SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10787
VETERINARY CENTERS OF AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4097995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3420 OCEAN PARK BOULEVARD, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices and zip code)
(310) 392-9599
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common stock, $.001 par value
Redeemable Warrants
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
Amendment to this Form 10-K. [ ]
At March 26, 1997, there were outstanding 19,344,643 shares of the Common
Stock of Registrant and the aggregate market value of the shares held on that
date by non-affiliates of Registrant, based on the closing price ($10.75 per
share) of the Registrant's Common Stock on the NASDAQ National Market, was
$188,228,000. For purposes of this computation, it has been assumed that the
shares beneficially held by directors and officers of Registrant were "held
by affiliates;" this assumption is not to be deemed to be an admission by
such persons that they are affiliates of Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1997 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual
Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Veterinary Centers of America, Inc. ("VCA" or the "Company") was founded
in 1986 and is a leading companion animal health care company. The Company
has established a premier position in the animal hospital and veterinary
diagnostic laboratory segments and has an interest in a joint venture in the
premium pet food segment. The Company operates the largest network of free-
standing, full service animal hospitals in the country and one of the largest
networks of veterinary-exclusive laboratories in the nation.
Animal hospitals, veterinary diagnostic laboratories and premium pet
foods represented approximately 66.3%, 30.0% and 3.7%, respectively, of the
Company's revenues for the year ended December 31, 1996. The Company's
animal hospitals offer a full range of general medical and surgical services
and also perform specialty surgeries such as orthopedics for small animals,
including dogs, cats, birds and other household pets. In addition to
treating disease and injury, the Company's animal hospitals emphasize pet
wellness and offer programs to encourage routine vaccinations, health
examinations, spaying and neutering and dental care. The Company's
veterinary laboratories offer a full range of diagnostic and reference tests.
Laboratory tests are used by veterinarians to diagnose, monitor and treat
diseases through the detection of substances in blood, urine or tissue
samples and other specimens. The Company does not conduct experiments on
animals and is not engaged in animal research.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
On July 19, 1996, the Company completed the acquisition of The Pet
Practice, Inc. ("Pet Practice") for a total consideration (including
acquisition costs) of $97,930,000 consisting of 3,516,268 shares of VCA
common stock, with a value at the date of acquisition of $65,930,000, and the
assumption of liabilities totaling $32,000,000. In addition, Pet Practice
outstanding employee stock options were converted into options to purchase an
additional 41,280 shares of VCA common stock. On the acquisition date, Pet
Practice was the operator of 84 veterinary clinics located in 11 states. The
acquisition of Pet Practice was accounted for as a purchase. Through March
26, 1997, the Company has sold, closed or merged 17 of the Pet Practice
hospitals with annual revenues of approximately $6.0 million. The Company is
continuing to evaluate the financial performance of certain remaining Pet
Practice animal hospitals and may close or sell additional facilities if they
are not expected to be able to meet the Company's operating plans. The
Company will complete this evaluation process by the end of the second
quarter of 1997 and will record any reserves required for these possible
closures as a component of the final purchase price allocation.
On June 19, 1996, the Company completed the merger with Pets' Rx, Inc.
("Pets' Rx") for 801,054 shares of VCA common stock. In addition,
outstanding Pets' Rx warrants, options and convertible securities were
converted into the right to purchase an additional 111,607 shares of VCA
common stock. Pets' Rx owned 16 veterinary hospitals. The Pets' Rx
acquisition was accounted for as a pooling of interests.
Also during 1996, the Company completed the acquisitions of 22 animal
hospitals and six veterinary diagnostic laboratories. In connection with
these acquisitions which were accounted for as purchases, VCA paid an
aggregate consideration of $48,826,000 consisting of $25,345,000 in cash,
$11,806,000 in debt, 603,832 shares of common stock of the Company, with a
value of $8,889,000 and the assumption of liabilities totaling $2,786,000,
including acquisition costs.
Since January 1, 1997 through March 26, 1997, the Company has acquired
three animal hospitals for an aggregate consideration of $3,220,000
consisting of $875,000 in cash, $1,195,000 in debt and 107,477 shares of VCA
common stock, with a value of $1,150,000.
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THE COMPANION ANIMAL HEALTH CARE INDUSTRY
The market segments in which the Company operates had total domestic
revenues in 1994 of approximately $10.0 billion, composed of approximately
$8.2 billion for veterinary care (animal hospitals and veterinary diagnostic
laboratories) and approximately $1.8 billion for premium pet food.
Approximately 96% of the Company's revenues for the year ended December 31,
1996 were derived from the veterinary care segment of the market with the
balance coming from premium pet food sales. The Company classifies its
markets by service or product type into three segments, Animal Hospital,
Laboratory and Premium Pet Food.
ANIMAL HOSPITALS
Veterinarians diagnose and treat animal illnesses and injuries, perform
surgeries, provide routine medical exams and prescribe medication. Some
veterinarians specialize by type of medicine, such as orthopedics, dentistry,
ophthalmology or dermatology and may specialize by type of animal. The
United States market for veterinary services is highly fragmented with
approximately 115 million dogs and cats cared for by an estimated 55,000
veterinarians practicing at 16,000 animal hospitals. These animal hospitals
are primarily single site, sole practitioner facilities. The Company
believes that the principal factors in a pet owner's decision as to which
veterinarian to use include convenient location, recommendation of friends,
reasonable fees and convenient hours.
The animal hospital industry is consolidating. Factors contributing to
this trend include (i) the desire of some owners of animal hospitals to
diversify their investment portfolio by selling all or a portion of their
investment in the animal hospital, (ii) the buying, marketing and
administrative cost advantages which can be realized by a large, multiple
location, multi-practitioner veterinary provider, (iii) the desire of
veterinarians to practice veterinary medicine rather than spend a large
portion of their working time performing the administrative tasks necessary
to operate an animal hospital, (iv) the cost of financing equipment purchases
and upgrading technology necessary for a successful practice, and (v) the
desire of many veterinarians for more flexible work hours and benefits than
are typically available to a sole practitioner or single site provider.
VETERINARY DIAGNOSTIC LABORATORIES
Given the inability of the patient to communicate verbally with the
doctor, laboratory testing is an important part of the diagnostic process in
veterinary medicine. Clinical laboratory tests are used by veterinarians to
diagnose, monitor and treat diseases through the detection of substances in
blood or tissue samples and other specimens.
Veterinary laboratory tests are performed primarily at the animal
hospital, using on-site diagnostic equipment, or at outside veterinary
diagnostic laboratories. On-site diagnostic equipment is sold by a number of
manufacturers. For many types of tests, on-site diagnostic equipment can
provide more timely results than outside laboratories but requires the animal
hospital or veterinarian to purchase the equipment and provide trained
personnel to operate it. Veterinary diagnostic laboratories, such as those
operated by the Company, can provide a wider range of tests than are
generally available on-site at most animal hospitals and do not require any
up-front investment on the part of the animal hospital or veterinarian.
Veterinary laboratory services are also available through universities and
several national laboratory companies.
The veterinary laboratory industry is highly fragmented and is primarily
characterized by local and regional competitors. The Company believes that
veterinarians usually prefer to use laboratories that specialize in the
veterinary market and that offer individual attention, rapid test reporting
and response to inquiries by veterinary professionals, a broad spectrum of
tests, convenient sample pick-up times, and customized testing services.
Achieving rapid sample pick-up, diagnostics and reporting, at
competitive prices, is benefited by high throughput volumes. The Company
believes that the industry will continue to consolidate as participants seek
to gain a cost advantage.
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PREMIUM PET FOOD
Retail sales of pet food in 1994 approximated $8.8 billion, of which
premium pet food accounted for approximately $1.8 billion. Over the past ten
years, the supermarket share of pet food retail sales has decreased from
approximately 95% to approximately 55% as customers have gained increased
product knowledge and sought higher quality products offered by premium pet
food retailers, including super-stores and veterinary professionals.
Moreover, a recommendation from a veterinarian can be instrumental in
heightening awareness and stimulating demand for a particular premium brand.
Premium pet food differentiates itself from pet food typically offered
by supermarkets primarily through its fixed formulas and high quality
ingredients. Within the premium pet food segment, brands distinguish
themselves through superior palatability and digestibility as well as
offering product lines tailored to specific life-stages and health
conditions.
BUSINESS STRATEGY
The Company's goal is to become the leading companion animal health care
company serving the animal hospital and veterinary diagnostic laboratory
markets. The Company intends to achieve this goal by continuing to (i)
expand its animal hospital and laboratory businesses through acquisitions and
internal growth, (ii) achieve cost savings by consolidating operations and
realizing economies of scale in purchasing and administrative support
functions and by implementing the Company's standard management programs,
(iii) take advantage of its unique opportunity to deliver its products and
services through multiple channels to its customers, primarily veterinarians
and pet owners, and (iv) capitalize on its leadership position within the
companion animal health care industry to expand into other products and
services for veterinarians and pet owners.
EXPAND THROUGH ACQUISITIONS IN NEW AND EXISTING MARKETS. Since 1988 the
Company has expanded rapidly from a single animal hospital in Los Angeles to
a nationwide network of 154 animal hospitals in 23 states at March 26, 1997.
As a result of these acquisitions and their successful integration into the
Company's operations, the Company has gained a leadership position in the
animal hospital industry, allowing it to expand into the veterinary
diagnostic laboratory business. Since March 1994, the Company has acquired
13 veterinary diagnostic laboratories, making it the nation's largest network
of veterinary-exclusive diagnostic laboratories serving over 9,000 animal
hospitals located in 45 states. Assuming the availability of capital, the
Company plans to continue its aggressive acquisition program. The Company
will also consider acquiring multiple hospital organizations and veterinary
diagnostic laboratories, as opportunities arise.
CONSOLIDATE OPERATIONS TO ENHANCE PROFITABILITY. Upon the acquisition
of an animal hospital or veterinary diagnostic laboratory, the Company
immediately begins to implement management programs to enhance the
productivity of veterinarians and to improve operating results. The
Company's business model enables it to realize improved operating margins at
its animal hospitals and veterinary diagnostic laboratories through a
strategy of centralizing various corporate and administrative functions and
leveraging fixed costs while providing its customers with improved services.
This model includes the following objectives:
CENTRALIZE ADMINISTRATIVE FUNCTIONS. The Company consolidates most
administrative functions at its corporate office, including purchasing,
accounting, payroll, data processing, personnel, accounts payable,
information services, marketing, planning and budgeting and other
administrative functions.
CONSOLIDATE PURCHASING. When advantageous, the Company purchases its
supplies on a consolidated basis in order to negotiate better prices and
terms from vendors.
STANDARDIZE TRAINING PROCEDURES. The Company implements standardized
training procedures for its administrators and professional personnel.
These programs are developed in conjunction with the Medical Advisory
Board and Client Services Advisory Board, two entities which are staffed
by Company personnel to recommend medical standards and to establish
service and training standards for local hospitals and laboratories.
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INCREASE INTERNAL REVENUES. The Company also seeks to expand through
internal growth. To achieve this, the Company (i) increases veterinarian
productivity by freeing the veterinarian from administrative tasks and
providing state-of-the-art equipment and technical support, (ii) expands the
services and operating hours of certain of its facilities in selected
markets, (iii) provides its facilities with access to medical specialists,
(iv) adds VCA's name to the acquired facilities to enhance customer
awareness, and (v) implements sales programs to attract new customers. By
implementing these strategies, VCA seeks to become the most convenient and
most recognized provider of veterinary services in its markets.
CONTINUE TO CAPITALIZE ON EXISTING RELATIONSHIPS TO LEVERAGE LINES OF
BUSINESS. The Company believes that its three lines of business -- Animal
Hospitals, Laboratory and Premium Pet Food -- are complementary. As a result
of the Company's national presence and name recognition throughout the
veterinary services industry, the Company believes it is building a
reputation of professional integrity and trust among veterinary professionals
and brand identification among pet owners. The Company's strategy is to
leverage this professional reputation and leadership position to expand its
operations, both in other geographic areas and related products and services.
An example of the results of this strategy is the Company's joint venture,
Vet's Choice, to market premium pet food. The Company uses its
relationships, as well as its national presence and name recognition in one
line of business to facilitate growth in other lines. Often, new business
opportunities arise in one line of business from contacts made in connection
with and relations developed through the Company's other lines of business.
For example, animal hospital acquisitions may be developed through contacts
initially established in the Company's laboratory business or from marketing
and other promotional efforts in connection with the sale of its premium pet
food.
ACQUISITION STRATEGY
ANIMAL HOSPITALS. The Company seeks to enter a new market through the
acquisition of one or more relatively large, high quality animal hospitals.
It has been the Company's experience that this initial acquisition in a new
market requires substantially more time to identify, negotiate and consummate
than additional acquisitions in the same market. Following this initial
acquisition, the Company seeks to increase its presence in such market as
opportunities arise.
The Company identifies potential candidates for acquisition through its
reputation in the professional community, direct contacts, finder
relationships and advertisements. The Company believes that acquisition
opportunities will continue to increase as it expands the geographic scope of
its operations and the products and services it offers to the companion
animal health care community. The typical acquisition candidate targeted by
the Company is located in a 4,000-6,000 square foot, free-standing facility,
has annual revenues of between $700,000 and $1.5 million per year, employs
two to six veterinarians, has an operating history of at least five years and
has achieved positive cash flow at an attractive location with an established
reputation in the community.
VETERINARY DIAGNOSTIC LABORATORIES. The Company intends to expand its
nationwide network of veterinary-exclusive diagnostic laboratories through
acquisitions and internal growth. The Company seeks acquisition
opportunities in the veterinary diagnostic laboratory industry which will
complement its existing business or which will expand the geographic area
which it services. The Company has been able to realize significant cost
savings at its veterinary diagnostic laboratories by consolidating acquired
operations into the existing operations, reducing fixed overhead, sample
collection, analysis and the reporting of results to veterinarians. By
obtaining additional testing volume for the laboratories and spreading fixed
costs over a larger revenue base, the unit costs of providing laboratory
services to clients should decline, producing improved operating margins. As
a result of these economies of scale, the Company has the ability to reduce
or maintain prices for testing services to customers.
ACQUISITION CONSIDERATION. Historically, consideration for
acquisitions has consisted of a combination of cash, the assumption of
liabilities, promissory notes and VCA common stock. The Company normally
obtains noncompetition and employment agreements from the selling owners.
The Company presently is evaluating and negotiating a number of potential
acquisitions, none of which are, individually, material to the Company.
There can be no assurance, however, that the Company will be able to identify
and acquire animal hospitals or veterinary diagnostic laboratories on terms
favorable to the Company in the future, or in a timely manner, or convert the
acquisitions to the VCA business model as planned. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Risk Factors--Rapid Expansion and Management of Growth."
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OPERATIONS AND MARKETING
ANIMAL HOSPITALS
The Company believes it operates one of the largest networks of free-
standing full-service animal hospitals in the United States. At March 26,
1997, the Company operated 154 animal hospitals, 19 of which were located in
Southern California, 18 in Florida, 16 in Northern California, 15 in
Illinois, 13 in Michigan, nine in each of Pennsylvania and Indiana, eight in
Maryland, seven in Massachusetts, six in each of Nevada, Ohio and Texas,
three in each of Alaska, Delaware, New Mexico and Virginia, two in each of
Colorado and Utah, and one in each of Arizona, Georgia, Hawaii, Nebraska,
West Virginia and New Jersey.
The animal hospitals operated by the Company offer a full range of
general medical and surgical services for small animals, including dogs,
cats, birds and other household pets. In addition to treating disease and
injury, the Company's hospitals emphasize pet wellness through pet health
education and preventative care and offer programs to encourage routine
vaccinations, health examinations, spaying and neutering and dental care.
The Company offers specialized treatment, including advanced diagnostic
services, internal medicine, surgery, oncology, ophthalmology, dermatology
and cardiology. Additional services provided by the Company at certain
locations include grooming, bathing and boarding. The Company also sells
specialty pet products at its hospitals, including pet food, a full range of
pharmaceuticals, vitamins, therapeutic shampoos and conditioners, flea
collars and sprays and other accessory products.
The Company's facilities are open an average of 10 to 15 hours per day,
six to seven days per week. Several of its facilities provide 24-hour
emergency care service.
The Company seeks to provide a uniform and broad range of quality
veterinary services. To accomplish this goal, the Company actively recruits
highly qualified veterinarians and technicians and is committed to supporting
continuing professional education for its professional and lay staff. The
Company operates two of the largest teaching programs maintained at privately
owned animal hospitals. The Company believes that these programs enhance its
reputation in the veterinary profession and provide it with access to
qualified recruits among graduating classes of veterinarians. The Company
believes it is an employer of choice for veterinarians because it offers an
increased patient flow and a diverse case mix, employee benefits not
generally available to a sole practitioner, continuing education, management
opportunities, scheduling flexibility to accommodate personal lifestyles and
the ability to relocate to different regions of the country.
To support the Company's operations, VCA has established a Medical
Advisory Board, whose function, under the direction of the Company's Chief
Medical Officer, is to recommend medical standards, for local hospitals. The
committee is comprised of leading veterinarians representing different
geographic regions and medical specialties served by the Company.
Seeking to provide state-of-the-art medical care in a clean, attractive
environment, the Company renovates facilities and upgrades its equipment on a
periodic basis. In addition, the Company provides, at some of its locations,
board certified or board eligible veterinarians in such specialized fields as
internal medicine, surgery, oncology, ophthalmology, dermatology, orthopedics
and cardiology to expand the range of services available at its facilities.
The Company's animal hospitals generally require a staff of between 10
to 60 full-time equivalent employees, depending upon the facility's size and
customer base. The staff includes administrative and technical support
personnel, two or more veterinarians, an office manager who supervises the
day-to-day activities of the facility and a small office staff. The Company
employs a relatively small corporate staff to provide centralized
administrative services to all of its veterinary hospitals. Financial
control is maintained through uniform fiscal and accounting policies which
are established at the corporate level for use at the hospitals. Financial
information is centralized through a computerized data collection and
processing system at the corporate level.
Use of veterinary services has traditionally been seasonal. In
addition, use of veterinary services may be affected by weather conditions,
levels of infestation of fleas, heartworms and ticks, the number of daylight
hours and general economic conditions. The seasonality of the use of
veterinary services may cause operating results to vary
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significantly from quarter to quarter. In each of the last five years,
demand for the Company's services has been greater in the second and
third quarters than in the first and fourth quarters.
The Company's internal marketing programs rely heavily on its existing
client-base in order to increase the frequency and intensity of the services
used by its clients. Reminder notices are used to increase awareness among
the Company's customers of the advantages of regular, comprehensive
veterinary medical care, including preventive care, such as vaccinations,
dental screening and geriatric care. The Company seeks to obtain referrals
from veterinarians by promoting its specialized diagnostic and treatment
capabilities to veterinarians and veterinary practices which cannot offer
their clients such services.
As the number of hospitals in a single regional network grows, media
advertising of the Company's services will become increasingly cost
effective. The Company believes that an effective media advertising program
will allow the Company to establish brand identification as well as expand
the revenues derived from the sale of new and existing services and products.
Such programs, services and products, the Company believes, may increase the
opportunities to expand the Company's market share in the regional markets
for veterinary services in which it competes.
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. The
Company has established operations in those states that it believes comply in
all material respects with applicable laws. In those states, the Company is
a party to long term management agreements ("Management Agreements") with
professional corporations ("PCs") which were founded by and are owned by the
veterinarians who are providing veterinary medical services at the animal
hospitals. Pursuant to these agreements, the PC is solely responsible for
all aspects of the practice of veterinary medicine, as defined in each
particular state, and the Company has the primary responsibility for the
business and administrative aspects of the animal hospitals. Consequently,
the Company is involved in the daily on-site financial and administrative
management for the PCs and provides various other services to the PC from
time to time, including legal, marketing, financial reporting, human
resources and insurance assistance. As compensation for these services, the
Company is entitled to a monthly management fee. To assist in the management
of these animal hospitals, the PC and the Company have established a policy
board composed of an equal number of representatives of the PC and the
Company. The duties of this policy board include marketing and advertising
(except with respect to the provision of veterinary services, which is the
responsibility of the PC), client fees and collection policies and
recommendation to the PC regarding the number and type of veterinarians
required at the hospital. The PC does not delegate to the Company any of the
powers, duties and responsibilities vested in the PC by law as a professional
corporation.
The Management Agreements may be terminated under certain circumstances
including by the written agreement of the parties, by the Company "for cause"
and by the PC "for cause." Termination by the Company "for cause" includes
the revocation or suspension of the license to practice veterinary medicine
held by any of the PC's shareholders, the dissolution of the PC, the filing
of a petition in voluntary bankruptcy or an assignment for the benefit of
creditors or a material default in the performance of any of the PC's
material duties under the Management Agreement which continues for a period
of sixty days following notice thereof to the PC. Termination by the PC "for
cause" includes a material default in the performance of any of the Company's
obligations under the Management Agreement which continues for a period of
sixty days following notice thereof to the Company, the determination by an
arbitrator pursuant to the Management Agreement that the Company materially
breached a fiduciary duty owed to the PC or the Company intentionally
misappropriates or misapplies the PC's funds and fails to correct such
misappropriation within thirty days of receipt of notice relating thereto.
VETERINARY DIAGNOSTIC LABORATORIES
The Company operates one of the largest networks of veterinary-exclusive
diagnostic laboratories in the United States, servicing approximately 9,000
animal hospitals located in 45 states. The Company operates four full-
service laboratories located in Irvine, California (serving Southern
California and the Southwest), Valparaiso, Indiana (serving the Chicago
metropolitan area and other parts of the Midwest), Phoenix, Arizona (serving
the Southwest) and Farmingdale, New York (serving the East Coast). These
laboratories also serve as STAT (quick response) laboratories, which are in
addition to the Company's STAT laboratories located in Dallas and Houston,
Texas; Kansas City, Missouri; Phoenix, Arizona; Orlando, Florida; Portland,
Oregon; San Jose, California; and Murrietta, Georgia.
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The Company regularly performs numerous types of diagnostic laboratory
tests, including chemistry, hematology, cytology, anatomical pathology as
well as other disease-specific tests. Clinical tests are performed on animal
fluids such as blood or urine and provide information that is used by
veterinarians for medical diagnosis. The Company does not conduct experiments
on animals and is not engaged in animal research. The Company performs most
of its clinical tests with state-of-the-art automated laboratory testing
equipment.
The first step in the testing process is for a veterinarian to take a
specimen from the patient and complete a test request form indicating the
tests to be performed on that specimen. The specimen is then picked up by
the laboratory's driver or by a commercial courier service and delivered to
one of the Company's laboratories for testing. When received at the
laboratory, each specimen and related request form is checked for accuracy
and completeness and then given a unique identification number to ensure that
the results are attributed to the appropriate animal. The test request
information is entered into the laboratory's computer system, where a file of
testing and billing information is established for each specimen. Once this
information is entered, the tests are performed by one of the laboratory
technicians or by utilizing the Company's automated testing equipment. Test
results are entered into the computer system through a computer interface or,
in some instances, manually, depending upon the test and the type of
equipment used to conduct the test. Most routine testing is completed at
night and the test results are automatically transmitted via modem or fax
machine to the veterinarian before the start of business the next morning.
The Company's STAT laboratories perform certain routine tests quickly
and report results to veterinarians within hours of being picked up from the
veterinarian. The turnaround time at the Company's STAT laboratories for
reporting test results is generally three hours or less. The STAT
laboratories are located in geographic areas where there is high
concentration of veterinarians and an airline hub-operation. The Company may
establish or close STAT laboratories depending upon the volume of tests
performed and the needs of its veterinarian-clients.
In addition to testing operations, the Company provides a variety of
laboratory services to its veterinarian-clients which the Company believes
enhances its competitive position. These include:
REPORTING. Rapid turnaround of test results is critical to the
successful operation of a clinical laboratory. Usually, routine testing
is performed overnight and results are transferred to the veterinarian
by modem or fax machine before 8:00 a.m. the following day.
SPECIMEN TRANSPORTATION. The Company has developed an extensive
network of drivers and independent couriers which enables the Company to
provide timely pickup and delivery of specimens to its laboratories.
Specimens are picked up from clients and transported to the Company's
laboratory facilities on a daily basis, and in some areas, twice each
day.
CLIENT SERVICE. Veterinarians are not obligated to use any
particular laboratory's services and can change laboratory service
providers at any time. Therefore, the services offered by a laboratory
are critical to client satisfaction and retention. In addition to
emphasizing client service through rapid turnaround time and electronic
reporting, the Company has veterinarian specialists on staff to assist
the veterinarians to interpret the lab's results, make diagnoses or
treat disease. Accordingly, the laboratories' staff of professionals
include board certified specialists in pathology, internal medicine,
oncology, cardiology, dermatology, neurology and endocrinology.
QUALITY ASSURANCE. The Company's quality assurance programs are
intended to ensure that specimens are collected and transported
properly, tests are performed accurately, and client, patient and test
information is reported and billed correctly. The quality assurance
programs include testing quality control specimens of known
concentration or reactivity in order to ensure accuracy and precision,
routine checks and preventive maintenance of laboratory testing
equipment, and personnel standards which ensure that only qualified
personnel perform testing.
The Company has 25 full-time sales and field service representatives who
sell and maintain relationships with existing customers. To support its
marketing efforts, the Company, among other activities, develops marketing
literature, attends trade shows, involves itself in trade associations and
provides educational services.
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PREMIUM PET FOOD
Through 1996, the Company's operations included the management of the
Company's joint venture, Vet's Choice, with Heinz Pet Products ("HPP"). In
February 1997, Vet's Choice was restructured and management of the joint
venture was assumed by HPP. Pursuant to a restructuring agreement, the
Company maintains its 50.5% equity interest in Vet's Choice but profits and
losses are allocated 99.9% to HPP and .1% to the Company. Additionally, the
Company agreed to provide certain consulting and management services for a
three year period commencing on February 1, 1997 and to continue to support
and sell the SELECT BALANCE and SELECT CARE brands through its network of
animal hospitals. On or after the earlier of a change of control in the
Company or January 1, 2000, HPP may purchase all of the Company's interest in
the partnership at a purchase price equal to (i) 51% of (ii) 1.3 times the
annual sales of all products bearing the SELECT BALANCE of SELECT CARE brand
(the "Annual Sales") less (iii) $4.5 million. If HPP fails to exercise its
option prior to January 1, 2001, the Company may purchase all of the interest
of HPP in the partnership at a purchase price equal to (i) 49.5% of (ii) 1.3
times the Annual Sales plus (iii) $4.5 million.
The first line of products offered by Vet's Choice was a complete line
of premium, life-stage pet foods marketed under the brand name SELECT
BALANCE. The SELECT BALANCE line consists of dry and canned dog and cat food
products nutritionally tailored to meet the specific dietary needs of dogs
and cats in different stages of their lives. In March 1995, the joint
venture commenced to market and distribute a second product line of premium
therapeutic pet foods, marketed under the brand name SELECT CARE. The SELECT
CARE line consists of dry and canned dog and cat food products, nutritionally
tailored to meet the specific dietary needs of dogs and cats afflicted with
illness or disease or other medical conditions requiring special diets.
MARKETING AND DISTRIBUTION
Knowledge and acceptance of the Company's brands by veterinarians and
other veterinary professionals is of significant importance to achieving
widespread consumer acceptance of Vet's Choice's pet products. The Company
believes that its leadership position in the animal hospital industry can
therefore play a significant role in creating customer awareness and
acceptance of the SELECT BALANCE and SELECT CARE products. To assist in
marketing Vet's Choice's pet food products to the veterinary community, the
Company has formed affiliations with groups of veterinary professionals in
the regional markets in which it competes. These professional affiliations
are established and maintained in conjunction with VCA's Partners In
Management program, which provides discount purchasing programs, training and
marketing programs, continuing education and other professional hospital
management services to veterinary hospital owners. More than 2,000 hospitals
and 8,000 animal hospital employees have joined VCA's Partners In Management
program. In addition to the Partners In Management program's promotional
efforts, the Company intends to actively participate in seminars, trade
shows and professional conferences and to contact veterinarians and clinic
personnel through direct mailings, advertising and promotional campaigns.
FEES AND SOURCES OF PAYMENT
The Company's fees for provision of veterinary and laboratory services
vary upon the complexity of the required procedure, the relative involvement
of the applicable professionals and local market conditions. The Company
does not incur a significant amount of accounts receivable for the provision
of veterinary services since payment for these services is generally received
at the time services are provided. The Company offers its laboratory
services and sells its pet food on customary commercial terms, requiring
payment within 30 days of the date the service or product is performed or
shipped. The Company is not dependent upon third party payors for collection
of its fees.
SYSTEMS
The Company realized the importance of management information systems in
the past and thus has made a significant investment in these systems.
Currently, substantially all of the animal hospitals operate on one of four
computer systems which are linked to a computer at the Company's
headquarters. All of the Company's financial and customer records and
laboratory results are stored in computer databases, most of which may be
accessed by the Company's management.
PAGE 9
<PAGE>
The Company intends to further upgrade and integrate its management
information system. When completed, the Company believes that this enhanced
management information system will allow for further cost savings and provide
management with a powerful tool in implementing its marketing and operating
strategies.
COMPETITION
The companion animal health care industry is highly competitive. In its
Animal Hospital segment, the Company competes primarily with independent
veterinarians established in private practices or small regional multi-clinic
practices. In addition, certain national companies in the pet care industry,
including the operators of super-stores, are developing multi-regional
networks of animal hospitals in markets which include the Company's markets.
The provision of veterinary services is highly fragmented, with approximately
55,000 veterinarians nationwide practicing in an estimated 16,000 veterinary
hospitals and clinics. The Company believes that convenient location,
recommendation of friends, reasonable fees and convenient hours are the
principal factors in a pet owner's decision as to which veterinarian to use.
The Company believes its facilities are competitive and are designed to
respond to the needs of the pet owner.
Competition in the veterinary diagnostic laboratory industry is intense.
The Company believes that there are many diagnostic laboratory companies
which provide a broad range of laboratory testing services in the same
markets serviced by the Company. Additionally, there are many animal
hospitals that provide in-house laboratory services. Competition is based
primarily upon quality, price and the time required to report results.
GOVERNMENT REGULATION
All of the states in which the Company operates impose various
registration requirements. To fulfill these requirements, the Company has
properly registered each of its facilities with appropriate governmental
agencies and, where required, has appointed a licensed veterinarian to act on
behalf of each facility. All veterinary doctors practicing in the Company's
clinics are required to maintain valid, unexpired and unrevoked state
licenses to practice.
In addition, the laws of many states prohibit veterinarians from
splitting fees with non-veterinarians and prohibit business corporations from
providing, or holding themselves out as providers of, veterinary medical
care. These laws vary from state to state and are enforced by the courts and
by regulatory authorities with broad discretion. While the Company seeks to
structure its operations to comply with the corporate practice of veterinary
medicine laws of each state in which it operates, there can be no assurance
that, given varying and uncertain interpretations of such laws, the Company
would be found to be in compliance with restrictions on the corporate
practice of veterinary medicine in all states. A determination that the
Company is in violation of applicable restrictions on the practice of
veterinary medicine in any state in which it operates could have a material
adverse effect on the Company if the Company were unable to restructure its
operations to comply with the requirements of such states.
The Company's growth strategy is dependent principally on its ability to
acquire existing animal hospitals and veterinary diagnostic laboratories.
Acquisitions may be subject to pre-merger or post-merger review by
governmental authorities for anti-trust and other legal compliance. Adverse
regulatory action could negatively affect the Company's operations through
the assessment of fines or penalties against the Company or the possible
requirement of divestiture of one or more of the Company's operations.
EMPLOYEES
At December 31, 1996, the Company had approximately 2,400 full-time-
equivalent employees, including approximately 500 licensed veterinarians.
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal executive offices for
VCA is located in Santa Monica, California, in approximately 21,000 square
feet of space occupied under two leases which expire on March 3, 1999. The
leases currently provide for aggregate minimum monthly rental payments of
approximately $27,000. The Company maintains leased and owned facilities at
173 other locations which house its animal hospitals and laboratories. The
Company owns 37 facilities and the remainder are leased from third parties.
For the year ended
PAGE 10
<PAGE>
December 31, 1996, the Company had lease costs of
approximately $6,317,000 and the Company expects to have lease costs at
facilities existing at December 31, 1996 of approximately $6,813,000 in 1997.
Lease costs for the hospitals acquired since December 31, 1996 will amount to
approximately $164,000 in 1997. The Company believes that its real property
facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of 1996.
PAGE 11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Stock Market under
the symbol "VCAI." The following table sets forth the range of high and low
last sale prices per share for the common stock as quoted on the NASDAQ Stock
Market for the periods indicated:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1995
First Quarter 11 3/16 8
Second Quarter 12 1/4 10 3/8
Third Quarter 17 11/16 11 1/2
Fourth Quarter 16 29/32 12 5/8
Fiscal 1996
First Quarter 29 3/8 13 5/8
Second Quarter 32 3/8 21 7/8
Third Quarter 23 1/4 16
Fourth Quarter 22 7/8 9
</TABLE>
At March 26, 1997, the closing price of the common stock on the Nasdaq
Stock Market was $10.75.
At March 26, 1997, there were approximately 638 holders of record of the
Company's common stock.
The Company has not paid cash dividends on its common stock and does not
anticipate that it will do so in the near future. The present policy of the
Company is to retain earnings to finance the development and expansion of its
operations.
ITEM 6. SELECTED FINANCIAL DATA
As discussed above, VCA and Pets' Rx merged in 1996 in a transaction
accounted for as a pooling of interests. As a result of this merger, the
Company has restated its historical financial statements to include the
historical results of Pets' Rx with VCA. Certain adjustments to conform
Pets' Rx's accounting policies to VCA's are reflected in these financial
statements.
The historical selected financial data set forth below for the three years
ended December 31, 1996 are derived from the Company's Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K and should
be read in conjunction with those financial statements and notes thereto.
Those financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose report with respect thereto appears
elsewhere in this Annual Report on Form 10-K. The selected financial data
set forth for the two years ended December 31, 1993 are derived from the
Company's audited consolidated financial statements. Reference is made to
Note 3 of Notes to Consolidated Financial Statements for information
regarding the Company's acquisitions and dispositions.
PAGE 12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA: For the Years Ended December 31,
--------------------------------------------------
(In thousands, except for per share data) 1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $182,160 $107,694 $51,871 $31,098 $22,133
Direct costs 139,586 80,099 40,759 25,562 18,437
--------- --------- -------- -------- --------
Gross profit 42,574 27,595 11,112 5,536 3,696
Selling, general and administrative 19,735 13,684 8,779 4,916 2,272
Depreciation and amortization 7,496 4,144 2,065 1,410 1,035
Restructuring charge 5,701 1,086 -- -- --
Merger costs 2,901 -- -- -- --
Writedown of assets 9,512 2,148 -- 4,506 --
--------- --------- -------- -------- --------
Operating (loss) income (2,771) 6,533 268 (5,296) 389
Interest income 4,487 828 404 469 396
Interest expense 7,812 3,377 2,388 1,225 890
--------- --------- -------- -------- --------
(Loss) income before minority interest, income
taxes and cumulative effect of accounting change (6,096) 3,984 (1,716) (6,052) (105)
Minority interest in income (loss) of subsidiaries 6,577 2,960 (540) (334) 34
--------- --------- -------- -------- --------
(Loss) income before income taxes and cumulative
effect of accounting change (12,673) 1,024 (1,176) (5,718) (139)
Provision (benefit) for income taxes 1,959 2,238 731 (152) 447
--------- --------- -------- -------- --------
Loss before cumulative effect
of accounting change (14,632) (1,214) (1,907) (5,566) (586)
Cumulative effect of accounting change -- -- -- 221 --
--------- --------- -------- -------- --------
Net loss $(14,632) $ (1,214) $(1,907) $(5,345) $ (586)
========= ========= ======== ======== ========
Primary loss per share:
Loss before cumulative effect
of accounting change $ (0.92) $ (0.13) $ (0.31) $ (0.93) $(0.09)
Cumulative effect of accounting change -- -- -- 0.03 --
--------- --------- -------- -------- --------
Net loss per common share $ (0.92) $ (0.13) $ (0.31) $ (0.90) $(0.09)
========= ========= ======== ======== ========
Average common shares used for computing
primary loss per share 15,941 9,224 6,202 5,966 6,272
========= ========= ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA: For the Years Ended December 31,
---------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
Cash and equivalents $ 23,820 $ 5,396 $ 7,807 $12,967 $11,956
Marketable securities 79,107 42,155 -- -- --
Total assets 354,009 153,416 67,902 52,589 42,014
Current portion of long-term obligations
and notes payable 14,055 7,496 5,552 2,318 1,731
Long-term obligations, less current portion 134,767 36,778 25,057 20,565 12,159
Guaranteed purchase price contingently
payable in cash or common stock -- -- 72 542 542
Total stockholders' equity 167,350 90,217 25,370 21,998 24,807
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Founded in 1986, VCA is a leading companion animal health care company
operating in the markets for veterinary care, veterinary diagnostic
laboratories and premium pet food. The Company made its first animal
hospital acquisition in December 1986, when it acquired West Los Angeles
Animal Hospital, one of the largest privately-owned teaching animal hospitals
in the United States. Between 1987 and 1992, the Company's operations were
directed primarily at establishing a corporate infrastructure and building a
network of animal hospitals in selected regional markets. During this
period, the Company grew with the acquisition of 17 additional animal
hospitals and one veterinary diagnostic laboratory.
PAGE 13
<PAGE>
In 1993, the Company began to expand the scope of its operations in order
to realize its goals of integrating the markets for veterinary care,
veterinary diagnostic laboratories and premium pet food. The integration of
these three markets is the foundation of the Company's business strategy to
leverage its access to its primary customers, veterinarians and pet owners.
From January 1, 1993 through December 31, 1995, the Company acquired and
integrated into its operations 36 animal hospitals. Also in 1993, the
Company entered into a joint venture called Vet's Choice with HPP to develop,
manufacture and market a full-line of premium pet food. In March 1994, the
Company expanded its veterinary diagnostic laboratory operations by acquiring
a 70 percent interest in Professional Animal Laboratory ("PAL"). In January
1995, the Company acquired an additional veterinary diagnostic laboratory,
Cenvet, Inc. ("Cenvet"), which it then contributed in March 1995 to, Vet
Research Laboratories, LLC ("Vet Research"), a joint venture, in exchange for
a 51 percent interest therein. Vet Research is a combination of the
operations of Cenvet and that of a full-service veterinary laboratory known
as Vet Research, Inc. ("VRI"). In 1995, the Company further expanded its
veterinary diagnostic laboratory operations by acquiring three smaller,
regional veterinary diagnostic laboratories and by purchasing the remaining
30 percent interest in PAL.
In 1996, the Company continued its expansion of animal hospital
operations with the mergers with Pets' Rx in June 1996 (16 hospitals) and Pet
Practice in July 1996 (84 hospitals) as well as the acquisition of an
additional 22 animal hospitals in separate transactions throughout the year.
The Company's laboratory operations were expanded with the acquisition of
Southwest Veterinary Diagnostics Laboratory, Inc. ("Southwest") in March
1996, and five other laboratories throughout the year.
At December 31, 1996, the Company owned or operated 161 animal hospitals
which were located in 22 states. The Company's network of veterinary
diagnostic laboratories consists of four full-service laboratories and eight
"STAT" (quick response) laboratories located throughout the country.
The acquisition of all of the outstanding shares of Pets' Rx in June 1996
was treated for accounting purposes as a pooling of interests. Accordingly,
the accompanying financial statements reflect the combined results of the
pooled businesses for the respective periods presented. Previously reported
financial information for VCA and Pets' Rx for each of the three years in the
period ended December 31, 1996, is shown in the table below.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Pre-merger
VCA $ 64,763,000 $ 92,072,000 $42,233,000
Pets' Rx 7,849,000 15,622,000 9,638,000
------------ ------------ ------------
72,612,000 107,694,000 51,871,000
Post-merger 109,548,000 -- --
------------ ------------ ------------
$182,160,000 $107,694,000 $51,871,000
Net (loss) income:
Pre-merger
VCA $1,647,000 $2,564,000 $589,000
Pets' Rx (658,000) (1,977,000) (2,805,000)
Merger adjustments 212,000 (1,801,000) 309,000
------------- ------------ ------------
1,201,000 (1,214,000) (1,907,000)
Post-merger (15,833,000) -- --
------------- ------------ ------------
$(14,632,000) $(1,214,000) $(1,907,000)
============= ============ ============
</TABLE>
VCA's 1996 pre-merger net income includes merger expenses of $2,901,000;
these expenses consist principally of legal, accounting, investment advisor,
termination of employment agreements and severance costs. The merger
adjustments were recorded to conform certain accounting methods of Pets' Rx
to those of VCA. These adjustments reduced intangible asset amortization
expense by $212,000, $347,000 and $309,000 in 1996, 1995 and 1994,
respectively, and wrote-off intangible assets of $2,148,000 in 1995
associated with certain animal hospitals whose projected future operating
results would not result in the recovery of such intangible assets under
VCA's accounting method.
PAGE 14
<PAGE>
RECENT ACQUISITIONS
For a discussion of recent acquisitions see "Business--Recent
Developments."
BASIS OF REPORTING
For 1996, the Company reported its operations in three business
lines--Animal Hospital, Laboratory and Premium Pet Food. Animal Hospital
operations include the operations of the Company's animal hospitals.
Laboratory operations include the operations of VCA Lab (merged into PAL in
March 1994), PAL (acquired in March 1994), Cenvet (from the date acquired,
January 1, 1995 through the formation of Vet Research in March 1995), Vet
Research and four smaller veterinary laboratories since the date of
acquisition in 1995 and Southwest (acquired in March 1996) and 5 smaller
laboratories acquired in 1996. The Company acquired the remaining 30 percent
interest in PAL from its minority interest partner effective July 1, 1995.
Throughout 1996, the Company owned a 51 percent interest in Vet Research.
The Company acquired the remaining 49% in January 1997. Premium Pet Food
includes the operations of the Vet's Choice joint venture of which the
Company owns a 50.5 percent interest. During 1993, Vet's Choice was
primarily engaged in developing and testing the formulas for its first
product line, SELECT BALANCE, and building a marketing infrastructure in
anticipation of commencing distribution in 1994. Vet's Choice began to
generate revenue in March 1994 with the launch of SELECT BALANCE. In 1995,
Vet's Choice began selling its second product line, SELECT CARE. The
Company's operating results include the results of operations of the joint
ventures on a consolidated basis.
Commencing February 1, 1997, the day-to-day management of Vet's
Choice was assumed by HPP. The Company maintains its 50.5% equity interest
in Vet's Choice but profits and losses are allocated 99.9% to HPP and 0.1% to
the Company. The Company will no longer report the results of operations of
Vet's Choice on a consolidated basis.
The Company's animal hospitals use the Company's veterinary
diagnostic laboratory services and purchase and resell the pet food products
of Vet's Choice. Revenue and the corresponding expense from intercompany
sales totaling $4,130,000, $1,727,000 and $759,000 in 1996, 1995, 1994,
respectively, have been eliminated from the Company's operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of certain items in relation to revenues.
<TABLE>
<CAPTION>
Percentage of Revenues
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Direct costs 76.6 74.4 78.6
Gross profit 23.4 25.6 21.4
Selling, general and administrative 10.8 12.7 16.9
Depreciation and amortization 4.1 3.8 4.0
Merger costs 1.6 -- --
Restructuring charges 3.1 1.0 --
Writedown of assets 5.3 2.0 --
Operating (loss) income (1.5) 6.1 0.5
Interest income 2.5 0.8 0.8
Interest expense 4.3 3.2 4.6
(Loss) income before minority
interest and income taxes (3.3) 3.7 (3.3)
Minority interest in income
(loss) of subsidiaries 3.6 2.7 (1.0)
(Loss) income before income taxes (6.9) 1.0 (2.3)
Provision for income taxes 1.1 2.1 1.4
Net loss (8.0)% (1.1)% (3.7)%
</TABLE>
PAGE 15
<PAGE>
REVENUES
Animal Hospital operations represented approximately 66.3%, 62.2% and
80.0% of total Company revenues in 1996, 1995 and 1994, respectively.
Laboratory operations represented 30.0%, 34.2% and 18.6% of total Company
revenues in 1996, 1995 and 1994, respectively. Premium Pet Food operations
represented 3.7%, 3.6% and 1.4% of total Company revenues in 1996, 1995 and
1994, respectively. The Company anticipates that Animal Hospital revenues as
a percentage of total revenues will increase in future periods as a result
of the expansion of the Company's animal hospital operations and the
elimination of revenues from the Premium Pet Food operations in 1997 when the
Company will no longer consolidate the Vet's Choice joint venture.
The following table summarizes the Company's revenues for each of the
three years in the period ended
December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Animal Hospital $120,842,000 $67,059,000 $41,484,000
Laboratory 56,774,000 37,606,000 10,150,000
Premium Pet Food 8,674,000 4,756,000 996,000
Intercompany Sales (4,130,000) (1,727,000) (759,000)
------------- ------------- ------------
$182,160,000 $107,694,000 $51,871,000
============= ============= ============
</TABLE>
Revenues of the Animal Hospital operations increased 61.7% from 1994 to
1995 and 80.2% from 1995 to 1996. This growth was primarily the result of
growth in the number of facilities owned and operated by the Company. The
increase in revenues resulting from changes in volume or prices at facilities
operated during all of 1994 and 1995 was 6.0%. The increase in revenues
resulting from change in volume or prices at facilities operated during all
of 1995 and 1996 was 4.7%.
Revenues of the laboratory operations increased 270.5% from 1994 to 1995
due primarily to the acquisition of Cenvet in January 1995 and the subsequent
formation of the Vet Research joint venture in March 1995. Revenues of the
laboratory operations increased by 51.0% from 1995 to 1996 due primarily to
the acquisition of Southwest in March 1996.
Vet's Choice began generating revenues in March 1994 when it commenced
commercial distribution of SELECT BALANCE through the Company's network of
animal hospitals in March 1994. Distribution was expanded nationally to
independent veterinary hospitals in selected regional markets beginning in
the second quarter of 1994. Vet's Choice revenue increased further in 1995
and 1996 with the introduction of SELECT CARE in the beginning of 1995.
Pursuant to the restructuring agreement and other related agreements
between HPP and the Company, the Company has agreed to provide certain
consulting and management services for a three year period commencing
February 1, 1997 and to continue to support and sell the SELECT BALANCE and
SELECT CARE brands through its network of animal hospitals. The agreements
call for the Company to receive an aggregate of $15.3 million payable in
semi-annual installments over a five year period.
GROSS PROFIT
The following table summarizes the Company's gross profit for each of the
three years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Animal Hospital $17,858,000 $11,767,000 $7,111,000
Laboratory 21,184,000 14,277,000 3,652,000
Premium Pet Food 3,532,000 1,551,000 349,000
----------- ----------- -----------
$42,574,000 $27,595,000 $11,112,000
=========== =========== ===========
</TABLE>
Animal Hospital gross profit represents the contribution from the Animal
Hospital operations and is comprised of revenues less all costs of services
and products at the animal hospitals, including salaries of veterinarians,
technicians and all other hospital-based personnel, facilities rent and
occupancy costs and medical supply costs. Animal Hospital gross profit
increased from $7,111,000 in 1994 to $11,767,000 in 1995 and to $17,858,000
in 1996, increases of $4,656,000 or 65.5% and $6,091,000 or 51.8%,
respectively. As a percentage of Animal Hospital revenues, gross profit
increased from 17.1% in 1994 to 17.5% in 1995 and decreased to 14.8% in 1996.
The 1996 decrease was
PAGE 16
<PAGE>
attributable primarily to the lower gross profit
margins at the newly acquired facilities. Gross profit margins at existing
hospitals decreased to 16.8% in 1996 from 18.3% in 1995 due to a 4.7%
increase in revenues compared to a 6.6% increase in direct costs composed
primarily of a 7.4% increase in salaries and benefits and a 10.6% increase in
supply costs. Gross profit margins at newly acquired hospitals were 13.5% in
1996.
Laboratory gross profit is comprised of revenues less all direct costs of
services at the veterinary diagnostic laboratories, including salaries of
veterinarians, technicians and other non-administrative laboratory-based
personnel, facilities rent and occupancy costs and supply costs. Laboratory
gross profit increased from $3,652,000 in 1994 to $14,277,000 in 1995 and to
$21,184,000 in 1996, increases of $10,625,000 and $6,907,000, respectively.
As a percentage of Laboratory revenues, gross profit earned by Laboratory
operations increased from 36.0% in 1994 to 38.0% in 1995 and decreased to
37.3% in 1996. The increase in the gross profit contributed by Laboratory
operations as a percentage of revenues in 1995 over 1994 was attributable to
the acquisition of Cenvet and the formation of Vet Research in January and
March 1995, respectively. The decrease in gross profit as a percentage of
revenue in 1996 compared to 1995, was attributable to difficulties with the
assimilation of the 1996 laboratory acquisitions primarily on the west coast,
an increase in advertising costs associated with the Laboratory's name change
to the "Antech Diagnostics" name at all laboratories, the effect of
promotional pricing programs and the addition of operating personnel.
Premium Pet Food gross profit is comprised of revenues less cost of goods
sold, including freight and distribution costs. Premium Pet Food gross
profit totaled $349,000 in 1994, $1,551,000 in 1995 and $3,532,000 in 1996.
As a percentage of revenues, gross profit was 35.0% in 1994, 32.6% in 1995
and 40.7% in 1996. The decrease in gross profit as a percent of revenue in
1995 compared to 1994 was attributable to the release of SELECT CARE in 1995,
which has lower gross profit margins than SELECT BALANCE. Gross profit also
decreased in 1995 due to increased sales to distributors which have lower
gross profit margins than sales to veterinary hospitals, which were the
Company's primary source of sales in 1994. The increase in gross profit as a
percentage of revenues from 1995 to 1996 was primarily attributable to
decreased distribution costs.
The Company's Animal Hospital business historically has realized gross
profit margins that are lower than that of the Laboratory and Premium Pet
Food businesses. As the portion of the Company's revenues attributable to
its Animal Hospitals operations grows in the future, the historical gross
profit margins for the Company as a whole may not be indicative of those to
be expected in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The following table sets forth the Company's selling, general and
administrative expense for each of the three years in the period ended
December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
VCA Corporate $10,450,000 $ 6,029,000 $4,539,000
Laboratory 4,619,000 3,569,000 812,000
Premium Pet Food 4,666,000 4,086,000 3,428,000
----------- ---------- ----------
$19,735,000 $13,684,000 $8,779,000
=========== =========== ==========
</TABLE>
VCA Corporate selling, general and administrative expense consists of
administrative expense at the Company's headquarters, including the salaries
of corporate officers and other personnel, accounting, legal and other
professional expense, and rent and occupancy costs. VCA Corporate selling,
general and administrative expense increased from $4,539,000 in 1994 to
$6,029,000 in 1995, and to $10,450,000 in 1996, increases of $1,490,000 or
32.8%, and $4,421,000 or 73.3% respectively. As a percentage of Animal
Hospital revenues, VCA Corporate selling, general and administrative expense
decreased from 10.9% in 1994 to 9.0% in 1995 and 8.6% in 1996. The decreases
from 1994 to 1996 are primarily attributable to spreading the expenses over
a larger revenue base.
Laboratory selling, general and administrative expense consists primarily
of sales and administrative personnel and selling, marketing and promotional
expense. Laboratory selling, general and administrative expense increased to
$4,619,000 for the year ended December 31, 1996 from $3,569,000 for the
comparable period in 1995, an increase of $1,050,000. As a percentage of
Laboratory revenues, Laboratory selling, general and administrative expense
increased from 8.0% in 1994 to 9.5% in 1995 and decreased to 8.1% in 1996.
The increase in selling, general and administrative expense from 1994 to 1995
was primarily attributable to the addition of Cenvet in January 1995 and the
formation of Vet Research in March 1995. The decrease from 1995 to 1996 was
primarily attributable to spreading the expenses over a larger revenue base.
PAGE 17
<PAGE>
Premium Pet Food selling, general and administrative expense consists
primarily of sales and administrative personnel and selling, marketing and
promotional expense. Premium Pet Food general and administrative expense
increased from $4,086,000 in 1995 to $4,666,000 in 1996, an increase of
$580,000 or 14.2%. The increases from 1994 to 1995 were primarily
attributable to additional sales and administrative personnel and increases
in marketing and promotional expenses associated with the launch of SELECT
BALANCE in March 1994 and the launch of SELECT CARE in April 1995. The
increases from 1995 to 1996 were primarily attributable to increases in
selling and promotional costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense primarily relates to the
depreciation of capital assets and the amortization of excess cost over the
fair value of net assets acquired (goodwill) and certain other intangibles.
Depreciation and amortization expense increased from $2,065,000 in 1994 to
$4,144,000 in 1995 and to $7,496,000 in 1996, representing 4.0%, 3.8% and
4.1% of revenue in 1994, 1995 and 1996, respectively. The Company's policy
is to amortize goodwill over the expected period to be benefited, not
exceeding forty years. The increase in depreciation and amortization expense
is primarily due to the acquisition of animal hospitals and veterinary
diagnostic laboratories.
RESTRUCTURING AND ASSET WRITEDOWN
As a result of the acquisition of Pets' Rx, Pet Practice and Southwest in
1996, the Company conducted a complete review of its animal hospital and
laboratory operations during the third quarter ended September 30, 1996. As
a result of this review, the Company determined to restructure its laboratory
operations and close, merge or sell certain of its hospitals which do not
meet new standards for performance adopted in light of the increase in the
size of the Company's animal hospital operations. Accordingly, the Company
adopted a restructuring plan and recorded a restructuring and asset writedown
charge of approximately $15.2 million.
The major components of the restructuring plan include (1) the
termination of leases, the writedown of intangibles, property and equipment,
and employee terminations in connection with the closure, sale or
consolidation of five VCA animal hospitals, (2) the termination of contracts
and leases, the writedown of certain real and personal property and equipment
and the termination of employees in connection with the restructuring of the
Company's laboratory operations, (3) contract terminations and writedown of
assets in connection with the move to common communications and computer
systems, and (4) the closure, sale or consolidation of certain Pet Practice
hospitals (which are recorded in the purchase price allocation and not as
part of the restructuring and asset writedown charge).
The restructuring plan is expected to be executed over the period
continuing through the second quarter of 1997. As part of the restructuring,
the Company expects to close, merge or sell eight existing VCA hospitals as
well as 17 hospitals acquired in connection with the Pet Practice merger.
Collectively, the hospitals have aggregate annual revenues of approximately
$10.9 million. The Company is continuing to evaluate the financial
performance of certain Pet Practice animal hospitals and may sell, close
or merge additional facilities once this evaluation is complete. In
connection with the anticipated closure of the eight VCA animal hospitals,
the Company has recognized writedowns of intangibles and property and
equipment of $7,919,000, charges associated with the termination of leases in
the amount of $1,877,000 and severance costs of $307,000. As indicated
above, the closures of the Pet Practice animal hospitals are reflected in the
allocation of the purchase price and do not result in a charge against
earnings. The intended restructuring of the Company's laboratory operations
has resulted in accruals of approximately $490,000 for contract and lease
terminations, $265,000 in severance and other employee related costs and a
writedown of fixed assets in the amount of $867,000. The charge to move the
Company's communications and computer systems to common systems includes an
accrual for contract terminations of $2,763,000 and asset writedowns of
$725,000.
Of the $15.2 million in restructuring and asset writedown charges, $5.7
million represents cash charges and the remainder represents non-cash
charges. Of the cash charges, $93,000 had been paid at December 31, 1996 and
the remainder is expected to be paid over the next 60 months.
The operations of Cenvet (acquired January 1, 1995) were merged into
VRI's operations to form Vet Research. The combined operations were
restructured in 1995 to eliminate duplicate operating and overhead costs. In
connection with the restructuring, the Company recorded a charge of
$1,086,000 in the first quarter of 1995 to accrue the estimated costs
associated with the restructuring, consisting primarily of lease termination
and severance costs.
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During 1995, the Company charged $2,148,000 to operations related to a
writedown of goodwill and certain intangible assets at three Pets' Rx
facilities. These facilities that were written down in 1995 collectively had
a net loss in 1996 of approximately $16,000 and will approximate break even
in 1997. The Company's goal in 1997 is to minimize the facilities' cash flow
requirements and ultimately bring the facilities to a breakeven status.
Management of the Company believes that the Company's strategy of building a
network of animal hospitals is served by continuing to operate these animal
hospitals even though the facilities themselves may not generate profits.
MERGER COSTS
In connection with the Pets' Rx merger, the Company recorded the
estimated costs to complete the transaction. The costs, amounting to
$2,901,000 primarily include legal, accounting, investment advisor,
termination of employment agreements and severance costs.
OPERATING (LOSS) INCOME
Operating (loss) income increased from income of $268,000 in 1994 to
income of $6,533,000 in 1995 and decreased to a loss of $2,771,000 in 1996.
Operating income in 1995 includes restructuring and asset writedown changes
totalling $3,234,000. The operating loss in 1996 includes restructuring and
asset writedown charges and merger costs totalling $18,114,000. (See Notes 2
and 14 of Notes to Consolidated Financial Statements.) Operating (loss)
income in 1994, 1995 and 1996 also includes the operating losses of Vet's
Choice amounting to $3,094,000, $2,573,000 and $1,263,000, respectively.
Excluding these items, operating income would have been $3,362,000,
$12,340,000 and $16,606,000, respectively, representing an increase of
$8,978,000 in 1995 over 1994 and $4,266,000 in 1996 over 1995. The increase
from 1994 to 1995 and from 1995 to 1996 primarily reflects higher operating
income at the Company's veterinary diagnostic laboratories, increased pet
food sales and an increase in the number of animal hospitals and veterinary
diagnostic laboratories owned and operated by the Company. As a percentage
of revenues, operating income excluding the Vet's Choice losses and the
restructuring and asset writedown and merger costs would have been 6.5% in
1994, 11.5% in 1995 and 9.1% in 1996.
INTEREST INCOME
Interest income increased from $404,000 in 1994 to $828,000 in 1995 and
to $4,487,000 in 1996, an increase of $424,000 and $3,659,000, respectively.
These increases are primarily due to changes in the Company's average daily
cash and marketable securities balances which in 1996 were attributable to
the proceeds from the sale of the convertible debentures. As a percentage of
revenues, interest income increased from 0.8% in 1994 and 1995 to 2.5% in
1996.
INTEREST EXPENSE
Interest expense increased from $2,388,000 in 1994 to $3,377,000 in 1995
and $7,812,000 in 1996, increases of $989,000 or 41.4% and $4,435,000 or
131.3%, respectively. These increases are primarily due to increases in the
Company's outstanding indebtedness incurred for acquisitions and the sale of
$84,385,000 of 5.25% convertible subordinated debentures in April 1996.
As a percentage of revenues, interest expense decreased from 4.6% in 1994
to 3.1% in 1995 and increased to 4.3% in 1996.
INCOME TAXES
Income taxes were $731,000, $2,238,000 and $1,959,000 in 1994, 1995 and
1996, respectively. A reconciliation of the provision for income taxes for
each of the three years in the period ended December 31, 1996 to the amount
computed at the Federal statutory rate is included in Note 12 of Notes to
Consolidated Financial Statements. The Company's effective income tax rate
for each of the years was higher than the statutory rate and the Company
expects that its effective income tax rate will be higher than the statutory
rate in the future primarily due to the nondeductibility for income tax
purposes of the amortization of goodwill at certain of the Company's
facilities. In addition, the Company's effective tax rate was higher than
the statutory rate in 1996 and 1995 due to the nondeductibility of the
writedown of certain assets, restructuring charges and acquisition related
costs.
MINORITY INTEREST
Minority interest in income (loss) of the consolidated subsidiaries was
($540,000), $2,960,000 and $6,577,000, in 1994, 1995 and 1996, respectively.
The increases are primarily due to the earnings of the Vet Research
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joint venture and the reduced losses of Vet's Choice. In 1997, the Company
acquired the remaining 49% interest in the Vet Research joint venture and the
Vet's Choice joint venture was restructured such that it will no longer be
consolidated. Consequently, minority interest in income of the consolidated
subsidiaries in the future will represent solely partners' interest in
various hospitals which in 1996 amounted to approximately $357,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to cash, primarily to
fund acquisitions, reduce long-term debt obligations and to fund property and
equipment additions.
Cash provided by operations during the years ended December 31, 1996,
1995 and 1994 was $1,603,000, $3,837,000 and $1,081,000, respectively. The
Company's operating cash flow was adversely impacted by the Vet's Choice
joint venture, which had a net cash outflow of $1,715,000, $3,043,000 and
$2,878,000 in 1996, 1995 and 1994, respectively. Excluding the Vet's Choice
operations, cash provided by operations in 1996, 1995 and 1994 was
$3,318,000, $6,880,000 and $3,959,000, respectively.
During 1996, 1995 and 1994, in connection with acquisitions, the Company
used cash in the amounts of $27,496,000 (acquisition of 122 hospitals and six
veterinary diagnostic laboratories), $9,147,000 (acquisition of 25
hospitals, six veterinary diagnostic laboratories and the remaining 30
percent interest in PAL) and $6,810,000 (acquisition of five animal hospitals
and one veterinary diagnostic laboratory). Additionally, in 1995 and 1994,
the Company paid $250,000 and $60,000 to acquire options to purchase the land
and building of four facilities. From January 1, 1997 through March 26,
1997, the Company used $825,000 in connection with the acquisition of three
animal hospitals and $18.6 million in cash to acquire the remaining 49%
interest in Vet Research Laboratory.
During 1996, 1995 and 1994, the Company used $6,962,000, $2,983,000 and
$1,166,000 to purchase property, plant and equipment and $11,135,000,
$6,241,000 and $3,097,000 to reduce long-term obligations.
In April 1996, the Company received net proceeds of $82,034,000 related
to the sale, in an offshore offering and concurrent private placement in the
United States, of $84,385,000 of 5.25% convertible subordinated debentures
due in 2006. The debentures, non-callable for three years, are convertible
into approximately 2.5 million shares of the Company's common stock at a rate
of $34.35 per share. Also in 1996 and in 1995, the Company received net
proceeds of $13,800,000 and $8,896,000 in connection with the exercise of
1,962,452 and 1,271,508, respectively, of its redeemable warrants. The
warrants expired in October 1996. In connection with the formation of Vet
Research in March 1995, the Company issued warrants to purchase 363,636
shares of its common stock at $11.00 per share (the "Vet Research warrants").
During 1996 and 1995, the Company received $2,134,000 and $550,000 in
connection with the exercise of 194,000 and 50,000 of these warrants,
respectively. The warrants expired in the first quarter of 1997.
In January 1995, Star-Kist Foods, Inc. through its division, HPP,
purchased 1,159,420 shares of the Company's common stock at $8.625 per share,
resulting in net proceeds to the Company of $9,980,000. In November 1995,
the Company completed a secondary public offering of 2,965,026
shares of common stock for net proceeds of approximately $33,932,000.
Of its cash and equivalents on hand at December 31, 1996 and 1995,
approximately $2,023,000 and $1,907,000, respectively, was restricted for use
by Vet's Choice. During the year ended December 31, 1995, Vet's Choice used
$3,075,000 of cash to fund its operating losses, the opening of three
regional warehouses, marketing and promotional expenses and an increase in
its sales force. As provided for in its joint venture agreement, the Company
and HPP each contributed $1.0 million to Vet's Choice in 1996 and 1995.In
connection with the restructuring of the Vet's Choice joint venture agreement
in February 1997, Vet's Choice made a capital distribution to the Company
amounting to $1,329,000.
The Company has achieved its growth in the past, and anticipates it will
continue its growth in the future, through the acquisition of animal
hospitals and veterinary diagnostic laboratories for cash, stock and notes
payable. Subject to available capital, the Company anticipates it will
complete the acquisition of an additional 20 to 30 individual animal
hospitals in 1997, which will require cash of up to $15.0 million. In
addition, the Company continues to examine acquisition opportunities in the
veterinary laboratory field which may impose additional cash requirements.
The Company has debt payment obligations related to the Animal Hospital
and Laboratory operations owned as of March 26, 1997 of approximately $14.2
and $16.8 million in the years ended December 31, 1997 and 1998,
respectively. In addition,
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<PAGE>
interest payments on the convertible debentures
amount to $4,430,000 annually. In addition to normal property and plant
additions, the Company expects to continue to upgrade its management
information systems in 1997 and change the signage at over 100 animal
hospitals for a combined cost of approximately $1 million.
Excluding Vet's Choice, the Company had cash and marketable securities of
$100,904,000 at December 31, 1996.
The Company intends to fund its future cash requirements primarily from
cash on hand, the sale of its marketable securities and internally generated
funds. The Company believes these sources of funds will be sufficient to
continue the Company's operations and planned capital expenditures for at
least the next 12 months. A significant portion of the Company's cash
requirements is determined by the pace and size of its acquisitions.
Consequently, the Company may need to obtain additional debt or equity
financings. The type, timing and terms of financing selected by the Company
will be dependent upon the Company's cash needs, the availability of other
financing sources and prevailing conditions in the financial markets.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
Statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this statement in January 1996
did not impact the Company's financial position or results of operations.
In November 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation." The Company adopted the Statement in 1996 by making the
required note disclosures only. Therefore, the adoption of the Statement did
not have an effect on the Company's financial position or results of
operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Although not readily detectable because of the impact of acquisitions,
the Company's operations are somewhat seasonal. In particular, revenues at
the Company's animal hospitals historically have been greater in the second
and third quarters than in the first and fourth quarters. The demand for the
Company's veterinary services are significantly higher during warmer months
because pets spend a greater amount of time outdoors, where they are more
likely to be injured and are more susceptible to disease and parasites. In
addition, use of veterinary services may be affected by levels of infestation
of fleas, heartworms and ticks, the number of daylight hours, as well as
general economic conditions. The Company expects its laboratory operations
to experience the same seasonality as its animal hospitals. A substantial
portion of the Company's costs are fixed and do not vary with the level of
demand. Consequently, net income for the second and third quarters, at
individual animal hospitals, generally has been higher than that experienced
in the first and fourth quarters.
The following table sets forth revenues, gross profit and operating
income for each of the quarters since January 1, 1995:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands) December 31, September 30, June 30, March 31,
1996 1996 1996 1996
----------- ------------ ---------- ---------
1996
Revenues $52,321 $52,399 $42,208 $35,232
Net income (loss) (2,619) (11,469) (1,304) 760
Earnings (loss) per share (0.14) (0.66) (0.09) 0.05
Quarter Ended
----------------------------------------------------------
December 31, September 30, June 30, March 31,
1995 1995 1995 1995
----------- ------------ ---------- ---------
1995
Revenues $30,578 $31,015 $27,449 $18,652
Net income (loss) (1,777) 1,032 567 (1,036)
Earnings (loss) per share (0.16) 0.09 0.05 (0.13)
</TABLE>
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<PAGE>
INFLATION
Historically, the Company's operations have not been materially affected
by inflation. There can be no assurance that the Company's operations will
not be affected by inflation in the future.
RISK FACTORS
ANTICIPATED EFFECTS OF ACQUISITIONS
VCA has acquired Pets' Rx and Pet Practice with the expectation that the
transactions will result in beneficial synergies for the combined business.
These synergies 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 benefits depends in part on the efficient,
effective and timely integration of the operations of Pets' Rx and Pet
Practice with those of the Company. The combination of these businesses
requires, 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 overhead and poor-performing
hospitals. These tasks are substantially complete as of the date of this
report. However, full integration will require additional efforts.
As a result of the integration process, the Company was unable to engage
in adequate marketing activities and, as a result, same-store sales growth of
the animal hospitals of the Company and those acquired through the Pet
Practice and Pets' Rx acquisitions declined. In addition, there existed
significant redundant overhead at the regional and corporate offices of the
companies which resulted in increased operational expenses during the
integration period. Also during this period, the Company closed, combined or
sold approximately 17 animal hospitals which did not meet the Company's
performance criteria. The integration process also required significant
dedication of management resources. During the integration period, the
accounting staff of the Company primarily focused on closing the books of the
Pet Practice and Pets' Rx and recording the acquisition on the books of the
Company. Operations personnel focused on integrating the management staffs
and organizational cultures of the three geographically separated
organizations. The combined staff focused on reducing overhead, integrating
personnel policies and procedures and developing the VCA
identity in marketing materials and hospital signage. Consequently,
during this period, the Company experienced operational inefficiencies
and increased expenses.
Moreover, during the integration period, the Company was in the process
of implementing new management information systems designed to integrate the
financial information of all of the animal hospitals and veterinary
laboratories of the companies in one system. See "Management Information
Systems" below.
While a significant portion of the integration of the companies is
complete, it is anticipated that the integration will continue to require
substantial dedication from management. There can be no assurance that the
problems associated with the integration identified above will not continue
or that the integration on an ongoing basis will proceed smoothly or
successfully. Furthermore, even if the operations of the three companies are
ultimately successfully integrated, it is anticipated that the integration
will continue to be accomplished over time and, in the interim, the
combination may continue to have an adverse effect on the business, results
of operations and financial condition of VCA.
RAPID EXPANSION AND MANAGEMENT OF GROWTH
Due to the number and size of acquisitions completed since January 1,
1995, the Company has experienced rapid growth. In 1995, the Company
completed 32 acquisitions (25 animal hospitals, six veterinary diagnostic
laboratories and the remaining 30 percent interest in Professional Animal
Laboratory). In 1996, the Company completed the acquisition of Pet Practice,
Pets' Rx, 22 animal hospitals and 6 veterinary diagnostic laboratories. As a
result of these acquisitions, the Company's revenues have grown from $42.2
million in 1994 to $92.1 million in 1995, to $182.2 million in 1996 and to
unaudited proforma 1996 revenue of over $228 million. In addition, during
this period, the Company entered two new lines of business, veterinary
diagnostic laboratories and premium pet food.
The Company's growth and pace of acquisitions have placed, and will
continue to place, a substantial strain on its management, operational,
financial and accounting resources. The successful management of this growth
will require the Company to continue to implement and improve its financial
and management information systems and to
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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.
MANAGEMENT INFORMATION SYSTEMS
The growth experienced by the Company, and specifically the acquisitions
of Pet Practice and Pets' Rx, and the corresponding increased need for timely
information, have placed significant demands on the Company's existing
accounting and management information systems. The Company is in the process
of implementing new management information systems to collect and organize
data from all of its operations. Once integrated, the Company anticipates
that the new systems will result in the automation of certain time intensive
manual procedures, daily access, if desired, to information relating to
sales, revenues and other financial and operational data from each animal
hospital and veterinary laboratory and ultimately in the delivery of
financial information to management and preparation of consolidated financial
reports, each on a more timely basis. While the Company has begun the
process of implementing new system, the continued development and
installation of the systems involves the risk of unanticipated delay and
expenses. There can be no assurance that the Company will successfully or
timely implement the new systems or that it will effectively serve the
Company's future information requirements.
DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH
The Company's growth strategy is dependent principally on its ability to
acquire existing animal hospitals. Successful acquisitions involve a number
of factors which are difficult to control, including the identification of
potential acquisition candidates, the willingness of the owners to sell on
reasonable terms and the satisfactory completion of negotiations. In
addition, acquisitions may be subject to pre-merger or post-merger review by
governmental authorities for antitrust and other legal compliance. Adverse
regulatory action could negatively affect the Company's operations through
the assessment of fines or penalties against the Company or the possible
requirement of divestiture of one or more of the Company's operations.
There can be no assurance that the Company will be able to identify and
acquire acceptable acquisition candidates on terms favorable to the Company
in a timely manner in the future. Assuming the availability of capital, the
Company's plans include an aggressive acquisition program involving the
acquisition of at least 15 to 25 facilities per year. The Company continues
to evaluate acquisitions and negotiate with several potential acquisition
candidates. The failure to complete acquisitions and continue expansion
could have a material adverse effect on the Company's financial performance.
As the combined business proceeds with its acquisition strategy, it will
continue to encounter the risks associated with the integration of
acquisitions described above.
LEVERAGE
The Company has incurred substantial indebtedness in connection with the
acquisition of its animal hospitals and veterinary diagnostic laboratories
and through the sale of the $84,385,000 of 5.25% convertible debentures in
April 1996. The Company had at December 31, 1996, consolidated long-term
obligations (including current portion) of $148.8 million. At December 31,
1996 and 1995, the Company's ratio of long-term debt to total stockholders'
equity was 88.9% and 49.1%, respectively.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
A substantial portion of the assets of the Company consists of
intangible assets, including goodwill and covenants not to compete relating
to the acquisition of animal hospitals and veterinary diagnostic
laboratories. At December 31, 1996, the Company's balance sheet reflected
$183.7 million of intangible assets of these types, a substantial portion of
the Company's $354.0 million in total assets at such date. The Company
expects the aggregate amounts of goodwill and other intangible assets on its
balance sheet to increase in the future in connection with additional
acquisitions. This increase will have an adverse impact on earnings as
goodwill and other intangible assets
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will be amortized against earnings. In the event of any sale or liquidation
of the Company, there can be no assurance that the value of these intangible
assets will be realized.
In addition, the Company continually evaluates whether events and
circumstances have occurred that indicate the remaining balance of intangible
assets may not be recoverable. When factors indicate that these intangible
assets should be evaluated for possible impairment, they may be required to
reduce the carrying value of intangible assets, which could have a material
adverse effect on results of operations during the periods in which such
reduction is recognized. In accordance with this policy, the Company
recognized a writedown of goodwill and related assets in the amount of $2.3
million in 1993 in connection with three of the Company's facilities which
were not performing. Further, the Company has recognized a writedown of
goodwill and related assets in the amount of $9.5 million as part of its
restructuring plan adopted during the third and fourth quarters of 1996.
There can be no assurance that the Company will not be required to writedown
assets further in future periods.
GUARANTEED PAYMENTS
In connection with acquisitions in which the purchase price consists, in
part, of the Company's common stock (the "Guarantee Shares"), the Company
often guarantees (the "Guarantee Right") that the value of such stock (the
"Measurement Price") two to three years following the date of the acquisition
(the "Guarantee Period") will equal or exceed the value of the stock on the
date of acquisition (the "Issue Price"). In the event the Measurement Price
does not equal or exceed the Issue Price, the Company typically is obligated
either to (i) pay to the seller in cash, notes payable or additional shares
of the Company's common stock the difference between the Issue Price and the
Measurement Price multiplied by the number of Guarantee Shares then held by
the seller, or (ii) purchase the Guarantee Shares then held by the seller.
Once the Guarantee Shares are delivered and registered for resale under the
Securities Act, which registration the Company covenants to effect generally
within nine months of issuance of the Guarantee Shares, the seller's
Guarantee Right typically terminates if the Company's common stock trades at
110% to 120% of the Issue Price (the "Release Price") for five to 15
consecutive days, depending on the terms of the specific acquisition at
issue. There are 256,672 Guarantee Shares outstanding at March 26, 1997 with
Issue Prices ranging from $11.62 to $24.53, with a weighted average of
$17.30, that have not met their respective Release Prices for the specified
period or have not been delivered due to escrow arrangements. If the value
of the Company's common stock decreases and is less than an Issue Price at
the end of the respective Guarantee Period for these shares, the Company may
be obligated to compensate these sellers.
SEASONALITY AND FLUCTUATING QUARTERLY RESULTS
A large portion of the business of the Company is seasonal, with
operating results varying substantially from quarter to quarter.
Historically, the Company's revenues have been greater in the second and
third quarters than in the first and fourth quarters. The demand for the
Company's veterinary services are significantly higher during warmer months
because pets spend a greater amount of time outdoors, where they are more
likely to be injured and are more susceptible to disease and parasites. In
addition, use of veterinary services may be affected by levels of infestation
of fleas, heartworms and ticks, and the number of daylight hours, as well as
general economic conditions. A substantial portion of the Company's costs
are fixed and do not vary with the level of demand. Consequently, net income
for the second and third quarters at individual animal hospitals generally
has been higher than that experienced in the first and fourth quarters.
DEPENDENCE ON KEY MANAGEMENT
The Company's success will continue to depend to a significant extent on
the Company's executive officers and other key management, particularly its
Chief Executive Officer, Robert L. Antin. 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 2002. 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.
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COMPETITION
The companion animal health care industry is highly competitive and
subject to continual change in the manner in which services are delivered and
providers are selected. The Company believes that the primary competitive
factors in connection with animal hospitals are convenient location,
recommendation of friends, reasonable fees, quality of care and convenient
hours. The Company's primary competitors for its animal hospitals in most
markets are individual practitioners or small, regional multi-clinic
practices. In addition, certain national companies in the pet care industry,
including the operators of super-stores, are developing multi-regional
networks of animal hospitals in markets which include the Company's animal
hospitals. Among veterinary diagnostic laboratories, the Company believes
that quality, price and the time required to report results are the major
competitive factors. There are many clinical laboratory companies which
provide a broad range of laboratory testing services in the same markets
serviced by the Company. In addition, several national companies provide
on-site diagnostic equipment that allows veterinarians to perform their own
laboratory tests.
GOVERNMENT REGULATION
The laws of many states prohibit veterinarians from splitting fees with
non-veterinarians and prohibit business corporations from providing, or
holding themselves out as providers of, veterinary medical care. These laws
vary from state to state and are enforced by the courts and by regulatory
authorities with broad discretion. While the Company seeks to structure its
operations to comply with the corporate practice of veterinary medicine laws
of each state in which it operates, there can be no assurance that, given
varying and uncertain interpretations of such laws, the Company would
be found to be in compliance with restrictions on the corporate practice of
veterinary medicine in all states. A determination that the Company is in
violation of applicable restrictions on the practice of veterinary medicine
in any state in which it operates could have a material adverse effect on the
Company if the Company were unable to restructure its operations to comply
with the requirements of such states.
ANTI-TAKEOVER EFFECT
A number of provisions of the Company's Certificate of Incorporation and
bylaws and certain Delaware laws and regulations relating to matters of
corporate governance, certain rights of directors and the issuance of
preferred stock without stockholder approval, may be deemed to have and may
have the effect of making more difficult, and thereby discouraging, a merger,
tender offer, proxy contest or assumption of control and change of incumbent
management, even when stockholders other than the Company's principal
stockholders consider such a transaction to be in their best interest. In
addition, H.J. Heinz Company has an option to purchase the Company's interest
in the Vet's Choice joint venture upon the occurrence of a change in control
(as defined in the joint venture agreement), which may have the same effect.
Accordingly, stockholders may be deprived of an opportunity to sell their
shares at a substantial premium over the market price of the shares.
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales by existing stockholders could adversely affect the
prevailing market price of the Company's common stock. As of March 26, 1997,
the Company had 19,344,643 shares of common stock outstanding (including
97,773 shares held in treasury), 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 237,199 shares which the Company is
obligated to issue in connection with the Pets' Rx and Pet Practice mergers
and certain acquisitions; 583,333 shares issuable upon conversion of
outstanding preferred stock; 3,688,930 shares of the Company's common stock
issuable upon exercise of outstanding stock options; 41,608 shares issuable
upon conversion of convertible notes; and 2,456,623 shares issuable upon
conversion of convertible debentures. Shares may also be issued under price
guarantees delivered in connection with acquisitions. These shares will be
eligible for immediate sale upon issuance.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's common stock could be subject to
significant fluctuations caused by variations in quarterly operating results,
litigation involving the Company, announcements by the Company or its
competitors, general conditions in the companion animal health care industry
and other factors. The stock market in recent years has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of publicly traded companies.
The broad fluctuations may adversely affect the market price of the Company's
common stock.
PAGE 25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
_________________
PAGE
----
Report of Independent Public Accountants 27
Consolidated Balance Sheets at December 31, 1996 and 1995 28
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 29
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 30
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 31
Notes to Consolidated Financial Statements 33
PAGE 26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Veterinary Centers of America,
Inc.:
We have audited the accompanying consolidated balance sheets of
Veterinary Centers of America, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Veterinary
Centers of America, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 14, 1997
PAGE 27
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At December 31, 1996 and 1995
A S S E T S
1996 1995
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 23,820,000 $ 5,396,000
Marketable securities 79,107,000 42,155,000
Trade accounts receivable, less allowance for uncollectible
accounts of $4,212,000 and $1,671,000 at December 31, 1996
and 1995, respectively 9,583,000 6,508,000
Inventory, prepaid expenses and other 8,788,000 4,084,000
Deferred income taxes 2,331,000 1,175,000
Prepaid income taxes 2,137,000 494,000
--------------- ---------------
Total current assets 125,766,000 59,812,000
PROPERTY, PLANT AND EQUIPMENT, NET. 37,467,000 18,169,000
DEFERRED INCOME TAXES 1,352,000 --
OTHER ASSETS:
Goodwill, net 178,806,000 66,943,000
Covenants not to compete, net 4,933,000 5,210,000
Building purchase options 887,000 1,087,000
Notes receivable 1,486,000 978,000
Deferred costs and other 3,312,000 1,217,000
--------------- ---------------
$ 354,009,000 $ 153,416,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 14,055,000 $ 7,496,000
Accounts payable 6,923,000 5,930,000
Accrued payroll and related liabilities 7,177,000 2,972,000
Accrued restructuring costs 8,847,000 849,000
Accrued interest 1,256,000 288,000
Other accrued liabilities 8,857,000 2,729,000
--------------- ---------------
Total current liabilities 47,115,000 20,264,000
LONG-TERM OBLIGATIONS, less current portion 134,767,000 36,778,000
DEFERRED INCOME TAXES -- 1,301,000
MINORITY INTEREST 4,777,000 4,856,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value; authorized -- 1,000,000 shares:
Issued and outstanding -- 583,333 at December 31, 1996 and 1995 1,000 1,000
Common stock; $.001 par value; authorized -- 60,000,000 shares:
Issued and outstanding including shares in treasury --
19,268,648 and 12,845,831 at December 31, 1996 and
1995, respectively 20,000 13,000
Additional paid-in capital 192,167,000 99,685,000
Accumulated deficit (24,114,000) (9,482,000)
Less cost of common stock held in treasury, 97,773 shares at
December 31, 1996 (724,000) --
--------------- ---------------
Total stockholders' equity 167,350,000 90,217,000
--------------- ---------------
$ 354,009,000 $ 153,416,000
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
PAGE 28
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $ 182,160,000 $ 107,694,000 $ 51,871,000
Direct costs 139,586,000 80,099,000 40,759,000
--------------- --------------- ---------------
Gross profit 42,574,000 27,595,000 11,112,000
Selling, general and
administrative 19,735,000 13,684,000 8,779,000
Depreciation and
amortization 7,496,000 4,144,000 2,065,000
Merger costs 2,901,000 -- --
Restructuring charges 5,701,000 1,086,000 --
Writedown of assets 9,512,000 2,148,000 --
--------------- --------------- ---------------
Operating (loss)
income (2,771,000) 6,533,000 268,000
Interest income 4,487,000 828,000 404,000
Interest expense 7,812,000 3,377,000 2,388,000
--------------- --------------- ---------------
(Loss) income before
minority interest
and provision for
income taxes (6,096,000) 3,984,000 (1,716,000)
Minority interest in
income (loss) of
subsidiaries 6,577,000 2,960,000 (540,000)
--------------- --------------- ---------------
(Loss) income before
provision for
income taxes (12,673,000) 1,024,000 (1,176,000)
Provision for
income taxes 1,959,000 2,238,000 731,000
--------------- --------------- ---------------
Net loss $ (14,632,000) $ (1,214,000) $ (1,907,000)
=============== =============== ===============
Net loss per common
share $ (0.92) $ (0.13) $ (0.31)
=============== ============== ===============
Average common shares
used for computing
loss per share 15,941,000 9,224,000 6,202,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE 29
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
Additional
Common Stock Preferred Stock Treasury Stock Paid-In
Accumulated
Shares Amount Shares Amount Shares Amount Capital (Deficit)
-------- ------- ------- ------- ------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 5,483,806 $ 5,000 583,333 $ 1,000 -- $ -- $ 26,238,000 $(6,137,000)
Sale of common stock 125,808 -- -- -- -- -- 3,245,000 --
Sale of warrants -- -- -- -- -- -- 13,000 --
Exercise of warrants 55,580 -- -- -- -- -- 55,000 --
Stock dividend 8,256 -- -- -- -- -- 224,000 (224,000)
Stock issued for payment
of interest 30,841 -- -- -- -- -- 223,000 --
Issued under stock option plans 32,765 -- -- -- -- -- 198,000 --
Business acquisitions 237,483 -- -- -- -- -- 1,732,000 --
Conversion of convertible debt 210,373 1,000 -- -- -- -- 1,232,000 --
Settlement of guaranteed
purchase price contingently
payable in cash or common
stock 63,214 -- -- -- -- -- 470,000 --
Net loss -- -- -- -- -- -- -- (1,907,000)
---------- -------- -------- -------- ------- -------- ------------- -----------
BALANCES, December 31, 1994 6,248,126 6,000 583,333 1,000 -- -- 33,630,000 (8,268,000)
Sale of common stock 4,129,616 4,000 -- -- -- -- 44,058,000 --
Sale of redeemable warrants 4,607 -- -- -- -- -- 58,000 --
Exercise of redeemable warrants 1,271,508 2,000 -- -- -- -- 8,894,000 --
Exercise of warrants issued
in connection with the Vet
Research joint venture 50,000 -- -- -- -- -- 550,000 --
Issued under stock plans 29,367 -- -- -- -- -- 209,000 --
Business acquisitions 1,075,288 1,000 -- -- -- -- 11,979,000 --
Conversion of convertible debt 37,319 -- -- -- -- -- 254,000 --
Settlement of guaranteed
purchase price contingently
payable in cash or common stock -- -- -- -- -- -- 53,000 --
Net loss -- -- -- -- -- -- -- (1,214,000)
---------- -------- -------- -------- ------- ------- ------------- -----------
BALANCES, December 31, 1995 12,845,831 13,000 583,333 1,000 -- -- 99,685,000 (9,482,000)
Sale of common stock 7,514 -- -- -- -- -- 207,000 --
Exercise of redeemable warrants 1,962,452 2,000 -- -- -- -- 13,798,000 --
Exercise of warrants issued in
connection with the Vet
Research joint venture 194,000 -- -- -- -- -- 2,134,000 --
Issued under stock option plans 79,090 -- -- -- -- -- 337,000 --
Business acquisitions 4,120,100 5,000 -- -- -- -- 74,814,000 --
Conversion of convertible debt 5,742 -- -- -- -- -- 54,000 --
Settlement of guaranteed purchase
price contingently payable in
cash or common stock 9,169 -- -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- (97,773) (724,000) -- --
Issuance of stock in settlement
of employment obligations 44,750 -- -- -- -- -- 1,138,000 --
Net loss -- -- -- -- -- -- -- (14,632,000)
---------- -------- -------- -------- ------- ------- ------------- -------------
BALANCES, December 31, 1996 19,268,648 $ 20,000 583,333 $ 1,000 (97,773)$(724,000) $192,167,000 $(24,114,000)
========== ======== ======= ======= ======== ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE 30
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,632,000) $ (1,214,000) $(1,907,000)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 7,496,000 4,144,000 2,065,000
Gain on sale of land and building -- (19,000) --
Amortization of debt discount 290,000 454,000 15,000
Utilization of acquired NOL carryforwards -- 69,000 --
Restructuring costs and asset writedowns 15,213,000 3,234,000 --
Minority interest in income (loss)
of subsidiary 6,577,000 2,960,000 (540,000)
Distributions to minority interest partners (7,292,000) (4,058,000) (904,000)
Issuance of common stock in settlement of
employment obligations 1,138,000 -- --
Increase in accounts receivable, net (729,000) (2,140,000) (124,000)
Increase in inventory and other (2,111,000) (1,875,000) (203,000)
Increase in prepaid income taxes (1,643,000) (322,000) (509,000)
Increase in other assets, net (231,000) (208,000) (122,000)
Decrease (increase) in deferred income
tax asset 1,249,000 (737,000) 408,000
Increase in accounts payable and
accrued liabilities (2,421,000) 3,112,000 2,829,000
(Decrease) increase in deferred income
tax liability (1,301,000) 437,000 73,000
----------- ----------- -----------
Net cash provided by operating activities 1,603,000 3,837,000 1,081,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (27,496,000) (9,147,000) (6,810,000)
Property, plant and equipment additions, net (6,962,000) (2,983,000) (1,166,000)
Investments in marketable securities (36,952,000) (42,155,000) --
Proceeds from the sale of assets 209,000 600,000 --
Payments for building purchase options -- (250,000) (60,000)
----------- ----------- -----------
Net cash used in investing activities (71,201,000) (53,935,000) (8,036,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible
subordinated debentures 82,034,000 -- --
(Repayment of) proceeds from line of
credit and addition of long-term
obligations -- (1,100,000) 1,394,000
Reduction of long-term obligations
and notes payable (11,135,000) (6,241,000) (3,097,000)
Payments received (advances made)
on notes receivable 379,000 272,000 (43,000)
Payments on guaranteed purchase price
contingently payable in cash or
common stock -- (19,000) --
Net proceeds from sale of common stock 207,000 44,062,000 3,245,000
Net proceeds from exercise of redeemable
warrants 13,800,000 8,896,000 55,000
Proceeds from exercise of warrants issued
in connection with Vet Research
joint venture 2,134,000 550,000 --
Proceeds from sale of warrants -- 58,000 13,000
Proceeds from issuance of common stock
under stock option plans 337,000 209,000 198,000
Capital contribution of minority
interest partners 990,000 1,000,000 30,000
Purchase of treasury stock (724,000) -- --
----------- ----------- -----------
Net cash provided by
financing activities 88,022,000 47,687,000 1,795,000
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 18,424,000 (2,411,000) (5,160,000)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 5,396,000 7,807,000 12,967,000
----------- ----------- -----------
CASH AND EQUIVALENTS AT END OF YEAR $ 23,820,000 $ 5,396,000 $ 7,807,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE 31
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
(Continued)
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 6,828,000 $ 2,878,000 $ 2,277,000
Income taxes paid 3,774,000 2,688,000 759,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
In connection with acquisitions, assets acquired
and liabilities assumed were as follows:
Fair value of assets acquired $ 146,756,000 $ 43,223,000 $ 19,584,000
Less: Consideration given
Cash paid (25,345,000) (9,147,000) (6,810,000)
Cash paid in settlement of assumed
liabilities (2,151,000) -- --
Common stock issued (74,819,000) (11,980,000) (1,732,000)
--------------- --------------- ---------------
Liabilities assumed including notes
payable issued $ 44,441,000 $ 22,096,000 $ 11,042,000
=============== =============== ===============
In connection with the formation of the
joint venture and partnerships, assets
and liabilities contributed by the
partners were as follows:
Assets $ 295,000 $ 3,467,000 $ 330,000
Liabilities -- 1,063,000 --
--------------- --------------- ---------------
Non-cash capital contribution of minority
interest partners $ 295,000 $ 2,404,000 $ 330,000
=============== =============== ===============
Issuance of common stock in exchange
for convertible debt $ 54,000 $ 254,000 $ 1,232,000
=============== =============== ===============
Settlement of guaranteed purchase price
through issuance of common stock $ -- $ 53,000 $ 482,000
=============== =============== ===============
Non-cash increase in long-term
obligations due to purchase of
equipment and building $ 510,000 $ 262,000 $ 164,000
=============== =============== ===============
Conversion of accounts payable
to notes payable $ -- $ 381,000 $ --
=============== =============== ===============
Payment of accrued interest on
notes by issuance of common stock $ -- $ -- $ 223,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE 32
<PAGE>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
Veterinary Centers of America, Inc. ("VCA" or the "Company"), a Delaware
corporation, was founded in 1986 and is a leading companion animal health
care company. The Company operates one of the largest networks of free-
standing, full service animal hospitals in the country and one of the largest
networks of veterinary-exclusive diagnostic laboratories in the nation. The
Company also markets both a life-stage and a therapeutic line of premium pet
foods through Vet's Choice, a joint venture with Heinz Pet Products ("HPP"),
an affiliate of H.J. Heinz Company.
In 1993, the Company began to expand the scope of its operations in order to
realize its goals of integrating the markets for veterinary care, veterinary
diagnostic laboratories and premium pet food. The integration of these three
markets is the foundation of the Company's business strategy to leverage its
access to its primary customers, veterinarians and pet owners. From January
1, 1993 through December 31, 1995, the Company acquired and integrated into
its operations 36 animal hospitals. Also in 1993, the Company entered into a
joint venture called Vet's Choice, with HPP to develop, manufacture and
market a full-line of premium pet food. In March 1994, the Company expanded
its veterinary diagnostic laboratory operations by acquiring a 70 percent
interest in Professional Animal Laboratory ("PAL"). In January 1995, the
Company acquired an additional veterinary diagnostic laboratory, Cenvet, Inc.
("Cenvet"), which it then contributed in March 1995 to Vet Research
Laboratories, LLC ("Vet Research"), a joint venture in exchange for a 51
percent interest therein. Vet Research is a combination of the operations of
Cenvet and that of a full-service veterinary laboratory known as Vet
Research, Inc. In 1995, the Company further expanded its veterinary
diagnostic laboratory operations by acquiring four smaller, regional
veterinary diagnostic laboratories and by purchasing the remaining 30 percent
interest in PAL.
In 1996, the Company continued its expansion of its animal hospital
operations with the mergers with Pets' Rx, Inc. ("Pets' Rx") in June 1996 (16
hospitals) and The Pet Practice, Inc. ("Pet Practice") in July 1996 (84
hospitals) as well as the acquisition of an additional 22 animal hospitals in
separate transactions throughout the year. The Company's laboratory
operations were expanded with the acquisition of Southwest Veterinary
Diagnostics Laboratory, Inc. ("Southwest") in March 1996, and five other
laboratories throughout the year.
At December 31, 1996, the Company owned or operated 161 animal hospitals, 20
of which were located in Northern California, 18 in each of Southern
California, Florida and Illinois, 15 in Michigan, 10 in Indiana, nine in
Pennsylvania, seven in each of Massachusetts, Maryland and Ohio, six in
Nevada, five in Texas, three in each of Delaware, Virginia, New Mexico and
Alaska, two in each of Colorado and Utah, and one in each of Arizona,
Georgia, Hawaii, West Virginia and New Jersey. The Company's animal
hospitals provide primary care, diagnostic, surgical and boarding services
for animals. The Company's network of veterinary diagnostic laboratories
consists of four full-service laboratories and eight "STAT" (quick response)
laboratories located throughout the country.
On June 19, 1996, the Company acquired all of the outstanding shares of Pets'
Rx in exchange for 801,054 shares of VCA common stock. Pets' Rx owned 16
veterinary hospitals. The business combination was treated for accounting
purposes as a pooling of interests, and accordingly, the accompanying
financial statements reflect the combined results of the pooled businesses
for the respective periods presented. Previously reported financial
information for VCA and Pets' Rx for each of the three years in the period
ended December 31, 1996, is shown in the table below.
PAGE 33
<PAGE>
The following table summarizes the revenues and net loss for each of the
companies combined:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1995 1994
------------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Pre-merger
VCA $64,763,000 $92,072,000 $42,233,000
Pets' Rx 7,849,000 15,622,000 9,638,000
------------- ------------ ------------
72,612,000 107,694,000 51,871,000
Post-merger 109,548,000 -- --
------------- ------------ ------------
$182,160,000 $107,694,000 $51,871,000
============= ============ ============
Net (loss) income:
Pre-merger
VCA $ 1,647,000 $ 2,564,000 $ 589,000
Pets' Rx (658,000) (1,977,000) (2,805,000)
Merger adjustments 212,000 (1,801,000) 309,000
------------- ------------ ------------
1,201,000 (1,214,000) (1,907,000)
Post-merger (15,833,000) -- --
------------- ------------ ------------
$(14,632,000) $(1,214,000) $(1,907,000)
============= ============ ============
</TABLE>
VCA's 1996 pre-merger net income includes merger expenses of $2,901,000;
these expenses consist principally of legal, accounting, investment advisor,
termination of employment agreements and severance costs. The merger
adjustments were recorded to conform certain accounting methods of Pets' Rx
to those of VCA. These adjustments reduced intangible asset amortization
expense by $212,000, $347,000 and $309,000 in 1996, 1995 and 1994,
respectively, and wrote-off intangible assets of $2,148,000 in 1995
associated with certain animal hospitals whose projected future operating
results would not result in the recovery of such intangible assets under VCA's
accounting method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
In addition to veterinary hospitals which the Company owns, it also manages
the operations of certain other animal hospitals. The Company has direct or
indirect unilateral and perpetual control over the assets and operations of
the professional corporations for all periods presented, other than by means
of owning the majority of the voting stock of the professional corporation.
Each professional corporation has entered into a management agreement with
the Company pursuant to which the Company manages all aspects of its
operations other than the practice of veterinary medicine, which is the sole
domain of the licensed professional. Additionally, the Company or one of its
subsidiaries and each shareholder/director has entered into a shareholder's
agreement pursuant to which the Company has the option to purchase, or to
designate a purchaser for, the stock of the professional corporation for a
nominal amount. Consequently, these professional corporations are
consolidated with the other controlled operations of the Company. The
Company believes that consolidation of the financial statements of these
professional corporations is necessary to present fairly the financial
position and results of operations of the Company. All significant inter-
entity transactions have been eliminated in consolidation.
b. CASH AND EQUIVALENTS
For purposes of the balance sheets and statements of cash flows, the Company
considers only highly liquid investments to be cash equivalents. Of its cash
on hand at December 31, 1996 and 1995, $2,023,000 and $1,907,000,
respectively, was restricted for use in the conduct of the Vet's Choice joint
venture.
c. MARKETABLE SECURITIES
All marketable securities are classified as held for sale and are available
to support current operations and acquisitions. The Company currently
invests in only high quality, short-term investments. There were no
significant differences between amortized cost and estimated fair value at
December 31, 1996 and 1995. Additionally, because investments are short-term
and are generally allowed to mature, realized gains and losses for both years
have been minimal.
PAGE 34
<PAGE>
d. INVENTORY
Inventory is valued at the lower of cost or market using the first-in, first-
out method.
e. NOTES RECEIVABLE
Notes receivable are not market traded financial instruments. The amounts
recorded approximate fair value. The notes bear interest at rates varying
from 8% to 9% per annum.
f. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Land, buildings and
equipment held under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair value of the equipment at
the beginning of the lease term.
Depreciation and amortization are provided for on the straight-line method
over the following estimated useful lives:
Buildings and improvements 5 to 30 years
Leasehold improvements 10 to 15 years
Furniture and equipment 5 to 7 years
Property held under capital leases 5 to 30 years
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land $6,635,000 $2,795,000
Land held under capital leases 362,000 --
Building and improvements 13,774,000 6,709,000
Buildings held under capital leases 835,000 --
Leasehold improvements 3,915,000 2,410,000
Furniture and equipment 17,468,000 8,942,000
Equipment held under capital leases 1,552,000 1,334,000
------------ ------------
44,541,000 22,190,000
Less -- Accumulated depreciation (7,074,000) (4,021,000)
------------ ------------
$37,467,000 $18,169,000
============ ============
</TABLE>
Accumulated depreciation on buildings and equipment held under capital
leases amounted to $527,000 and $303,000 at December 31, 1996 and 1995,
respectively.
g. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill relating to acquisitions represents the purchase price paid and
liabilities incurred in excess of the fair market value of net assets
acquired. Goodwill is amortized over the expected period to be benefited,
not exceeding 40 years, on a straight-line basis.
Subsequent to its acquisitions, the Company continually evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should
be evaluated for possible impairment, the Company uses an estimate of the
related facility's undiscounted net income over the remaining life of the
goodwill in measuring whether the goodwill is recoverable (Note 14).
Other intangible assets principally include covenants not to compete. The
value assigned to the covenants not to compete is amortized on a straight-
line basis over the term of the agreements (principally 5 to 10 years).
Accumulated amortization of goodwill and covenants not to compete at December
31, 1996 is $14,424,000 and $3,871,000, respectively. Accumulated
amortization of goodwill and covenants not to compete at December 31, 1995 is
$3,563,000 and $2,986,000, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The
PAGE 35
<PAGE>
Statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this Statement in the first
quarter of 1996 did not impact the Company's financial position or its
results of operations.
h. USE OF ESTIMATES IN 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 those estimates.
i. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company adopted SFAS 123 in 1996 by making
the required note disclosures only. Therefore, the adoption of SFAS 123 did
not have an effect on the Company's financial positions or results of
operations.
j. RECLASSIFICATIONS
Certain 1995 balances have been reclassified to conform with the 1996
financial statement presentation.
3. ACQUISITIONS AND DISPOSITIONS
On July 19, 1996, the Company completed the acquisition of Pet Practice for a
total consideration (including acquisition costs) of $97,930,000 consisting
of 3,516,268 shares of VCA common stock, with a value at the date of
acquisition of $65,930,000, and the assumption of liabilities totaling
$32,000,000. In addition, outstanding employee stock options were converted
into options to purchase an additional 41,280 shares of VCA common stock. On
the acquisition date, Pet Practice was the operator of 84 veterinary clinics
located in 11 states. The acquisition of Pet Practice was accounted for as a
purchase.
On June 19, 1996, the Company completed the merger with Pets' Rx for 801,054
shares of VCA common stock. In addition, outstanding Pets' Rx warrants,
options and convertible securities were converted into the right to purchase
an additional 111,607 shares of VCA common stock. Pets' Rx owned 16
veterinary hospitals in the San Jose and Sacramento, California and the Las
Vegas, Nevada markets. The Pets' Rx acquisition was accounted for as a
pooling of interests.
During 1996, the Company purchased 22 animal hospitals for an aggregate
consideration (including acquisition costs) of $28,261,000 consisting of
$9,691,000 in cash, $9,296,000 in debt, 518,056 shares of VCA common stock,
with a value of $7,389,000, and the assumption of liabilities totaling
$1,885,000.
Also during 1996, the Company purchased six veterinary diagnostic
laboratories for an aggregate consideration of $20,565,000, including
acquisition costs, consisting of $15,654,000 in cash, $2,510,000 in long-term
obligations, 85,776 shares of VCA common stock, with a value of $1,500,000
and the assumption of liabilities totaling $901,000.
Through December 31, 1996, the Company has sold, closed or merged 11 of the
Pet Practice hospitals with annual revenues of approximately $4.0 million.
Net proceeds from the sale of the hospitals amounted to $134,000. The
Company is continuing to evaluate the financial performance of the remaining
Pet Practice animal hospitals and may close or sell additional facilities as
the evaluation is completed. The Company will complete this evaluation
process by the end of the second quarter of 1997 and will record any reserves
required for these possible closures as a component of the final purchase
price allocation.
Also, during 1996, the Company sold two hospitals for a total consideration
of $75,000 in cash which approximated the net book value of the hospitals.
During 1995, the Company purchased 26 animal hospitals for an aggregate
consideration (including acquisition costs) of $29,237,000, consisting of
$6,476,000 in cash, $10,899,000 in debt, 836,576 shares of common stock of
the
PAGE 36
<PAGE>
Company with a value of $9,780,000, and the assumption of liabilities
totaling $2,082,000. In addition, the Company paid $250,000 to acquire an
option to purchase the land and building of two of the hospitals.
During 1995, a limited liability company (LLC) was formed by combining a
veterinary clinic owned by Pets' Rx 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.
Also during 1995, the Company purchased substantially all of the assets of
Cenvet, a full-service veterinary diagnostic laboratory, four other
veterinary diagnostic laboratories and the remaining 30 percent interest in
PAL, for an aggregate consideration of $13,986,000, including acquisition
costs, consisting of $2,671,000 in cash, $8,633,000 in long-term obligations,
238,712 shares of VCA common stock with a value of $2,200,000 and the
assumption of liabilities totaling $482,000.
On March 20,1995, the Company and Vet Research, Inc., ("VRI"), formed Vet
Research. In connection with the formation of Vet Research, VRI contributed
all of the assets and certain of the liabilities of VRI's full-service
veterinary diagnostic laboratory located in Farmingdale, New York. The
Company contributed substantially all of the assets and certain of the
liabilities of Cenvet for a 51 percent controlling interest in the joint
venture (Note 4).
In connection with the formation of Vet Research, the Company issued warrants
to purchase 363,636 shares of the common stock of the Company at $11.00 per
share. The warrants were purchased at $0.001 per warrant and were
exercisable until January 1997.
In 1994, the Company purchased 10 veterinary hospitals for a total
consideration (including acquisition costs) of $9,785,000 consisting of
$2,191,000 in cash, $3,663,000 in non-recourse promissory notes payable and
$2,529,000 in secured notes payable, 91,996 shares of VCA common stock with a
value of $680,000, and 2,154 shares of Pets' Rx common stock with a value of
$15,000, and the assumption of liabilities totaling $382,000. In addition,
the Company paid $60,000 to acquire an option to purchase the land and
building of one of the hospitals.
In 1994, the Company acquired substantially all of the assets and assumed
certain of the liabilities of PAL, a full-service veterinary laboratory
located in Irvine, California. In connection with the purchase, the Company
also acquired from a principal shareholder of PAL the real property and
building occupied by the business of PAL. The business is operated by a
partnership to which the Company contributed the veterinary laboratory that
it previously owned. The net consideration (including acquisition costs)
paid by the Company in connection with these transactions, totaling
$9,799,000, consisted of $4,619,000 in cash, $3,446,000 in notes payable,
143,333 shares of VCA common stock with a value of $1,037,000, and the
assumption of liabilities totaling $697,000.
All acquisitions described above (the "Acquired Companies"), with the
exception of the merger with Pets' Rx, have been accounted for using the
purchase method of accounting. The operations of the Acquired Companies
are included in the accompanying consolidated financial statements from
the dates of acquisition.
The pro forma results listed below are unaudited and reflect purchase price
accounting adjustments assuming 1995 and 1996 acquisitions occurred at
January 1, 1995. 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 operation.
<TABLE>
<CAPTION>
(Unaudited)
----------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Revenue $228,048,000 $227,181,000
Net loss $(14,679,000) $(2,993,000)
Primary loss per share $(0.75) $(0.20)
Weighted average shares used
for computing loss per share 19,700,000 15,299,000
</TABLE>
PAGE 37
<PAGE>
4. JOINT VENTURES
In January 1993, the Company entered into a joint venture with HPP, Vet's
Choice, to develop, manufacture and market new pet products and services.
The Company obtained a 50.5 percent controlling interest in the joint venture
for a capital contribution of $3,030,000 in cash and was the managing general
partner. HPP contributed $2,970,000 in cash for a 49.5 percent minority
interest in the joint venture. As provided by the joint venture agreement,
the Company and HPP each contributed approximately $1 million to the joint
venture in each of 1996 and 1995. Subsequent to year end, the joint venture
was restructured (Note 16).
Through December 31, 1996, the Company operated Vet Research in a joint
venture with VRI. Vet Research's operating results have been accounted for
as part of the consolidated operations of the Company. Distributions of
distributable cash, as defined, were made pursuant to a formula contained in
the operating agreement between the Company and VRI. Pursuant to that
formula, during each contract year, the first $1.5 million of distributable
cash was distributed to VRI; the next $3 million of distributable cash was
distributed to the Company; and the remaining distributable cash was
distributed 25 percent to the Company and 75 percent to VRI. The Company has
recorded minority interest expense related to the joint venture of $6,809,000
and $3,646,000 in 1996 and 1995, respectively, representing 57.3 percent and
52.4 percent, respectively, of Vet Research's income.
The Company has an option pursuant to an agreement with VRI to acquire VRI's
entire interest in Vet Research for a purchase price as computed in
accordance with the operating agreement (Note 16).
PAGE 38
<PAGE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C> <C>
MORTGAGE DEBT Notes payable and other obligations, various maturities
through 2006, secured by land and buildings of certain
subsidiaries, various interest rates ranging from 7.3 percent
to 10.5 percent with a weighted average of 8.9 percent
at December 31, 1996 $2,381,000 $1,314,000
SECURED DEBT Notes payable and other obligations, various maturities
through 2007, secured by assets and stock of certain
subsidiaries, various interest rates ranging from 4.0
percent to 12.5 percent with a weighted average of 7.1
percent at December 31, 1996 53,813,000 37,694,000
CONVERTIBLE DEBT Notes payable, convertible into VCA common stock at
prices ranging from $7.00 to $15.00 per share, due
through 2003, secured by stock of certain subsidiaries
at a range of interest from 5.0 percent to 12.0 percent
with a weighted average of 8.2 percent at December
31, 1996 1,659,000 2,427,000
UNSECURED DEBT Notes payable, various maturities through 2015,
adjustable interest rates from 6.3 percent to 7.0 percent
adjusted annually, and fixed interest rates ranging from
5.0 percent to 7.8 percent with a weighted average of
6.4 percent at December 31, 1996. 4,847,000 2,159,000
DEBENTURES Convertible subordinated 5.25 percent debentures, due in
2006, convertible into VCA common stock at $34.35 per
share 84,385,000 --
------------ ------------
Total debt obligations 147,085,000 43,594,000
Capital lease obligations 1,901,000 931,000
Less--unamortized discount (164,000) (251,000)
------------ ------------
148,822,000 44,274,000
Less--current portion (14,055,000) (7,496,000)
------------- ------------
$134,767,000 $36,778,000
============= ============
</TABLE>
The annual aggregate scheduled maturities of debt obligations for the five
years subsequent to December 31, 1996 are presented below:
<TABLE>
<S> <C>
1997 $ 14,055,000
1998 11,691,000
1999 8,752,000
2000 9,114,000
2001 5,448,000
Thereafter 99,762,000
------------
$148,822,000
============
</TABLE>
The convertible subordinated debentures may be redeemed at the option
of the Company in whole or in part at any time after May 15, 1999 at
103%, after May 15, 2000 at 102%, after May 15, 2001 at 101%, and after
May 15, 2002 at 100%.
Certain acquisition debt of the Company included above and amounting to
$56,194,000 and $39,008,000 at December 31, 1996 and 1995, respectively, is
non-recourse debt secured solely by the assets or the stock of the veterinary
hospital acquired under security arrangements whereby the creditor's sole
remedy in the event of default is the contractual right to take possession of
the entire veterinary hospital regardless of the outstanding indebtedness at
the time of default.
The following disclosure of the estimated fair value of the Company's debt is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107 "Disclosures about Fair Value of Financial
PAGE 39
<PAGE>
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, the estimates provided therein are not necessarily indicative
of the amounts that could be realized in a current market exchange.
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Fixed-rate long-term debt $132,025,000 $102,475,000
Variable-rate long-term debt 2,742,000 2,742,000
</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, 1996 for similar securities
with similar remaining maturities. The carrying value of variable-rate long-
term debt is a reasonable estimate of its fair value.
6. PREFERRED STOCK
On December 22, 1992, the Company completed the sale of 583,333 shares of
convertible preferred stock for net proceeds of $2,985,000. The shares are
convertible into 583,333 shares of the Company's common stock commencing
December 22, 1997. The preferred stock participates in any dividend payments
on the Company's common stock on an "as if" converted basis. The
preferred stock has a liquidation preference of $5.14 per share and it is
callable by the Company any time after March 22, 1998 at a price of $5.14 per
share. The preferred stock has no voting rights.
Under the Company's certificate of incorporation, the Company is authorized
to issue additional series of preferred stock. The rights, preferences and
privileges of the preferred stock are to be determined by the board of
directors and do not require stockholder approval.
7. COMMON STOCK
On July 19, 1996, the stockholders of the Company approved an amendment to
its Certificate of Incorporation to increase the number of authorized shares
of VCA Common Stock from 30,000,000 to 60,000,000.
On July 19, 1996, the stockholders of the Company approved the adoption of
the Veterinary Centers of America, Inc. 1996 Employee Stock Purchase Plan and
authorized the reservation of up to 250,000 shares of VCA Common Stock for
issuance under the Plan. No shares have been issued under the Plan.
On November 13, 1996, the Company's Board of Directors authorized the Company
to repurchase its common stock on the open market. As of December 31, 1996,
the Company has acquired 97,773 shares for a total consideration of $724,000.
During 1996, the Company issued 3,516,268 shares of VCA common stock, with a
value of $65,930,000, as a portion of the consideration for the Pet Practice
acquisition and 603,832 shares of VCA common stock, with a value of
$8,889,000 as a portion of the consideration for 22 animal hospitals and six
veterinary diagnostic laboratories acquired in separate transactions. Also,
in 1996, the Company issued 801,054 shares of its stock in the merger with
Pets' Rx. Of this amount, 438,341 shares of common stock
had not been issued as of December 31, 1996. Such shares are
reflected as though they are outstanding in the accompanying consolidated
financial statements.
In January 1995, Star-Kist Foods, Inc. through its division, HPP, purchased
1,159,420 shares of the Company's common stock at $8.625 per share, resulting
in net proceeds to the Company of $9,980,000.
In November 1995, the Company completed a secondary public offering of
2,965,026 shares of common stock for net proceeds of $33,932,000.
During 1995, the Company issued 1,075,226 shares of its common stock valued
at $11,980,000, the fair market value at the date of commitment, as a portion
of the consideration for 15 animal hospitals and three veterinary diagnostic
laboratories. Of this amount, 156,303 shares of common stock valued at
$1,970,000 had not been issued as of
PAGE 40
<PAGE>
December 31, 1995. Such shares are reflected as though they are outstanding
in the accompanying consolidated financial statements.
In conjunction with the acquisition of two hospitals and PAL in 1994, the
Company issued 235,329 shares of common stock with a market value at the date
of issuance of $1,717,000. Also in 1994, the Company issued 63,214 shares of
common stock in settlement of a guaranteed purchase price contingently
payable in cash or common stock (Note 9).
On October 6, 1991, the Company completed a public offering of 2,400,000
shares of common stock and 3,240,000 redeemable warrants for $12,598,000.
Each redeemable warrant entitled the holder to purchase one share of common
stock for $7.20 commencing April 10, 1992 until October 10, 1996, and was
redeemable at the option of the Company at any time after April 10, 1992 on
30 days prior written notice, provided that the market price of the common
stock equals or exceeds $9.00 per share for 20 consecutive trading days
ending within 10 days prior to notice of redemption. Such market price
exceeded $9.00 per share for 20 consecutive days on March 10,1995. During
1996 and 1995, redeemable warrants were exercised for 1,962,452 and 1,271,508
shares of common stock, respectively. Cash proceeds from the exercise of
redeemable warrants in 1996 and 1995 amounted to $13,800,000 and $8,896,000,
respectively.
8. STOCK BASED COMPENSATION PLANS
The Company has granted stock options to various employees and directors.
The Company accounts for these plans under APB Opinion No. 15, under which no
compensation cost has been recognized.
In November 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." The statement recommends changes in accounting for employee
stock-based compensation plans, and requires certain disclosures with respect
to these plans. The Statement's disclosures have been adopted by the Company
effective January 1, 1996.
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the following PRO FORMA amounts:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net (loss) income
As reported $(14,632,000) $(1,214,000)
Pro forma (17,510,000) (1,997,000)
Primary EPS
As reported $(0.92) $(0.13)
Pro forma (1.09) (0.21)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to December 31, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk free interest rates of
6.4 percent and 6.3 percent, respectively; expected volatility of 55.1
percent and 54.7 percent respectively; weighted average fair value of options
of $10,756 and $7,432, respectively; expected lives of seven years for both
years and no expected dividend yield for either year.
Under the provisions of the Company's non-qualified and incentive stock
option plans for officers and key employees, 750,000 shares of common stock
were reserved for issuance at December 31, 1992. On May 5, 1995, the
stockholders of the Company approved the adoption of the Veterinary Centers
of America, Inc. 1995 Stock Incentive Plan, and authorized the reservation of
750,000 shares of common stock for issuance under the Plan. On July 19,
1996, the stockholders of the Company approved the adoption of the Veterinary
Centers of America, Inc. 1996 Stock Incentive Plan, and authorized the
reservation of 1,500,000 shares of common stock for issuance under the Plan.
The options become exercisable over a two to five year period, commencing at
the date of grant or one year from the date of grant depending on the option.
All options expire 10 years from the date of grant. The prices of all
options granted were greater than or equal to the fair market value at the
date of the grant.
PAGE 41
<PAGE>
The table below summarizes the transactions in the Company's stock option
plans during 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at
beginning of year 1,579,903 754,171 635,627
Granted 254,780 859,965 144,993
Exercised (69,498) (21,033) (9,499)
Canceled (54,391) (13,200) (16,950)
---------- --------- ---------
Options outstanding at
end of year
($.75 to $36.79 per share) 1,710,794 1,579,903 754,171
========== ========== =========
Exercisable at end of year 847,478 664,642 433,168
========== ========== =========
</TABLE>
The following table summarizes information about certain options in the stock
option plans outstanding as of December 31, 1996 in accordance with SFAS 123:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ --------------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ---------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Less than $15.00 866,874 8.61 years $11.770 427,276 $11.616
$15.00 to $26.00 206,354 9.62 years 17.340 163 25.754
$26.00 and up 13,963 6.53 years 28.425 7,616 27.571
--------- -------
1,087,191 435,055
========= =======
</TABLE>
In addition to the options granted under VCA's stock option plans, the
Company had 30,667 and 45,667 options outstanding at December 31, 1996 and
1995, respectively, to certain members of the board of directors and to the
previous owners of certain acquired companies. During 1996, 10,000 of these
options were exercised. The options are exercisable at $.75 to $6.00 per
share. At December 31, 1996, 30,667 of the options are exercisable.
9. GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK
The Company has guaranteed the value of certain shares of its common stock
issued in connection with the acquisition of certain animal hospitals in 1996
and 1995. If the aggregate market value of the stock (as quoted by a
nationally recognized stock exchange) at various specified valuation dates is
below the value of the stock on the acquisition date, the Company has agreed
to pay the difference in additional shares of stock, cash or notes payable.
The Company's guarantee of the value, however, terminates if the common stock
is registered for resale and trades at 110 percent to 120 percent of the
issue price of the stock for five to twenty consecutive days. At December
31, 1996, there were 256,672 shares of stock outstanding with such
guarantees, with issue prices ranging from $11.62 to $24.53, with a weighted
average of $17.30.
In connection with certain acquisitions completed prior to 1995, the Company
guaranteed the price of certain shares of its common stock issued in
connection with the acquisitions. If the aggregate market value of the stock
(as quoted by a nationally recognized stock exchange) had not reached the
guaranteed value, which exceeded the value of the stock at the acquisition
date, by the various specified valuation dates, the Company agreed to pay the
difference in additional shares of stock, cash, or notes payable. The
guaranteed purchase price contingently payable in cash or common stock
represents the liability for the difference between the aggregate guaranteed
value of the common stock net of the Company's estimate of the fair market
value of the stock at the date of the acquisition, discounted at 10 percent.
In 1995, pursuant to two of these stock guarantee arrangements pertaining to
a total of 13,494 shares, the Company paid $19,000 in cash for the difference
between the guaranteed value of the stock held and the market value of the
stock, as defined. The difference between the $19,000 and the $72,000
liability for the guaranteed purchase price contingently payable in cash or
common stock, amounting to $53,000, was credited to additional paid-in-
capital.
In 1994, pursuant to a stock guarantee arrangement for 80,000 shares, the
Company issued 63,214 shares of common stock for the difference between the
guaranteed value of the stock held and the market value of the stock, as
defined. The market value of the additional shares issued, totaling
$470,000, was charged to the liability for the guaranteed purchase price
contingently payable in cash or common stock.
PAGE 42
<PAGE>
10. COMMITMENTS
The Company operates many of its animal hospitals from premises that are
leased from the hospitals' previous owners under operating leases with
terms, including renewal options, ranging from one to 35 years. Certain
leases include purchase options which can be exercised at the Company's
discretion at various times within the lease terms.
The annual lease payments under the lease agreements have provisions for
annual increases based on the Consumer Price Index or other amounts specified
within the lease contracts. The Company also leases certain medical and
computer equipment under capital leases.
The future minimum lease payments on operating leases at December 31, 1996,
including renewal option periods, are as follows:
<TABLE>
<S> <C>
1997 $ 5,517,000
1998 5,351,000
1999 4,869,000
2000 4,686,000
2001 4,703,000
Thereafter 65,240,000
-----------
$90,366,000
===========
</TABLE>
Rent expense totaled $7,036,000, $3,880,000 and $2,158,000 for the years
ended December 31, 1996, 1995 and 1994, respectively. Rental income totaled
$313,000, $246,000 and $96,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
In connection with the acquisition of Pet Practice, the Company assumed
certain contractual arrangements, whereby additional shares of the Company's
common stock and cash may be issued to former owners of acquired hospitals
upon attainment of specified financial criteria over periods of three to five
years, as set forth in the respective agreements ("Earnout Payments"). The
number of shares of common stock and cash to be issued cannot be determined
until the earnout periods expire and the attainment of criteria is
established. Earnout Payments in 1996 amounted to approximately $2,015,000,
consisting of $752,000 in cash, 30,709 shares of common stock valued on the
date of issuance at $356,000, and a $907,000 note payable. If the specified
financial criteria is attained in the future, but not exceeded, the Company
will be obligated to make cash payments of approximately $875,000 and issue
approximately 22,800 shares of common stock over the next three years.
The Company has employment agreements with three officers of the Company
which currently expire on December 31, 2002. Each of the agreements provide
for annual compensation (subject to upward adjustment) which aggregated
$616,000 for the year ended December 31, 1996.
11. CALCULATION OF PER SHARE AMOUNTS
Earnings per share calculations are based on the weighted average common
shares outstanding including obligated shares (Note 7) plus common shares
subject to dilutive stock options, common shares contingently issuable
pursuant to the guaranteed purchase price contingently payable in cash or
common stock as discussed in Note 9, convertible debt and shares issuable
upon redemption of redeemable warrants and conversion of preferred stock.
Stock options, common shares contingently issuable and shares issuable upon
conversion of preferred stock are not included in the weighted average common
shares in 1994, 1995 and 1996 as they have an anti-dilutive effect.
PAGE 43
<PAGE>
12. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Federal:
Current $1,842,000 $1,888,000 $183,000
Deferred (444,000) (192,000) 296,000
----------- ----------- ---------
1,398,000 1,696,000 479,000
----------- ----------- ---------
State:
Current 450,000 560,000 239,000
Deferred 111,000 (18,000) 13,000
----------- ----------- ---------
561,000 542,000 252,000
----------- ----------- ---------
$1,959,000 $2,238,000 $731,000
=========== =========== =========
</TABLE>
The Company has adopted the provision of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires recognition of deferred tax liabilities and assets for the expected
future consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The net deferred tax asset (liability) is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable $692,000 $301,000
State taxes (923,000) 156,000
Other liabilities and reserves 1,072,000 588,000
Start-up costs 33,000 59,000
Property, plant and equipment -- 95,000
Restructuring charges 5,100,000 345,000
Other assets (2,000) (4,000)
Inventory 768,000 --
Valuation allowance (4,409,000) (365,000)
----------- -----------
Total current deferred
tax asset, net $2,331,000 $1,175,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Non-current deferred tax (liabilities)
assets:
Net operating loss carryforwards $9,395,000 $2,482,000
Writedown of assets 1,587,000 1,587,000
Start-up costs 288,000 288,000
Other assets 59,000 (119,000)
Intangible assets 832,000 (2,037,000)
Property, plant and equipment 190,000 258,000
Valuation allowance (10,999,000) (3,760,000)
------------ ------------
Total non-current deferred
tax asset (liability), net $1,352,000 $(1,301,000)
============ ============
</TABLE>
At December 31, 1996, the Company has federal net operating loss ("NOL")
carryforwards of approximately $25,400,000, comprised principally of NOL
carryforwards acquired in the Pets' Rx and Pet Practice mergers. These NOL
carryforwards expire at various dates through 2010.
Under the Tax Reform Act of 1986, the utilization of NOL carryforwards to
reduce taxable income will be restricted under 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 Pets' Rx and Pet Practice mergers caused such a change of
ownership and, accordingly, utilization of the NOL carryforwards may be
limited in future years. Accordingly, the valuation allowance is principally
related to subsidiaries' NOL carryforwards, as well as certain acquisition
related expenditures where the realization of this deduction is uncertain at
this time.
PAGE 44
<PAGE>
A reconciliation of the provision for income taxes to the amount computed at
the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal income tax at statutory rate (34.0)% 34.0% (34.0)%
Effect of amortization of goodwill 5.0 5.0 9.0
State taxes, net of Federal benefit 3.0 8.0 12.0
Tax exempt income (3.0) -- --
Subsidiary net operating loss 10.0 -- --
Increase in valuation allowance
associated with certain writedown
of assets, restructuring and
acquisition related costs 34.0 172.0 75.0
------- ------- -------
15.0% 219.0% 62.0%
======= ======= =======
</TABLE>
For financial reporting purposes, the benefit arising from the utilization of
NOL carryforwards generated by certain companies, including Pet Practice and
Pets' Rx, prior to their acquisition by the Company is accounted for as a
reduction of goodwill of the acquired companies. Such benefit amounted to
$69,000 for the year ended December 31, 1995. No benefit was realized for
the years ended December 31, 1994 and 1996.
13. 401(K) PLAN
During 1992, the Company established a voluntary retirement plan under
Section 401(k) of the Internal Revenue Code. The plan covers all eligible
employees and provides for annual matching contributions by the Company at
the discretion of the Company's board of directors. In 1996, 1995 and 1994,
the Company provided a matching contribution at the discretion of the Board
of Directors. Such matching contributions approximated $250,000, $87,000 and
$46,000 in 1996, 1995 and 1994, respectively.
14. RESTRUCTURING AND ASSET WRITEDOWN
As a result of the acquisition of Pets' Rx, Pet Practice and Southwest in
1996, the Company conducted a complete review of its animal hospital and
laboratory operations during the third quarter ended September 30, 1996. As
a result of this review, the Company determined to restructure its laboratory
operations and close, merge or sell certain of its hospitals which do not
meet new standards for performance adopted in light of the increase in the
size of the Company's animal hospital operations. Accordingly, the Company
adopted a restructuring plan and recorded a restructuring and asset writedown
charge of approximately $15.2 million.
The major components of the restructuring plan include (1) the termination of
leases, the writedown of intangibles, property and equipment, and employee
terminations in connection with the closure, sale or consolidation of five
VCA animal hospitals, (2) the termination of contracts and leases, the
writedown of certain real and personal property and equipment and the
termination of employees in connection with the restructuring of the
Company's laboratory operations, (3) contract terminations and writedown of
assets in connection with the move to common communications and computer
systems, and (4) the closure, sale or consolidation of certain Pet Practice
hospitals which are recorded in the purchase price allocation and not as part
of the restructuring and asset writedown charge.
The restructuring plan is expected to be executed over the period continuing
through the second quarter of 1997. As part of the restructuring, the
Company expects to close, merge or sell eight existing VCA hospitals as well
as 17 hospitals acquired in connection with the Pet Practice merger.
Collectively, the hospitals have aggregate annual revenues of approximately
$10.8 million. The Company is continuing to evaluate the financial
performance of the Pet Practice animal hospitals and may sell, close or merge
additional facilities once this evaluation is complete. In connection with
the anticipated closure of the eight VCA animal hospitals, the Company has
recognized writedowns of intangibles and property and equipment of
$7,919,000, charges associated with the termination of leases in the amount
of $1,877,000 and severance costs of $307,000. As indicated above, the
closures of the Pet Practice animal hospitals are reflected in the allocation
of goodwill and do not result in a charge against earnings. The intended
restructuring of the Company's laboratory operations has resulted in accruals
of approximately $490,000 for contract and lease terminations, $265,000 in
severance and other employee related costs and a writedown of fixed assets in
the amount of $867,000. The charge to move the Company's communications and
computer systems to common systems includes an accrual for contract
terminations of $2,763,000 and asset writedowns of $725,000.
PAGE 45
<PAGE>
Of the $15.2 million in restructuring and asset writedown charges recorded in
1996, $5.7 million represents cash charges and the remainder represents non-
cash charges. Of the cash charges, $93,000 had been paid at December 31,
1996 and the remainder is expected to be paid over the next 60 months.
The operations of Cenvet (acquired January 1, 1995) were merged into VRI's
operations to form Vet Research. The combined operations were restructured
to eliminate duplicate operating and overhead costs. In connection with the
restructuring, the Company recorded a charge of $1,086,000 in the first
quarter of 1995 to accrue the estimated costs associated with the
restructuring, consisting primarily of lease termination and severance costs
(the "1995 restructuring charge").
The 1995 restructuring charges included employee severance costs of
$468,000, lease termination costs of $433,000 and other costs of $185,000.
During 1996 and 1995, the Company utilized $473,000 and $237,000,
respectively, of the 1995 restructuring reserve. At December 31, 1996,
$376,000 of the 1995 restructuring reserve remained on the Company's balance
sheet.
During 1995, the Company charged $2,148,000 to operations related to a
writedown of goodwill and certain intangible assets at three Pets' Rx
facilities. These facilities that were written down in 1995 collectively had
a net loss in 1996 of approximately $16,000 and will approximate break even
in 1997. The Company's goal in 1997 is to minimize the facilities' cash flow
requirements and ultimately bring the facilities to a breakeven status.
Management of the Company believes that the Company's strategy of building a
network of animal hospitals is served by continuing to operate these animal
hospitals even though the facilities themselves may not generate profits.
15. LINES OF BUSINESS
The Company classifies its business operations into three segments: Animal
Hospital, Laboratory and Premium Pet Food.
The following is a summary of certain financial data for each of the three
segments:
<TABLE>
<CAPTION>
Animal Premium
(In thousands) Hospital Laboratory Pet Food Corporate Eliminations Total
-------- ---------- -------- --------- ------------ ---------
<S> <C> <C> <C>
1996
Revenues $120,842 $56,774 $8,674 $-- $(4,130) $182,160
Operating income (loss) (1,295) 13,120 (1,263) (13,333) -- (2,771)
Depreciation/amortization expense 5,156 1,823 129 388 -- 7,496
Identifiable assets 188,675 48,205 4,491 112,638 -- 354,009
Capital expenditures 4,575 1,049 169 1,679 -- 7,472
1995
Revenues $67,059 $37,606 $4,756 $-- $(1,727) $107,694
Operating income (loss) 6,776 8,359 (2,573) (6,029) -- 6,533
Depreciation/amortization expense 2,779 1,263 38 64 -- 4,144
Identifiable assets 74,819 29,798 3,854 44,945 -- 153,416
Capital expenditures 1,571 1,194 179 101 -- 3,045
</TABLE>
Corporate operating loss includes (1) salaries, general and administrative
expense for the executive finance, accounting, human resources, marketing,
purchasing and regional operational management functions that support the
Animal Hospital Laboratory and Premium Pet food segments; and (2) certain
restructuring charges and asset writedowns amounting to $3,488,000 for the
year ended December 31, 1996.
16. SUBSEQUENT EVENTS
From January 1, 1997 through March 26, 1997, the Company purchased three
animal hospitals in separate transactions for a total consideration
(including acquisition costs) of $3,220,000, consisting of $875,000 in cash,
$1,195,000 in notes payable, 107,477 shares of VCA common stock with a value
of $1,150,000.
In January 1997, the Company acquired the remaining 49% interest in the Vet
Research Joint Venture for a price as computed in accordance with the
operating agreement, amounting to $18,600,000 in cash and a $29,000,000 note
payable, payable in quarterly installments over six years.
PAGE 46
<PAGE>
In February 1997, Vet's Choice was restructured and management of the joint
venture was assumed by HPP. Pursuant to a restructuring agreement, the
Company maintains its 50.5% equity interest in Vet's Choice but profits and
losses are allocated 99.9% to HPP and .1% to the Company. Additionally, the
Company agreed to provide certain consulting and management services for a
three year period commencing on February 1, 1997 and to continue
to support and sell the SELECT BALANCE and SELECT CARE brands through its
network of animal hospitals. On or after the earlier of a change of control
in the Company or January 1, 2000, HPP may purchase all of the Company's
interest in the partnership at a purchase price equal to (i) 51% of (ii) 1.3
times the annual sales of all products bearing the SELECT BALANCE of SELECT
CARE brand (the "Annual Sales") less (iii) $4.5 million. If HPP fails to
exercise its option prior to January 1, 2001, the Company may purchase all of
the interest of HPP in the partnership at a purchase price equal to (i) 49.5%
of (ii) 1.3 times the Annual Sales plus (iii) $4.5 million.
PAGE 47
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no events or transactions requiring
reporting under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of
the Company will appear in the Proxy Statement for the
1997 Annual Meeting of Stockholders and is incorporated
herein by this reference. The Proxy Statement will be
filed with the SEC within 120 days following December 31,
1996.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear
in the Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain
beneficial owners and management will appear in the Proxy
Statement for the 1997 Annual Meeting of Stockholders and
is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions will appear in the Proxy Statement for the
1997 Annual Meeting of Stockholders and is incorporated
herein by this reference.
PAGE 48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Exhibits:
See attached Exhibit Index
(b) Financial Statement Schedules:
Form 10-K
Page No.
-----------
Report of Independent Public Accountants 56
Schedules for the years ended December 31, 1996,
1995, 1994
II - Valuation and Qualifying Accounts 57
Schedules other than those listed above are omitted
since they are not applicable, not required or the
information required to be set forth herein is
included in the consolidated financial statements or
notes thereto.
(c) Reports on Form 8-K:
None
PAGE 49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 28th day of March, 1997.
VETERINARY CENTERS OF AMERICA, INC.
(Registrant)
By: /s/ Tomas W. Fuller
Tomas W. Fuller
Its: Chief Financial Officer
PAGE 50
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert L. Antin and Arthur J. Antin,
or any one of them, his attorney-in-fact and agent, with full power of
substitution, for him in any and all capacities, to sign any amendments to
this Annual Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact,
or their substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
President, Chief Executive
Officer and Chairman of the
Board (Principal Executive
/s/ Robert L. Antin Officer and Director) March 28, 1997
Robert L. Antin
Senior Vice President,
Chief Operating Officer,
/s/ Arthur J. Antin Secretary and Director March 28, 1997
Arthur J. Antin
Senior Vice President,
/s/ Neil Tauber Treasurer and Director March 28, 1997
Neil Tauber
Vice President,
Chief Financial Officer
and Assistant Secretary
/s/ Tomas W. Fuller (Principal Accounting Officer) March 28, 1997
Tomas W. Fuller
- ---------------------- Director
John Heil
/s/ John Chickering Director March 28, 1997
John Chickering
- --------------------- Director
Dr. Richard Gillespie
</TABLE>
PAGE 51
<PAGE>
EXHIBIT INDEX
Item Exhibit
- ---- -------
2.1 Agreement and Plan of Reorganization dated March 21, 1996 by and
among Veterinary Centers of America, Inc., Golden Merger Corporation
and the Pet Practice, Inc. (attached as Appendix A to the Joint Proxy
Statement/Prospectus included in this Registration Statement (1)
2.2 Agreement and Plan of Reorganization dated February 27, 1996, as
amended on April 11, 1996, May 23, 1996 and June 7, 1996 by and among
Veterinary Centers of America, Inc., PRI Merger Company, Pets Rx,
Inc. and the Principal Stockholder. (1)
2.3 Irrevocable Proxy dated March 21, 1996 by and between Abbingdon
Ventures Partners Limited Partnership-II and Veterinary Centers of
America, Inc. (1)
3.1 Certificate of Incorporation of Registrant, as amended to date ((2)
3.2 Bylaws of Registrant, as currently in effect (3)
4.1 Specimen certificate evidencing Common Stock of Registrant (4)
4.2 Form of Warrant Agreement (4)
4.3 Indenture dates as of April 17, 1996 between Veterinary Centers of
America, Inc. and the Chase Manhattan Bank, N.A. (1)
10.1 1987 Stock Option Plan of the Company and form of Stock Option
Agreement used therewith, as amended (2)
10.2 Form of Indemnification Agreement between the Company and its
Directors (3)
10.3 Employment Agreement, dated January 1, 1994, by and between Robert L.
Antin and the Company, as amended (6)
10.4 Employment Agreement, dated January 1, 1994, by and between Arthur J.
Antin and the Company, as amended (6)
10.5 Employment Agreement, dated January 1, 1994, by and between Neil
Tauber and the Company, as amended (6)
10.6 Lease and Sublease Agreement, dated September 1, 1992, by and among
GSK Associates, Gebhart/Sevedge Properties and West Los Angeles
Veterinary Medical Group, Inc. (7)
10.7 Stock Purchase Agreement, dated as of December 9, 1992, between Heinz
Pet Products Company, a division of Star-Kist Foods, Inc. and
Veterinary Centers of America, Inc. (2)
10.8 Partnership Agreement, dated January 1, 1993, of Specialty Pet
Products Partners (2)
10.9 Partnership Agreement, dated March 2, 1989, by and between the
Company and Robert L. Antin (3)
10.10 Stock Option Agreement, dated March 2, 1989, by and between the
Company and Arthur J. Antin (3)
10.11 Stock Option Agreement, dated March 2, 1989, by and between the
Company and Neil Tauber (3)
10.12 Revolving Line of Credit Agreement, dated December 19, 1995 for
$3,100,000, by and between First Professional Bank and Veterinary
Centers of America, Inc. (2)
10.13 1993 Incentive Stock Plan of the Company and form of Stock Plan
Option Agreement used therewith (6)
PAGE 52
<PAGE>
Item Exhibit
- ---- -------
10.14 Asset Purchase Agreement, dated March 4, 1994 by and among VCA
Professional Animal Laboratory, Inc. and Dennis Moore, D.V.M., Paul
Greenlee, D.V.M., Andrew Loar, D.V.M. and Lon Rich, D.V.M. (5)
10.15 Agreement of Purchase and Sale, dated March 9, 1994 by and among
Veterinary Centers of America and NAWOC Partnership (6)
10.16 Partnership Agreement dated as of March 4, 1994 by and between Dr.
Lon Rich, D.V.M., and VCA Professional Animal Laboratory, Inc. (5)
10.17 Asset Purchase Agreement dated as of November 1, between VCA Cenvet,
Inc., and Cenvet Inc., a New York corporation and its stockholders,
Robert Wilkins, B.V. Se and Steven R. Gilbertson, D.V.M. (7)
10.18 Management Consulting Agreement by and between VCA Cenvet, Inc. and
R&B Management, Inc., a New York corporation, and Robert Wilkins, its
President (7)
10.19 Pathology Consulting Agreement by and between VCA Cenvet, Inc. and
R&B Management, Inc., a New York corporation, and Robert Wilkins, its
President (7)
10.20 Management Consulting Agreement by and between VCA Cenvet, Inc. and
SRG Consulting, Inc., a New York corporation, and Steven Gilbertson,
its President (7)
10.21 Pathology Consulting Agreement by and between VCA Cenvet, Inc. and
SRG Consulting Inc., a New York corporation, and Steven Gilbertson,
its President (7)
10.22 Lease of premises located at 32-50 57th Street, Woodside, New York by
and between VCA Cenvet, Inc., and RJW Associates, a New York general
partnership (7)
10.23 Security Agreement by and among VCA Cenvet, Inc., R&B Management,
Inc., and SRG Consulting, Inc. (7)
10.24 Noncompetition Agreement by and between VCA Cenvet, Inc., and Robert
Wilkins (7)
10.25 Noncompetition Agreement by and between VCA Cenvet, Inc., and Steven
Gilbertson (7)
10.26 Letter Agreement entered into by and between VCA Cenvet, Inc., and
Robert Wilkins (7)
10.27 Letter Agreement entered into by and between VCA Cenvet, Inc., and
Steven Gilbertson (7)
10.28 Stock Purchase Agreement, dated as of January 11, 1995, by and
between Star-Kist Foods, Inc. and Veterinary Centers of America, Inc.
(8)
10.29 Registration Rights Agreement, dated as of January 11, 1995, and
between Star-Kist Foods, Inc. and Veterinary Centers of America, Inc.
(8)
10.30 Shareholders Agreement, dated as of January 11, 1995, by and between
Star-Kist Food, Inc., Robert L. Antin and Arthur J. Antin (8)
10.31 First Amendment to Partnership Agreement, dated as of January 11,
1995 by and between HPP Specialty Pet Products Inc. and VCA Specialty
Pet Products, Inc. (8)
10.32 Operating Agreement for Vet Research Laboratories, L.L.C. dated as of
March 20, 1995 between Veterinary Centers of America, Inc., VCA
Cenvet, Inc., and Vet Research, Inc., a Delaware corporation and its
stockholders, Robert H. Schneider and Bruce Schneider (9)
PAGE 53
<PAGE>
Item Exhibit
- ---- -------
10.33 VRI Option Agreement entered into as of March 20, 1995 by and between
VCA Cenvet, Inc. and Vet Research Inc. (9)
10.34 VCA Option Agreement entered into as of March 20, 1995 by and between
Veterinary Center of America, Inc., VCA Cenvet, Inc. and Vet Research
Inc. (9)
10.35 Warrant Agreement entered into as of March 20, 1995 by and between
Veterinary Centers of America, Inc. and Robert H. Schneider (9)
10.36 Warrant Agreement entered into as of March 20, 1995 by and between
Veterinary Centers of America, and Bruce T. Schneider (9)
10.37 Asset Purchase Agreement, dated February 8, 1996, by and among VCA
Professional Animal Laboratory, Inc., Veterinary Centers of America,
Inc., Southwest Veterinary Diagnostics, Inc., and is stockholders,
Robert Bartsch and Merge Westhoff (10)
10.38 Lease Agreement dated June 7, 1996 between Barclay-Curci Investment
Company and Veterinary Centers of America, Inc. (11)
10.39 Letter Agreement dated September 9, 1996 between VCA Specialty Pet
Products, Inc., Veterinary Centers of America, Inc., HPP Specialty
Pet Products, Inc. and Heinz Pet Products.
10.40 Restructuring Agreement between HPP Specialty Products, Inc., Heinz
Pet Products, VCA Specialty Products, Inc. and Veterinary Centers of
America, Inc.
11.1 Computation of Per Share Earnings
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
PAGE 54
<PAGE>
(1) Incorporated by reference from Registrant's Registration Statement on
Form S-4, File No. 333-6667.
(2) Incorporated by reference from Registrant's Report on Form 10-KSB,
for the year ended December 31, 1992.
(3) Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-40095.
(4) Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-42504.
(5) Incorporated by reference from Registrant's Report on Form 8-K filed
on March 22, 1994.
(6) Incorporated by reference from Registrant's Report on Form 10KSB, for
the year ended December 31, 1993.
(7) Incorporated by reference from Registrant's Report on Form 8-K, filed
on January 14, 1995.
(8) Incorporated by reference from Registrant's Report on Form 10-KSB,
for the year ended December 31, 1994.
(9) Incorporated by reference from Registrant's Report on Form 8-K, filed
on March 26, 1995.
(10) Incorporated by reference from Registrant's Report on Form 8-K, filed
on March 15, 1996.
(11) Incorporated by reference from Registrant's Report on Form 8-K, filed
on March 25, 1996.
(12) Incorporated by reference from Registrant's Report on 10-K, for the
year ended December 31, 1995.
PAGE 55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Veterinary Centers of America,
Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Veterinary Centers of America, Inc.
and subsidiaries included in this Form 10-K and have issued our report
thereon dated March 14, 1997. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule identified as "Schedule II - Valuation and Qualifying Accounts" is
the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in a
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 14, 1997
PAGE 56
<PAGE>
<TABLE>
<CAPTION>
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Balance at Charged to
beginning costs and Balance at
of period expenses Other(1) end of period
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for uncollectible accounts $374,000 $314,000 $109,000 $797,000
Excess and obsolescence inventory
allowance -- 51,000 -- 51,000
Year ended December 31, 1995
Allowance for uncollectible accounts $797,000 $772,000 $102,000 $1,671,000
Excess and obsolescence inventory
allowance 51,000 65,000 (96,000) 20,000
Year ended December 31, 1996
Allowance for uncollectible accounts $1,671,000 $1,844,000 $697,000 $4,212,000
Excess and obsolescence inventory
allowance 20,000 -- -- 20,000
(1) "Other" changes in the allowance for uncollectible accounts include
accounts receivable write-offs net of allowances acquired with
hospital and laboratory acquisitions.
PAGE 57
<PAGE>
</TABLE>
HPP SPECIALTY PET PRODUCTS, INC.
HEINZ PET PRODUCTS
One Riverfront Place
Newport, Kentucky 41070
September 9, 1996
CONFIDENTIAL
Mr. Robert Antin, President & CEO
VCA Specialty Pet products, Inc.
3420 Ocean Park Boulevard
Suite 1000
Santa Monica, CA 90405
Dear Bob,
Reference is made to the Partnership Agreement of Vet's Choice Partnership
(originally Specialty Pet products Partners) (the "Partnership') dated as of
January 1, 1993 by and between VCA Specialty Pet Products, Inc. ("VCA Specialty
Pet") and HPP Specialty Pet Products, Inc. ("HPP Specialty Pet"), as amended to
date (the "Partnership Agreement"). VCA Specialty Pet is a wholly owned
subsidiary of Veterinary Centers of America, Inc. ("VCA") and EPP Specialty Pet
is a wholly owned subsidiary of Star-Kist Foods, Inc. ("Star-Kist"), Star-Kist
is a wholly owned subsidiary of H. J. Heinz Company ("Heinz"). Undefined
capitalized terms used herein shall have the meanings set forth in the
Partnership Agreement.
Particular reference is made to section 6.10 Of the partnership which
relates to "Other Business of Partners." Section 6.10 provides that "the
Partners, their corporate Affiliates, and any Affiliate of any Partner who is
an executive officer of such Partner or of the Partnership shall not engage in
the wholesale marketing, sale or distribution of premium pet products through
the endorsement of veterinarians or veterinary facilities except through the
Partnership." In addition, Paragraph(i) of the letter agreement dated March 8,
1996 (the "Letter Agreement") among HPP Specialty Pet, HPP, VCA Specialty Pet
and VCA amending the Partnership Agreement provides the HPP Specialty Pet and
its corporate Affiliates shall not engage in the wholesale marketing, sale or
distribution of therapeutic pet foods which are competitive with Select Care
products through the endorsement of veterinarians or through veterinary
facilities except through the Partnership. HPP Specialty Pet has informed VCA
and VCA Specialty Pet that H. J. Heinz Company of Canada Ltd. ("Heinz Canada"),
or an Affiliate of Heinz Canada, intends to acquire the pet food business of
Martin Pet Foods Inc. and its affiliates (the "Acquired Business"). Products
manufactured, marketed and sold by the Acquired Business (including therapeutic
<PAGE> 1
products which are competitive with Select Care) are now and will in the future
be sold in veterinary facilities or through the endorsement of veterinarians.
In exchange for the payments provided for below, VCA Specialty Pet and VCA
shall provide support, assistance, management consultation and sales materials
and will assist in marketing and sales of pet food products by Heinz or any
current or future Affiliate of Heinz (collectively, a "Heinz Seller") in the
countries of Canada, Japan, New Zealand and Australia upon the request of any
Heinz Seller for a period of five years from the date of this letter agreement.
Heinz will reimburse VCA Specialty Pet and VCA for travel overseas and out-of-
pocket expenses incurred in connection with providing such services. VCA shall
not be required to provide such services if it determines, in its sole
judgment, that provision of such services shall interfere with VCA or its
operations. Subject to the provisions set forth in the following paragraph,
VCA Specialty Pet and VCA agree in perpetuity that no restrictions on the sales
or marketing of pet food products in Canada, Japan, New Zealand and Australia
by Heinz or any current or future Affiliate of Heinz shall be imposed by VCA
Specialty Pet, VCA or any Affiliate of either of such parties by reason of
Section 6.10 of the Partnership Agreement, the Letter Agreement or otherwise in
connection with the Partnership.
VCA and VCA Specialty Pet have agreed to the foregoing on the express
condition that Heinz agrees to the following:
(i) In consideration of the foregoing, Heinz or an Affiliate shall pay
VCA $1,000,000 on September 30, 1996 plus four payment of $1,200,000
each on September 30, 1997, 1998, 1998 and 2000 (or on the following
business day with respect to any such date that does not fall on a
business day). Heinz shall not be in default under this provision
unless payment is not made within five business days following
written notification of its failure to pay an installment on the
specified due date. Heinz shall have the right to prepay any amounts
due hereunder without penalty.
(ii) Heinz or an Affiliate shall provide Vet's Choice Partnership with
commercially reasonable R&D support.
(iii) Heinz will cause VMD US or the assignee of VMD US' partnership
interest in Vet's Choice Therapeutic to elect to dissolve Vet's
Choice Therapeutic in accordance with the Joint Venture
Agreement dated as of March 23, 1994.
Compliance with the provisions of clauses (i) through (iii) hereof are
conditions subsequent to the matters set forth in this letter. Time is of the
essence hereof. This agreement will be effective only upon the completion of
the acquisition of the Acquired Business by Heinz Canada or an Affiliate of
Heinz Canada. If such acquisition fails for any reason to be completed, this
Letter Agreement shall be null and void.
<PAGE> 2
Please indicate the agreement of VCA Specialty Pet and VCA to the matters
set forth in this letter by signing the enclosed copy of this letter and
returning it tome.
Very truly yours,
HPP SPECIALTY PET
PRODUCTS, INC.
By: ___________________________________
Its: ___________________________________
HEINZ PET PRODUCTS, a Division of
STAR-KIST FOODS, INC.
By: ____________________________________
Its: ____________________________________
Accepted and Agreed.
VCA SPECIALTY PET H J. HEINZ COMPANY
PRODUCTS, INC.
By: ______________________________ By: ____________________________________
Its: ____________________________________
VETERINARY CENTERS
OF AMERICA, INC.
By: ______________________________
Dated: September ____, 1996
Vet's Choice Partnership
Veterinary Centers of America, Inc.
Restructuring Agreement
1. MANAGEMENT AGREEMENT. Vet's Choice Partnership ("Vet's Choice")
hereby agrees with Veterinary Centers of America, Inc. ("VCA") as follows:
- - For the three-year period commencing January 1, 1997 (the "Term"), VCA
will use Select Care and Select Balance products as its principal pet food
products in its hospitals (now owned or acquired during the Term) as long
as such products meet minimum quality standards (consistent with industry
norms) and serve the reasonable clinical needs of the veterinarians. In
addition, during the Term, VCA will continue its efforts to grow the use
of such products at its hospitals in the same manner as it has prior to
this time and Vet's Choice will support such efforts with competitive
pricing and reasonable promotion and product support. VCA will provide
Vet's Choice with an initial report on the distribution of Select Care and
Select Balance products at VCA's hospitals and will provide quarterly
updates throughout the Term. In addition to the foregoing, Vet's Choice
shall continue to provide during the Term Select Care and Select Balance
products on the preferred pricing plan currently in place between the
companies.
- - During the Term, VCA will provide Vet's Choice the option to participate
in VCA's Vnet Internet project on terms to be agreed to between VCA and
Vet's Choice. In addition, Vet's Choice will have a right of first
refusal to meet any offer by another pet food manufacturer to participate
on VCA's Vnet Internet project as a "preferred vendor" or any other
special class of vendor. The foregoing will not limit the right of VCA to
offer participation on Vnet to any other pet food manufacturer or other
vendor. VCA shall have no obligation hereunder to actually implement its
Vnet Internet project or, once implemented, continue the service for any
period of time.
- - During the Term, VCA will continue to allow Vet's Choice hospital
customers to participate in the Partners-in-Management Program maintained
by VCA. Notwithstanding the foregoing, VCA shall have the option of
terminating such participation upon at least 90 days' advance written
notice if VCA determines in its sole discretion such participation in the
Partners-in-Management Program does or will interfere with VCA's other
businesses or strategies or create strategic conflicts. VCA shall be able
to furnish the Partners-in-Management program to customers of any of its
other operating divisions.
Further, nothing contained herein shall restrict VCA from modifying or
terminating its Partners-in-Management Program at any time.
- - If requested by Vet's Choice, VCA will provide additional consulting
services to Vet's Choice during the Term.
PAGE 1
<PAGE>
- - Vet's Choice will reimburse VCA for its out-of-pocket expenses incurred in
connection with providing the consulting services provided for herein to
the extent such costs are pre-approved by Vet's Choice.
- - During the Term, VCA will continue to publicly support Vet's Choice within
the pet food and veterinary industries.
2. PARTNERSHIP AGREEMENT. The Partnership Agreement (the "Partnership
Agreement") existing between HPP Specialty Pet Products, Inc. ("HPP Specialty")
and VCA Specialty Products, Inc. ("VCA Specialty") with respect to the
ownership and operation of Vet's Choice is hereby amended as follows:
- - Effective February 1, 1997, all profits and losses of Vet's Choice shall
be allocated 99.9% to HPP Specialty 0.1% to VCA Specialty.
- - Effective February 1, 1997, HPP Specialty shall replace VCA Specialty as
Managing Partner and will assume the day-to-day control of Vet's Choice.
All other provisions in the Partnership Agreement relating to the Managing
Partner, including, but not limited to provisions regarding reporting
obligations and restrictions on its authority, shall remain in full force
and effect.
- - On February 1, 1997 (and prior to the replacement of VCA Specialty as
Managing Partner on such date by HPP Specialty), VCA Specialty shall cause
Vet's Choice to distribute to VCA Specialty and HPP Specialty all cash
held by Vet's Choice on the close of business on January 31, 1997 in
accordance with the equity interests of VCA Specialty and HPP.
- - Effective February 1, 1997, the restrictions set forth in Section 6.10 of
the Partnership Agreement applicable to VCA Specialty and its affiliates
and HPP Specialty and its affiliates (as modified by prior agreements of
the parties) shall terminate provided that the restrictions of Section
6.10 shall continue in force with respect to Medi-Cal sales in the United
States by HPP Specialty and its affiliates unless agreed to otherwise by
VCA. H. J. Heinz Company shall pay when due all payments to VCA under the
letter agreement dated September 9, 1996 relating to the acquisition of
Martin Pet Foods by Heinz, Canada.
- - In recognition of the benefits afforded to Vet's Choice by use of the
Heinz distribution system, the parties have agreed to modify the Purchase
Price payable in the event either party exercises the purchase options
provided for in Section 9 of the Partnership Agreement and certain other
provisions of the Partnership Agreement. If HPP Specialty, exercises its
right to acquire VCA Specialty's 51% partnership interest in Vet's Choice
pursuant to Section 9.2.1 of the Partnership Agreement, the Purchase Price
provided for in such Section 9.2.1 will not apply. Instead, the Purchase
Price shall be equal to 51% of 1.3 multiplied by the Net Sales of all
PAGE 2
<PAGE>
Vet's Choice products sold during the twelve-month period
described below, less $4.5 million. Net sales are equal to gross sales minus
deals and allowances, cash discounts and returns. The purchase price
shall be determined by reference to the twelve months ending one month
prior to the closing date of the purchase but in no case earlier than the
period November 1, 1998 to October 31, 1999. Vet's Choice products
will be limited to all products bearing the Select Balance or Select
Care brands; provided, that Vet's Choice will not, without the prior
written consent of VCA Specialty, discontinue the sale of any of the products
(as
determined by UPC) set forth on Schedule B hereto; provided such
restriction shall not limit the right of Vet's Choice to change at its option
the formulation, branding (provided any re-branded products will
maintain the current UPC symbols in order to facilitate tracking),
marketing, packaging or other characteristics of such products. HPP Specialty
will
continue to use its reasonable best efforts to expand the sales and
profitability of the Select Balance and Select Care product lines in both the
hospital and retail markets.
- - The provisions of Section 9.2.2 of the Partnership Agreement
are eliminated and the following agreement is substituted
therefor: In the event HPP Specialty shall not have exercised its right to
acquire the interest of VCA Specialty in Vet's Choice by June 30, 2000,
VCA Specialty shall have the right to acquire HPP Specialty's interest in
Vet's Choice for an amount determined in the same manner as provided in the
immediately preceding paragraph except 49% shall be substituted for 51%
and the purchase price shall be increased following such calculation
by $4.5 million. In other words, the sale price shall be equal to Net
Sales multiplied by 1.3 multiplied by 49% plus $4.5 million.
- - If neither HPP Specialty nor VCA Specialty exercises the
option to buy out the other party by January 31, 2001, the partners will make
best efforts to sell the Partnership business to a third party and the
Partnership shall be dissolved as promptly as practicable thereafter
unless otherwise agreed by the parties. Upon dissolution, following a sale of
the business or otherwise, the first $4.5 million shall be distributed to
HPP Specialty and the remaining net assets of Vet's Choice shall be
distributed 51% to VCA Specialty and 49% to HPP Specialty.
- - HPP Specialty shall provide VCA with periodic sales and other
reports in the same format and with the same frequency as VCA Specialty
has provided to HPP Specialty in the past.
3. CONSIDERATION. In consideration of the management and
consulting services to be performed during the Term as described in Paragraph
1 above and the other agreements of VCA and VCA Specialty contained herein,
HPP (or H. J. Heinz) shall pay to VCA on February 10, 1997, 1998 and 1999 a
consulting fee of $2.5 million and on February 10, 2000 and 2001, a consulting
fee of $1.0 million (for a total of $9.5 million). Further, commencing June 1,
1997, Vet's Choice shall reimburse VCA monthly for the use of office space and
reasonable overhead costs related to employees of Vet's Choice who are located
at VCA's
PAGE #3
<PAGE>
headquarters in an amount acceptable to Vet's Choice (or failing
agreement Vet's Choice shall have the option to discontinue use of the VCA
office space).
If HPP fails to pay any amount due hereunder or due under the September 9, 1996
letter referred to above within 30 days of written notice from VCA of such
failure, then VCA's obligations under Paragraph 1 shall terminate. Such
termination, however, shall not alter or modify HPP's obligations to make the
payments referred to herein or in the September 9, 1996 letter or otherwise
limit VCA's remedies for any breach. The obligations set forth in this
Paragraph 3 shall be obligations of HPP and not Vet's Choice.
By executing this Agreement in the Space provided for below, each of the
parties agrees to be bound by the foregoing.
HPP SPECIALTY PRODUCTS. INC.
By: ________________________________
Title: _________________________________
Name:_________________________________
HEINZ PET PRODUCTS,
a division of Star-Kist Tuna, Inc.
By: __________________________________
Title: _______________________________
Name:_________________________________
VCA SPECIALTY PRODUCTS, INC.
By: __________________________________
Title: _______________________________
Name:_________________________________
VETERINARY CENTERS OF AMERICA, INC.
By: __________________________________
Title: _______________________________
Name:_________________________________
EXHIBIT 11.1
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE LOSS
The computations of net loss per share for the three years ended December 31,
1996 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Primary:
Net loss $(14,632,000) $(1,214,000) $(1,907,000)
============= ============ ============
Average common shares
outstanding 15,941,000 9,224,000 6,202,000
============= ============ ============
Net loss per share: $(0.92) $(0.13) $(0.31)
============= ============ ============
</TABLE>
The fully-diluted loss per share computation is not presented as there were
no securities outstanding which would be dilutive.
EXHIBIT 21.1
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SUBSIDIARIES OF REGISTRANT
LEGAL NAME JURISDICTION DOING BUSINESS AS
- ---------- ------------ -----------------
<S> <C> <C>
West Los Angeles Veterinary Medical Group, Inc. California
VCA Clinical Veterinary Labs, Inc. California
Lakewood Animal Hospital, Inc. California VCA Lakewood Animal Hospital
Robertson Blvd. Animal Hospital, Inc. California VCA Robertson Blvd. Animal Hospital
VCA Bay Area Animal Hospital, Inc. California
VCA of Phoenix, Inc. California
Northern Animal Hospital Inc. Arizona VCA Northern Animal Hospital
VCA of San Jose, Inc California VCA Crocker Animal Hospital
VCA Real Property Acquisition Corporation California
VCA of Colorado - Anderson, Inc. California VCA Anderson Animal Hospital
Anderson Animal Hospital, Inc Colorado
VCA - Animal Hospital West, Inc. California
Westwood Dog and Cat Hospital, Inc. California VCA Animal Hospital West
VCA of Teresita, Inc. California VCA Teresita Animal Hospital
VCA of Asher, Inc. California VCA Asher Animal Hospital
Asher Veterinary Clinic, Inc. California
VCA Wingate, Inc. California
Wingate, Inc. Colorado VCA Wingate Animal Hospital
VCA-Mission, Inc. California VCA Mission Animal Hospital
VCA Albuquerque, Inc. California VCA Veterinary Care Animal Hospital
VCA Wyoming Animal Hospital, Inc. California
Berwyn Veterinary Associates, Inc. Illinois VCA Berwyn Animal Hospital
VCA Specialty Pet Products, Inc. California
VCA Rossmoor, Inc. California
Rossmoor-El Dorado Animal Hospital, Inc. California VCA-Rossmoor El Dorado Animal Hospital
VCA Albany Animal Hospital, Inc. California
Albany Veterinary Clinic, Inc. California
VCA Howell Branch Animal Hospital Inc. California
VCA Cacoosing Animal Hospital, Inc. California
Cacoosing Animal Hospital, Ltd. Pennsylvania
Cacoosing Pet Care & Nutrition Center, Inc. Pennsylvania
VCA Sinking Spring Animal Hospital, Inc. California
Vet Research Laboratories, LLC Delaware
VCA Anderson of California, Inc. California
South County Veterinary Clinic, Inc. California
South County Animal Hospital, LLC California
VCA Clinipath Labs, inc. California
VCA Florida Veterinary Labs, Inc. California
VCA Eagle River Animal Hospital, Inc. California
Eagle River Veterinary Hospital, Inc. Alaska
VCA Miller Animal Hospital, Inc. California
Miller Animal Hospital, Inc. California
VCA Marina Animal Hospital, Inc. California
PAGE 1
<PAGE>
Veterinary Hospitals, Inc. California Marina Veterinary Clinic
VCA All Pet Animal Complex, Inc. California
VCA Castle Shannon Animal Hospital, Inc. California
VCA APAC Animal Hospital, Inc. California
VCA Northwest Diagnostic Labs, Inc. California
VCA Information Systems, Inc. California
VCA East Anchorage Animal Hospital, Inc. California
VCA Fox Chapel - Shadyside Animal, Inc. California
Fox Chapel Animal Hospital, Inc. Pennsylvania
VCA Companion Animal Hospital, Inc. California
VCA Animal Hospital East, Inc. California
MS Animal Hospitals, Inc. California
VCA Professional Animal Laboratory, Inc. California
VCA Detwiler Animal Hospital, Inc. California
Detwiler Veterinary Clinic, Inc. Pennsylvania
VCA Lakeside Animal Hospital, Inc. California
VCA Cenvet, Inc. California
VCA Golden Cove Animal Hospital, Inc. California
Berla, Inc. California VCA Golden Cove Animal Hospital
VCA Tampa Animal Hospital, Inc. California
Tampa Animal Medical Center, Inc. Florida VCA Tampa Animal Hospital
VCA Silver Spur Animal Hospital, Inc. California
Silver Spur Animal Hospital, Inc. California
VCA Lewis Animal Hospital, Inc. California
VCA Lewelling Animal Hospital, Inc. California
Lewelling Veterinary Hospital, Inc. California
VCA South Shore Animal Hospital, Inc. California
VCA Alpine Animal Hospital, Inc. California
VCA Greater Savannah Animal Hospital, Inc. California
VCA Kaneohe Animal Hospital, Inc. California
VCA Elkton Animal Hospital, Inc. California
VCA Rotherwood Animal Hospital, Inc. California
VCA Lammers Animal Hospital, Inc. California
Lammers Veterinary Hospital, Inc. California
VCA Referral Associates Animal Hospital, Inc. California
VCA Clarmar Animal Hospital, Inc. California
Clarmar Animal Hospital, Inc. California
VCA Conewago Animal Hospital, Inc. California
VCA St. Petersburg Animal Hospital, Inc. California
St. Petersburg Animal Hospital, LLC California
VCA Northboro Animal Hospital, Inc. California
VCA Animal Care Center, Inc. California
VCA Lakeshore Animal Hospital, Inc. California
VCA Bering Sea Animal Hospital, Inc. California
VCA Acacia Animal Hospital, Inc. California
VCA Animal Hospitals, Inc. California VCA Parkwood Animal Hospital
Agoura Meadows Veterinary Clinic
VCA Santa Anita Animal Hospital
Pets' Rx, Inc. Delaware
Pets' Rx Nevada, Inc. Nevada
William C. Fouts, Ltd. Nevada Decatur Animal Clinic
H.B. Animal Clinics, Inc. California Blossom Veterinary Clinic
PAGE 2
<PAGE>
Princeton Animal Hospital California Almaden Valley Veterinary Hospital
Spring Mountain Animal Hospital, L.L.C. Nevada
Old Town Veterinary Hospital, Inc. Virginia
VCA North Rockville Animal Hospital, Inc. California
North Rockville Veterinary Hospital, Inc. Maryland
VCA Lamb & Steward Animal Hospital, Inc.
VCA Squire Animal Hospital, Inc. California
VCA Texas Management, Inc. California
VCA Centers-Texas, Inc. Texas
Veterinary Centers of Texas, L.P. Texas
VCA Animal Hospitals of Texas, L.P. Texas
Golden Merger Corporation Delaware
Eagle Park Animal Clinic, Inc. Indiana
Newark Animal Hospital, Inc. Delaware
Academy Animal, Inc. Maryland
Edgebrook, Inc. New Jersey
Riviera Animal Hospital, Inc. Florida
PPI of Pennsylvania, Inc. Delaware
Noyes Animal Hospital, Inc. Illinois
Professional Veterinary Services, Inc. Indiana
The Pet Practice (Florida), Inc. Delaware
The Pet Practice (Illinois), Inc. Delaware
The Pet Practice of Michigan, Inc. Delaware
The Pet Practice (Massachusetts), Inc. Delaware
The Pet Practice (Massachusetts), Inc. Massachusetts
PAGE 3
<PAGE>
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-1 and Form S-3 File No. 33-42504, on Form
S-8 File No. 33-44622, File No. 33-56846, File No. 33-56848, File No. 33-57768,
File No. 33-57770, File No. 33-57772, File No. 33-67588 and File No. 333-19017,
on Form S-3 File No. 33-80212, File No. 333-97682, File No. 333-00376, File No.
333-8441 and File No. 333-18261 and on Form S-4 File No. 333-6667 and File
No. 333-9119.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23,820,000
<SECURITIES> 79,107,000
<RECEIVABLES> 9,583,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,766,000
<PP&E> 37,467,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 354,009,000
<CURRENT-LIABILITIES> 47,115,000
<BONDS> 0
<COMMON> 20,000
0
1,000
<OTHER-SE> 167,329,000
<TOTAL-LIABILITY-AND-EQUITY> 354,009,000
<SALES> 0
<TOTAL-REVENUES> 182,160,000
<CGS> 0
<TOTAL-COSTS> 139,586,000
<OTHER-EXPENSES> 7,496,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,812,000
<INCOME-PRETAX> (12,673,000)
<INCOME-TAX> 1,959,000
<INCOME-CONTINUING> (14,632,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,632,000)
<EPS-PRIMARY> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
