SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) June 19, 1996
VETERINARY CENTERS OF AMERICA, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-10787 95-4097995
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. employer
of incorporation) file number) identification number)
3420 OCEAN PARK BOULEVARD, SUITE 1000, SANTA MONICA, CALIFORNIA 90405
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 392-9599
--------------
<PAGE>
Item 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Attached hereto are financial statements of Pets' Rx, Inc. filed in
addition to the financial statements included in the
Registrant's Current Report on Form 8-K filed on July 5, 1996.
(a) Financial Statements of Businesses Acquired.
PETS' RX, INC.
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1995
and 1994
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Redeemable Preferred Stock
and Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(c) Exhibits.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and
Stockholders of Pets' Rx, Inc.:
We have audited the accompanying consolidated balance sheet of Pets' Rx, Inc.
(a Delaware corporation) and subsidiary as of December 31, 1995, and the related
consolidated statements of operations, redeemable preferred stock and
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
which 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pets' Rx, Inc. and subsidiary
as of December 31, 1995, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
San Jose, California
March 20, 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and
Stockholders of Pets' Rx, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable preferred stock and stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Pets' Rx, Inc at December 31, 1994 and the results of its operations
and its cash flows for the years ended December 31, 1994 and 1993 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
September 12, 1995
F-2
<PAGE>
PETS' RX, INC.
--------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
(In thousands, except share and per share data)
ASSETS
------
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 752 $ 2,254
Other current assets (Note 2) 671 571
------- -------
Total current assets 1,423 2,825
PROPERTY AND EQUIPMENT, net (Note 2) 4,054 4,138
INTANGIBLE ASSETS, net (Note 2) 9,490 9,909
NOTE RECEIVABLE (Note 3) 100 293
OTHER ASSETS 265 118
------- -------
$15,332 $17,283
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,080 $ 854
Current portion of long-term obligations (Note 4) 1,412 702
Accrued expenses and other current liabilities (Note 2) 1,358 1,188
------- -------
Total current liabilities 3,850 2,744
------- -------
LONG-TERM OBLIGATIONS, net of current portion (Note 4) 9,426 10,986
------- -------
MINORITY INTEREST (Note 3) 251 -
------- -------
COMMITMENTS AND CONTINGENCIES (Note 3 and 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
2,000,000 shares designated; 915,464 shares issued and outstanding in 1995
and 1994 (Note 5) 2,947 2,947
------- -------
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 6 and 7):
Preferred stock, $0.01 par value; 5,000,000 shares authorized
Convertible preferred stock, 100,000 shares designated Series A; 38,000
and 35,000 shares issued and outstanding in 1995 and 1994 3,395 3,095
Convertible preferred stock (Series A) 5,000 shares
subscribed - 150
Common stock, $0.01 par value; 20,000,000 shares authorized; 6,265,685 and
6,069,261 shares issued and outstanding in 1995 and 1994 63 61
Additional paid-in capital 3,547 3,470
Accumulated deficit (8,147) (6,170)
------- -------
Total stockholders' equity (deficit) (1,142) 606
------- -------
$15,332 $17,283
======= =======
</TABLE>
F-3
<PAGE>
PETS' RX, INC.
--------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
REVENUES $15,622 $ 9,638 $ 5,785
------- ------- -------
COSTS OF SERVICES:
Cost of revenues 3,045 2,055 1,214
Salaries and wages of clinic operations 6,136 4,162 2,429
Other operating expenses of clinics 4,055 2,562 1,594
------- ------- -------
13,236 8,779 5,237
------- ------- -------
Gross profit 2,386 859 548
GENERAL AND ADMINISTRATIVE 2,203 1,777 1,054
DEPRECIATION AND AMORTIZATION 1,200 919 562
WRITE-OFF OF GOODWILL - - 123
------- ------- -------
Operating loss (1,017) (1,837) (1,191)
INTEREST EXPENSE (1,009) (1,006) (352)
INTEREST INCOME 99 38 21
------- ------- -------
Loss before minority interest in
income of subsidiary (1,927) (2,805) (1,522)
MINORITY INTEREST IN INCOME OF SUBSIDIARY 50 - -
------- ------- -------
Net loss $(1,977) $(2,805) $(1,522)
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
PETS' RX, INC.
--------------
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
(DEFICIT)
---------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
-----------------------------------------
Redeemable Series A
Preferred Stock Preferred Stock Common Stock
--------------- ---------------- --------------------
Shares Amount Shares Amount Shares Amount
------- ------ ------ -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 792,170 $2,515 - $ - 1,792,500 $18
Issuance of common stock warrants - - - - - -
Issuance of redeemable preferred stock warrants - - - - - -
Redeemable preferred stock dividend 59,424 208 - - - -
Subscription of Series C preferred stock - - - - - -
Net loss - - - - - -
------- ------ ------ ------ --------- ---
BALANCE AT DECEMBER 31, 1993 851,594 2,723 - - 1,792,500 18
Redeemable preferred stock dividend 63,870 224 - - - -
Issuance of common stock for surrender of Series C
preferred stock subscription - - - - 537,500 5
Issuance of Series A convertible preferred
stock, net of issuance cost of $238 - - 35,000 3,262 - -
Issuance of common stock to directors in conjunction
with sale of Series A preferred stock - - - (167) 270,000 3
Subscription of Series A convertible preferred stock - - - - - -
Issuance of common stock for exercise and surrender
of warrants - - - - 645,000 6
Issuance of common stock for payment of note interest - - - - 357,903 4
Issuance of common stock for note conversion - - - - 2,441,358 25
Issuance of common stock for acquisition - - - - 25,000 -
Issuance of common stock warrants - - - - - -
Net loss - - - - - -
------- ------ ------ ------ --------- ---
BALANCE AT DECEMBER 31, 1994 915,464 2,947 35,000 3,095 6,069,261 61
Issuance of Series A convertible preferred stock - - 3,000 300 - -
Issuance of common stock for bridge note conversion - - - - 142,960 2
Issuance of common stock for exercise and surrender of
warrants - - - - 53,464 -
Net loss - - - - - -
------- ------ ------ ------ --------- ---
BALANCE AT DECEMBER 31, 1995 915,464 $2,947 38,000 $3,395 6,265,685 $63
======= ====== ====== ====== ========= ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
-------------------------------------------------------
Additional
Paid-in Stock Accumulated
Capital Subscribed Deficit Total
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $1,386 $ - $(1,411) $ (7)
Issuance of common stock warrants 101 - - 101
Issuance of redeemable preferred stock warrants 121 - - 121
Redeemable preferred stock dividend - - (208) (208)
Subscription of Series C preferred stock - 200 - 200
Net loss - - (1,522) (1,522)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1993 1,608 200 (3,141) (1,315)
Redeemable preferred stock dividend - - (224) (224)
Issuance of common stock for surrender of Series C
preferred stock subscription 195 (200) - -
Issuance of Series A convertible preferred
stock, net of issuance cost of $238 - - - 3,262
Issuance of common stock to directors in conjunction
with sale of Series A preferred stock 164 - - -
Subscription of Series A convertible preferred stock - 150 - 150
Issuance of common stock for exercise and surrender
of warrants 49 - - 55
Issuance of common stock for payment of note interest 219 - - 223
Issuance of common stock for note conversion 1,207 - - 1,232
Issuance of common stock for acquisition 15 - - 15
Issuance of common stock warrants 13 - - 13
Net loss - - (2,805) (2,805)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1994 3,470 150 (6,170) 606
Issuance of Series A convertible preferred stock - (150) - 150
Issuance of common stock for bridge note conversion 77 - - 79
Issuance of common stock for exercise and surrender of
warrants - - - -
Net loss - - (1,977) (1,977)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 3,547 $ - $(8,147) $(1,142)
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PETS' RX, INC.
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,977) $(2,805) $(1,522)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 1,200 919 562
Gain on sale of land and building (19) - -
Write-off of goodwill - - 123
Minority interest in income of subsidiary in excess of distributions 7 - -
Changes in assets and liabilities, net of effect of acquired clinics-
Other current assets (88) 116 (136)
Other assets 19 (51) (36)
Accounts payable 607 476 115
Accrued expenses and other current liabilities 32 954 219
------- ------- -------
Net cash used in operating activities (219) (391) (675)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (916) (114) (160)
Purchases of veterinary clinics (40) (862) (1,140)
Sale of marketable securities - - 140
Proceeds from sale of land and building 600 - -
Payments received (advances made) under note receivable 193 (98) 2
------- ------- -------
Net cash used in investing activities (163) (1,074) (1,158)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations - 294 1,426
Proceeds from issuance of redeemable preferred stock warrants and
common stock warrants - 13 222
Net proceeds from issuance of convertible preferred stock, preferred
stock subscribed, and common stock 150 3,467 200
Principal payments under long-term obligations (1,270) (603) (356)
------- ------- -------
Net cash provided by (used in) financing activities (1,120) 3,171 1,492
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,502) 1,706 (341)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,254 548 889
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 752 $ 2,254 $ 548
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 972 $ 982 $ 324
Non-cash financing activities-
Payment of accrued interest on notes by issuance of common stock $ - $ 223 $ -
Conversion of notes payable to common stock $ 79 $ 1,232 $ -
Capital leases $ 78 $ - $ -
Conversion of accounts payable to note payable $ 381 $ - $ -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PETS' RX, INC.
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995
-----------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
---------------------------------------------------
The Company
- -----------
Pets' Rx, Inc. (the "Company") was incorporated in Delaware on May 28, 1991. The
Company is engaged in the acquisition and operation of veterinary clinics. As of
December 31, 1995, the Company operates 16 clinics in the San Jose and
Sacramento, California, and Las Vegas, Nevada, markets.
The Company has substantial operating and debt service obligations as a result
of the significant acquisition activity (see Note 3). The Company will require
additional capital in 1996 if the merger discussed in Note 11 is not
consummated.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of the
Company and its majority-owned subsidiary. All significant intercompany
transactions and balances have been eliminated. Minority interest on the
accompanying balance sheet represents the initial contribution of assets to the
subsidiary by the minority member increased by the member's share of income less
distributions made.
Revenue Recognition
- -------------------
Revenues are recognized upon performance of veterinary services or sale of
related veterinary products.
Cash Equivalents
- ----------------
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Inventories
- -----------
Inventories consist of veterinary supplies, pharmaceuticals, and retail
veterinary products and are stated at the lower of cost, determined using the
first-in, first-out basis, or market.
F-7
<PAGE>
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Property and equipment, other than
leasehold improvements, are depreciated using the straight-line method over the
estimated useful lives of the assets, generally thirty-seven years for buildings
and three to seven years for equipment. Amortization of leasehold improvements
is computed using the straight-line method over the shorter of the remaining
lease term or the estimated useful lives of the improvements.
Intangible Assets
- -----------------
Acquired animal records are valued based on their expected future contribution
and are amortized using the straight-line method over the estimated lives of the
records, generally seven years. Payments due under covenants not to compete are
capitalized and amortized over the life of the covenants, generally five years,
using the straight-line method. The excess of the Company's investment in
veterinary clinics over the fair value of the net assets acquired (goodwill) is
amortized using the straight-line method over its estimated useful life of 40
years. Intangible assets relating to discontinued clinics are charged to expense
upon approval of the decision to close the clinic.
Income Taxes
- ------------
Income taxes are determined using an asset and liability approach that
recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
New Accounting Standards
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company's 1996 fiscal year. SFAS
No. 123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting rules
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" but with additional financial statement disclosure. The
Company plans to continue to account for stock-based compensation arrangements
under APB Opinion No. 25 and, therefore, does not anticipate SFAS No. 123 will
have a material impact on its financial position, results of operations or cash
flows.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." This pronouncement requires that long-lived assets and certain
identifiable intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss is to be recognized when the sum of
undiscounted cash flows is less than the carrying amount of the asset.
Measurement of the loss for assets that the entity expects to hold and use is to
be based on the fair value of the asset. Although this pronouncement did not
have a material impact on the Company's financial condition or results of
operations at adoption in 1996, its provisions will be applicable to any future
assessments of its long-lived assets. Goodwill not associated with long-lived
assets will continue to be assessed under APB Opinion No. 17.
F-8
<PAGE>
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to their 1995
classifications.
2. BALANCE SHEET COMPONENTS (in thousands):
---------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------- -------
<S> <C> <C>
Other current assets:
Accounts receivable, net $ 205 $ 210
Inventories 429 346
Prepaid expenses 37 15
------- -------
$ 671 $ 571
======= =======
Property and equipment:
Buildings $ 2,002 $ 2,487
Clinic equipment 1,534 1,381
Leasehold improvements 682 254
Computer and office equipment 627 290
------- -------
4,845 4,412
Less- Accumulated depreciation and
amortization (939) (537)
------- -------
3,906 3,875
Land 148 263
------- -------
$ 4,054 $ 4,138
======= =======
Intangible Assets:
Covenants not to compete and animal records $ 3,314 $ 3,351
Goodwill 8,359 7,960
------- -------
11,673 11,311
Less- Accumulated amortization (2,183) (1,402)
------- -------
$ 9,490 $ 9,909
======= =======
Accrued Expenses and Other Current Liabilities:
Payroll $ 246 $ 207
Professional services 252 139
Vacation 183 145
Settlement 200 350
Other 477 347
------- -------
$ 1,358 $ 1,188
======= =======
</TABLE>
F-9
<PAGE>
3. ACQUISITIONS:
------------
Since its inception, the Company has completed the acquisition of 19 veterinary
clinics (of which three have been merged into other clinics). All of the
acquisitions were accounted for using the purchase method of accounting;
accordingly, the costs of these acquisitions have been allocated to assets
acquired based on their fair value at date of acquisition. The results of the
acquired clinics are included in the Company's results commencing from the date
of acquisition.
During 1993, the Company completed the acquisition of four veterinary clinics
for total consideration of $6,733,000 consisting of $1,140,000 in cash,
$5,350,000 in secured promissory notes payable, $200,000 payable under covenants
not to compete, and the assumption of $43,000 in trade and payroll liabilities.
During 1994, the Company completed the acquisition of six veterinary clinics for
total consideration of $4,031,000 consisting of $862,000 in cash, $2,529,000 in
secured promissory notes payable, $325,000 payable under convenants not to
compete, 25,000 shares of newly issued common stock of the Company valued at
$15,000 and the assumption of $300,000 of notes payable.
In conjunction with one of the 1994 acquisitions, the Company advanced cash of
$100,000 to the seller in exchange for an unsecured note receivable. Under the
terms of the note, the Company will receive quarterly installments of interest
at a rate of 7.5% per annum, with the entire principal balance and all accrued
and unpaid interest due on November 1, 2004.
The Company is contingently obligated for additional purchase price
consideration related to one of its 1994 acquisitions. The amount to be paid
equals 50 percent of the amount by which the revenues for the twelve-month
period ending September 1997 exceed a base revenue amount. This additional
consideration will be recorded as additional purchase price when and if earned.
During 1995, the Company completed the acquisition of two veterinary clinics. In
April 1995, the Company acquired a veterinary hospital for a total consideration
of $218,000 consisting of $40,000 in cash, $25,000 in secured promissory note
payable, $15,000 payable under covenants not to compete, $31,000 payable under
an assumed lease obligation, and $32,000 in other assumed liabilities. The
agreement also requires an additional payment based on revenues derived from
pre-acquisition clients during the eighteen month period after the acquisition.
As such, the Company recorded additional purchase price and a liability of
$75,000 for the amounts expected to be paid in 1996. The purchase price will be
adjusted in 1996 to reflect the actual payment.
During 1995, a limited liability company (LLC) was formed by combining a
veterinary clinic owned by the Company (Spring Mountain Clinic) with the
practice of another veterinary clinic owned by an unrelated party. Certain
assets were contributed by each party to form the new entity, which is not
liable for any contracts or for any indebtedness relating to the predecessor
clinics. The Company has an 80% interest in the LLC. The Company has certain
obligations under an operating lease for the real property of the facility used
by the other member prior to the consolidation of the operations of the LLC into
the Spring Mountain clinic. Upon the occurrence of certain events, including an
initial public offering or merger with a public company (see Note 11), the
minority owner's interest may be converted into shares of the public entity.
F-10
<PAGE>
The pro forma results listed below are unaudited and reflect purchase price
accounting adjustments assuming the 1994 and 1995 acquisitions occurred at
January 1, 1994. The pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for the
entire periods presented. In addition, they are not intended to be a projection
of future results and do not reflect any efficiencies that might be achieved
from the combined operations.
<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Revenues $15,863 $13,426
Net loss (1,962) (3,004)
</TABLE>
4. LONG-TERM OBLIGATIONS:
----------------------
Long-term obligations consisted of the following (in thousands, except share
data):
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
---------- ---------
<S> <C> <C>
Promissory notes, secured by clinics, bearing
interest at interest rates between 7% and 10%
payable monthly, principal is generally due in
monthly installments through July 2014 $ 7,517 $ 8,285
Promissory note, interest at prime plus 3%
(11.75% at December 31, 1995), principal and
interest payable in monthly installments through 133 154
July 2000
Convertible promissory note payable to a
shareholder, officer and director, secured by a
clinic, interest at 9% per annum payable
semi-annually, principal due July 1996,
convertible into 75,000 shares of common stock 250 250
Convertible promissory notes, secured by clinics,
interest at 7% per annum payable monthly,
principal due through December 2003, convertible
into 88,625 shares of common stock 649 649
Convertible promissory note payable to an
employee, secured by a clinic, interest at 8.5%
per annum, interest and principal payable in
monthly installments from January 1994 through
December 1998, convertible into 100,000 shares of
common stock 671 686
Convertible promissory notes payable primarily to
directors and stockholders, secured by common
stock and key man life insurance, interest at 12%
per annum payable annually, principal due
December 1998, convertible into shares of common
stock at a conversion rate of $0.6233 183 272
Convertible promissory notes payable primarily
to stockholders, interest at 12%, repaid at
maturity on January 1, 1996 307 307
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Obligations under covenants not to compete,
payable in installments through 2003 782 1,005
Installment obligations bearing interest at 8% to
10.25%, due through 2005 295 -
Installment obligations, variable interest rates,
periodic installments due through 1996 - 131
Capital lease obligations (see Note 9) 69 -
------- -------
Total obligations 10,856 11,739
Less- Unamortized portion of discount on notes
payable (18) (51)
Less- Current portion (1,412) (702)
------- -------
Total long-term obligations $ 9,426 $10,986
======= =======
</TABLE>
Future principal payments, excluding capital lease obligations (see Note 9), are
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1996 $ 1,398
1997 1,650
1998 1,555
1999 476
2000 429
Thereafter 5,279
-------
$10,787
=======
</TABLE>
In 1995, the Company restructured a $50,000 payment under a covenant not to
compete to extend the payment date to 1997. In consideration of the extension,
the Company committed to issue 2,500 shares of the Company's common stock and
granted an option to convert the $50,000 into the Company's common stock at
$2.50 per share. No shares have been issued under this agreement as of December
31, 1995.
Convertible Promissory Notes Issued with Stock Warrants
- -------------------------------------------------------
Under the terms of a financing agreement the Company entered into during 1993,
the Company issued convertible promissory notes with a face value of $1,348,000,
warrants to purchase 404,250 shares of common stock at an exercise price of
$0.50 per share and warrants to purchase 404,250 shares of Series B Convertible
Preferred Stock at an exercise price of $0.50 per share. The common warrants may
be exercised at any time until their expiration in December 1998. The preferred
warrants allowed for exercise until December 1998 or upon repayment or
conversion of the promissory notes. The estimated fair value of the warrants has
been recorded as discount on notes payable and is being amortized over the term
of the notes. In 1994 and 1995, 645,000 and 53,464 shares of common stock were
issued
F-12
<PAGE>
upon exercise and surrender of warrants, respectively. All shares were issued at
a reduced exercise price under the terms of the agreement for the issuance of
Series A Preferred Stock.
In December 1993, the Company received $500,000 in cash for a $500,000
convertible promissory note and a subscription for 500,000 shares of Series C
Preferred stock valued at $0.40 per share. These proceeds have been allocated
among the note payable and the stock subscription, with the difference between
the face value and the proceeds being recorded as discount on notes payable and
amortized over the term of the note. The face value of the note was $500,000 and
bears interest at 12%.
During 1994, notes payable with a face value of $1,575,000 were converted into
2,441,358 shares of common stock including shares for interest thereon. The
Company also issued convertible promissory notes with a face value of $307,000
together with warrants to purchase 127,813 shares of common stock at an exercise
price of $2.40 per share. The common warrants expire in December 1998.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
--------------------------------------
The Company's articles of incorporation authorize the issuance of up to
5,000,000 shares of Preferred Stock, 2,000,000 of which have been designated
redeemable convertible preferred stock.
The Redeemable Preferred Stock has certain rights, preferences and restrictions.
Each share of Redeemable Preferred Stock is convertible into one and one-half
shares of common stock, subject to adjustment for dilution, at the option of the
holder. The Redeemable Preferred Stock automatically converts to common stock
upon the sale of common stock by the Company pursuant to an effective
registration statement under the Securities Act of 1933 at a price per share of
at least $5.25.
The Company's articles of incorporation cannot be amended to alter in an adverse
manner the designations, preferences or other rights of the Redeemable Preferred
Stock without the consent of the holders of a majority of the outstanding shares
of Redeemable Preferred Stock, voting together as a class. Similar consent is
required for a change to the Company's articles of incorporation that
establishes, authorizes or enlarges a series of any class of capital stock
ranking senior to the Redeemable Preferred Stock. The Redeemable Preferred Stock
shareholders have no additional voting rights.
At its option, the Company may redeem the then outstanding shares of Redeemable
Preferred Stock at any time after October 15, 1994 at a redemption price of
$3.50 per share plus all declared but unpaid dividends. On October 15, 2001, any
shares of Redeemable Preferred Stock remaining outstanding must be redeemed at a
redemption price of $3.50 per share plus all declared but unpaid dividends.
In the event of liquidation, the holders of the Redeemable Preferred Stock are
entitled to receive, prior to and in preference to any distribution to the
holders of common stock, the amount of $3.50 plus any accrued but unpaid
dividends. After such distribution, holders of the Redeemable Preferred Stock
are entitled to no further participation in the remaining assets of the Company.
The holders of Preferred stock are entitled to receive, when and as declared by
the Board of Directors, cash dividends per share in the amounts determined by
the Board of Directors.
F-13
<PAGE>
The Redeemable Preferred Stock is on parity with all other preferred stock.
6. CONVERTIBLE PREFERRED STOCK
---------------------------
Series A Preferred Stock
- ------------------------
In October 1994, the Company entered into an agreement whereby the Company sold
35,000 shares of Series A Preferred Stock to an investor at a price of $100 per
share (par value $0.01 per share). Also pursuant to the agreement, approximately
$1,575,000 of the Company's 12% Convertible Promissory Notes was converted into
Common Stock. The agreement also limits the number of preferred stock purchase
warrants which may be issued.
The agreement also required a reduction in the number of directors. In
conjunction with this reduction, the Company issued certain directors 270,000
shares of common stock for no consideration (see Note 7). The fair value of
these shares has been recorded as issuance costs of the Series A Preferred
Stock.
Concurrent with the closing, a director and shareholder agreed to purchase 5,000
shares of the Series A Preferred Stock for an aggregate consideration of
$500,000. Through December 31, 1995, the Company had received payments totaling
$300,000 pursuant to which 3,000 shares were issued. The remaining $200,000 was
received in 1996, at which time the remaining subscribed shares were issued. The
Series A Preferred Stock has certain rights, preferences and restrictions.
The Series A Preferred Stock is on a parity with all other "Convertible
Preferred Stock" and "Series B Convertible Preferred Stock," when issued. The
Series A is senior to Common Stock.
Holders of the Series A Preferred Stock are entitled to receive, when and if
declared by the Board of Directors, cumulative dividends at the annual rate of
7.5% times the stated value ($100 per share); provided, however, that dividends
must also have been declared on the "Convertible Preferred Stock" and the
"Series B Convertible Preferred Stock."
In the event of any voluntary or involuntary liquidation or dissolution, the
holders of Series A Preferred Stock are entitled to an amount equal to $125 per
share, plus accrued and unpaid dividends.
Series A shareholders may convert such shares into shares of Common Stock at a
rate equal to the stated value plus accrued and unpaid dividends, divided by the
conversion price. The initial conversion price is $2.50 per share. Shares of
Series A will be converted into shares of Common Stock at the conversion rate
should the Company file a registration statement for a common share offering
with aggregate gross proceeds of at least $7,500,000.
Series A holders and the Common Stock class will vote together as a class on
transactions and each share of Series A is entitled to the number of votes per
share equal to the number of shares of Common Stock issuable upon conversion of
the Series A. However, as long as at least 10,000 shares of Series A are issued
and outstanding, the Board of Directors shall not exceed five members and the
holders of Series A are entitled (voting as a class) to elect in person or by
proxy one director. If less than 10,000 shares are issued and outstanding, the
term of the director elected by the Series A shall end and the remaining
directors shall fill the vacancy. In addition, there are voting rights to
prevent the establishment of new capital stock classes and enlargement of
existing classes.
F-14
<PAGE>
Series B Preferred Stock Warrants
- ---------------------------------
During 1994 and 1995, outstanding warrants for Series B Preferred Stock were
surrendered to the Company for the direct issuance of shares of common stock
into which the Series B Preferred Stock were convertible. As of December 31,
1995, warrants to purchase 55,018 shares of Series B Preferred Stock at an
exercise price of $0.50 were outstanding.
7. COMMON STOCK:
------------
During 1994, the Company issued 25,000 shares of common stock as part of the
consideration for acquisition of a clinic and 357,903 shares of common stock for
repayment of promissory note interest.
During 1993 and 1994 the Company issued certain equity securities to investors.
In early 1996 the Company determined that such issuances were technically
invalid due to the lack of filing legal documents in some states on a timely
basis. Effective 1994, the Company's board of directors has resolved to issue
537,500 shares of common stock in exchange for the surrender of one class of
such equity securities and to issue 322,500 shares of common stock in exchange
for the surrender of the other class of such equity securities. Such shares of
common stock represent the number of shares into which the invalidly issued
securities were originally converted in 1994.
Common Stock Warrants
- ---------------------
In addition to the common stock warrants discussed in Note 4, the Company, as of
December 31, 1995, has warrants outstanding to purchase 108,544 common shares at
exercise prices ranging from $0.50 to $2.66 per share. These warrants are
exercisable at the option of the holder and expire on December 31, 1998. A
nominal value was assigned to the warrants.
Common Stock Options
- --------------------
In July 1991, the Company granted an officer and director options to purchase
162,000 shares of the Company's common stock at a price of $0.50 per share. The
options, which are currently exercisable, expire in July 2001.
In 1992 and 1993, the Board of Directors authorized the grant of options to
officers of the Company to purchase 197,500 shares of common stock at a price of
$2.33 per share. The options, which are currently exercisable, expire in
December 2002.
In January 1992, the Board of Directors adopted a resolution which provides for
the grant of common stock options to directors who are not employees of the
Company (the "Outside Directors"). Under the resolution, each of the Outside
Directors received options to purchase 54,000 shares of Common Stock at an
exercise price per share of $1.67. Such options vest ratably over a four year
period. In 1994, certain directors were required to resign, pursuant to the
Stock Purchase Agreement for the issuance of Series A Preferred Stock. In
consideration for the reconstitution of the Board of Directors, the Outside
Directors' options became fully vested and the exercise price was reduced to
zero. The fair value of the options were recorded as an issuance cost of the
Series A Preferred Stock.
F-15
<PAGE>
In 1994, the Board of Directors granted options to purchase 141,500 shares of
Common Stock at a price of $2.75 per share to employees. These options, which
are currently exercisable, expire in 2004 .
A summary of the stock option activity follows:
<TABLE>
<CAPTION>
Number Price
of Shares Per Share
---------- ---------
<S> <C> <C>
Balance at December 31, 1992 421,500 $0.50 - $2.33
Granted 208,000 $2.33
Exercised - -
Canceled - -
--------
Balance at December 31 ,1993 629,500 $0.50 - $2.33
Granted 141,500 $2.75
Exercised (270,000) -
Canceled - -
--------
Balance at December 31, 1994 501,000 $0.50 - $2.75
Granted 2,500 $2.75
Exercised - -
Canceled - -
--------
Balance at December 31, 1995 503,500 $0.50 - $2.75
========
Exercisable at December 31, 1995 503,500 $0.50 - $2.75
========
</TABLE>
8. INCOME TAXES:
------------
No provision for income taxes has been recorded as the Company has incurred
losses since its inception.
At December 31, 1995, the Company has federal and state net operating loss
("NOL") carryforwards of approximately $6.5 million and $3.2 million,
respectively. These NOL carryforwards expire at various dates through 2010 and
2000, respectively.
Deferred tax assets of approximately $2.6 million and $1.9 million, resulting
primarily from NOL carryforwards, were fully offset by a valuation allowances as
of December 31, 1995 and 1994 due to the uncertainty of realization.
Under the Tax Reform Act of 1986, the utilization of NOL carryforwards to reduce
taxable income will be restricted in certain circumstances. Events which cause
such a limitation include, but are not limited to, a cumulative ownership change
of more than 50% over a three year period. Management believes that the issuance
of Convertible Preferred Stock during 1994 caused such a change in ownership
and, accordingly, utilization of NOL carryforwards may be limited in future
years.
F-16
<PAGE>
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company leases clinic and office facilities under noncancelable operating
lease agreements. The leases require the Company to pay property taxes,
maintenance and certain insurance expenses. Total rent expense under the
operating leases was $944,000, $584,000 and $436,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
Minimum future lease payments under non-cancelable operating and capital leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending Operating Capital
December 31, Leases Leases
------------ --------- --------
<S> <C> <C>
1996 $ 859 $ 24
1997 817 24
1998 824 24
1999 762 21
2000 753 4
Thereafter 6,430 -
------- ---
$10,445 97
======= ---
Less- Amounts representing
interest (28)
----
Present value of net minimum
lease payments $ 69
====
</TABLE>
The cost of equipment under capital lease included in the balance sheet as
property and equipment as of December 31, 1995 was approximately $78,000.
Accumulated amortization of the leased equipment as of December 31, 1995 was
approximately $13,000.
In February 1996, the Company settled a wrongful termination claim in which it
was the defendant. The settlement amount of approximately $200,000 approximated
the accrued amount as of December 31, 1995 related to this matter.
Various claims arising in the course of business, seeking monetary damages, are
pending. The amount of liability, if any, from such claims cannot be determined
with certainty; however, in the opinion of management, the ultimate outcome of
such claims will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
F-17
<PAGE>
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------------------------
The following disclosure of the estimated fair value of the Company's debt is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, thus the estimates provided therein are not necessarily
indicative of the amounts that could be realized in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1995
-----------------
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Fixed-rate long-term debt $10,723 $10,427
Variable rate long-term debt 133 139
------- ------
$10,856 $10,566
======= ======
</TABLE>
The estimated fair value of the Company's fixed-rate long-term debt is based on
prime plus an estimated spread at December 31, 1995 for similar securities with
similar remaining maturities.
11. SUBSEQUENT EVENTS:
-----------------
In February, 1996 the Company entered into a merger agreement with Veterinary
Centers of America, Inc. (VCA). Under terms of the agreement, which is intended
to qualify for pooling-of-interests accounting, stockholders and rights holders,
as defined, are to receive shares with a market value on March 20, 1996 of
approximately $25 million.
F-18
<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 thereto duly authorized.
VETERINARY CENTERS OF AMERICA, INC.
(Registrant)
Dated: July 16, 1996 By: /s/ Tomas W. Fuller
Tomas W. Fuller
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit Page Number
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K/A, into the
Company's previously filed Registration Statements (File Nos. 33-
42504, 33-44622, 33-56846, 33-56848, 33-57768, 33-57770, 33-57772,
33-67588, 33-80212, 333-97682, 333-00376, 333-6667, and 333-7677).
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
July 16, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-8 of Veterinary Centers of
America, Inc. (No.'s 33-44622, 33-56848, 33-57770, 33-57772, 33-
57768 and 33-56846) and the Registration Statements on Form S-3 of
Veterinary Centers of America, Inc. (No.'s 33-80212, 33-42504, 33-
97682, 33-00376 and 333-07677) of our report dated September 12,
1995 relating to the financial statements of Pets' Rx, Inc., which
appears in this amended Current Report on Form 8-K/A of Veterinary
Centers of America, Inc.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
July 16, 1996
<PAGE>
