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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 19, 1996
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VETERINARY CENTERS OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 1-10787 95-4097995
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (310) 392-9599
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ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
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GENERAL
On July 19, 1996, The Pet Practice, Inc. ("Pet Practice"), a Delaware
corporation, merged with and into Golden Merger Corporation, a Delaware
corporation and a wholly owned subsidiary of Veterinary Centers of America, Inc.
("VCA"), in a stock-for-stock transaction (the "Merger") pursuant to an
Agreement and Plan of Reorganization (the "Agreement") dated as of March 21,
1996 resulting in Pet Practice becoming a wholly owned subsidiary of VCA. Under
the Agreement, each outstanding share of Pet Practice common stock, par value
$.01 per share ("Pet Practice Common Stock") was converted into the right to
receive 0.4077 share of VCA common stock, par value $.001 per share ("VCA Common
Stock"). In connection with the Merger, VCA issued approximately 3,519,100
shares of VCA Common Stock, representing approximately 19.7% (after consummation
of the Merger) of the issued and outstanding shares of VCA Common Stock. No
fractional shares of VCA Common Stock were issued in the Merger. Each former
Pet Practice stockholder otherwise entitled to a fractional share of VCA Common
Stock is entitled to receive cash in the amount of the fraction of a share
multiplied by $21.469.
Each outstanding option to purchase Pet Practice Common Stock was converted
into an option to purchase that number of shares of VCA Common Stock (to the
nearest whole share) into which the number of shares of Pet Practice Common
Stock subject to such option would be converted under the terms of the
Agreement. The exercise price per share of each such option is equal to (x) the
per share exercise price of such option in effect immediately prior to the
Merger multiplied by the number of shares of Pet Practice Common Stock subject
to such option immediately prior to the Merger, divided by (y) the number of
shares of VCA Common Stock subject to such option immediately after the Merger.
The terms of the Merger were negotiated at arm's length between officers of
VCA and Pet Practice (none of whom were affiliated with VCA, its affiliates, its
directors and officers and their associates).
Pet Practice was the operator of 84 veterinary care practices in 11 states.
The assets of Pet Practice primarily consist of medical equipment used in
connection with the operation of its clinics, certain properties owned by Pet
Practice and goodwill. VCA intends to continue the operation of a majority of
the clinics acquired. With respect to the clinics it does not intend to operate,
VCA expects to sell the assets to doctors currently employed at these clinics or
to third parties or to close the facilities. See "Anticipated Effects of
Acquisitions," below.
Attached hereto as Exhibit 99.1 is Registrant's press release, issued July
22, 1996, which is incorporated in its entirety by this reference.
RECENT DEVELOPMENTS
VCA acquired Pets' Rx, Inc. ("Pets' Rx") the owner and operator of 16
animal hospitals in California and Nevada, on June 19, 1996 and Pet Practice on
July 19, 1996.
VCA entered into these transactions with the expectation that the
transactions would 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 Pet Practice and Pets' Rx, or either of them, can be
integrated with the operations of VCA in an efficient, effective and timely
manner. There can be no assurance that this will occur. The combination 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 VCA 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 the
companies following the mergers will require the dedication of management
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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 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 VCA, Pet Practice and Pets' Rx will continue their current
utilization patterns without regard to the mergers or that the mergers will not
have an adverse impact upon relationships with veterinarians and other animal
health care professionals currently employed by VCA, Pet Practice and Pets' Rx.
Any significant reduction in utilization patterns by VCA's, Pet Practice's or
Pets' Rx's customers, or any significant adverse impact on relationships with
the veterinarians and other animal health care professionals currently employed
by VCA, Pet Practice or Pets' Rx, could have an adverse effect on the near-term
business and results of operations of the combined business.
Pet Practice commenced operations in October 1993, although the initial
business Pet Practice acquired has, and most of the veterinary hospitals
acquired since have, operated over a substantial period. Pet Practice had net
losses of $4,888,000 in fiscal 1994, $3,175,000 in fiscal 1995 and $899,000 for
the thirteen weeks ended April 3, 1996 and an accumulated deficit of $9,591,000
as of April 3, 1996 relating to net losses in the period from October 27, 1993
(commencement of operations) through December 29, 1993, fiscal 1994 and 1995 and
the thirteen weeks ended April 3, 1996. In view of Pet Practice's significant
recent growth and the impact of certain charges on Pet Practice's 1994 and 1995
results, Pet Practice's historical financial performance may not be indicative
of its future performance. There can be no assurance that Pet Practice will
achieve profitability or successfully implement its business strategy.
Pets' Rx commenced operations on May 28, 1991. Pets' Rx had net losses of
approximately $2,805,000 in fiscal 1994, $1,977,000 in fiscal 1995 and $358,000
for the three months ended March 31, 1996 and an accumulated deficit of
$8,505,000 as of March 31, 1996. Further losses are expected to be recorded for
fiscal 1995 and 1996 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 performance. There can
be no assurance that Pets' Rx will achieve profitability or successfully
implement its business strategy.
ANTICIPATED EFFECTS OF ACQUISITIONS
VCA has implemented a plan with respect to the integration of the
businesses of Pets' Rx and Pet Practice into VCA's existing operations. 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, VCA anticipates incurring one-time
restructuring and related charges in 1996. The magnitude of these charges has
not been quantified at this time.
The Pets' Rx acquisition was accounted for on a pooling of interests method
of accounting. Under the pooling rules, the historical financial results of VCA
will be restated to reflect the combination, together with certain adjustments.
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. The historical results of
VCA will be restated to reflect the historical losses of Pets' Rx. In addition,
Pets' Rx is expected to continue to incur losses in the second quarter of 1996.
Further, under the pooling rules, the costs incurred by VCA and Pets' Rx in
consummating the merger have been expensed during the second quarter.
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The Pet Practice acquisition was accounted for as a purchase. Under the
purchase rules, the Pet Practice acquisition is expected to result in a
significant increase in the goodwill and other intangibles recorded on VCA'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, VCA expects that its amortization expense will significantly
increase over historical levels.
The combined effect of the restructuring and related charges discussed
above, the pooling treatment in the Pets' Rx acquisition and the increased
amortization expense will have an adverse effect on the results of operations of
VCA in the remainder of 1996. Further, the effect of the increased amortization
expense is expected to temper reported earnings of VCA in the fourth quarter and
subsequent periods.
RAPID EXPANSION AND MANAGEMENT OF GROWTH
Due to the number and size of acquisitions completed since January 1, 1994,
VCA and Pet Practice have experienced rapid growth. In 1994, VCA completed six
acquisitions (five animal hospitals and one veterinary diagnostic laboratory)
and in 1995, VCA completed 32 acquisitions (25 animal hospitals, six veterinary
diagnostic laboratories and the remaining 30 percent interest in Professional
Animal Laboratory ("PAL")). As a result of these acquisitions, VCA'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, VCA entered two new lines of
business, veterinary diagnostic laboratories and premium pet food.
In 1994, Pet Practice acquired 30 veterinary hospitals and in 1995, Pet
Practice acquired 38 veterinary hospitals. As a result of these acquisitions,
Pet Practice's revenues have grown from $1.2 million in the period from October
27, 1993 to December 29, 1993 to $15.1 million in fiscal 1994 and to $40.6
million in fiscal 1995.
VCA's and Pet Practice's growth and pace of acquisitions have placed, and
will continue to place, a substantial strain on their respective management,
operational, financial and accounting resources. The successful management of
this growth will require VCA 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, and the corresponding increased need
for timely information, have placed significant demands on VCA's and Pet
Practice's existing accounting and management information systems. As a result,
VCA 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
VCA's growth strategies are 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 VCA's
operations through the assessment of fines or penalties against VCA or the
possible requirement of divestiture of one or more of VCA's operations.
There can be no assurance that the combined business will be able to
identify and acquire acceptable acquisition candidates on terms favorable to the
combined business in a timely manner in the future. Assuming the availability of
capital, VCA's plans include an aggressive acquisition program involving the
acquisition by the combined business of at least 15 to 25 facilities per year.
VCA continues to evaluate acquisitions and negotiate with
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several potential acquisition candidates. The failure to complete acquisitions
and continue expansion could have a material adverse effect on VCA'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
VCA, Pet Practice and Pets' Rx each have incurred substantial indebtedness
to finance the acquisition of their respective animal hospitals and (in the case
of VCA) veterinary diagnostic laboratories. Giving effect to debt incurred in
acquisitions subsequent to March 31, 1996 through July 29, 1996 (excluding the
acquisition of Pets' Rx and Pet Practice), VCA had at March 31, 1996
consolidated long-term obligations (including current portion) of approximately
$39.5 million. Pet Practice had at April 3, 1996 consolidated long-term
obligations (including current portion) of approximately $20.0 million. At March
31, 1996, Pets' Rx had consolidated long-term obligations (including current
portion) of $10.4 million. In addition, on April 17, 1996, VCA issued
subordinated debt in an aggregate principal amount of $84.4 million (the
"Debentures"). At December 31, 1995 and March 31, 1996, VCA's ratio of long-term
debt to total stockholders' equity was 36.3% and 36.4%, respectively. As of
March 31, 1996, after giving effect to the acquisitions completed subsequent to
March 31, 1996 through July 29, 1996 and the sale of the Debentures, the ratio
of long-term debt to total stockholders' equity will be 91.7%. VCA 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 VCA, Pet Practice and Pets' Rx
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, VCA's balance sheet reflected $85.2 million of
intangible assets of these types, a substantial portion of VCA's $157.0 million
in total assets at such date. At April 3, 1996, Pet Practice's balance sheet
reflected $53.8 million of intangible assets of these types, a significant
portion of Pet Practice's $79.7 million in total assets. At March 31, 1996,
Pets' Rx's balance sheet reflected $9.3 million of intangible assets of these
types prior to pooling adjustments, a significant portion of Pets' Rx's $14.6
million in total assets at such date. VCA 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 VCA,
there can be no assurance that the value of these intangible assets will be
realized. In addition, the respective companies continually evaluate 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, VCA recognized a
writedown of goodwill and related assets in the amount of $2.3 million in 1993
in connection with three of VCA's facilities which were not performing. There
can be no assurance that the combined business will not be required to writedown
assets further in future periods. In connection with an accounting change
related to the pooling of interests of Pets' Rx, the combined company will
recognize a pretax writedown of $2.1 million in each of 1993 and 1995.
GUARANTEED PAYMENTS
In connection with acquisitions in which the purchase price consists, in
part, of shares of common stock, par value $0.001, of VCA ("VCA Common Stock")
(the "Guarantee Shares"), VCA often guarantees (the "Guarantee Right") that the
value of such stock two to three years following the date of the acquisition
(the "Measurement Price") 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, VCA typically is obligated either to (i)
pay to the seller in cash, notes payable or additional shares of VCA 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 Act, which registration VCA covenants to
effect generally within six months of issuance of the Guarantee Shares, the
seller's Guarantee Right typically terminates if the VCA Common Stock trades at
110% to 120% of the Issue Price (the "Release Price") for five to 20 consecutive
days, depending on the terms of the specific acquisition agreement. All
Guarantee Shares outstanding as of March 31, 1996 have been registered for
resale under the Act and 268,566 of these shares, with Issue Prices ranging from
$11.70 to $17.49, have not reached their respective Release Prices for the
required period. If the value of the VCA Common Stock decreases and is less than
an Issue
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Price at the end of the respective Guarantee Period for these shares, VCA may be
obligated to compensate these sellers.
In connection with the Pet Practice merger, VCA has assumed the Guarantee
Rights issued by Pet Practice (which generally operate similarly to the
Guarantee Rights issued by VCA, except that there is no provision for a release
of the Guarantee Right). Giving effect to the terms of the Pet Practice merger,
the number of Guarantee Shares issued by Pet Practice is not material to the
capitalization of the combined business.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
A large portion of the businesses of VCA, Pet Practice and Pets' Rx is
seasonal, with operating results varying substantially from quarter to quarter.
Historically, VCA's revenues have been greater in the second and third quarters
than in the first and fourth quarters. The demand for VCA'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 VCA's and the combined business' 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
VCA's and the combined business' success will continue to depend to a
significant extent on VCA's executive officers and other key management,
particularly its Chief Executive Officer, Robert L. Antin. VCA has an employment
contract with Mr. Robert Antin, Mr. Arthur Antin, Chief Operating Officer of
VCA and Mr. Neil Tauber, Senior Vice President of VCA, each of which expires in
December 1998. VCA has no other written employment agreements with its executive
officers. None of VCA's officers are parties to noncompetition covenants which
extend beyond the term of their employment with VCA. VCA maintains "key man"
life insurance on Mr. Robert Antin in the amount of $3.0 million, of which VCA
is the sole beneficiary. VCA does not maintain any insurance on the lives of its
other senior management. As VCA continues to grow, it will continue to hire,
appoint or otherwise change senior managers and other key executives. There can
be no assurance that VCA 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 of VCA's acquisitions may depend on VCA'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 VCA's business.
JOINT VENTURES
VCA 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. VCA has an option (the "VCA Option Agreement") 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, VCA expects to exercise its purchase option in
January 1997. If for any reason VCA does not exercise the option, VRI has the
option to purchase from VCA its entire 51 percent interest for $3.5 million. On
the earlier of a change in control of VCA or January 1, 2000, Heinz Pet Products
has the option to purchase all of VCA's interest in the Vet's Choice joint
venture at a purchase price equal to the fair market value of such interest. The
acquisition of Pet Practice will not result in a change in control for purposes
of the Vet's Choice joint venture. There can be no assurance that VCA 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. VCA 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. VCA'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
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in markets which include VCA's animal hospitals. Among veterinary diagnostic
laboratories, VCA 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 VCA. In addition, several national companies provide on-site
diagnostic equipment that allows veterinarians to perform their own laboratory
tests. VCA'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 VCA and Pet Practice
believe their respective operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that VCA's
and Pet Practice'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 VCA and the combined business through the assessment of fines or
penalties against VCA or the combined business or the possible requirement of
divestiture of VCA's operations in the state. In addition, there can be no
assurance that state legislation or regulations will not change so as to
restrict VCA's or, in the future, the combined business' existing operations or
the expansion of such operations.
ANTI-TAKEOVER EFFECT
A number of provisions of VCA'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 VCA's principal stockholders consider such a transaction
to be in their best interest. In addition, H.J. Heinz Company has an option to
purchase VCA'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.
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the prevailing
market price of the VCA Common Stock. As of July 19, 1996 (and giving effect to
the acquisition of Pets' Rx and Pet Practice), VCA had 17,860,913 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 159,197 shares which VCA is obligated to issue in
connection with certain acquisitions; 583,333 shares issuable upon conversion of
outstanding preferred stock; 1,557,750 shares of VCA Common Stock issuable upon
exercise of outstanding stock options; 1,198,362 shares of VCA 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, the Debentures are
convertible into 2,457,060 shares of VCA Common Stock at a rate of $34.35 per
share.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the VCA Common Stock could be subject to significant
fluctuations caused by variations in quarterly operating results, litigation
involving VCA, announcements by VCA 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 VCA Common Stock.
<PAGE>
ITEM 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
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(a) Financial Statements of Businesses Acquired.
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THE PET PRACTICE, INC. (1)
Consolidated Balance Sheet as of April 3, 1996 and
January 3, 1996
Consolidated Statement of Operations for the Thirteen Weeks Ended
April 3, 1996 and March 29, 1995
Consolidated Statement of Changes in Stockholders' Equity
for the Thirteen Weeks Ended April 3, 1996
Consolidated Statement of Cash Flows for the Thirteen Weeks Ended
April 3, 1996 and March 29, 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet as of December 28, 1994, and
January 3, 1996
Consolidated Statement of Operations for the Period October
27, 1993 to December 29, 1993 and for the Fiscal
Years Ended December 28, 1994 and January 3, 1996
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the Period October 27, 1993 to December
29, 1993 and for the Fiscal Years Ended December 28,
1994 and January 3, 1996
Consolidated Statement of Cash Flows for the Period October
27, 1993 to December 29, 1993 and for the Fiscal
Years Ended December 28, 1994 and January 3, 1996
Notes to Consolidated Financial Statements
PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. (1)
Report of Independent Accountants
Statement of Operations for the Year Ended January 27, 1993
and the Period January 28, 1993 to October 26, 1993
Statement of Stockholders' Deficit for the Year
Ended January 27, 1993 and the Period
January 28, 1993 to October 26, 1993
Statement of Cash Flows for the Year Ended January 27, 1993
and the Period January 28, 1993 to October 26, 1993
Notes to Financial Statements
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(b) Pro Forma Financial Information
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THE PET PRACTICE, INC.
Introduction
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended January 3, 1996
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Thirteen Weeks Ended April 3, 1996
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
Introduction
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31, 1995
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Three Months Ended March 31, 1996
Unaudited Pro Forma Condensed Consolidated Balance Sheet
at March 31, 1996
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
Unaudited Pro Forma Condensed Combined Statements of
Operations for the Years Ended December 31, 1993,
1994, 1995 and the Three Months Ended March 31,
1996.
(c) Exhibits.
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2.1 Agreement and Plan of Reorganization dated March 21, 1996 by
and among Veterinary Centers of America, Inc., a Delaware
corporation ("Parent"), Golden Merger Corporation, a
Delaware corporation and The Pet Practice, Inc. (2)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
99.1 Press Release issued July 22, 1996 with respect to the
merger with The Pet Practice, Inc.
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(1) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on July 5, 1996, as amended on July 16, 1996.
(2) Incorporated by reference from Appendix A to Registrant's Registration
Statement on Form S-4 (File No. 333-6667), filed on June 24, 1996.
<PAGE>
PET PRACTICE
The following unaudited pro forma financial data and explanatory notes give
effect to all acquisitions (41 animal hospitals during 1995 and through June 7,
1996) completed by Pet Practice (collectively, the "Pet Practice Acquired
Companies"). The unaudited pro forma financial data should be read in
conjunction with Pet Practice's historical consolidated financial statements and
notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus.
The unaudited pro forma financial data have been prepared utilizing the
historical financial statements of Pet Practice and the historical financial
statements of the Pet Practice Acquired Companies. The unaudited pro forma
financial data are based on the estimates and assumptions set forth in the notes
to the unaudited pro forma financial data.
The unaudited pro forma condensed consolidated statements of operations
represent the historical results of operations of Pet Practice for the period
ended January 3, 1996 and the thirteen weeks ended April 3, 1996 adjusted to
reflect acquisitions of the Pet Practice Acquired Companies as if they had
occurred at the beginning of the periods presented. Each of the acquisitions has
been accounted for as a purchase.
The unaudited pro forma financial data are provided for illustrative
purposes only and are not necessarily indicative of the results of operations or
financial position that would have occurred if the acquisitions of the Pet
Practice Acquired Companies had been consummated at the beginning of the periods
presented, nor are they necessarily indicative of future operating results or
financial position.
10
<PAGE>
THE PET PRACTICE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
PET PRACTICE PET PRACTICE
ACQUIRED PRO FORMA PRO FORMA
PET PRACTICE COMPANIES (1) ADJUSTMENT COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $40,571 $18,257 $58,828
Costs of revenues 34,776 15,914 $(761)(2) 49,929
------- ------- ----- -------
Gross profit 5,795 2,343 761 8,899
General and administrative 5,796 410 (410)(3) 5,796
Amortization of excess of cost over fair
value of net assets acquired and other
intangible assets 1,229 620 (4) 1,849
------- ------- ----- -------
Operating income (loss) (1,230) 1,933 551 1,254
Interest expense, net 1,861 290 746 (5) 2,897
------- ------- ----- -------
Income (loss) before provision for
income taxes (3,091) 1,643 (195) (1,643)
Provision for income taxes 84 84
------- ------- ----- -------
Net income (loss) $(3,175) $ 1,643 $(195) $(1,727)
======= ======= ===== =======
Loss per share $ (0.54) $ (0.29)
======= =======
Weighted average common shares used
for computing loss per share 5,863 181 (6) 6,044
======= ===== =======
</TABLE>
11
<PAGE>
THE PET PRACTICE, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
PET PRACTICE PET PRACTICE
ACQUIRED PRO FORMA PRO FORMA
PET PRACTICE COMPANIES (1) ADJUSTMENT COMBINED
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $13,404 $ 175 $13,579
Costs of revenues 12,104 172 $(18)(2) 12,258
------- ------- ---- -------
Gross profit 1,300 3 18 1,321
General and administrative 1,490 1,490
Amortization of excess of cost over fair
value of net assets acquired and other
intangible assets 460 10 (4) 470
------- ------- ---- -------
Operating income (loss) (650) 3 8 (639)
Interest expense, net 228 12 10 (5) 250
------- ------- ---- -------
Loss before provision for
income taxes (878) (9) (2) (889)
Provision for income taxes 21 21
------- ------- ---- -------
Net loss $ (899) $ (9) $ (2) $ (910)
======= ======= ==== =======
Loss per share $ (0.10) $(0.11)
======= =======
Weighted average common shares used
for computing loss per share 8,614 12 (6) 8,626
======= ==== =======
</TABLE>
12
<PAGE>
THE PET PRACTICE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Reflects the historical statement of operations data for the Pet Practice
Acquired Companies for the period from December 29, 1994 to the earlier of
the respective dates of the acquisition of such companies or January 3,
1996. Each of the acquisitions has been accounted for as a purchase.
Accordingly, the results of operations of each of the Pet Practice Acquired
Companies is included in the results of operations of Pet Practice from the
date of acquisition.
The following animal hospitals represent the Pet Practice Acquired
Companies:
Marietta Animal Hospital, Inc.; W. Harold Davis, D.V.M. (d/b/a Zionsville
Animal Clinic); S.V. Rowell D.V.M., Ltd. (d/b/a La Grange Park Pet
Hospital); Salvatore M. Zeitlin, V.M.D.; P.A. (d/b/a Palm Beach County
Animal Medical Clinic); Forrest D. Hayes, P.A. (d/b/a Atlantic Animal
Clinic); Glen R. Redeker, D.V.M. (d/b/a Oakton Animal Clinic); Charles R.
McCune, D.V.M. (d/b/a 46th Street Pet Clinic); Mary L. Jutte, D.V.M. (d/b/a
Southland Hospital for Animals and Taylor Veterinary Clinic); Academy Animal
Hospital of Hillsboro, Inc.; Robert S. Legg, D.V.M., P.A. (d/b/a Colonial
Animal Hospital); Riviera Animal Hospital, Inc.; Academy Animal Inc.;
Andreas Wurzer, D.V.M. (d/b/a Chicago Heights Animal Hospital); Richard R.
Brown, D.V.M. (d/b/a Golfview Animal Clinic); Westboro Animal Hospital,
P.C.; Andrew M. Payson, D.V.M., P.A. (d/b/a Boca Grove Animal Hospital & Pet
Supplies); Edward A. Jones, D.V.M. (d/b/a Companion Animal Hospital and
Oldsmar Animal Hospital); Edgebrook Veterinary Hospital P.C.; George D.
Brodsky, D.V.M. (d/b/a Bourbonnais Animal Clinic); Bowie Hospital, Inc. and
Crofton Animal Hospital, Inc.; Peter E. Coakley, V.M.D. (d/b/a Animal Extra
Care); Academy Animal Hospital of Boca, Inc.; Academy Animal Hospital of
Cooper City, Inc.; Academy Animal Hospital of Coral Springs, Inc.; Peticare
Animal Medical Center, P.C.; Peter V. Birzon, D.V.M., Animal Hospital of
North Miami Beach, P.A.; Jon J. Rappaport, D.V.M. and Craig Horowitz, D.V.M.
and Miami Shores Animal Hospital, P.A.; Edward D. Lukuch, D.V.M. (d/b/a
Midpark Animal Hospital); Joanne Nelson (d/b/a Collins & South Pompano
Animal Hospital); Dr. Jenifer Preston, Inc. (d/b/a Westerville East Animal
Hospital); Donald Denoff, D.V.M., P.A. (d/b/a Wellington Animal Hospital);
and Neshaminy Animal Medical Center, P.C.
(2) The adjustments to costs of revenues consist primarily of reductions or
increases to certain of the Pet Practice Acquired Companies' historical
amounts of compensation for services provided by owner/veterinarians for the
difference between such historical amounts and amounts specified in
employment contracts for comparable positions in Pet Practice, net of
certain general and administrative expenses of the Pet Practice Acquired
Companies which have been reclassified as costs of revenues.
(3) The adjustments to general and administrative expenses consist primarily of
(i) reductions or increases to certain of the Pet Practice Acquired
Companies' historical amounts of compensation for certain owners and
administrative personnel between such historical amounts and amounts
specified in employment contracts for such individuals, (ii) elimination of
certain non-recurring charges and credits attributable to the acquisitions
of the Pet Practice Acquired Companies and (iii) reclassifications of
certain amounts to cost of revenues.
(4) The adjustment to amortization of excess of cost over fair value of net
assets acquired and other intangible assets relates to the additional
amortization over periods of three to 40 years of the excess of cost over
fair value of net assets acquired and other intangible assets of the Pet
Practice Acquired Companies.
(5) The adjustment reflects the additional interest expense that would have been
incurred and the reduction of interest income had the consideration in the
form of cash and notes for the acquisitions of the Pet Practice Acquired
Companies been paid on December 29, 1994, net of the elimination of
approximately $290,000 of interest expense relating to outstanding debt of
certain of the Pet Practice Acquired Companies that was not assumed by Pet
Practice. The notes relating to the acquisition of the Pet Practice
Acquired Companies bear interest at annual rates of 6.0% to 8.0%.
(6) Reflects the issuance of an aggregate of approximately 221,000 shares of Pet
Practice Common Stock in connection with the Pet Practice Acquired
Companies.
13
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
The following unaudited pro forma financial data and explanatory notes give
effect to VCA's acquisition of Pet Practice, including the acquisition by Pet
Practice of the Pet Practice Acquired Companies, VCA's issuance of the
Debentures and the acquisitions of Pets' Rx, 38 animal hospitals and nine
veterinary diagnostic laboratories completed by VCA during 1995 and 1996
(through July 29, 1996) (the "VCA Acquired Companies").
The unaudited pro forma financial data have been prepared utilizing the
historical consolidated financial statements of VCA, the unaudited pro forma
financial data of Pet Practice and the historical financial statements of the
VCA Acquired Companies. The acquisitions have been accounted for under purchase
accounting except for the acquisitions of Pets' Rx (sixteen animal hospitals)
and two animal hospitals which have been accounted for as a pooling of
interests. The unaudited pro forma financial data are based on the estimates and
assumptions set forth in the notes thereto.
The unaudited pro forma condensed consolidated statements of operations for
VCA represent the historical results of operations of VCA for the year ended
December 31, 1995 and the three months ended March 31, 1996 adjusted to reflect
the acquisitions of Pet Practice and the VCA Acquired Companies as if they had
occurred at the beginning of the period. The unaudited pro forma condensed
consolidated balance sheet represents the balance sheet of VCA at March 31, 1996
adjusted to reflect the acquisition of Pet Practice, the issuance of the
Debentures and the acquisitions of the VCA Acquired Companies acquired after
March 31, 1996 as if such acquisitions had occurred on March 31, 1996.
Unaudited pro forma financial data are provided for illustrative purposes
only and are not necessarily indicative of the results of operations or
financial position that would have occurred if the acquisition of Pet Practice,
the issuance of the Debentures and the acquisitions of the VCA Acquired
Companies had been consummated at the beginning of the period presented and
March 31, 1996 respectively, nor are they necessarily indicative of future
operating results or financial position.
14
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
VCA
PET PRACTICE ACQUIRED PRO FORMA PRO FORMA
VCA PRO FORMA(1) COMPANIES(2) ADJUSTMENTS COMBINED
------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Animal hospital.............................. $51,437 $58,828 $48,249 $158,514
Laboratory................................... 37,606 17,674 $ 125 (3) 55,405
Pet food..................................... 4,756 4,756
Intercompany sales........................... (1,727) (125)(4) (1,852)
------- ------- ------- ------- --------
92,072 58,828 65,923 216,823
------- ------- ------- ------- --------
Direct costs
Animal hospital.............................. 42,056 49,929 43,279 (1,933)(5) 133,331
Laboratory................................... 23,977 10,155 (5)(6) 34,127
Pet food..................................... 3,205 3,205
Intercompany sales........................... (1,727) (125)(4) (1,852)
------- ------- ------- ------- --------
67,511 49,929 53,434 (2,063) 168,811
------- ------- ------- ------- --------
Gross profit
Animal hospital.............................. 9,381 8,899 4,970 1,933 25,183
Laboratory................................... 13,629 7,519 130 21,278
Pet food..................................... 1,551 1,551
------- ------- ------- ------- --------
24,561 8,899 12,489 2,063 48,012
Selling, general and administrative........... 10,833 5,796 7,614 (1,145)(7) 23,098
Amortization of excess of cost over fair
value of net assets acquired and other
intangible assets............................ 1,849 (1,849)(8)
Depreciation and amortization................. 3,291 2,189 4,397 (8)(9) 9,877
Royalty fees.................................. 118 (118)(10)
Restructuring charge.......................... 1,086 1,086
Writedown of assets........................... 2,148 (11) 2,148
------- ------- ------- ------- --------
Operating income.............................. 9,351 1,254 2,568 (1,370) 11,803
Interest expense, net......................... 1,639 2,897 1,231 1,677 (12) 7,444
------- ------- ------- ------- --------
Income (loss) before minority interest and
provision for income taxes................... 7,712 (1,643) 1,337 (3,047) 4,359
Minority interest in income of subsidiaries... 2,910 57 346 (13) 3,313
------- ------- ------- ------- --------
Income (loss) before provision for income
taxes........................................ 4,802 (1,643) 1,280 (3,393) 1,046
Provision for income taxes.................... 2,238 84 102 2,046 (14) 4,470
------- ------- ------- ------- --------
Net income (loss)............................. $ 2,564 $(1,727) $ 1,178 $(5,439) $ (3,424)
======= ======= ======= ======= ========
Primary earnings (loss) per share............. $ 0.24 $ (0.22)
======= ========
Weighted average common shares used for
computing primary earnings (loss) per
share....................................... 10,703 5,065 (15) 15,768
======= ======= ========
Fully diluted earnings (loss) per share....... $ 0.23
=======
Weighted average common shares used for
computing fully diluted earnings per
share........................................ 11,238
======
</TABLE>
15
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
VCA
PET PRACTICE ACQUIRED PRO FORMA PRO FORMA
VCA PRO FORMA(1) COMPANIES(2) ADJUSTMENTS COMBINED
------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Animal hospital........................... $17,831 $13,579 $6,764 $38,174
Laboratory................................ 12,056 2,547 14,603
Pet food.................................. 1,850 1,850
Intercompany sales........................ (733) (733)
------- ------- ------ ------ -------
31,004 $13,579 9,311 53,894
------- ------- ------ ------ -------
Direct costs
Animal hospital........................... 15,390 12,258 5,895 $ (489)(5) 33,054
Laboratory................................ 7,386 1,618 (21)(6) 8,983
Pet food.................................. 1,160 1,160
Intercompany sales........................ (733) (733)
------- ------- ------ ------ -------
23,203 12,258 7,513 (510) 42,464
------- ------- ------ ------ -------
Gross profit
Animal hospital........................... 2,441 1,321 869 489 5,120
Laboratory................................ 4,670 929 21 5,620
Pet food.................................. 690 690
------- ------- ------ ------ -------
7,801 1,321 1,798 510 11,430
Selling, general and administrative........ 3,314 1,490 1,677 (120)(7) 6,361
Amortization of excess cost over fair
value of neT assets acquired and other
intangible assets......................... 470 (470)(8)
Depreciation and amortization.............. 1,034 346 954 (9) 2,334
------- ------- ------ ------ -------
Operating income (loss).................... 3,453 (639) (225) 146 2,735
Interest expense, net...................... 296 250 233 198 (12) 977
------- ------- ------ ------ -------
Income (loss) before minority interest and
provision for income taxes................ 3,157 (889) (458) (52) 1,758
Minority interest in income of subsidiaries 1,346 25 1,371
------- ------- ------ ------ -------
Income (loss) before provision for income
taxes..................................... 1,811 (889) (483) (52) 387
Provision for income taxes................. 799 21 (347)(14) 473
------- ------- ------ ------ -------
Net income (loss).......................... $ 1,012 $ (910) $ (483) $ 295 $ (86)
======= ======= ====== ====== =======
Primary earnings (loss) per share.......... $ 0.07 $ (0.00)
======= =======
Weighted average common shares used for
computing primary earnings (loss) per
share..................................... 15,110 4,587 (15) 19,697
======= ====== =======
Fully diluted earnings (loss) per share.... $ 0.07
=======
Weighted average common shares used for
computing fully diluted earnings (loss)
per share................................. 15,492
=======
</TABLE>
16
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1996
(In thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
VCA PET PRACTICE ACQUISITIONS(16) ADJUSTMENTS COMBINED
--------- ------------ ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 37,615 $ 4,916 $ 251 $ 74,476 (18) $117,258
Accounts receivable, net 8,816 836 428 (233)(19) 9,847
Other current assets 5,497 5,010 642 (91)(20) 11,058
-------- ------- ------- -------- --------
51,928 10,762 1,321 74,152 138,163
Property and equipment, net 15,981 15,029 4,722 196 (21) 35,928
Other assets:
Notes receivable 1,183 100 1,283
Goodwill 79,637 8,872 71,878 (22)(23) 160,387
Covenants 5,573 438 491 (22)(24) 6,502
Excess of cost over fair value of net
assets acquired and other intangible
assets 53,775 (53,775)(22)
Other 2,746 149 270 3,650 (22)(25) 6,815
-------- ------- ------- -------- --------
$157,048 $79,715 $15,723 $ 96,592 $349,078
======== ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 7,563 $ 3,820 $ 1,284 $ 255 (26) $ 12,922
Accounts payable 5,794 2,169 1,226 (144)(27) 9,045
Other accrued liabilities 5,577 4,989 1,414 192 (26) 12,172
-------- ------- ------- -------- --------
18,934 10,978 3,924 303 34,139
Long-term obligations, less current
portion 29,588 16,216 9,491 86,256 (28) 141,551
Deferred income taxes 1,538 1,538
Minority interest 4,843 269 5,112
Redeemable convertible preferred stock 2,947 (2,947)(29)
Stockholders' equity (deficit) 102,145 52,521 (908) 12,980 (30) 166,738
-------- ------- ------- -------- --------
$157,048 $79,715 $15,723 $ 96,592 $349,078
======== ======= ======= ======== ========
</TABLE>
17
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(1) Represents the historical statement of operations of Pet Practice adjusted
to reflect the 1995 and 1996 acquisitions of Pet Practice as if they had
occurred at the beginning of the periods presented.
(2) Reflects the historical statement of operations data of the VCA Acquired
Companies for the period from January 1, 1995 to the earlier of the
respective dates of acquisition of such companies or December 31, 1995.
Each of the acquisitions has been accounted for as a purchase. Accordingly,
the results of operations of each such VCA Acquired Company is included in
the results of operations of VCA from the date of acquisition.
The following are the VCA Acquired Companies: Cenvet, Inc. ("Cenvet"),
January 1995; Animal Reference Lab, January 1995; BerLa, Inc. (d/b/a Animal
and Avian Clinic of Golden Cove), January 1995; Silver Spur Animal
Hospital, Inc., January 1995; Stephen A. LaDue D.V.M., P.A. (d/b/a Tampa
Animal Medical Center), January 1995; Lewis Veterinary Hospital, Inc.,
February 1995; Animal Hospital of Sinking Spring, March 1995; Vet Research,
Inc., March 1995; Lewelling Veterinary Hospital, Inc., April 1995;
Northwest Veterinary Diagnostics, Inc., May 1995; South County Veterinary
Clinic, Inc., May 1995; Alpine Veterinary Clinic, Inc., May 1995; Eagle
River Veterinary Hospital, Inc., June 1995; Clinipath Diagnostics, Inc.,
July 1995; Florida Veterinary Laboratories, Inc. (composed of four
hospitals), July 1995; Miller Animal Hospital, Inc., July 1995; Marina
Veterinary Clinic, July 1995; South Shore Veterinary Associates, Inc., July
1995 (includes four animal hospitals); Pet Complex, P.A. (d/b/a All Pets
Animal Complex-Sandy), July 1995; Brett T. Neville, D.V.M., Inc., P.C.
(d/b/a All Pets Animal Complex-Taylorsville), July 1995; Castle Shannon
Veterinary Hospital, Inc., August 1995; Fox Chapel Animal Hospital, Inc.,
September 1995 (includes two animal hospitals); East Anchorage Veterinary
Hospital, Inc., September 1995; Greater Savannah Hospital for Animals,
Inc., September 1995; Kaneohe Pet Health Center, November 1995; Elkton
Veterinary Center, Inc. (composed of two hospitals), November 1995;
Conawago Veterinary Practice, January 1996; Animal Hospital of St.
Petersburg, Inc., January 1996; Kaneohe Veterinary Clinic, January 1996;
Veterinary Referral Associates, Inc., February 1996; Lammers Veterinary
Hospital, Inc., February 1996; Southwest Veterinary Diagnostics Inc., March
1996; Clarmar Animal Hospital, Inc., March 1996; Rotherwood Animal Clinic,
Inc., March 1996; Northboro Veterinary Clinic, Inc., April 1996; Diagnostic
Veterinary Services, Inc., May 1996; the assets pertaining to the
veterinary business of APL Healthcare Group Inc., May 1996; Beacon Hill Cat
Hospital, Inc., May 1996; Old Town Veterinary Hospital, Inc., May 1996;
North Rockville Veterinary Hospital Inc., June 1996; Animal Care Center of
Tidewater Inc., June 1996; Lake Shore Animal Hospital Ltd., June 1996; and
Pets' Rx, Inc. (includes 16 animal hospitals).
(3) Represents the revenue for laboratory services previously rendered by
laboratories not owned by VCA. Such services are to be rendered by
laboratories owned by VCA following the respective dates of acquisition.
(4) Represents the elimination of intercompany revenue and the corresponding
expense.
(5) Represents principally an adjustment of $586,000 and $157,000 for the
twelve months ended December 31, 1995 and the three months ended March 31,
1996, respectively, related to rental expense for the difference between
such historical amounts and that to be paid following the acquisitions as a
result of modifications to lease terms or the purchase of the hospital land
and buildings previously leased, an adjustment of $685,000 and $74,000 for
the twelve months ended December 31, 1995 and the three months ended March
31, 1996, respectively, related to compensation for services provided by
owner/veterinarians and other key employees for the difference between such
historical amounts and employment terms existing following the acquisition
and an adjustment of $636,000 and $343,000 for the twelve months ended
December 31, 1995 and the three months ended March 31, 1996, respectively
to reclassify the depreciation expense related to the Pet Practice animal
hospitals.
(6) Represents principally an adjustment of $86,000 and $21,000 for the twelve
months ended December 31, 1995 and the three months ended March 31, 1996,
respectively, related to (i) rental expense for the difference between such
historical amounts and that to be paid following the acquisitions as a
result of modifications to lease terms or the purchase of the laboratory
land and buildings previously leased, and (ii) increases reflecting the
incremental costs associated with the laboratory revenue which was
previously rendered by laboratories not owned by VCA. Such services are to
be rendered by laboratories owned by VCA following the respective dates of
acquisition.
(7) Adjustments to selling, general and administrative expenses consist
primarily of adjustments to certain VCA Acquired Companies' historical
amounts relating to (i) compensation for services provided by
owner/veterinarians and other key
18
<PAGE>
employees for the difference between such historical amounts and employment
terms existing following the acquisition, and (ii) administrative services
eliminated following certain acquisitions and (iii) to an adjustment to
reclassify the depreciation expense related to the Pet Practice
administration.
(8) To reclassify the Pet Practice amortization of excess cost over fair value
of net assets acquired and other intangible assets to conform with VCA's
presentation.
(9) Reflects additional depreciation of assets acquired and amortization of
goodwill and other intangibles resulting from the acquisition of the VCA
Acquired Companies and Pet Practice. Goodwill acquired in 1995 and 1996
amounted to $126,413,000. Other intangibles acquired in 1995 and 1996
amounted to $8,086,000. Goodwill is amortized over forty years. Other
intangibles consist primarily of covenants not to compete and are amortized
over the term of the agreement (principally 5 to 10 years).
(10) Reflects the elimination of royalty fee expense under an agreement that
was not assumed by VCA.
(11) To reflect the writedown of assets, amounting to $3.9 million, related to
conforming the Pets' Rx method for evaluating the impairment of long lived
assets to VCA's method net of an adjustment of $632,000 to reflect the
reclassification of certain intangibles to conform to VCA policy. VCA uses
an estimate of the related facility's undiscounted net income over the
remaining life of the goodwill and other intangibles in measuring whether
the goodwill is recoverable.
(12) Reflects the additional interest expense that would have been incurred on
the indebtedness of $27,558,000 issued by VCA in connection with the
acquisitions of the VCA Acquired Companies. Annual interest rates on such
indebtedness range from approximately 5.0 percent to 9.0 percent.
(13) Represents the minority interest in certain of the VCA Acquired Companies
net of an adjustment of $219,000, to eliminate a minority interest in
another VCA Acquired Company acquired in 1995.
(14) Represents an adjustment to provide income taxes at the effective rate.
(15) To reflect the issuance of approximately 5,789,382 and 4,714,122 shares of
VCA Common Stock for the twelve months ended December 31, 1995 and the
three months ended March 31, 1996, respectively, in connection with the
acquisition of the VCA Acquired Companies and Pet Practice.
(16) Reflects the acquisition of animal hospitals and laboratories which
occurred in 1996. See Note 1. The operations of Conawago Veterinary
Practice, Animal Hospital of St. Petersburg, Inc. and Kaneohe Veterinary
Clinic which were acquired on January 2, 1996 are included in "VCA Acquired
Companies."
(17) Reflects the combined financial position of the VCA Acquired Companies
acquired after March 31, 1996 (the "Acquisitions"). See Note 1.
(18) Represents the net proceeds received in connection with the issuance of the
Debentures ($82,165,000) net of cash consideration paid in connection with
the Acquisitions ($4,289,000) and transaction costs of the Pet Practice
acquisition including financial advisor, legal and accounting ($3,400,000).
(19) Reflects an adjustment to net realizable value of accounts receivable
acquired from certain companies.
(20) Reflects an adjustment to reflect other current assets, principally
inventory, at fair market value.
(21) Reflects an adjustment to fair market value of property and equipment, net,
acquired.
(22) To reclassify Pet Practice balances to conform to VCA's presentation.
(23) Reflects the excess of cost over the fair value of the net tangible assets
acquired in connection with the Acquisitions.
(24) Represents the value of consideration given in connection with non-compete
agreements obtained in connection with the Acquisitions.
(25) Represents the deferred financing costs related to the issuance of the
Debentures ($2,220,000).
19
<PAGE>
(26) Represents the indebtedness incurred or assumed in connection with the
acquisitions, net of indebtedness of the acquired entities which was not
assumed.
(27) Reflects the elimination of certain current liabilities not assumed in
connection with certain of the Acquisitions.
(28) Reflects the issuance of the Debentures ($84,385,000) and long-term
indebtedness incurred in connection with the acquisition of certain
Acquisitions at annual interest rates ranging from 5.0 percent to 8.0
percent.
(29) Represents the exchange of the redeemable convertible preferred stock as
part of the Pets' Rx merger.
(30) Reflects the elimination of the stockholders' equity of the Acquisitions
and Pet Practice and the issuance of 3,519,101 shares of VCA Common Stock
in connection with the acquisition of Pet Practice.
20
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
1993 1994 1995 MARCH 31, 1996
------- ------- -------- --------------
<S> <C> <C> <C> <C>
Revenues
Animal hospital............................................ $30,208 $41,484 $158,514 $38,174
Laboratory................................................. 1,234 10,150 55,405 14,603
Pet food................................................... 996 4,756 1,850
Intercompany sales......................................... (344) (759) (1,852) (733)
------- ------- -------- -------
31,098 51,871 216,823 53,894
Direct costs
Animal hospital............................................ 24,714 34,373 133,331 33,054
Laboratory................................................. 1,192 6,573 34,127 8,983
Pet food................................................... 647 3,205 1,160
Intercompany sales......................................... (344) (759) (1,852) (733)
------- ------- -------- -------
25,562 40,834 168,811 42,464
Gross profit
Animal Hospital............................................ 5,494 7,111 25,183 5,120
Laboratory................................................. 42 3,577 21,278 5,620
Pet food................................................... 349 1,551 690
------- ------- -------- -------
5,536 11,037 48,012 11,430
Selling, general and administrative......................... 4,916 8,704 23,098 6,361
Depreciation and amortization............................... 1,410 2,065 9,877 2,334
Restructuring charge........................................ 1,086
Writedown of assets......................................... 4,506 2,148
------- ------- -------- -------
Operating (loss) income..................................... (5,296) 268 11,803 2,735
Interest expense, net....................................... 756 1,984 7,444 977
------- ------- -------- -------
(Loss) income provision before minority interest (6,052) (1,716) 4,359 1,758
and (benefit) for income taxes.............................
Minority interest in (loss) income of subsidiaries.......... (334) (540) 3,313 1,371
------- ------- -------- -------
(Loss) income before (benefit) provision for income taxes (5,718) (1,176) 1,046 387
and cumulative effect of accounting change.................
(Benefit) provision for income taxes........................ (152) 731 4,470 473
------- ------- -------- -------
Loss before cumulative effect of accounting change.......... (5,566) (1,907) (3,424) (86)
Cumulative effect of accounting change...................... 221
------- ------- -------- -------
Net loss.................................................... $(5,345) $(1,907) $ (3,424) $ (86)
======= ======= ======== =======
Loss per share.............................................. $(0.90) $(0.26) $(0.22) $(0.00)
======= ======= ======== =======
Weighted average common shares used
for computing loss per share............................. 5,966 7,233 15,768 19,697
======= ======= ======== =======
</TABLE>
21
<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 , 1996 By: /s/ Deborah W. Moore
-----------------------------------------
Deborah W. Moore
Vice President
22
<PAGE>
EXHIBIT INDEX
Exhibit Page Number
- ------- -----------
2.1 Agreement and Plan of Reorganization dated March 21, 1996 by and among
Veterinary Centers of America, Inc., a Delaware corporation ("Parent"),
Golden Merger Corporation, a Delaware corporation and The Pet Practice,
Inc. (2)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
99.1 Press Release issued July 22, 1996 with respect to the merger with The Pet
Practice, Inc.
____________________
(2) Incorporated by reference from Appendix A to Registrant's Registration
Statement on Form S-4 (File No. 333-6667), filed on June 24, 1996.
23
<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, 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, 333-7677, 333-8441, and 333-9119).
/s/ Arthur Andersen, LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
July 31, 1996
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 33-42504, 33-67588, 33-80212, 33-97682, 333-00376,
333-8441), the Registration Statement on Form S-4 (No.333-9119), and the
Registration Statements on Form S-8 (Nos. 33-44622, 33-56846, 33-56848,
33-57770, 33-57772, 33-57768) of our reports as of the dates and relating to the
financial statements of the companies listed below, which are incorporated by
reference in the Current Report on Form 8-K of Veterinary Centers of America,
Inc. dated July 19, 1996:
COMPANY DATE OF REPORT
------- --------------
The Pet Practice, Inc. March 22, 1996
Professional Veterinary Hospitals of America, Inc. March 29, 1995
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, PA
July 31, 1996
<PAGE>
HEADLINE: Veterinary Centers of America Inc. and The Pet Practice Inc. announce
completion of merger
DATELINE: SANTA MONICA, Calif.
BODY:
July 22, 1996--Veterinary Centers of America Inc. (NMS:VCAI/VCAIW) and The
Pet Practice Inc. (NMS:VETS) today announced that they have completed the
merger of The Pet Practice Inc. into a wholly owned subsidiary of Veterinary
Centers of America Inc.
As previously announced, each share of common stock of The Pet Practice
Inc. is converted into the right to receive 0.4077 share of common stock of
Veterinary Centers of America Inc. for an aggregate of approximately 3,519,000
shares. Shareholders of The Pet Practice Inc. will receive instructions from
the Exchange Agent in the next several days on how to exchange their
certificates of The Pet Practice Inc. common stock for certificates of
Veterinary Centers of America Inc. common stock.
Bob Antin, chief executive officer of VCA, said, "This merger is a major
step in furthering our goal of making VCA the leading animal health care company
in the United States. With this acquisition, Veterinary Centers of America now
operates the largest network of independent animal hospitals in the country and
our combined companies have proforma combined 1995 revenues of over $200
million."
VCA owns and operates a nationwide network of veterinary hospitals and
veterinary laboratories. The company currently provides goods and services to
approximately 8,000 animal hospitals nationwide. In addition, VCA is the
managing general partner of Vets Choice, a joint venture with Heinz Pet
Products, an affiliate of H.J. Heinz Co. (NYSE:HNZ), which markets and
distributes a complete line of specialty pet foods.
CONTACT: Veterinary Centers of America Inc.
Bob Antin or Tom Fuller, 310/392-9599