<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10787
VETERINARY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4097995
(State or other jurisdiction (I.R.S. Employer
or organization) Identification No.)
3420 OCEAN PARK BOULEVARD, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 392-9599
NONE
Former name, address and fiscal year, if changed since last report
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: Common Stock, $.001 Par Value
13,182,482 shares as of May 13, 1996.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents............................................. $ 37,615,000 $ 46,799,000
Accounts receivable, less allowance for uncollectible accounts... 8,816,000 6,303,000
Inventory, prepaid expenses and other............................ 4,121,000 3,518,000
Deferred income taxes............................................ 1,126,000 1,175,000
Prepaid income taxes............................................. 250,000 494,000
------------ ------------
Total current assets.......................................... 51,928,000 58,289,000
Property, plant and equipment, net................................. 15,981,000 13,641,000
Other assets:
Goodwill, net.................................................... 79,637,000 61,359,000
Covenants not to compete, net.................................... 5,573,000 4,885,000
Building purchase options........................................ 887,000 887,000
Notes receivable................................................. 1,183,000 878,000
Deferred costs and other......................................... 1,859,000 1,526,000
------------ ------------
$157,048,000 $141,465,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations......................... $ 7,563,000 $ 6,009,000
Accounts payable................................................. 5,794,000 4,850,000
Accrued payroll and taxes........................................ 2,238,000 1,961,000
Other accrued liabilities........................................ 3,339,000 3,593,000
------------ ------------
Total current liabilities..................................... 18,934,000 16,413,000
Long-term obligations, less current portion........................ 29,588,000 27,352,000
Deferred income taxes.............................................. 1,538,000 1,301,000
Minority interest.................................................. 4,843,000 4,605,000
Stockholders' equity:
Preferred stock, par value $0.001................................ 1,000 1,000
Common stock, par value $0.001................................... 13,000 12,000
Additional paid-in capital....................................... 99,072,000 89,734,000
Accumulated earnings............................................. 3,059,000 2,047,000
------------ ------------
Total stockholders' equity.................................... 102,145,000 91,794,000
------------ ------------
$157,048,000 $141,465,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
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VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- -------------
<S> <C> <C>
Revenues.............................................................................. $31,004,000 $15,230,000
Direct costs.......................................................................... 23,203,000 11,809,000
----------- -----------
Gross profit.......................................................................... 7,801,000 3,421,000
Selling, general and administrative................................................... 3,314,000 2,262,000
Depreciation and amortization......................................................... 1,034,000 548,000
Restructuring charge.................................................................. -- 1,086,000
----------- -----------
Operating income (loss)............................................................... 3,453,000 (475,000)
Interest and other investment income.................................................. 376,000 120,000
Interest expense...................................................................... 672,000 479,000
----------- -----------
Income (loss) before minority interest and provision (benefit) for income taxes....... 3,157,000 (834,000)
Minority interest in income of subsidiaries........................................... 1,346,000 21,000
----------- -----------
Income (loss) before provision (benefit) for income taxes............................. 1,811,000 (855,000)
Provision (benefit) for income taxes.................................................. 799,000 (263,000)
----------- -----------
Net income (loss)..................................................................... $ 1,012,000 $ (592,000)
=========== ===========
Earnings (loss) per share............................................................. $0.07 $(0.09)
=========== ===========
Weighted average common equivalent shares used for computing earnings (loss) per share 15,110,000 6,865,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 1,012,000 $ (592,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.................................... 1,034,000 548,000
Amortization of debt discount.................................... 72,000 3,000
Minority interest in income of subsidiaries...................... 1,346,000 21,000
(Increase) decrease in other assets, net......................... (325,000) 59,000
Decrease in deferred income taxes................................ 286,000 65,000
Increase in accounts receivable, net............................. (1,289,000) (1,507,000)
Increase in inventory, prepaid expenses and other................ (387,000) (885,000)
Decrease (increase) in prepaid income taxes...................... 244,000 (332,000)
Increase in accounts payable and accrued liabilities............. 300,000 2,704,000
Payments to minority interest partners........................... (961,000) (43,000)
----------- -----------
Net cash provided by operating activities..................... 1,332,000 41,000
----------- -----------
Cash flows from investing activities:
Property and equipment additions, net................................ (948,000) (78,000)
Business acquisitions, net of cash acquired.......................... (12,051,000) (2,028,000)
------------ -----------
Net cash used in investing activities......................... (12,999,000) (2,106,000)
------------ -----------
Cash flows from financing activities:
Reduction of long-term obligations................................... (3,000,000) (1,471,000)
Payments received on notes receivable................................ 12,000 32,000
Net proceeds from exercise of warrants............................... 5,330,000 2,108,000
Proceeds from issuance of common stock under stock option plans...... 141,000 4,000
Proceeds from issuance of common stock............................... -- 9,980,000
Repayment of line of credit.......................................... -- (1,100,000)
------------ -----------
Net cash provided by financing activities..................... 2,483,000 9,553,000
------------ -----------
(Decrease) increase in cash and equivalents............................ (9,184,000) 7,488,000
Cash and equivalents at beginning of period............................ 46,799,000 5,553,000
------------ -----------
Cash and equivalents at end of period.................................. $ 37,615,000 $13,041,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
(UNAUDITED)
(continued)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid................................................................... $ 550,000 $ 457,000
Taxes paid...................................................................... 269,000 4,000
Supplemental schedule of non-cash investing and financing activities:
In connection with acquisitions, assets acquired and liabilities assumed
were as follows:
Fair value of assets acquired............................................... $23,304,000 $11,571,000
Less: Consideration given
Cash paid to sellers, net of cash acquired............................... 9,875,000 2,028,000
Cash paid in settlement of assumed liabilities........................... 2,176,000 --
Common stock issued...................................................... 3,868,000 2,300,000
----------- -----------
Liabilities assumed including notes payable issued, net of payments......... $ 7,385,000 $ 7,243,000
=========== ===========
In connection with the formation of the joint venture and partnerships, assets and
liabilities contributed by the partners were as follows:
Assets..................................................................... $ 317,000 $ 2,876,000
Liabilities................................................................ -- 1,063,000
----------- -----------
Non-cash capital contribution of minority interest partners................ $ 317,000 $ 1,813,000
=========== ===========
Non-cash increase in long-term obligations due to purchase of property..... $ -- $ 163,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) GENERAL
The accompanying unaudited consolidated financial statements of Veterinary
Centers of America, Inc. and subsidiaries (the "Company" or "VCA") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for the three months
ended March 31, 1996 and 1995 are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the financial
statements and footnotes thereto for the year ended December 31, 1995 included
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 25, 1996.
(2) RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform with the 1996
financial statement presentation.
(3) ACQUISITIONS
During the first quarter of 1996, the Company purchased seven veterinary
hospitals and a veterinary diagnostic laboratory in separate transactions for a
total consideration (including acquisition costs) of $23,304,000 consisting of
$9,875,000 in cash, $6,551,000 in long-term obligations, 242,926 shares of VCA
common stock, with a value of $3,868,000, and the assumption of liabilities
totaling $3,010,000.
On February 27, 1996, the Company signed a definitive merger agreement with
Pets' Rx, Inc. ("Pets' Rx") which agreement was amended on April 11, 1996,
pursuant to which the Company may acquire all of the outstanding securities of
Pets' Rx for 850,000 shares of VCA common stock. Pets' Rx owns and operates 16
veterinary hospitals in the San Jose and Sacramento, California and the Las
Vegas, Nevada markets. The Company expects that the Pets' Rx merger will be
consummated in the second quarter of 1996.
On March 21, 1996, the Company signed a definitive merger agreement with The
Pet Practice, Inc. ("The Pet Practice") pursuant to which the Company may
acquire all of the outstanding securities of The Pet Practice for approximately
3.2 million shares of VCA common stock. The Pet Practice currently operates 86
veterinary hospitals in 11 states. The Company expects that The Pet Practice
merger will be consummated in the third quarter of 1996.
(4) INCOME TAXES
The provision for income taxes is greater than the amount computed using the
statutory rate due primarily to nondeductible amortization of intangible assets.
(5) SUBSEQUENT EVENTS
On April 17, 1996, the Company received net proceeds of $82,697,000 from an
offshore offering and concurrent private placement in the United States, of
$84,385,000 of 5.25% convertible subordinated debentures due in 2006. The
debentures, non-callable for three years, will be convertible into approximately
2.5 million shares of the Company's common stock at a rate of $34.35 per share.
Under the terms of the agreement the debentures and common stock issuable upon
conversion will be registered under the United States Securities Act of 1933 by
October 12, 1996.
6
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reports its operations in three business lines -- Animal Hospital,
Laboratory and Premium Pet Food. Animal Hospital operations include the
operations of the Company's veterinary hospitals. Laboratory operations include
the Company's veterinary diagnostic laboratories. Premium Pet Food includes the
operations of the Vet's Choice joint venture. With the launch of Select
Balance, its first product line, Vet's Choice commenced generating revenues in
March 1994. A portion of the Company's operations, including Vet's Choice, Vet
Research Laboratories, and selected animal hospitals, are operated as joint
ventures in which VCA owns a majority interest. The results of operations of
the Company include the results of operations of the joint ventures on a
consolidated basis. The Company acquired the remaining 30 percent interest in
Professional Animal Laboratory ("PAL") effective July 1, 1995. Prior to that
date, it was operated as a joint venture.
RECENT DEVELOPMENTS
Recent Acquisitions
Since January 1, 1996 through May 10, 1996, VCA has acquired eight animal
hospitals in the states of Maryland, Massachusetts, Pennsylvania, Florida,
Hawaii and California. In addition, VCA has acquired two veterinary
laboratories, one of which was Southwest Veterinary Diagnostics, Inc.
("Southwest"), a veterinary diagnostic laboratory located in Phoenix, Arizona.
The acquisition of Southwest, which services more than 2,500 veterinary
hospitals in the states of Arizona, California, New Mexico, Texas, Kansas,
Nebraska and Missouri, and other portions of the Midwest, expands the customer
base of VCA's laboratory division, providing VCA with the opportunity to serve
over 9,000 veterinary hospitals daily. In connection with these acquisitions,
VCA paid an aggregate consideration of $24,839,000 consisting of $10,530,000 in
cash, $7,376,000 in debt, 242,926 shares of VCA common stock, with a value of
$3,868,000, and the assumption of liabilities totaling $3,065,000, including
acquisition costs.
Pets' Rx, Inc.
On February 27, 1996, VCA signed a definitive merger agreement with Pets' Rx,
Inc. ("Pets' Rx"), as amended on April 11, 1996, pursuant to which VCA will
acquire all of the outstanding securities of Pets' Rx. Pets' Rx owns and
operates 16 veterinary hospitals in the San Jose and Sacramento, California and
the Las Vegas, Nevada markets. Under the terms of the merger, the stockholders
of Pets' Rx will receive approximately 850,000 shares (the "Merger Shares") of
VCA common stock (subject to adjustment). In the event the average closing sale
prices of the VCA common stock on the Nasdaq National Market for the five
trading days preceding the merger is between $18.55 and $21.169, the Merger
Shares shall be increased, up to a maximum of 970,000 shares. VCA expects that
the merger will be consummated in June 1996. The merger will be accounted for
as a pooling of interests. If consummated, the merger will provide VCA with
entry into the Las Vegas, Nevada market and will strengthen VCA's presence in
Northern California.
Consummation of the merger with Pets' Rx is subject to certain significant
conditions and, consequently, may never occur.
The shares of VCA common stock to be issued to Pets' Rx stockholders in the
merger will be sold pursuant to exemptions from registration under the
Securities Act. Pursuant to the merger agreement, VCA has agreed to file with
the Commission promptly after the effective date a registration statement on an
appropriate form under the Securities Act but is not required to include in such
registration statement any of the Pets' Rx shareholders as selling shareholders
for 24 months following the closing.
The Pet Practice, Inc.
On March 21, 1996, the Company signed a definitive merger agreement with The
Pet Practice, Inc. ("The Pet Practice") pursuant to which the Company may
acquire all of the outstanding securities of The Pet Practice (the "Pet Practice
Merger").
The Pet Practice typically establishes comprehensive networks that include day
clinics and 24-hour emergency/acute care clinics. In certain markets, The Pet
Practice also provides pet boarding and grooming services. The Pet Practice
currently
7
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operates 86 veterinary clinics in 11 states. Of those 86 clinics, 56
operate in three established networks, 18 operate in one network in the
integration stage and 12 operate in two networks still in the development stage.
Under the terms of the merger agreement, each share of The Pet Practice common
stock will be converted into a fraction of a share of the Company's common stock
determined by a reference to the average closing price of the Company's common
stock over the twenty trading days ending on the third day before the
stockholder meetings at which the stockholders of the Company and The Pet
Practice will consider the Pet Practice Merger. If the average price of the
Company's common stock ranges from $25 to $30 per share, the exchange ratio
shall be determined by dividing $10 by the average price of the Company's common
stock, resulting in a valuation of $10 per share of The Pet Practice common
stock throughout the range. If the average closing price of the Company's
common stock is between $24 and $25, the exchange ratio will be 0.3950 increased
by an amount equal to 0.005 multiplied by a fraction, the numerator of which is
the difference between the average price and $24 and denominator of which is $1.
If the average price of the Company's common stock is between $30 and $31, the
exchange ratio will be 0.3333 increased by an amount equal to 0.0017 multiplied
by a fraction, the numerator of which is the difference between the average
price and $30 and the denominator of which is $1. If the average closing price
of the Company's common stock is less than $24 per share, the exchange ratio
will be increased (from 0.395 shares at $24 per share) by 0.005 for each dollar
of such reduction down to $18.50 of the Company's common stock, and if the
average price of the Company's common stock is more than $31 per share, the
exchange ratio shall be reduced (from 0.3350 at $31 per share) by 0.005 for each
dollar of such increase, up to $49.00 per share. No further adjustment shall be
made if the average price of the Company's common stock shall be less than
$18.50. In each case, a proportionate reduction or increase, as the case may
be, shall be made if the price of the Company's common stock is less than a
round dollar. If the average price of the Company's common stock is greater
than $49.00, the exchange ratio shall be determined by dividing $12.005 by the
average price. By way of illustration, at $23 per share of the Company's common
stock, the exchange ratio shall be 0.400, resulting in a valuation of $9.20 per
share of The Pet Practice common stock. At $32.00 per share of the Company's
common stock, the exchange ratio shall be 0.330, resulting in a valuation of
$10.56 per share of The Pet Practice common stock. The Company expects that the
Pet Practice Merger will be consummated in July 1996. The Pet Practice Merger
will be accounted for as a purchase. Each party has the right to terminate (but
may elect not to) the definitive merger agreement if the average price of the
Company's common stock is $18.50 or less.
Consummation of The Pet Practice Merger is subject to certain significant
conditions and consequently may not ever be consummated.
Debt Offering
On April 17, 1996, VCA issued $84.4 million of 5.25% convertible subordinated
debentures due in 2006. The debentures, non-callable for three years, will be
convertible into approximately 2.5 million shares of VCA common stock at a rate
of $34.35 per share. The proceeds of this offering are intended to be used to
repay long-term debt and for general corporate purposes.
ANTICIPATED EFFECTS OF ACQUISITIONS
As indicated above, the Company has entered into acquisition agreements with
Pets' Rx and The Pet Practice which are expected to close in June 1996 and July
1996, respectively. If both acquisitions are consummated, the Company will
acquire combined operations which exceed the size of its current animal hospital
operations (measured by number of hospitals) with two separate additional
corporate general and administrative infrastructures. The Company is currently
evaluating the operations of the businesses to be acquired for purposes of
developing a plan for the integration of the businesses to be acquired with the
Company's existing operations. Although this plan is not complete at the time
of the filing of this report, it is anticipated that a significant restructuring
of the combined operations will be required as a result of the mergers. As a
consequence of this restructuring and the consummation of the mergers, the
Company anticipates incurring one-time restructuring and related charges in the
second and/or third quarters of 1996. The magnitude of these charges has not
been quantified at this time.
The Pets' Rx acquisition is intended to be accounted for on a pooling of
interests basis. Under the pooling rules, historical financial results of the
Company will be restated to reflect the combination, following adjustment, of
the historical
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consolidated results and balance sheet of the Company and the historical
consolidated results and balance sheet of Pets' Rx. Pets' Rx incurred a loss in
each of the three fiscal years ended December 31, 1995 and in the first quarter
ended March 31, 1996. Following the consummation of the merger, the historical
results of the Company will be restated to reflect the historical losses at
Pets' Rx. In addition, Pets' Rx is expected to continue to incur a loss in the
second quarter 1996. Further, under the pooling rules, the costs incurred by the
Company and Pets' Rx in consummating the merger will be expended during the
second quarter.
The Pet Practice acquisition is intended to be accounted for as a purchase.
Under the purchase rules, the acquisition is expected to result in a significant
increase in the goodwill and other intangibles recorded on the Company's balance
sheet. This increase in goodwill and other intangibles will be in addition to
the increase resulting from the combination with Pets' Rx, which also has
significant goodwill and other intangibles recorded on its balance sheet. As a
result, the Company expects that its amortization expense will significantly
increase over historical levels.
The combined effect of the restructuring and other charges discussed above,
the pooling treatment in the Pets' Rx acquisition and the increased amortization
expense will have an adverse effect in each of the second and third quarters of
1996. Further, the effect of the increased amortization expense is expected to
temper reported earnings of the Company in the fourth quarter. These effects
will be offset by cost savings expected to be realized as the Company completes
its restructuring plan.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 compared to three months ended March 31, 1995.
Revenues
The following table summarizes the Company's revenues for each of the three
month periods ended March 31:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Animal Hospital $17,831,000 $ 9,150,000
Laboratory 12,056,000 5,817,000
Premium Pet Food 1,850,000 541,000
Intercompany Sales (733,000) (278,000)
----------- -----------
$31,004,000 $15,230,000
=========== ===========
</TABLE>
Revenues for the Animal Hospital operations increased 94.9% from 1995 to 1996.
This growth was primarily the result of growth in the number of facilities owned
and operated by the Company. The results for 1996 include the results of 20
veterinary hospitals acquired from April 1, 1995 to December 31, 1995, and the
results, from the date of acquisition, for an additional seven veterinary
hospitals acquired during the first quarter of 1996. The increase in revenues
resulting from changes in volume or prices at existing facilities was
approximately 9.1%.
Revenues of the Laboratory operations increased 107.3% from 1995 to 1996 due to
the inclusion of a full quarter of Vet Research operations and the acquisition
of four other veterinary diagnostic laboratories since March 31, 1995.
Vet's Choice began generating revenues in March 1994 when it commenced
commercial distribution of Select Balance through VCA's network of owned animal
hospitals. Distribution was expanded nationally to independent veterinary
hospitals in selected regional markets beginning in the second quarter of 1994.
In April 1995, Vet's Choice commenced distributing its second product line,
Select Care, a complete line of therapeutic diets.
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Gross Profit
Gross profit for each of the three month periods ended March 31, is comprised
of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Animal Hospital $2,441,000 $1,488,000
Laboratory 4,670,000 1,747,000
Premium Pet Food 690,000 186,000
---------- ----------
$7,801,000 $3,421,000
========== ==========
</TABLE>
Gross profit of the Animal Hospital operations represents the contribution from
the hospital operations and is comprised of revenues less all costs of services
and products at the hospitals, including salaries of veterinarians, technicians
and all other hospital-based personnel, facilities rent and occupancy costs and
medical supply costs and costs of goods sold associated with the retail sales of
pet food and pet supplies. Animal Hospital gross profit increased 64.0% from
1995 to 1996, representing 16.0% and 13.7% of Animal Hospital revenues in 1995
and 1996 respectively. The decrease in gross profit as a percentage of revenues
from 1995 to 1996 was primarily attributable to increased supply costs.
Gross profit of the Laboratory operations is comprised of revenues less all
direct costs of services at the laboratory, including salaries of veterinarians,
technicians and other non-administrative laboratory-based personnel, facilities
rent and occupancy costs and supply costs. As a percentage of revenues,
Laboratory gross profit was 30.0% and 38.7% of revenues in 1995 and 1996,
respectively. The increase in gross profit as a percentage of revenue from 1995
to 1996 was primarily attributable to the inclusion of a full quarter of Vet
Research operations in 1996.
Gross profit of Premium Pet Food is comprised of revenues less cost of goods
sold, including warehousing, freight and distribution costs. Gross profit as a
percentage of revenues in 1995 and 1996 was 34.4% and 37.2%, respectively.
The Laboratory and Premium Pet Food operations are expected to continue to
carry gross profit margins that are higher than the Animal Hospital operations.
Consequently, historical gross profit margins for the Company as a whole may not
be indicative of those to be expected in the future.
Selling, General and Administrative Expenses
VCA Corporate selling, general and administrative expense consists of
administrative expense at the Company's headquarters, including the salaries of
corporate officers and other personnel, accounting, legal and other professional
expense and rent and occupancy.
Selling, general and administrative expense for each of the three month periods
ended March 31, is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
VCA Corporate $1,279,000 $ 827,000
Laboratory 915,000 500,000
Premium Pet Food 1,120,000 935,000
---------- ----------
$3,314,000 $2,262,000
========== ==========
</TABLE>
VCA Corporate and Laboratory selling, general and administrative expense, as a
percentage of Animal Hospital and Laboratory revenues, was 8.9% and 7.3% in 1995
and 1996, respectively. The decrease from 1995 to 1996 was primarily
attributable to spreading the expenses over a larger revenue base.
Premium Pet Food selling, general and administrative expense as a percentage of
Premium Pet Food revenues was 172.8% and 60.5% in 1995 and 1996, respectively.
The decrease as a percentage of revenue was primarily attributable to spreading
the expenses over a larger revenue base.
Depreciation and Amortization
Depreciation and amortization expense primarily relates to the depreciation of
capital assets and the amortization of excess cost over the fair value of net
assets acquired (goodwill) and certain other intangibles. Depreciation and
amortization expense
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increased from $548,000 in 1995 to $1,034,000 in 1996. The Company's policy is
to amortize goodwill over the expected period to be benefited, not exceeding
forty years. The increase in depreciation and amortization expense is primarily
due to the acquisition of hospitals and laboratories.
Restructuring Charge
The operations of Cenvet (acquired January 1, 1995) were merged into Vet
Research Inc.'s operations to form Vet Research Laboratories. The combined
operations were restructured to eliminate duplicate operating and overhead
costs. In connection with the restructuring, the Company recorded a charge of
$1,086,000 in the first quarter of 1995 to accrue the estimated costs associated
with the restructuring, consisting primarily of lease termination and severance
costs.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the three months ended March 31, 1996 was
$1,332,000. The Company's operating cash flow was adversely impacted by Vet's
Choice, which had a net outflow from operations during the quarter of $717,000.
Excluding Vet's Choice, cash provided by operations was $2,049,000. The Company
used cash, net of cash acquired, of $12,051,000, to purchase seven veterinary
hospitals and Southwest. The Company used cash of $3,000,000 to retire long-
term obligations.
The Company has a $3.1 million unsecured line of credit. The line of credit is
at the bank prime rate and converts to a 36-month term loan at December 18,
1996, if not renewed. At March 31, 1996, the Company had $3.1 million available
under the line.
Of its cash and equivalents on hand at March 31, 1996, $1,134,000 was
restricted for use by Vet's Choice. In 1996, Vet's Choice used $773,000 of
cash, primarily for increases in inventory and cost of sales.
The Company and Heinz Pet Products contributed $1,010,000 and $990,000,
respectively to Vet's Choice during May 1996. As sales of Premium Pet Food
grow, Vet's Choice will require additional cash to fund its working capital
requirements (primarily inventory and accounts receivable). Heinz Pet Products
has agreed to lend Vet's Choice up to $1.0 million at its bank prime rate plus
one-half percent to assist in meeting these working capital needs. Vet's
Choice, however, may require additional equity or debt financing. If Vet's
Choice is unable to obtain debt financing on favorable terms, it may be
necessary for the Company to make additional capital contributions to the
venture.
During the second quarter of 1996, the Company received net proceeds of
$82,697,000 related to the sale, in an offshore offering and concurrent private
placement in the United States, of $84,385,000 of 5.25% convertible subordinated
debentures due in 2006. The debentures, non-callable for three years, will be
convertible into approximately 2.5 million shares of the Company's common stock
at a rate of $34.35 per share.
The Company has achieved its growth in the past, and anticipates it will
continue its growth in the future, through the acquisition of veterinary
hospitals and veterinary diagnostic laboratories for cash, stock and notes
payable.
The Company intends to fund its future cash requirements primarily from cash on
hand, internally generated funds, the net proceeds from the exercise of its
warrants (which, if all were exercised, would generate approximately $9.9
million of cash), and borrowings on the Company's $3.1 million unsecured line of
credit. The Company believes these sources of funds will be sufficient to
continue the Company's operations and planned capital expenditures for at least
the next 12 months. A significant portion of the Company's cash requirements is
determined by the pace and size of its acquisitions. Consequently, the Company
may need to obtain additional debt or equity financings. The type, timing and
terms of financing selected by the Company will be dependent upon the Company's
cash needs, the availability of other financing sources and prevailing
conditions in the financial markets.
11
<PAGE>
RISK FACTORS
Pending Transactions
The Company is a party to an Agreement and Plan of Reorganization with Pets'
Rx, the owner and operator of 16 animal hospitals in California and Nevada. The
merger with Pets' Rx is subject to significant conditions, some of which are
outside of the control of the Company. Accordingly, there can be no assurance
that the merger with Pets' Rx will in fact occur.
The Company is also a party to an Agreement and Plan of Reorganization with The
Pet Practice the operator of 86 animal hospitals in 11 states. The merger with
The Pet Practice is subject to significant conditions, some of which are outside
of the control of the Company. Accordingly, there can be no assurance that
either of these mergers will in fact occur.
The Company has entered into merger agreements with The Pet Practice and Pets'
Rx with the expectation that the transactions will result in beneficial
synergies for the combined business. These include the potential to realize
improved operating margins at animal hospitals through a strategy of
centralizing various corporate and administrative functions and leveraging fixed
costs while providing customers with improved services.
Achieving these anticipated business benefits will depend in part on whether
the operations of The Pet Practice and Pets' Rx, or either of them, can be
integrated with the operations of the Company in an efficient, effective and
timely manner. There can be no assurance that this will occur. The combination
of two or three of the companies will require, among other things, integration
of the companies' management staffs, coordination of the companies' sales and
marketing efforts, integration and coordination of the companies' development
teams and the identification and elimination of redundant and/or unnecessary
overhead and poor-performing hospitals. The success of this process will be
significantly influenced by the ability of the combined business to retain key
management and marketing and development personnel. There is no assurance that
this integration will be accomplished smoothly or successfully or that the
Company will be successful in retaining key members of management. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations with distinct cultures. The
integration of operations of two or three of the companies following the mergers
will require the dedication of management resources, which may temporarily
distract attention from the day-to-day business of the combined business. The
inability of management to integrate successfully the operations of two or three
of the companies could have an adverse effect on the business and results of the
combined business. In addition, even if the operations of the three companies
are ultimately successfully integrated, it is anticipated that the integration
will be accomplished over time and, in the interim, the combination may have an
adverse effect on the business, results of operations and financial condition of
the combined business.
In addition, there can be no assurance that the present and potential customers
of the Company, The Pet Practice and Pets' Rx will continue their current
utilization patterns without regard to the proposed mergers or that the proposed
mergers will not have an adverse impact upon relationships with veterinarians
and other animal health care professionals currently employed by the Company,
The Pet Practice and Pets' Rx. Any significant reduction in utilization
patterns by the Company, The Pet Practice and Pets' Rx's customers, or any
significant adverse impact on relationships with the veterinarians and other
animal health care professionals currently employed by the Company, The Pet
Practice or Pets' Rx, could have an adverse effect on the near-term business and
results of operations of the combined business.
The Pet Practice commenced operations in October 1993, although the initial
business The Pet Practice acquired has, and most of the veterinary hospitals
acquired since have, operated over a substantial period. The Pet Practice had a
net loss of $4,888,000 in fiscal 1994 and a net loss of $3,175,000 in fiscal
1995 and an accumulated deficit of $8,692,000 as of January 3, 1996 relating to
net losses in the period from October 27, 1993 (commencement of operations)
through December 29, 1993 and in fiscal 1994 and 1995. In view of The Pet
Practice's significant recent growth and the impact of certain charges on The
Pet Practice's 1994 and 1995 results, The Pet Practice's historical financial
performance may not be indicative of its future performance. There can be no
assurance that The Pet Practice will achieve profitability or successfully
implement its business strategy.
Pets' Rx commenced operations on May 28, 1991. Pets' Rx had a net loss of
approximately $2,805,000 in fiscal 1994 and a net loss of $1,977,000 in fiscal
1995 and an accumulated deficit of $8,147,000 as of December 31, 1995. Further
losses are expected to be recorded for fiscal 1995 if the Pets' Rx merger with
the Company is consummated as a result of anticipated pooling adjustments. In
view of Pets' Rx's recent growth and the impact of nonrecurring charges and
certain other charges on Pets' Rx's 1994 and 1995 results, Pets' Rx's historical
financial performance may not be indicative of its future
12
<PAGE>
performance. There can be no assurance that Pets' Rx will achieve profitability
or successfully implement its business strategy.
Rapid Expansion and Management of Growth
Due to the number and size of acquisitions completed since January 1, 1994, the
Company has experienced rapid growth. In 1994, the Company completed six
acquisitions (five animal hospitals and one veterinary diagnostic laboratory)
and in 1995, the Company completed 32 acquisitions (25 animal hospitals, six
veterinary diagnostic laboratories and the remaining 30 percent interest in
Professional Animal Laboratory). As a result of these acquisitions, the
Company's revenues have grown from $25.3 million in 1993 to $42.2 million in
1994 and to $92.1 million in 1995. In addition, during this period, the Company
entered two new lines of business, veterinary diagnostic laboratories and
premium pet food.
The Company's growth and pace of acquisitions have placed, and will continue to
place, a substantial strain on its management, operational, financial and
accounting resources. The successful management of this growth will require the
Company to continue to implement and improve its financial and management
information systems and to train, motivate and manage its employees. There can
be no assurance that the combined business will be able to identify, consummate
or integrate acquisitions without substantial delays, costs or other problems.
Once integrated, acquisitions may not achieve sales, profitability and asset
productivity commensurate with the combined business' other operations. In
addition, acquisitions involve several other risks, including adverse short-term
effects on the combined business' reported operating results, impairments of
goodwill and other intangible assets, the diversion of management's attention,
the dependence on retention, hiring and training of key personnel, the
amortization of intangible assets and risks associated with unanticipated
problems or legal liabilities. The combined business' failure to manage growth
effectively would have a material adverse effect on the combined business'
results of operations and its ability to execute its business strategy.
In addition, the growth experienced by the Company, and the corresponding
increased need for timely information, have placed significant demands on the
Company's existing accounting and management information systems. As a result,
the Company is in the process of upgrading these systems. No assurance can be
given that these upgrades will be completed successfully or that the new systems
can be successfully integrated or that the new systems will effectively serve
the combined business' future information requirements.
Dependence on Acquisitions for Future Growth
The Company's growth strategy is dependent principally on its ability to
acquire existing animal hospitals and veterinary diagnostic laboratories.
Successful acquisitions involve a number of factors which are difficult to
control, including the identification of potential acquisition candidates, the
willingness of the owners to sell on reasonable terms and the satisfactory
completion of negotiations. In addition, acquisitions may be subject to pre-
merger or post-merger review by governmental authorities for antitrust and other
legal compliance. Adverse regulatory action could negatively affect the
Company's operations through the assessment of fines or penalties against the
Company or the possible requirement of divestiture of one or more of the
Company's operations.
There can be no assurance that the Company will be able to identify and acquire
acceptable acquisition candidates on terms favorable to the Company in a timely
manner in the future. Assuming the availability of capital, the Company's plans
include an aggressive acquisition program involving the acquisition of at least
15 to 25 facilities per year. During the period from January 1, 1996 to May 10,
1996, the Company acquired two veterinary diagnostic laboratories and eight
animal hospitals, one of which was consolidated into an existing facility. The
Company continues to evaluate acquisitions and negotiate with several potential
acquisition candidates. The failure to complete acquisitions and continue
expansion could have a material adverse effect on the Company's financial
performance. As the combined business proceeds with its acquisition strategy,
it will continue to encounter the risks associated with the integration of
acquisitions described above.
Leverage
The Company has incurred substantial indebtedness to finance the acquisition of
its animal hospitals and veterinary diagnostic laboratories. Giving effect to
debt incurred in acquisitions subsequent to March 31, 1996 through May 10, 1996,
the Company had at March 31, 1996, consolidated long-term obligations (including
current portion) of approximately $38.0 million. In addition, on April 17,
1996, the Company issued subordinated debt in an aggregate principal amount of
$84.4 million (the "Debentures"). At December 31, 1995 and March 31, 1996, the
Company's ratio of long-term debt to total
13
<PAGE>
stockholders' equity was 36.5% and 36.4%, respectively. The Company expects to
incur additional indebtedness in the future to continue its acquisition
strategy.
Risks Associated with Intangible Assets
A substantial portion of the assets of the Company consists of intangible
assets, including goodwill and covenants not to compete relating to the
acquisition of animal hospitals and veterinary diagnostic laboratories. At March
31, 1996, the Company's balance sheet reflected $85.2 million of intangible
assets of these types, a substantial portion of the Company's $157.0 million in
total assets at such date. The Company expects the aggregate amounts of goodwill
and other intangible assets on its balance sheet to increase in the future in
connection with additional acquisitions. This increase will have an adverse
impact on earnings as goodwill and other intangible assets will be amortized
against earnings. In the event of any sale or liquidation of the Company, there
can be no assurance that the value of these intangible assets will be realized.
In addition, the Company continually evaluates whether events and circumstances
have occurred that indicate the remaining balance of intangible assets may not
be recoverable. When factors indicate that these intangible assets should be
evaluated for possible impairment, they may be required to reduce the carrying
value of intangible assets, which could have a material adverse effect on
results of operations during the periods in which such reduction is recognized.
In accordance with this policy, the Company recognized a write down of goodwill
and related assets in the amount of $2.3 million in 1993 in connection with
three of the Company's facilities which were not performing. There can be no
assurance that the Company will not be required to write down assets further in
future periods.
Guaranteed Payments
In connection with acquisitions in which the purchase price consists, in part,
of the Company's common stock (the "Guarantee Shares"), the Company often
guarantees (the "Guarantee Right") that the value of such stock (the
"Measurement Price") two to three years following the date of the acquisition
(the "Guarantee Period") will equal or exceed the value of the stock on the date
of acquisition (the "Issue Price"). In the event the Measurement Price does not
equal or exceed the Issue Price, the Company typically is obligated either to
(i) pay to the seller in cash, notes payable or additional shares of the
Company's common stock the difference between the Issue Price and the
Measurement Price multiplied by the number of Guarantee Shares then held by the
seller, or (ii) purchase the Guarantee Shares then held by the seller. Once the
Guarantee Shares are registered for resale under the Securities Act, which
registration the Company covenants to effect generally within six months of
issuance of the Guarantee Shares, the seller's Guarantee Right typically
terminates if the Company's common stock trades at 110% to 120% of the Issue
Price for five to 15 consecutive days, depending on the terms of the specific
acquisition at issue. There are 268,566 Guarantee Shares outstanding at March
31, 1996 with Issue Prices ranging from $11.70 to $17.49 that have not been
registered for resale. If the value of the Company's common stock decreases and
is less than an Issue Price at the end of the respective Guarantee Period for
these shares, the Company may be obligated to compensate these sellers.
Seasonality and Fluctuating Quarterly Results
A large portion of the business of the Company is seasonal, with operating
results varying substantially from quarter to quarter. Historically, the
Company's revenues have been greater in the second and third quarters than in
the first and fourth quarters. The demand for the Company's veterinary services
are 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, as well as general economic conditions. A substantial
portion of the Company's costs are fixed and do not vary with the level of
demand. Consequently, net income for the second and third quarters at
individual animal hospitals generally has been higher than that experienced in
the first and fourth quarters.
Dependence on Key Management
The Company's success will continue to depend to a significant extent on the
Company's executive officers and other key management, particularly its Chief
Executive Officer, Robert L. Antin. The Company has an employment contract with
Mr. Antin which expires in December 1998. The Company maintains "key man" life
insurance on Mr. Antin in the amount of $3.0 million, of which the Company is
the sole beneficiary. The Company does not maintain any insurance on the lives
of its other senior management. As the Company continues to grow, it will
continue to hire, appoint or otherwise change senior managers and other key
executives. There can be no assurance that the Company will be able to retain
its executive officers and key personnel or attract additional qualified members
to management in the future. In addition, the success of certain
14
<PAGE>
of the Company's acquisitions may depend on the Company's ability to retain
selling veterinarians of the acquired companies. The loss of services of any key
manager or selling veterinarian could have a material adverse effect upon the
Company's business.
Joint Ventures
The Company conducts a portion of its veterinary diagnostic laboratory business
through a joint venture with Vet Research, Inc. ("VRI"), and conducts its pet
food business through a joint venture with Heinz Pet Products, an affiliate of
H.J. Heinz Company. The Company has an option in January 1997 to acquire the
remaining 49 percent interest in the laboratory joint venture for $18.6 million
in cash plus an additional amount based upon the earnings of the joint venture
to be paid over six years. Based on current information available to it, the
Company expects to exercise its purchase option in January 1997. If for any
reason the Company does not exercise the option, VRI has the option to purchase
from the Company its entire 51 percent interest for $3.5 million. On the
earlier of a change in control of the Company or January 1, 2000, Heinz Pet
Products has the option to purchase all of the Company's interest in the Vet's
Choice joint venture at a purchase price equal to the fair market value of such
interest. There can be no assurance that the Company will not have to sell
these joint venture interests.
Competition
The companion animal health care industry is highly competitive and subject to
continual change in the manner in which services are delivered and providers are
selected. The Company believes that the primary competitive factors in
connection with animal hospitals are convenient location, recommendation of
friends, reasonable fees, quality of care and convenient hours. The Company's
primary competitors for its animal hospitals in most markets are individual
practitioners or small, regional multi-clinic practices. In addition, certain
national companies in the pet care industry, including the operators of super-
stores, are developing multi-regional networks of animal hospitals in markets
which include the Company's animal hospitals. Among veterinary diagnostic
laboratories, the Company believes that quality, price and the time required to
report results are the major competitive factors. There are many clinical
laboratory companies which provide a broad range of laboratory testing services
in the same markets serviced by the Company. In addition, several national
companies provide on-site diagnostic equipment that allows veterinarians to
perform their own laboratory tests. The Company's major competitors in the
premium pet food industry are Hill's and Iams, both of which have extensive
experience in the manufacture of premium pet food and possess research and
development, marketing and financial resources far greater than that of Vet's
Choice.
Government Regulation
The laws of some states prohibit veterinarians from splitting fees with non-
veterinarians and prohibit business corporations from providing veterinary
services through the direct employment of veterinarians. These laws and their
interpretations vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company believes
that its operations as currently conducted are in material compliance with
existing applicable laws, there can be no assurance that the Company's existing
operational structure will not be successfully challenged in one or more states
as constituting the unlicensed practice of veterinary medicine. Such a
determination in a state could adversely affect the operations of the Company
and the combined business through the assessment of fines or penalties against
the Company or the combined business or the possible requirement of divestiture
of the Company's operations in the state. In addition, there can be no
assurance that state legislation or regulations will not change so as to
restrict the Company's or, in the future, the combined business' existing
operations or the expansion of such operations.
Anti-takeover Effect
A number of provisions of the Company's Certificate of Incorporation and bylaws
and certain Delaware laws and regulations relating to matters of corporate
governance, certain rights of directors and the issuance of preferred stock
without stockholder approval, may be deemed to have and may have the effect of
making more difficult, and thereby discouraging, a merger, tender offer, proxy
contest or assumption of control and change of incumbent management, even when
stockholders other than the Company's principal stockholders consider such a
transaction to be in their best interest. In addition, H.J. Heinz Company has
an option to purchase the Company's interest in the Vet's Choice joint venture
upon the occurrence of a change in control (as defined in the joint venture
agreement), which may have the same effect. Accordingly, stockholders may be
deprived of an opportunity to sell their shares at a substantial premium over
the market price of the shares.
15
<PAGE>
Impact of Shares Eligible for Future Sale
Future sales by existing stockholders could adversely affect the prevailing
market price of the Company's common stock. As of May 13, 1996, the Company had
13,182,482 shares of common stock outstanding, most of which are either freely
tradeable in the public market without restriction or tradeable in accordance
with Rule 144 under the Act. There are also 157,697 shares which the Company is
obligated to issue in connection with certain acquisitions; 583,333 shares
issuable upon conversion of outstanding preferred stock; 1,470,804 shares of the
Company's common stock issuable upon exercise of outstanding stock options;
1,308,647 shares of the Company's common stock issuable upon exercise of
outstanding warrants; and 6,635 shares issuable upon conversion of convertible
notes. Shares may also be issued under price guarantees delivered in connection
with acquisitions. These shares will be eligible for immediate sale upon
issuance. In addition, if the Pets' Rx and The Pet Practice transactions are
consummated, the Company will be obligated to issue an aggregate of
approximately 850,000 shares (subject to adjustment) and approximately 3,195,000
shares (assuming the Company's common stock has an average price at that time of
$27.00), respectively.
Possible Volatility of Stock Price
The market price of the Company's common stock could be subject to significant
fluctuations caused by variations in quarterly operating results, litigation
involving the Company, announcements by the Company or its competitors, general
conditions in the companion animal health care industry and other factors. The
stock market in recent years has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of publicly traded companies. The broad fluctuations may adversely
affect the market price of the Company's common stock.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
Exhibit 11. Computation of Per Share Earnings (Loss)
(b) Form 8-K.
--------
Report on Form 8-K dated March 14, 1996 (as amended April 11, 1996 and
April 17, 1996)
Report on Form 8-K dated March 22, 1996
Report on Form 8-K dated April 10, 1996
Report on Form 8-K dated April 11, 1996
17
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
VETERINARY CENTERS OF AMERICA, INC.
Date: May 14, 1996 /s/ Tomas W. Fuller
---------------------------
Tomas W. Fuller
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
ITEM EXHIBIT PAGE
- ---- ------- ----
11 Computation of Per Share Earnings (Loss)
1
<PAGE>
EXHIBIT 11
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATIONS OF PER SHARE EARNINGS (LOSS)
The computations of net income (loss) per share for three months ended March
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Primary:
Net income (loss).................................. $ 1,012,000 $ (592,000)
=========== ===========
Average common shares outstanding.................. 12,434,000 6,865,000
Dilutive common equivalent shares issuable upon:
Conversion of preferred stock.................... 583,000 --
Redemption of redeemable warrants................ 1,233,000 --
Exercise of options to purchase common shares.... 860,000 --
----------- -----------
15,110,000 6,865,000
=========== ===========
Net income (loss) per share.................... $0.07 $ (0.09)
=========== ===========
Fully Diluted (1):
Net income........................................... $ 1,012,000 $ (592,000)
Addback: Interest expense, net of tax,
applicable to convertible debt..................... 1,000 3,000
----------- -----------
$ 1,013,000 $ (589,000)
=========== ===========
Average common shares outstanding.................. 12,434,000 6,865,000
Dilutive common equivalent shares issuable upon:
Conversion of preferred stock.................... 583,000 583,000
Redemption of redeemable warrants................ 1,413,000 1,144,000
Exercise of options to purchase common shares.... 1,055,000 497,000
Issuance of contingently issuable shares......... -- 4,000
Conversion of convertible debt................... 7,000 47,000
----------- -----------
15,492,000 9,140,000
=========== ===========
Net income (loss) per share....................... $0.07 $(0.06)
=========== ===========
</TABLE>
(1) The computations of the fully diluted income per share are submitted in
accordance with Regulation S-K item 601(b)(11) although it is contrary to
paragraph 40 of APB Opinion No.15 because it produces an anti-dilutive result.
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 37,615,000 46,799,000
<SECURITIES> 0 0
<RECEIVABLES> 8,816,000 6,303,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 51,928,000 58,289,000
<PP&E> 15,981,000 13,641,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 157,048,000 141,465,000
<CURRENT-LIABILITIES> 18,934,000 16,413,000
<BONDS> 0 0
0 0
1,000 1,000
<COMMON> 13,000 12,000
<OTHER-SE> 102,131,000 91,781,000
<TOTAL-LIABILITY-AND-EQUITY> 157,048,000 141,465,000
<SALES> 0 0
<TOTAL-REVENUES> 31,004,000 15,230,000
<CGS> 0 0
<TOTAL-COSTS> 23,203,000 11,809,000
<OTHER-EXPENSES> 1,034,000 1,634,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 672,000 479,000
<INCOME-PRETAX> 1,811,000 (855,000)
<INCOME-TAX> 799,000 (263,000)
<INCOME-CONTINUING> 1,012,000 (592,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,012,000 (592,000)
<EPS-PRIMARY> .07 (.09)<F1>
<EPS-DILUTED> .07 (.06)
<FN>
<F1>1995 EPS was negatively impacted by a pre tax restructuring charge of
$1,086,000 to eliminate duplicate operating and overhead costs related to the
merger of Cenvet into Vet Research, Inc.
</FN>
</TABLE>
