during 2007, 2006
and 2005 was $23.0 million, $19.0 million and
$9.6 million, respectively. The actual tax benefit realized
on options exercised during 2007, 2006 and 2005 was
$8.9 million, $7.3 million and $3.8 million,
respectively. The total fair value of options vested during
2007, 2006 and 2005 was $1.8 million, $3.2 million and
$22.7 million, respectively.
The following table summarizes information about the options
outstanding at December 31, 2007 (in thousands, except per
share amounts and the weighted-average remaining contractual
life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Avg.
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
Weighted-Avg.
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Weighted-Avg.
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$0.50
|
|
|
127
|
|
|
|
2.7
|
|
|
$
|
0.50
|
|
|
|
127
|
|
|
$
|
0.50
|
|
$6.26 - $7.97
|
|
|
1,069
|
|
|
|
4.9
|
|
|
$
|
7.01
|
|
|
|
1,069
|
|
|
$
|
7.01
|
|
$15.33 - $30.70
|
|
|
3,236
|
|
|
|
3.8
|
|
|
$
|
20.36
|
|
|
|
2,694
|
|
|
$
|
21.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,432
|
|
|
|
|
|
|
|
|
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, there was $1.4 million of total
unrecognized compensation cost related to our stock options.
This cost is expected to be recognized over a weighted-average
period of less than one year.
75
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The following assumptions were used to
determine the fair value of those options granted during 2006
and 2005:
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
2006
|
|
2005
|
|
Expected volatility(1)
|
|
35.5%
|
|
37.8% to 39.6%
|
Weighted-average volatility(1)
|
|
35.5%
|
|
37.9%
|
Expected dividends
|
|
0.0%
|
|
0.0%
|
Expected term(2)
|
|
4.3 years
|
|
5.2 years
|
Risk-free rate(3)
|
|
5.0%
|
|
3.9% to 4.3%
|
|
|
|
(1) |
|
We estimate the volatility of our common stock on the date of
grant based on historical volatility. |
|
(2) |
|
The expected term represents the period of time that we expect
the options to be outstanding. We estimated the expected term
based on the simplified method permitted under Staff Accounting
Bulletin No. 107. |
|
(3) |
|
The risk-free interest rate is based on the implied yield in
effect at the time of option grant on U.S. Treasury zero-coupon
issues with equivalent remaining terms. |
We use historical data to estimate pre-vesting option
forfeitures. We recognize share-based compensation only for
those awards that we expect to vest.
The compensation cost that has been charged against income for
stock options was $1.9 million and $3.1 million for
2007 and 2006, respectively. As mentioned previously, there was
no compensation expense recorded in 2005. The corresponding
income tax benefit recognized in the income statement was
$0.7 million and $1.2 million for 2007 and 2006,
respectively.
Non-Vested
Shares
Additionally, under our 2006 Plan, we have issued non-vested
stock awards in our common stock to certain employees and
members of our Board of Directors. These non-vested stock awards
generally vest in equal annual increments over four years from
the date of the grant. Total compensation expense related to
non-vested stock awards was $2.7 million in 2007. The
corresponding income tax benefit recognized in the income
statement was $1.1 million for 2007. There was no
non-vested compensation expense recognized in 2006 and 2005. As
of December 31, 2007, there was $8.7 million of
unrecognized compensation cost related to these non-vested
shares that will be recognized over a weighted-average period of
3.0 years. A summary of our non-vested stock activity for
2007 is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Fair
|
|
|
|
|
|
|
Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Outstanding at January 1, 2007
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
355,832
|
|
|
|
32.89
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(3,000
|
)
|
|
|
32.34
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
352,832
|
|
|
$
|
32.90
|
|
|
|
|
|
|
|
|
|
|
76
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Commitments
and Contingencies
|
We operate many of our animal hospitals from premises that are
leased under operating leases with terms, including renewal
options, ranging from five to 35 years. Certain leases
include fair-value purchase options that can be exercised at our
discretion at various times within the lease terms.
The future minimum lease payments on operating leases at
December 31, 2007, including renewal option periods, are as
follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
37,668
|
|
2009
|
|
|
38,010
|
|
2010
|
|
|
37,012
|
|
2011
|
|
|
36,855
|
|
2012
|
|
|
36,814
|
|
Thereafter
|
|
|
454,286
|
|
|
|
|
|
|
Total
|
|
$
|
640,645
|
|
|
|
|
|
|
Rent expense totaled $36.9 million, $32.0 million and
$27.5 million in 2007, 2006 and 2005, respectively. Rental
income totaled $543,000, $761,000 and $546,000 in 2007, 2006,
and 2005, respectively.
Under the terms of certain purchase agreements, we have
aggregate commitments to purchase approximately
$42.8 million of products and services through 2011.
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 $938,000.
In connection with certain acquisitions, we withheld a portion
of the purchase price, or the holdback, as security for
indemnification obligations of the sellers under the acquisition
agreement. The amounts withheld are typically payable within a
12-month
period. The total outstanding holdbacks at December 31,
2007 and 2006 were $2.2 million and $1.6 million,
respectively, and are included in other accrued liabilities.
|
|
e.
|
Officers
Compensation
|
Each of our Chief Executive Officer (CEO), Chief
Operating Officer (COO) and Chief Financial Officer
(CFO) 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, under their contracts, each
officer has the remaining term: five years for the CEO, three
years for the COO and two years for the CFO.
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
77
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 bonuses, 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, the cash value of all
benefits due under their employment contracts as a result of the
termination would be immediately payable to the 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 the excess parachute payment.
Pursuant to a letter agreement between our Senior Vice President
and our company, in the event our Senior Vice Presidents
employment is terminated for any reason other than cause, that
officer is entitled to receive an amount equal to one
years base salary in effect at the date of termination and
the right to continue receiving specified benefits and
perquisites. Our Senior Vice Presidents base salary and
annual bonus are set by our Compensation Committee of the Board
of Directors. The Compensation Committee has approved an
amendment to increase the amount our Senior Vice President is
entitled to receive from one year to two years base salary
in effect at the date of termination; however, as of the date
hereof, this amendment has not been executed.
We have certain contingent liabilities resulting from litigation
and claims incident 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.
The provision for income taxes is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
56,917
|
|
|
$
|
42,631
|
|
|
$
|
29,197
|
|
Deferred
|
|
|
9,299
|
|
|
|
6,458
|
|
|
|
7,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,216
|
|
|
|
49,089
|
|
|
|
36,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
10,779
|
|
|
|
9,331
|
|
|
|
5,941
|
|
Deferred
|
|
|
1,641
|
|
|
|
1,230
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,420
|
|
|
|
10,561
|
|
|
|
7,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,636
|
|
|
$
|
59,650
|
|
|
$
|
44,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net deferred income tax assets (liabilities) at
December 31, 2007 and 2006 is comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
4,109
|
|
|
$
|
4,423
|
|
State taxes
|
|
|
1,059
|
|
|
|
2,247
|
|
Other liabilities and reserves
|
|
|
7,360
|
|
|
|
6,860
|
|
Other assets
|
|
|
780
|
|
|
|
301
|
|
Inventory
|
|
|
1,094
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax assets
|
|
$
|
14,402
|
|
|
$
|
14,935
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax (liabilities) assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
26,670
|
|
|
$
|
11,043
|
|
Write-down of assets
|
|
|
1,216
|
|
|
|
1,226
|
|
Start-up
costs
|
|
|
333
|
|
|
|
336
|
|
Other assets
|
|
|
20,176
|
|
|
|
10,035
|
|
Intangible assets
|
|
|
(68,392
|
)
|
|
|
(55,635
|
)
|
Property and equipment
|
|
|
(4,360
|
)
|
|
|
(1,184
|
)
|
Unrealized loss on investments
|
|
|
1,950
|
|
|
|
1,967
|
|
Share-based compensation
|
|
|
2,344
|
|
|
|
1,000
|
|
Valuation allowance
|
|
|
(8,134
|
)
|
|
|
(8,592
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current deferred income tax liabilities, net
|
|
$
|
(28,197
|
)
|
|
$
|
(39,804
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, we had Federal net operating loss
(NOL) carryforwards of approximately
$69.0 million, comprised mainly of acquired NOL
carryforwards. These NOLs expire at various dates through 2027.
The utilization of NOL carryforwards to reduce taxable income is
subject to certain statutory limitations. Events that cause such
a limitation include, but are not limited to, a cumulative
ownership change of more than 50% over a three-year period. We
believe that some of our acquisitions caused such a change of
ownership and, accordingly, utilization of the NOL carryforwards
may be limited in future years. Accordingly, the valuation
allowance is principally related to subsidiaries NOL
carryforwards as well as certain investment-related expenditures
where the realization of the benefits is more likely than not to
occur.
Our effective tax rate was 39.4%, 36.1% and 39.4% in 2007, 2006
and 2005, respectively. The effective tax rate for 2007 as
compared to 2006 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
reduction in our estimated tax liabilities.
79
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the provision for income taxes to the amount
computed at the Federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal income tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of Federal benefit
|
|
|
3.9
|
|
|
|
4.3
|
|
|
|
4.3
|
|
Reduction in Federal tax liability
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
Miscellaneous
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.4
|
%
|
|
|
36.1
|
%
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Partnership
Interests
|
We own some of our animal hospitals in partnerships with
minority interest holders. We consolidate our partnerships in
our consolidated financial statements because our ownership
interest in these partnerships is equal to or greater than 50.1%
and we control these entities. We record minority interest in
income of subsidiaries equal to our partners percentage
ownership of the partnerships income. Minority interest in
income of subsidiaries was $3.8 million, $3.1 million
and $3.1 million in 2007, 2006 and 2005, respectively. In
addition, we reflect our minority partners cumulative
share in the equity of the respective partnerships as minority
interests in our consolidated balance sheets. At
December 31, 2007 and 2006, minority interest was
$10.2 million and $9.7 million, respectively.
The terms of some of our partnership agreements require us to
purchase the partners equity in the partnership in the
event of the partners death. These obligations are
considered liabilities because of the certainty of the event. As
a result we valued these liabilities at fair value as of the
date of partnership formation. At December 31, 2007 and
2006, these liabilities were $1.8 million and are included
in other liabilities in our consolidated balance sheets.
In 1992, we established a voluntary retirement plan under
Section 401(k) of the Internal Revenue Code. The plan
covers all employees with at least six months of employment with
our company and provides the annual matching contributions by us
at the discretion of our Board of Directors. Our expense for
matching contributions to our voluntary retirement plan
approximated $1.6 million, $2.0 million and
$1.6 million in 2007, 2006 and 2005, respectively.
Our reportable segments are Laboratory, Animal Hospital and
Medical Technology. These segments are strategic business units
that have different services, products,
and/or
functions. Our segments are managed separately because each is a
distinct and different business venture with unique challenges,
risks and rewards. Our Laboratory segment provides diagnostic
laboratory testing services for veterinarians, both associated
with our animal hospitals and those independent of us. Our
Animal Hospital segment provides veterinary services for
companion animals and sells related retail and pharmaceutical
products. Our Medical Technology segment sells digital
radiography and ultrasound imaging equipment, related computer
hardware, software and ancillary services to the veterinary
market. We also operate a corporate office that provides general
and administrative support services for our other segments.
The accounting policies of our segments are the same as those
described in the summary of significant accounting policies
included in Note 2., Summary of Significant Accounting
Policies. We evaluate the
80
VCA
ANTECH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
performance of our segments based on gross profit and operating
income. For purposes of reviewing the operating performance of
our segments, all intercompany sales and purchases are accounted
for as if they were transactions with independent third parties
at current market prices.
The following is a summary of certain financial data for each of
our segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal
|
|
|
Medical
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
Laboratory
|
|
|
Hospital
|
|
|
Technology
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
268,132
|
|
|
$
|
844,344
|
|
|
$
|
43,669
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,156,145
|
|
Intercompany revenue
|
|
|
27,563
|
|
|
|
|
|
|
|
3,154
|
|
|
|
|
|
|
|
(30,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
295,695
|
|
|
|
844,344
|
|
|
|
46,823
|
|
|
|
|
|
|
|
(30,717
|
)
|
|
|
1,156,145
|
|
Direct costs
|
|
|
152,623
|
|
|
|
681,291
|
|
|
|
30,944
|
|
|
|
|
|
|
|
(30,134
|
)
|
|
|
834,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
143,072
|
|
|
|
163,053
|
|
|
|
15,879
|
|
|
|
|
|
|
|
(583
|
)
|
|
|
321,421
|
|
Selling, general and administrative expense
|
|
|
19,648
|
|
|
|
21,562
|
|
|
|
11,528
|
|
|
|
34,139
|
|
|
|
|
|
|
|
86,877
|
|
Write-down and loss on sale of assets
|
|
|
80
|
|
|
|
1,147
|
|
|
|
95
|
|
|
|
1
|
|
|
|
|
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
123,344
|
|
|
$
|
140,344
|
|
|
$
|
4,256
|
|
|
$
|
(34,140
|
)
|
|
$
|
(583
|
)
|
|
$
|
233,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
6,416
|
|
|
$
|
17,671
|
|
|
$
|
1,590
|
|
|
$
|
1,758
|
|
|
$
|
(386
|
)
|
|
$
|
27,049
|
|
Capital expenditures
|
|
$
|
11,222
|
|
|
$
|
32,210
|
|
|
$
|
726
|
|
|
$
|
5,524
|
|
|
$
|
(968
|
)
|
|
$
|
48,714
|
|
Total assets at December 31, 2007
|
|
$
|
178,846
|
|
|
$
|
934,366
|
|
|
$
|
54,954
|
|
|
$
|
125,173
|
|
|
$
|
(6,628
|
)
|
|
$
|
1,286,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
235,781
|
|
|
$
|
711,997
|
|
|
$
|
35,535
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
983,313
|
|
Intercompany revenue
|
|
|
22,564
|
|
|
|
|
|
|
|
3,770
|
|
|
|
|
|
|
|
(26,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
258,345
|
|
|
|
711,997
|
|
|
|
39,305
|
|
|
|
|
|
|
|
(26,334
|
)
|
|
|
983,313
|
|
Direct costs
|
|
|
138,896
|
|
|
|
573,639
|
|
|
|
25,092
|
|
|
|
|
|
|
|
(24,878
|
)
|
|
|
712,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
119,449
|
|
|
|
138,358
|
|
|
|
14,213
|
|
|
|
|
|
|
|
(1,456
|
)
|
|
|
270,564
|
|
Selling, general and administrative expense
|
|
|
17,460
|
|
|
|
20,232
|
|
|
|
10,762
|
|
|
|
29,566
|
|
|
|
|
|
|
|
78,020
|
|
Write-down and loss on sale of assets
|
|
|
8
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
101,981
|
|
|
$
|
118,138
|
|
|
$
|
3,451
|
|
|
$
|
(29,587
|
)
|
|
$
|
(1,456
|
)
|
|
$
|
192,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4,644
|
|
|
$
|
14,595
|
|
|
$
|
1,452
|
|
|
$
|
1,753
|
|
|
$
|
(202
|
)
|
|
$
|
22,242
|
|
Capital expenditures
|
|
$
|
9,054
|
|
|
$
|
23,359
|
|
|
$
|
615
|
|
|
$
|
3,914
|
|
|
$
|
(1,626
|
)
|
|
$
|
35,316
|
|
Total assets at December 31, 2006
|
|
$
|
167,363
|
|
|
$
|
671,975
|
|
|
$
|
53,161
|
|
|
$
|
85,533
|
|
|
$
|
(6,075
|
)
|
|
$
|
971,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
203,595
|
|
|
$
|
607,565
|
|
|
$
|
28,506
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
839,666
|
|
Intercompany revenue
|
|
|
18,469
|
|
|
|
|
|
|
|
1,824
|
|
|
|
|
|
|
|
(20,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
222,064
|
|
|
|
607,565
|
|
|
|
30,330
|
|
|
|
|
|
|
|
(20,293
|
)
|
|
|
839,666
|
|
Direct costs
|
|
|
123,138
|
|
|
|
489,326
|
|
|
|
20,897
|
|
|
|
|
|
|
|
(19,562
|
)
|
|
|
613,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
98,926
|
|
|
|
118,239
|
|
|
|
9,433
|
|
|
|
|
|
|
|
(731
|
)
|
|
|
225,867
|
|
Selling, general and administrative expense
|
|
|
13,993
|
|
|
|
16,224
|
|
|
|
9,033
|
|
|
|
26,935
|
|
|
|
|
|
|
|
66,185
|
|
Write-down and loss on sale of assets
|
|
|
5
|
|
|
|
434
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
84,928
|
|
|
$
|
101,581
|
|
|
$
|
400
|
|
|
$
|
(26,937
|
)
|
|
$
|
(731
|
)
|
|
$
|
159,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
3,954
|
|
|
$
|
12,457
|
|
|
$
|
1,312
|
|
|
$
|
1,676
|
|
|
$
|
(64
|
)
|
|
$
|
19,335
|
|
Capital expenditures
|
|
$
|
8,409
|
|
|
$
|
16,528
|
|
|
$
|
696
|
|
|
$
|
4,404
|
|
|
$
|
(828
|
)
|
|
$
|
29,209
|
|
Total assets at December 31, 2005
|
|
$
|
146,902
|
|
|
$
|
615,824
|
|
|
$
|
47,114
|
|
|
$
|
90,977
|
|
|
$
|
(2,412
|
)
|
|
$
|
898,405
|
|
81
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
VCA
ANTECH, INC. (Parent Company)
CONDENSED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
$
|
|
|
|
$
|
|
|
Investment in subsidiaries
|
|
|
557,813
|
|
|
|
440,758
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
557,813
|
|
|
$
|
440,758
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Intercompany (receivable) payable
|
|
$
|
(10,571
|
)
|
|
$
|
10,453
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
84
|
|
|
|
84
|
|
Additional paid-in capital
|
|
|
296,037
|
|
|
|
275,013
|
|
Accumulated earnings
|
|
|
275,598
|
|
|
|
154,586
|
|
Accumulated other comprehensive (loss) income
|
|
|
(3,335
|
)
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
568,384
|
|
|
|
430,305
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
557,813
|
|
|
$
|
440,758
|
|
|
|
|
|
|
|
|
|
|
82
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
VCA
ANTECH, INC. (Parent Company)
CONDENSED
STATEMENTS OF INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Direct costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down and loss on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense, net
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Equity interest in income of subsidiaries
|
|
|
121,012
|
|
|
|
105,528
|
|
|
|
67,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and provision for income taxes
|
|
|
121,012
|
|
|
|
105,529
|
|
|
|
67,816
|
|
Minority interest in income of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
121,012
|
|
|
|
105,529
|
|
|
|
67,816
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
VCA
ANTECH, INC. (Parent Company)
CONDENSED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
121,012
|
|
|
$
|
105,529
|
|
|
$
|
67,816
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity interest in earnings of subsidiaries
|
|
|
(121,012
|
)
|
|
|
(105,528
|
)
|
|
|
(67,815
|
)
|
Increase in intercompany receivable
|
|
|
(7,989
|
)
|
|
|
(6,228
|
)
|
|
|
(3,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,989
|
)
|
|
|
(6,227
|
)
|
|
|
(3,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under stock option plans
|
|
|
7,989
|
|
|
|
6,227
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,989
|
|
|
|
6,227
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
VCA
ANTECH, INC. (Parent Company)
NOTES TO
CONDENSED FINANCIAL STATEMENTS
The borrowings under the senior credit facility are guaranteed
by VCA Antech, Inc. (VCA) and its wholly-owned
subsidiaries. Vicar Operating, Inc. (Vicar), a
wholly-owned subsidiary of VCA, may borrow up to
$75.0 million under a revolving line of credit under the
senior credit facility. VCAs guarantee under the senior
credit facility is secured by the assets of its wholly-owned
subsidiaries in addition to a pledge of capital stock or similar
equity interest of its wholly-owned subsidiaries.
Our senior subordinated notes were general unsecured obligations
owed by Vicar. These notes were unconditionally guaranteed on a
senior subordinated basis by VCA and its wholly-owned
subsidiaries.
See Note 6., Long-Term Obligations, in our
accompanying consolidated financial statements of this annual
report on
Form 10-K
for a five-year schedule of debt maturities.
|
|
Note 2.
|
Dividends
from Subsidiaries
|
The senior credit facility has restrictions on the ability of
Vicar and its consolidated subsidiaries to transfer assets in
the form of cash, dividends, loans or advances to VCA. In 2007,
2006 and 2005, VCA did not receive any cash dividends from its
consolidated subsidiaries.
85
VCA
ANTECH, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
at End
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Write-offs
|
|
|
Other(1)
|
|
|
of Period
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
11,253
|
|
|
$
|
5,053
|
|
|
$
|
(6,033
|
)
|
|
$
|
744
|
|
|
$
|
11,017
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
9,509
|
|
|
$
|
5,923
|
|
|
$
|
(4,703
|
)
|
|
$
|
524
|
|
|
$
|
11,253
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts(2)
|
|
$
|
7,755
|
|
|
$
|
4,766
|
|
|
$
|
(3,842
|
)
|
|
$
|
830
|
|
|
$
|
9,509
|
|
|
|
|
(1) |
|
Other changes in the allowance for uncollectible
accounts include allowances acquired with animal hospitals and
laboratory acquisitions. |
|
(2) |
|
Balance includes allowance for trade accounts receivable and
notes receivable. |
86
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
We carried out an evaluation required by the Securities Exchange
Act of 1934, as amended (the 1934 Act), under
the supervision and with the participation of our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rule 13a-15(e)
of the 1934 Act, as of December 31, 2007. Based on
this evaluation, our principal executive officer and principal
financial officer concluded that, as of December 31, 2007,
our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the
1934 Act is recorded, processed, summarized, and reported
within the time periods specified in the SECs rules and
forms and to provide reasonable assurance that such information
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosures.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management does not expect that our internal control over
financial reporting will prevent all error and all fraud.
Internal controls over financial reporting, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the internal control
over financial reporting are met. Further, the design of
internal controls over financial reporting 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 internal controls over financial
reporting, 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. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective internal control over financial reporting,
misstatements due to error or fraud may occur and not be
detected.
Our managements report on internal control over financial
reporting, and the related report of our independent public
accounting firm, are included in our annual report on
Form 10-K
under Managements Annual Report on Internal Control
Over Financial Reporting and Report of Independent Registered
Public Accounting Firm on Internal Control Over Financial
Reporting, respectively, and are incorporated by reference.
Changes
in Internal Control Over Financial Reporting
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.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
87
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Information regarding our directors and executive officers will
appear in the proxy statement for the 2008 annual meeting of
stockholders and is incorporated herein by this reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information regarding executive compensation will appear in the
proxy statement for the 2008 annual meeting of stockholders and
is incorporated herein by this reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters will
appear in the proxy statement for the 2008 annual meeting of
stockholders and is incorporated herein by this reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Information regarding certain relationships and related
transactions will appear in the proxy statement for the 2008
annual meeting of stockholders and is incorporated herein by
this reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information regarding principal accountant fees and services
will appear in the proxy statement for the 2008 annual meeting
of stockholders and is incorporated herein by this reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
(1)
|
FINANCIAL STATEMENTS See Item 8 of this annual
report on
Form 10-K.
|
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM See Item 8 of this annual report on
Form 10-K.
|
|
|
|
(2)
|
SCHEDULE I CONDENSED FINANCIAL
INFORMATION See Item 8 of this annual report on
Form 10-K.
|
|
|
(3)
|
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS See Item 8 of this annual report on
Form 10-K.
|
|
|
(4)
|
EXHIBITS See Exhibit Index attached to this
annual report on
Form 10-K.
|
88
List of
Exhibits
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrants annual report on
Form 10-K
filed March 29, 2002.
|
|
3
|
.2
|
|
Certificate of Amendment to the Certificate of Incorporation of
Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrants current report on
Form 8-K
filed July 16, 2004.
|
|
3
|
.3
|
|
Certificate of Correction to the Certificate of Amendment to the
Amended and Restated Certificate of Incorporation of Registrant.
Incorporated by reference to Exhibit 3.2 to the
Registrants current report on
Form 8-K
filed July 16, 2004.
|
|
3
|
.4
|
|
Amended and Restated Bylaws of Registrant. Incorporated by
reference to Exhibit 3.4 to the Registrants quarterly
report on
Form 10-Q
filed August 6, 2004.
|
|
4
|
.1
|
|
Specimen Certificate for shares of common stock of Registrant.
Incorporated by reference to Exhibit 4.9 to Amendment
No. 3 to the Registrants registration statement on
Form S-1
filed November 16, 2001.
|
|
10
|
.1
|
|
Credit & Guaranty Agreement, dated as of May 16,
2005, by and among Registrant, Vicar Operating, Inc., certain
subsidiaries of Registrant as Guarantors, Goldman Sachs Credit
Partners L.P., and Wells Fargo Bank, National Association as
Administrative and Collateral Agent. Incorporated by reference
to Exhibit 10.1 to the Registrants current report on
Form 8-K
filed May 18, 2005.
|
|
10
|
.2
|
|
First Amendment to the Credit and Guaranty Agreement, dated as
of February 17, 2006, by and among Registrant, Vicar
Operating, Inc., certain subsidiaries of Registrant as
Guarantors, Goldman Sachs Credit Partners L.P., and Wells Fargo
Bank, National Association as Administrative and Collateral
Agent. Incorporated by reference to Exhibit 10.1 to the
Registrants current report on
Form 8-K
filed February 22, 2006.
|
|
10
|
.3
|
|
Second Amendment to the Credit and Guaranty Agreement, dated as
of June 1, 2007, by and among Registrant, Vicar Operating,
Inc., certain subsidiaries of Registrant as Guarantors, Goldman
Sachs Credit Partners L.P., and Wells Fargo Bank, National
Association as Administrative and Collateral Agent. Incorporated
by reference to Exhibit 10.1 to the Registrants
current report on
Form 8-K
filed June 1, 2007.
|
|
10
|
.4
|
|
Stockholders Agreement, dated as of September 20, 2000, by
and among Registrant, Green Equity Investors III, L.P.,
Co-Investment Funds and Stockholders. Incorporated by reference
to Exhibit 4.1 to the Registrants registration
statement on
Form S-1
filed August 9, 2001.
|
|
10
|
.5
|
|
Amendment No. 1 to Stockholders Agreement, dated as of
November 27, 2001, by and among Registrant, Green Equity
Investors III, L.P., GS Mezzanine Partners II, L.P. and Robert
Antin. Incorporated by reference to Exhibit 4.2 to
Amendment No. 2 to the Registrants registration
statement on
Form S-1
filed October 31, 2001.
|
|
10
|
.6
|
|
Amendment No. 2 to Stockholders Agreement, dated as of
November 27, 2001, by and among Registrant, Green Equity
Investors III, L.P., GS Mezzanine Partners II, L.P., Robert L.
Antin, Arthur J. Antin and Tomas W. Fuller. Incorporated by
reference to Exhibit 4.3 to Amendment No. 1 to the
Registrants registration statement on
Form S-3
filed January 17, 2003.
|
|
10
|
.7*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Robert Antin. Incorporated by
reference to Exhibit 10.5 to the registration statement of
Vicar Operating, Inc., on
Form S-4
filed February 1, 2002.
|
|
10
|
.8*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Arthur J. Antin. Incorporated by
reference to Exhibit 10.6 to the registration statement of
Vicar Operating, Inc., on
Form S-4
filed February 1, 2002.
|
|
10
|
.9*
|
|
Employment Agreement, dated as of November 27, 2001, by and
between VCA Antech, Inc. and Tomas W. Fuller. Incorporated by
reference to Exhibit 10.7 to the registration statement of
Vicar Operating, Inc., on
Form S-4
filed February 1, 2002.
|
|
10
|
.10*
|
|
Letter Agreement, dated as of March 3, 2003, by and between
VCA Antech, Inc. and Neil Tauber. Incorporated by reference to
Exhibit 10.5 to the Registrants annual report on
Form 10-K
filed March 27, 2003.
|
89
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.11*
|
|
Letter Agreement, dated as of March 9, 2004, by and between
VCA Antech, Inc. and Robert L. Antin. Incorporated by reference
to Exhibit 10.20 to the Registrants annual report on
Form 10-K
filed March 12, 2004.
|
|
10
|
.12*
|
|
Letter Agreement, dated as of March 9, 2004, by and between
VCA Antech, Inc. and Arthur J. Antin. Incorporated by reference
to Exhibit 10.21 to the Registrants annual report on
Form 10-K
filed March 12, 2004.
|
|
10
|
.13*
|
|
Summary of Board of Directors Compensation. Incorporated by
reference to Exhibit 10.13 to the Registrants annual
report on Form
10-K filed
March 1, 2007.
|
|
10
|
.15*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and
Robert L. Antin.
|
|
10
|
.16*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and
Arthur J. Antin.
|
|
10
|
.17*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and Neil
Tauber.
|
|
10
|
.18*
|
|
Post-Retirement Medical Benefits Coverage Agreement dated as of
December 27, 2007, by and between VCA Antech, Inc. and
Tomas W. Fuller.
|
|
10
|
.20*
|
|
Summary of Executive Officer Compensation. Incorporated by
reference to the description set forth under the heading
Annual Base Salaries in Item 5.02 to the
Registrants current report on
Form 8-K
filed December 28, 2007
|
|
10
|
.21*
|
|
Summary of Cash Bonus Plan for Executive Officers. Incorporated
by reference to Exhibit 1.01 to the Registrants
current report on
Form 8-K
filed October 13, 2005.
|
|
10
|
.22*
|
|
VCA Antech, Inc. 2007 Annual Cash Incentive Plan. Incorporated
by reference to Annex A to the Registrants proxy
statement on Schedule 14A filed on April 27, 2007.
|
|
10
|
.23
|
|
Amended and Restated 1996 Stock Incentive Plan of VCA Antech,
Inc. Incorporated by reference to Exhibit 10.9 to Amendment
No. 2 to the Registrants registration statement on
Form S-1
filed October 31, 2001.
|
|
10
|
.24
|
|
2001 Stock Incentive Plan of VCA Antech, Inc. Incorporated by
reference to Exhibit 10.10 to Amendment No. 2 to the
Registrants registration statement on
Form S-1
filed October 31, 2001.
|
|
10
|
.25
|
|
VCA Antech, Inc. 2006 Equity Incentive Plan, as amended on
May 22, 2006. Incorporated by reference to Exhibit 4.5
to the Registrants registration statement on
Form S-8
filed on December 15, 2006.
|
|
10
|
.26
|
|
Stock Option Agreement for VCA Antech, Inc. 2006 Equity
Incentive Plan. Incorporate by reference to Exhibit 4.6 to
the Registrants registration statement on
Form S-8
filed on December 15, 2006.
|
|
10
|
.27
|
|
Restricted Stock Award Agreement for VCA Antech, Inc. 2006
Equity Incentive Plan. Incorporated by reference to
Exhibit 4.7 to the Registrants registration statement
on
Form S-8
filed on December 15, 2006.
|
|
10
|
.28
|
|
Corporate Headquarters Lease, dated as of January 1, 1999,
by and between VCA Antech, Inc. and Werner Wolfen, Michael
Duritz, Nancy Bruch, Dorothy A. Duritz, Harvey Rosenberg and
Judy Rosenberg (Landlords). Incorporated by reference to
Exhibit 10.11 to Amendment No. 1 to the
Registrants registration statement on
Form S-1
filed October 15, 2001.
|
|
10
|
.29
|
|
Corporate Headquarters Lease, dated as of June 9, 2004, by
and between VCA Antech, Inc. and Martin Shephard, Trustee of the
Shephard Family Trust of 1998 (Lessor). Incorporated by
reference to Exhibit 10.21 to the Registrants annual
report on
Form 10-K
filed March 14, 2006.
|
|
10
|
.30
|
|
Form of Indemnification Agreement. Incorporated by reference to
Exhibit 10.13 to the Registrants registration
statement on
Form S-1
filed August 9, 2001.
|
|
14
|
.1
|
|
Code of Conduct and Business Ethics of the Registrant.
Incorporated by reference to Exhibit 14.1 to the
Registrants annual report on
Form 10-K
filed March 12, 2004.
|
|
18
|
.1
|
|
Preferability letter of independent registered public accounting
firm regarding change in the goodwill impairment testing date.
|
90
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
21
|
.1
|
|
Subsidiaries of Registrant.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney (included in signature page).
|
|
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.
|
|
|
* |
Management contract or compensatory plan or arrangement.
|
91
SIGNATURES
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 February 27, 2008.
VCA Antech, Inc.
Tomas W. Fuller
Chief Financial Officer, Principal Financial Officer,
Vice President and Secretary
KNOWN BY ALL PERSONS THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Robert L. Antin
and Tomas W. Fuller, or any one of them, their attorneys-in-fact
and agents with full power of substitution and re-substitution,
for him and his name, place and stead, in any and all
capacities, to sign any or all amendments to this annual report
on
Form 10-K
and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either
of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
L. Antin
Robert
L. Antin
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Tomas
W. Fuller
Tomas
W. Fuller
|
|
Chief Financial Officer, Principal Financial Officer, Vice
President and Secretary
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Dawn
R. Olsen
Dawn
R. Olsen
|
|
Principal Accounting Officer, Vice President and Controller
|
|
February 27, 2008
|
|
|
|
|
|
/s/ John
M. Baumer
John
M. Baumer
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ John
Heil
John
Heil
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Frank
Reddick
Frank
Reddick
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ John
B. Chickering, Jr.
John
B. Chickering, Jr.
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
|
|
*By:
|
|
Attorney-in-Fact
|
|
Director
|
|
|
92