<PAGE> 1
UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10787
VETERINARY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4097995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12401 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064-1022
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 584-6500
3420 OCEAN PARK BOULEVARD, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
Former name, address and fiscal year, if changed since last report
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's class
of common stock as of the latest practicable date: Common Stock, $.001 par value
21,580,422 shares as of November 5, 1999.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
ASSETS Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents ...................................................... $ 6,991 $ 8,977
Marketable securities ..................................................... 19,006 33,358
Trade accounts receivable, less allowance for uncollectible accounts of
$7,287 and $6,532 at September 30 and December 31, respectively ....... 14,931 11,436
Inventory, prepaid expenses and other ..................................... 8,180 7,897
Deferred income taxes ..................................................... 4,111 4,111
Prepaid income taxes ...................................................... -- 5,040
--------- ---------
Total current assets .................................................. 53,219 70,819
Property and equipment, net .................................................. 65,134 50,140
Goodwill and covenants not to compete, net ................................... 287,203 261,227
Other assets ................................................................. 11,218 10,697
--------- ---------
$ 416,774 $ 392,883
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations .................................. $ 18,951 $ 17,431
Accounts payable .......................................................... 6,468 5,208
Other accrued liabilities ................................................. 20,756 16,707
--------- ---------
Total current liabilities ............................................. 46,175 39,346
Long-term obligations, less current portion .................................. 139,985 142,356
Deferred income taxes ........................................................ 858 5,800
Minority interest ............................................................ 3,022 2,696
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001 ............................................ 20 20
Additional paid-in capital ................................................ 212,997 202,850
Notes receivable from stockholders ........................................ (645) (617)
Retained earnings ......................................................... 21,432 3,380
Other comprehensive income, unrealized loss on investments ................ (244) (468)
Less cost of common stock held in treasury, 583 and 227 shares at September
30 and December 31, respectively .......................................... (6,826) (2,480)
--------- ---------
Total stockholders' equity ............................................ 226,734 202,685
--------- ---------
$ 416,774 $ 392,883
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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<PAGE> 3
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues ........................................... $ 83,590 $ 74,599 $243,592 $211,348
Direct costs ....................................... 60,164 55,185 176,260 156,108
-------- -------- -------- ---------
Gross profit .................................... 23,426 19,414 67,332 55,240
Selling, general and administrative ................ 5,763 5,157 16,654 14,521
Depreciation and amortization ...................... 3,929 3,333 11,389 9,592
Year 2000 remediation expenses ..................... 1,073 -- 2,244 --
Year 2000 accelerated depreciation ................. 247 -- 861 --
1996 restructuring plan favorable settlement ....... -- -- 320 --
-------- -------- -------- ---------
Operating income ................................ 12,414 10,924 36,504 31,127
Interest income .................................... 73 756 941 2,059
Interest expense ................................... 2,555 2,650 7,943 8,566
Minority interest in income of subsidiaries ........ 248 242 653 620
-------- -------- -------- ---------
Income before provision for income taxes ........... 9,684 8,788 28,849 24,000
Provision for income taxes ......................... 2,222 3,947 10,797 10,770
-------- -------- -------- ---------
Net income ...................................... $ 7,462 $ 4,841 $ 18,052 $ 13,230
======== ======== ======== =========
Basic earnings per common share .................... $ 0.35 $ 0.24 $ 0.86 $ 0.65
======== ======== ======== =========
Diluted earnings per common share .................. $ 0.34 $ 0.22 $ 0.82 $ 0.61
======== ======== ======== =========
Shares used for computing basic earnings per share . 21,270 20,380 21,075 20,295
======== ======== ======== =========
Shares used for computing diluted earnings per share 21,882 22,025 22,090 21,747
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 18,052 $ 13,230
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................... 12,250 9,592
Deferred tax benefit ............................................. (2,102) --
Minority interest in income of subsidiaries ...................... 653 620
Distributions to minority interest partners ...................... (634) (428)
Provision for uncollectible accounts ............................. 1,833 2,066
Increase in accounts receivable, net ............................. (4,891) (4,434)
Decrease in inventory, prepaid expenses and other assets ......... 345 10
Decrease in prepaid income taxes ................................. 5,040 5,634
Increase in taxes payable ........................................ 763 856
Increase (decrease) in accounts payable and accrued liabilities .. 1,295 (2,133)
-------- --------
Net cash provided by operating activities ..................... 32,604 25,013
-------- --------
Cash flows from investing activities:
Property and equipment additions ................................. (14,572) (9,042)
Business acquisitions, net of cash acquired ...................... (16,484) (19,293)
Proceeds from sales of marketable securities ..................... 64,581 67,950
Investments in marketable securities ............................. (50,005) (44,728)
Proceeds from the sale of equipment
96 55
Investment in Veterinary Pet Insurance ........................... -- (4,000)
-------- --------
Net cash used in investing activities ......................... (16,384) (9,058)
-------- --------
Cash flows from financing activities:
Repayment of long-term obligations ............................... (14,393) (15,622)
Advances made on notes receivable ................................ -- (291)
Payments received on notes receivable ............................ 149 124
Proceeds from issuance of common stock under stock option plans .. 384 499
Payments on guaranteed purchase price contingently payable in cash
or common stock .............................................. -- (46)
Purchase of treasury stock ....................................... (4,346) --
-------- --------
Net cash used in financing activities ......................... (18,206) (15,336)
-------- --------
Increase (decrease) in cash and equivalents ............................... (1,986) 619
Cash and equivalents at beginning of period ............................... 8,977 19,882
-------- --------
Cash and equivalents at end of period ..................................... $ 6,991 $ 20,501
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) GENERAL
The accompanying unaudited condensed consolidated financial
statements of Veterinary Centers of America, Inc. and subsidiaries (the
"Company" or "VCA") have been prepared in accordance with generally accepted
accounting principles for interim financial information and in accordance with
the rules and regulations of the United States Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements as permitted under applicable rules and regulations. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. The results of operations for the three and
nine months ended September 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year. For further information, refer to
the consolidated financial statements and footnotes thereto for the year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on March 31, 1999.
(2) ACQUISITIONS
During the third quarter of 1999, the Company purchased four animal
hospitals, one of which was merged into an existing VCA facility, for an
aggregate consideration (including acquisition cost) of $5,128,000, consisting
of $3,053,000 in cash, $2,040,000 in notes payable and $35,000 in assumed
liabilities. The aggregate purchase price was allocated as follows: $1,174,000
to tangible assets, $3,697,000 to goodwill and $257,000 to other intangibles.
On April 1, 1999, the Company completed the acquisition of AAH
Management Corp. ("AAH") for a total consideration (including acquisition costs)
of $28,450,000, consisting of 517,598 shares of VCA common stock, with a value
at the date of acquisition of $7,753,000, $8,648,000 in cash, $1,182,000 in
notes payable and the assumption of $10,867,000 in liabilities. AAH operated 15
animal hospitals located in New York and New Jersey. The acquisition of AAH was
accounted for as a purchase. The purchase price has been allocated as follows,
subject to final valuation: $6,763,000 to tangible assets and $21,687,000 to
goodwill and other intangibles.
In addition to the AAH acquisition, the Company purchased four
animal hospitals during the second quarter of 1999, one of which was merged into
an existing VCA facility, and one veterinary diagnostic laboratory, for an
aggregate consideration (including acquisition costs) of $3,267,000, consisting
of $1,637,000 in cash, $1,571,000 in notes payable and $59,000 in assumed
liabilities. The aggregate purchase price was allocated as follows: $141,000 to
tangible assets, $2,960,000 to goodwill and $166,000 to other intangible assets.
During the first quarter of 1999, the Company purchased five animal
hospitals, two of which were merged into existing VCA facilities, and one
veterinary diagnostic laboratory for an aggregate consideration (including
acquisition costs) of $5,861,000, consisting of $2,794,000 in cash, $1,802,000
in notes payable, 70,712 shares of VCA common stock with a market value of
$1,075,000 and the assumption of liabilities totaling $190,000. The aggregate
purchase price was allocated as follows: $284,000 to tangible assets, $5,319,000
to goodwill and $258,000 to other intangible assets.
(3) VET'S CHOICE JOINT VENTURE
In February 1997, the Company's joint venture, Vet's Choice, was
restructured and management of the joint venture was assumed by the Company's
partner, Heinz Pet Products ("HPP"). Pursuant to a restructuring agreement, the
Company maintains its 50.5% equity interest in Vet's Choice. Profits and losses
are allocated 99.9% to HPP and 0.1% to the Company, and all management control
has been transferred from the Company to HPP. Additionally, the Company agreed
to provide certain consulting and management services for a three-year period
commencing on February 1, 1997, for an aggregate fee of $15.3 million, payable
in semi-annual installments over a
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<PAGE> 6
five-year period (the "Consulting Fees"). The Consulting Fees earned for the
1999 and 1998 quarters and nine-month periods ending September 30, of $1,275,000
and $3,825,000, respectively, are included in Animal Hospital revenues. The
Company will cease to earn these consulting fees February 2000.
(4) RESTRUCTURING RESERVES
During 1996, the Company adopted and implemented a restructuring
plan (the "1996 Plan") designed to restructure the Company's animal hospital and
laboratory operations in connection with its 1996 acquisitions. In addition,
certain hospitals which did not meet the new standards for performance adopted
by the Company in light of the increase in the size of its animal hospital
operations, were to be closed or sold. During the nine months ended September
30, 1999, pursuant to the 1996 Plan, the Company incurred $301,000 of cash
expenditures for lease and other contractual obligations. Also, during the nine
months ended September 30, 1999, the Company recognized a $320,000 favorable
settlement from a laboratory operations' contract, terminated as part of the
1996 Plan.
At September 30, 1999, the 1996 Plan restructuring reserve balance
was $1,090,000, consisting primarily of lease and other contractual obligations,
which will extend through 2014.
During 1997, the Company reviewed the financial performance of its
animal hospitals. As a result of this review, additional animal hospitals were
determined not to meet the Company's performance standards. Accordingly, the
Company adopted phase two of its restructuring plan (the "1997 Plan"). During
the nine months ended September 30, 1999, pursuant to the 1997 Plan, the Company
incurred $51,000 of cash expenditures for lease obligations. In addition, the
Company sold the building of a previously closed hospital resulting in an
additional $4,000 asset write-down.
At September 30, 1999, the 1997 Plan restructuring reserve balance
was $1,173,000, consisting primarily of lease obligations and reserves for asset
write-downs. The 1997 Plan is expected to be completed in 1999, although certain
lease obligations will continue through 2005.
The following tables summarize the activity in the Company's
restructuring reserves by plan year (in thousands):
The 1996 Plan
<TABLE>
<CAPTION>
Cash Non-Cash
Charges Charges Total
------- ------- -------
<S> <C> <C> <C>
Balance, December 31, 1998 $ 1,391 $ -- $ 1,391
Cash expenditures for lease and other contractual obligations (301) -- (301)
Refund of disputed contract termination settlement 320 -- 320
Restructuring plan favorable settlement (320) -- (320)
------- ------- -------
Balance, September 30, 1999 $ 1,090 $ -- $ 1,090
======= ======= =======
</TABLE>
The 1997 Plan
<TABLE>
<CAPTION>
Cash Non-Cash
Charges Charges Total
------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 866 $ 362 $ 1,228
Cash expenditures for lease and other contractual obligations (51) -- (51)
Non-cash asset write-down -- (4) (4)
------- ------- -------
Balance, September 30, 1999 $ 815 $ 358 $ 1,173
======= ======= =======
</TABLE>
(5) STOCKHOLDER LAWSUITS
The Company and certain of its current and former officers and
directors were named as defendants in lawsuits filed in both Los Angeles
Superior Court and the United States District Court for the Central District of
California, each entitled Pegasus Holdings and Pacific Strategic Funds Group,
Inc. v. Veterinary Centers of America, Inc., et al., (the "Pegasus Lawsuits")
and each filed on June 19, 1998. The Pegasus Lawsuits primarily involve claims
alleging securities fraud.
Settlements have been reached with respect to these lawsuits. Under
the settlements, the claims against VCA and all other defendants were dismissed
without presumption or admission of any liability or wrongdoing.
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<PAGE> 7
The full amount of the settlement and associated legal costs was either
previously reserved or is covered by VCA's insurance carriers.
(6) CALCULATION OF PER SHARE AMOUNTS
Below is a reconciliation of the income and shares used in the
computations of the basic and diluted earnings per share ("EPS") (amounts in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income .................. $7,462 21,270 $ 0.35 $ 18,052 21,075 $ 0.86
======== ======
Effect of dilutive stock options -- 612 -- 1,015
------ ------ -------- ------
Diluted EPS .................... $7,462 21,882 $ 0.34 $ 18,052 22,090 $ 0.82
====== ====== ======== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income ................ $ 4,841 20,380 $ 0.24 $13,230 20,295 $ 0.65
======= ======
Effect of dilutive securities:
Stock options ............. -- 1,620 -- 1,401
Stock guarantees .......... -- -- -- 26
Converted debt ............ 6 25 10 25
------- ------- ------- ------- ------- ------
Diluted EPS .................. $ 4,847 22,025 $ 0.22 $ 13,240 21,747 $ 0.61
======= ======= ======= ======== ======= ======
</TABLE>
(7) COMPREHENSIVE INCOME
Below is a calculation of comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ......................................... $ 7,462 $ 4,841 $ 18,052 $ 13,230
Decrease (increase) in unrealized loss on investment 117 (319) 224 (319)
-------- -------- -------- --------
Net comprehensive income ........................... $ 7,579 $ 4,522 $ 18,276 $ 12,911
======== ======== ======== ========
</TABLE>
No income tax benefit related to the unrealized loss on investment
was recognized due to potential tax treatment of investment losses.
(8) LINES OF BUSINESS
During the three and nine months ended September 30, 1999 and 1998,
the Company had three reportable segments: Animal Hospitals, Laboratories and
Corporate. These segments are strategic business units that have different
products, services and functions. The segments are managed separately because
each is a distinct and different business venture with unique challenges,
rewards and risks. The Animal Hospitals provide veterinary services for
companion animals and sells related retail products. The Laboratories provide
testing services for
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veterinarians both associated with the Company and independent of the Company.
Corporate provides selling, general and administrative support for the other
segments. Though Corporate does not generate revenue, it is being included as a
reportable segment to provide a better understanding of the Company as a whole.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies as detailed in the
Company's 1998 Annual Report on Form 10-K filed with the SEC on March 31, 1999.
The Company evaluates performance of segments based on profit or loss before
income taxes, interest income, interest expense and minority interest, which are
evaluated on a consolidated level. For purposes of reviewing the operating
performance of the segments, all inter-segment sales and purchases are accounted
for as if they were transactions with independent third parties at current
market prices.
Below is a summary of certain financial data for each of the three
segments (in thousands):
<TABLE>
<CAPTION>
Inter-Segment
Animal Sales
Hospitals Laboratories Corporate Eliminations Total
--------- ------------ --------- ------------ -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ........................ $ 59,425 $ 25,591 $ -- $ (1,426) $ 83,590
Operating income (loss) ......... 11,064 6,766 (5,416) -- 12,414
Depreciation/amortization expense 2,921 1,081 174 -- 4,176
Capital expenditures ............ 4,281 494 2,041 -- 6,816
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues ........................ 52,372 23,718 -- (1,491) 74,599
Operating income (loss) ......... 9,159 5,692 (3,927) -- 10,924
Depreciation/amortization expense 2,156 1,048 129 -- 3,333
Capital expenditures ............ 461 662 124 -- 1,247
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ........................ 169,585 78,436 -- (4,429) 243,592
Operating income (loss) ......... 29,672 21,640 (14,808) -- 36,504
Depreciation/amortization expense 8,398 3,274 578 -- 12,250
Capital expenditures ............ 10,425 1,634 2,513 -- 14,572
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues ........................ 148,839 66,962 -- (4,453) 211,348
Operating income (loss) ......... 26,660 15,434 (10,967) -- 31,127
Depreciation/amortization expense 6,204 2,964 424 -- 9,592
Capital expenditures ............ 5,584 3,149 309 -- 9,042
AT SEPTEMBER 30, 1999
Identifiable assets ............. 264,493 106,405 45,876 -- 416,774
AT SEPTEMBER 30, 1998
Identifiable assets ............. 225,580 108,856 55,965 -- 390,401
AT DECEMBER 31, 1998
Identifiable assets ............. 226,182 106,217 60,484 -- 392,883
</TABLE>
Corporate operating loss includes salaries, general and
administrative expense for the executive, finance, accounting, human resources,
marketing, purchasing and regional operational management functions that support
the Animal Hospitals and Laboratories segments.
Below is a reconciliation between total segment operating income
after eliminations and consolidated income before provision for income taxes as
reported on the condensed consolidated statements of operations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total segment operating income after eliminations $ 12,414 $ 10,924 $ 36,504 $ 31,127
Interest income ................................. 73 756 941 2,059
Interest expense ................................ (2,555) (2,650) (7,943) (8,566)
Minority interest ............................... (248) (242) (653) (620)
-------- -------- -------- --------
Income before provision for income taxes ........ $ 9,684 $ 8,788 $ 28,849 $ 24,000
======== ======== ======== ========
</TABLE>
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<PAGE> 9
(9) INCOME TAXES
As a result of a favorable change in the U.S. tax regulations with
respect to limitations on the use of net operating loss carryforwards, the
Company recorded a deferred tax benefit during the three months ended September
30, 1999 of $2,102,000. This benefit was recorded as a reduction of the
provision for income taxes.
(10) RECLASSIFICATIONS
Certain 1998 balances have been reclassified to conform with the
1999 financial statement presentation.
(11) ACCOUNTING PRONOUNCEMENTS
In March 1998, the America Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which is effective for
fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not
have a material effect on the Company's financial position or its results of
operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000, as per the
issuance of SFAS 137. SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Adoption of SFAS 133 is not expected to have a
material effect on the Company's financial position or results of operations.
(12) SUBSEQUENT EVENTS
The Company entered into an agreement to sell its investment in
Veterinary Pet Insurance, Inc. ("VPI") for $8,250,000 in cash. VCA acquired the
investment in January 1998 for $5 million and expects that when the transaction
is finalized it will record a one-time gain. The terms of the transaction are
subject to approval by the California Department of Insurance.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Veterinary Centers of America, Inc. and subsidiaries ("VCA" or the
"Company") is one of the nation's largest animal health care companies. The
Company has established a premier position in two core businesses, animal
hospitals ("Animal Hospitals") and veterinary diagnostic laboratories
("Laboratories"). The Company operates the largest nationwide networks of
free-standing, full-service animal hospitals and veterinary-exclusive
laboratories.
Over the past several years, the Company has expanded its animal
hospital network and veterinary diagnostic laboratory operations through
acquisitions. Animal hospitals and veterinary diagnostic laboratories have been
acquired through issuing a combination of common stock, notes payable and cash.
FUTURE OPERATING RESULTS
This filing contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "expect," "estimate," "anticipate," "predict," "believe" and
similar expressions and variations thereof are intended to identify
forward-looking statements. Such statements appear in a number of places in this
filing and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations, and (ii) the Company's business and growth strategies.
The readers of this filing are cautioned that any such forward-looking
statements are not guarantees of future performance, involve risks and
uncertainties, and that actual results may differ materially from those
projected in this filing, including, without limitation, the information set
forth under the heading "Risk Factors," as well as the information set forth
below.
RESULTS OF OPERATIONS
REVENUES
The following table summarizes the Company's revenues for the three
and nine months ended September 30, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 % Increase 1999 1998 % Increase
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Animal Hospitals . $ 59,425 $ 52,372 13.5% $ 169,585 $ 148,839 13.9%
Laboratories ..... 25,591 23,718 7.9% 78,436 66,962 17.1%
Intercompany Sales (1,426) (1,491) (4,429) (4,453)
--------- --------- --------- --------
$ 83,590 $ 74,599 12.1% $ 243,592 $ 211,348 15.3%
========= ========= ========= ========
</TABLE>
The increases in Animal Hospitals' revenues in the 1999 periods from
the 1998 comparable periods were primarily the result of the increase in the
number of facilities owned by the Company. The results for 1999 include the
revenues of 23 animal hospitals acquired subsequent to September 30, 1998. The
increase in revenues that resulted from increases in volume or prices at
same-store facilities, as compared to the corresponding period in the prior
year, was approximately 1.4% and 1.8% for the three and nine months ended
September 30, 1999, respectively. Same-store facilities are animal hospitals
that were owned as of the beginning of the prior-year periods.
At September 30, 1999, the Company owned and managed 189 animal
hospitals, of which 39 were located in states that prohibit veterinarians from
splitting fees with non-veterinarians and prohibit business corporations from
providing, or holding themselves out as providers of, veterinary medical care.
In these states, the Company has contracted with professional corporations
("PCs") who provide all veterinary medical care and have the rights to all
associated revenues. The Company owns all of the assets of these 39 animal
hospitals and provides all administrative functions. In return for its services,
the Company receives management fees from the PCs, which has been included in
the Company's revenues. The Company does not consolidate the operations of these
39 managed
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animal hospitals. Combined revenues from animal hospitals owned and managed by
VCA (had the managed hospitals' operations been consolidated with owned
hospitals) increased 15.9% and 15.8% for the three and nine months ended
September 30, 1999, respectively, relative to the comparable 1998 periods. The
increase in combined revenues from animal hospitals owned and managed by VCA
resulting from changes in volume or prices at same-store facilities, as compared
to the corresponding periods in the prior year, was approximately 1.5% and 2.1%
for the three and nine months ended September 30, 1999, respectively.
Pursuant to the restructuring agreement and other related agreements
between Heinz Pet Products (HPP) and the Company, the Company has agreed to
provide certain consulting and management services for a three-year period
commencing February 1, 1997 for an aggregate fee of $15.3 million receivable in
semi-annual installments over a five-year period (the "Consulting Fees"). The
Consulting Fees earned for the 1999 and 1998 quarter and nine-month periods
ending September 30, of $1,275,000 and $3,825,000, respectively, are included in
Animal Hospital revenues. The Company will cease to earn these consulting fees
February 2000.
The increase in Laboratories' revenues for the three months ended
September 30, 1999 is primarily due to success achieved with increased marketing
efforts and the acquisition of the business of two veterinary diagnostic
laboratories since March 31, 1998. In addition to the these items revenues for
the nine months have primarily increased due to the $10.9 million acquisition on
February 26, 1998, of certain assets of the veterinary diagnostics laboratory
business from Laboratory Corporation of America Holdings ("LabCorp"), which
generated revenues beginning April 1998.
GROSS PROFIT
The following table summarizes the Company's gross profit for the
three and nine months ended September 30, 1999 and 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 % Increase 1999 1998 % Increase
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Animal Hospitals $13,985 $11,315 23.6% $38,070 $32,864 15.8%
Laboratories ... 9,441 8,099 16.6% 29,262 22,376 30.8%
------- ------- ------- -------
$23,426 $19,414 20.7% $67,332 $55,240 21.9%
======= ======= ======= =======
</TABLE>
Gross profit for the Animal Hospitals is comprised of revenues less
all costs of services and products at the hospitals, including salaries of
veterinarians, technicians and all other hospital-based personnel, facilities
rent, occupancy costs, supply costs and costs of goods sold associated with the
retail sales of pet food and pet supplies. Animal Hospitals' gross profit
represented 23.5% and 21.6% of Animal Hospitals' revenues for the three months
ended September 30, 1999 and 1998, respectively. Animal Hospital gross profit
represented 22.4% and 22.1% of Animal Hospital revenues for the nine months
ended September 30, 1999 and 1998, respectively.
The gross profit margin for "same-store" hospitals owned by the
Company prior to July 1, 1998 was 22.7% and 21.2% for the three months ended
September 30, 1999 and 1998, respectively, and for those owned by the Company
prior to January 1, 1998 was 20.3% and 19.9% for nine months ended September 30,
1999 and 1998, respectively. The gross profit margins for "newly acquired"
hospitals (those acquired by the Company after the beginning of the periods
presented) were 17.8% and 20.4% for the three and nine months ended September
30, 1999, respectively. Gross profit margins for "same-store" and "newly
acquired" hospitals have been calculated excluding the Consulting Fees of
$1,275,000 earned in each of the three-month periods and $3,825,000 earned in
each of the nine-month periods ended September 30, 1999 and 1998 respectively.
Had the managed hospitals' operations been consolidated with owned
hospitals ("Combined Hospital Operations"), gross profit margins would have been
22.4% and 21.0% for the three months ended September 30, 1999 and 1998,
respectively. The Combined Hospital Operations' profit margin would have been
21.5% for both 1999 and 1998 nine-month periods ended September 30, 1999 and
1998. "Same-store" gross profit margins from the Combined Hospital Operations of
animal hospitals owned and managed by VCA was 21.9% and 20.6% for the
three-month periods and 20.1% and 19.4% for the nine-month periods ended
September 30, 1999 and 1998, respectively.
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<PAGE> 12
Gross profit of the Laboratories is comprised of revenues less all
direct costs of services, including salaries of veterinarians, technicians and
other non-administrative, laboratory-based personnel, facilities rent, occupancy
costs, and supply costs. Laboratories gross profit represented 36.9% and 34.1%
of Laboratories revenues for the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999 and 1998,
Laboratories gross margins were 37.3% and 33.4%, respectively. The increase in
the gross profit percentages for the three and nine months ended September 30,
1999 when compared to the corresponding 1998 periods was primarily attributable
to the phase-in of operations of LabCorp during 1998. While the Company
recognized certain costs related to the phase-in of LabCorp during the nine
months ended September 30, 1998, revenue was not earned until April 1, 1998.
The Company's Animal Hospitals historically has realized lower gross
profits margins than that of its Laboratories business. If 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
VCA Corporate selling, general and administrative expenses consists
of administrative expense, including the salaries of corporate officers, other
professional expenses, rent and occupancy costs associated with the Company's
headquarters.
Selling, general and administrative expense for the three and nine
months ended September 30, 1999 and 1998 is comprised of the following (amounts
in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
VCA Corporate .... $ 4,169 $ 3,798 $12,379 $10,543
Laboratories ..... 1,594 1,359 4,275 3,978
------- ------- ------- -------
$ 5,763 $ 5,157 $16,654 $14,521
======= ======= ======= =======
</TABLE>
Selling, general and administrative expense, as a percentage of
total revenues, was 6.9% for both the three months ended September 30, 1999 and
1998. For the nine months ended September 30, 1999 and 1998, selling, general
and administrative expenses as a percentage of total revenues was 6.8% and 6.9%,
respectively.
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 to $11,389,000 for the nine
months ended September 30, 1999 from $9,592,000 for the nine months ended
September 30, 1998. The increase in depreciation and amortization expense is due
to the acquisition of animal hospitals and laboratories since the beginning of
1998. The Company's policy is to amortize goodwill over the expected period to
be benefited, not exceeding forty years.
RESTRUCTURING RESERVES
During 1996, the Company adopted and implemented a restructuring
plan (the "1996 Plan") designed to restructure the Company's animal hospital and
laboratory operations in connection with its 1996 acquisitions. In addition,
certain hospitals which did not meet the new standards for performance adopted
by the Company in light of the increase in the size of its animal hospital
operations, were to be closed or sold. During the nine months ended September
30, 1999, pursuant to the 1996 Plan, the Company incurred $301,000 of cash
expenditures for lease and other contractual obligations. Also, during the nine
months ended September 30, 1999, the Company recognized a $320,000 favorable
settlement from a laboratory operations' contract, terminated as part of the
1996 Plan.
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<PAGE> 13
At September 30, 1999, the 1996 Plan restructuring reserve balance
was $1,090,000, consisting primarily of lease and other contractual obligations,
which will extend through 2014.
During 1997, the Company reviewed the financial performance of its
animal hospitals. As a result of this review, additional animal hospitals were
determined not to meet the Company's performance standards. Accordingly, the
Company adopted phase two of its restructuring plan (the "1997 Plan"). During
the nine months ended September 30, 1999, pursuant to the 1997 Plan, the Company
incurred $51,000 of cash expenditures for lease obligations. In addition, the
Company sold the building of a previously closed hospital resulting in an
additional $4,000 asset write-down.
At September 30, 1999, the 1997 Plan restructuring reserve balance
was $1,173,000, consisting primarily of lease obligations and reserves for asset
write-downs. The 1997 Plan is expected to be completed in 1999, although certain
lease obligations will continue through 2005.
INCOME TAXES
As a result of a favorable change in the U.S. tax regulations with
respect to limitations on the use of net operating loss carry forwards, the
Company recorded a deferred tax benefit during the three months ended September
30, 1999 of $2,102,000. This benefit was recorded as a reduction of the
provision for income taxes.
YEAR 2000 REMEDIATION EXPENSES AND ACCELERATED DEPRECIATION
The Company incurred $1,073,000 and $2,244,000 in Year 2000
remediation expenses for the three and nine months ended September 30, 1999,
respectively. The Company also recorded $247,000 and $861,000 in Year
2000-related accelerated depreciation for the three and nine months ended
September 30, 1999, respectively. See "Impact of Year 2000" for additional
disclosures on the Company's Year 2000 plans and expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations during the nine months ended September
30, 1999 was $32,604,000 compared to $25,013,000 for the comparable period in
1998, an increase of $7,591,000. The most significant component of this increase
is the addition of 23 animal hospitals and two veterinary diagnostic laboratory
businesses acquired since September 30, 1998, as well as a full nine months of
LabCorp operations versus six months in 1998. Additionally, the increase relates
to the timing of certain receipts and disbursements.
The Company has plans to build, upgrade, expand or replace
approximately 15 animal hospitals. The Company expended $6.0 million for such
purposes during the nine months ended September 30, 1999 and expects to incur
additional expenditures of approximately $6.4 million over the next 12 months.
Additionally, the Company spent $5.7 million to purchase equipment, furniture
and fixtures, software and the leasehold improvements of corporate headquarters.
The Company expects to continue upgrades or replacements as needed.
As of September 30, 1999, the Company has incurred approximately
$5.1 million in expenditures relating to Year 2000 compliance, and the Company
projects spending an additional $2.7 million in the fourth quarter of 1999. Of
the total $7.8 million that will be expended, approximately $4.5 million is
expected to be capitalized while $3.3 million is expected to be expensed. See
"Impact of Year 2000" for more information on the Company's plans related to the
Year 2000 compliance.
On March 23, 1999, the Company's Board of Directors authorized the
Company to repurchase up to an additional $15 million of its common stock on the
open market. As of November 5, 1999, the Company has acquired 356,200 shares for
a total consideration of $4.4 million, under this plan.
On September 16, 1999 the Company entered into an agreement to sell
its investment in Veterinary Pet Insurance, Inc. (VPI) to Scottsdale Insurance
Company for $8,250,000 in cash. The terms of the transaction are subsequent to
approval by the California Department of Insurance.
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<PAGE> 14
On April 1, 1999, the Company completed the acquisition of AAH
Management Corp. ("AAH"), for a total consideration of approximately $28.5
million, consisting of $8.6 million in cash, $1.2 million notes, 517,568 shares
of VCA common stock valued at approximately $7.8 million and the assumption of
approximately $10.9 million in debt. In addition to the AAH acquisition, the
Company acquired 13 animal hospitals and two laboratories for a total
consideration of $14.3 million, during the nine months ended September 30, 1999.
The Company has achieved its growth in the past through
acquisitions, and anticipates it will continue its growth in the future through
the acquisition of animal hospitals for cash, stock and notes. The Company
anticipates it will complete the acquisition of an additional 15 to 20
individual animal hospitals during the next 12 months, which will require cash
of up to $15 million. In addition, the Company continues to examine acquisition
opportunities in the veterinary diagnostic laboratory field which may impose
additional cash requirements.
The Company intends to fund its future cash requirements primarily
from its cash and marketable securities and funds generated from operations. The
Company believes these sources of funds will be sufficient to support 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.
IMPACT OF YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer hardware and software
language which utilizes two digits rather than four digits to define the
applicable year. As a result, some of the Company's software, hardware,
equipment and building operating systems have date-sensitive software or
embedded chips which may recognize a date using "00" as Year 1900 rather than as
Year 2000 or not recognize the year at all. This could result in system failures
that would disrupt Company operations, including a temporary inability of the
Company to process transactions and customer invoices or engage in normal
business activities.
The Company will modify or replace significant portions of its
software, hardware, equipment and building operating systems so that those
systems and equipment will properly function beyond December 31, 1999. The
Company believes that with modification or replacement of certain existing
software, hardware, equipment and building operating systems, the Year 2000
issue will be mitigated. However, if action is not timely, the Year 2000 issue
could have a material impact on the operations of the Company.
STATE OF READINESS
The Company's plan to resolve its Year 2000 issues involves the
following four phases: (i) completing an inventory of all software, hardware,
equipment and building operating systems ("Inventory"), (ii) assessing the Year
2000 compliance status of all software, hardware, equipment and building
operating systems ("Assessment"), (iii) repairing or replacing software,
hardware, equipment and building operating systems that are determined not to be
Year 2000 compliant ("Repair/Replace"), and (iv) testing software, hardware,
equipment and building operating systems for Year 2000 compliance ("Testing").
The Company will assess each of its three divisions of business operations
(Animal Hospitals, Laboratories and VCA Corporate) for Year 2000 compliance.
As of November 5, 1999, the Company has completed its inventory of
all software, hardware, equipment and building operating systems. The Company
has completed its assessment of the IT (Information Technology) systems that
could be significantly affected by the Year 2000 issue. The assessment of the
non-IT systems and equipment resulted in the determination that the impact of
the Year 2000 issue on such non-IT systems and equipment will not be material to
the Company's overall operations. There are no significant IT projects that have
currently been deferred due to the Year 2000 efforts.
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<PAGE> 15
The Company's Year 2000 compliance plan includes either upgrades to
or replacement of software, hardware, equipment and building operating systems.
The Company's Year 2000 efforts are progressing according to schedule. The
status of the Company's progress, identified by phase and division, is
summarized in the table below:
<TABLE>
<CAPTION>
Estimated
Approximate Percentage
Phase Division Start Date Completion Date Complete
- --------------------- ----------------------- ------------------ --------------- ----------
<S> <C> <C> <C> <C>
Inventory Animal Hospitals September 1998 January 1999 100%
VCA Corporate September 1998 January 1999 100%
Laboratories September 1998 January 1999 100%
Assessment Animal Hospitals October 1998 June 1999 100%
VCA Corporate October 1998 March 1999 100%
Laboratories September 1998 April 1999 100%
Repair/Replace Animal Hospitals February 1999 November 1999 95%
VCA Corporate October 1998 December 1999 80%
Laboratories October 1998 December 1999 95%
Testing Animal Hospitals February 1999 November 1999 95%
VCA Corporate October 1998 December 1999 80%
Laboratories October 1998 December 1999 95%
</TABLE>
The Company projects that modifications to all software, hardware,
equipment and building operating systems will be Year 2000 compliant by December
1999. There is no certainty that the schedule will proceed according to plan or
that delays will not occur. Specific factors that might cause such delays
include the availability of personnel and the ability to locate and correct all
relevant IT and non-IT systems and equipment.
The Company has completed the process of contacting material third
parties (suppliers, vendors and subcontractors) to determine the extent to which
the Company may be vulnerable as a result of a failure by any of these third
parties to remedy their own Year 2000 issues. The Company has requested all
material third parties to respond to a questionnaire, which was sent by the
Company, on the status of their Year 2000 compliance, and to provide written
assurance that they will be Year 2000 compliant. As of November 5, 1999, the
Company has received approximately 72% of the required responses from material
third parties. Most of the responses received from third parties indicated that
they are in process of evaluating their Year 2000 compliance. The Company is
evaluating and verifying the status of all material third-party Year 2000
compliance status through it's follow-up questionnaires, letters and phone
calls. The Company is uncertain whether the risks of non-Year 2000 compliance by
third parties will materially affect the Company's operations or financial
position. The Company has determined it is not substantially reliant on any one
vendor or supplier and expects to find alternative resources in order to
continue to conduct daily operations. However, there can be no assurance that
material third parties will not suffer a Year 2000 business disruption which
could have a material adverse effect on the Company's results of operations or
financial position.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE
The Company will utilize both internal and external resources to
inventory, assess, repair or replace and test the software, hardware, equipment
and building operating systems needed for Year 2000 modifications. The Company
has prepared a budget relating to all aspects for Year 2000 compliance. This
budget accounts for all labor, hardware, software, maintenance and equipment,
including Animal Hospitals' medical billing systems, VCA Corporate's accounting
system and Laboratories' billing and diagnostic systems.
The Company's expenditures relating to Year 2000 compliance in 1999
through November 5, 1999 amounted to approximately $5.5 million. Expenditures
for Year 2000 compliance costs approximated $365,000 in
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<PAGE> 16
1998. The Company projects spending an additional $2.3 million in 1999. The
total 1999 budget for the Year 2000 project is estimated at approximately $7.8
million. There can be no assurance that the actual cost of Year 2000 correction
will not materially exceed these estimates. The projected costs will be funded
through normal operations and leasing of hardware and software. Additionally,
the Company has recently determined that certain software, hardware, equipment
and building operating systems will not have useful lives beyond 1999 because of
Year 2000 system issues. This results in shorter useful lives than originally
projected. Total depreciation on such software, hardware, equipment and building
operating systems in 1999 is estimated at $1.6 million, which includes
approximately $1.0 million of additional accelerated depreciation as a result of
the shorter projected useful lives.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Unless the Company completes the planned upgrades and implementation
of software, hardware, equipment and building operating systems, the Year 2000
issue will pose significant operational problems. If such conversions are not
made, or are not completed in a timely manner, the Year 2000 issue could have a
material impact on the operations of the Company. Failure to be Year 2000
compliant could result in potential unidentified liabilities, a decline in
billing and collections, and the Company's inability to perform necessary
day-to-day functions. At this time, the estimated lost revenues and the impact
on the Company's operations and financial position cannot be determined. The
following describes the most reasonably likely worst case Year 2000 scenarios
for each division of the Company:
(a) The Company's animal hospitals' medical billing systems would
cease to function properly, resulting in an inability of the
Company to access data or operate the computerized cash
balancing features. Additionally, the medical non-IT systems
and equipment would fail, resulting in an inability of the
Company to provide certain services for customers.
(b) The Company's accounting and payroll systems would fail or
malfunction, resulting in the corruption of data files on a
Company-wide basis. Such failure or malfunction would also
prevent the accounts payable, accounts receivable and payroll
functions from operating properly, resulting in the inability
to produce checks and delays in billings and cash collections.
(c) The Company's laboratories would experience problems if the
computer interface with the lab equipment and/or fax machines
fail. This would prevent the computerization of lab reports,
resulting in delayed reporting to clients. Certain non-IT
medical systems and equipment also could fail, resulting in an
inability of the Company to provide certain services for
customers.
(d) The Company's material third parties would fail to
appropriately remedy their Year 2000 issues, such failure
would have a material adverse effect on the Company's daily
operations, results of operations and financial position.
CONTINGENCY PLAN
The Company's Year 2000 compliance plan includes contingency plans
for each division in the event of any system failures or as a result of any
third parties who become unable to provide goods or services essential to the
Company's operations.
The Contingency plans for critical processes of the Company are as
follows:
- Animal Hospitals can operate using manual accounting and
medical record procedures.
- Laboratories can operate using manual lab reports and
outsourcing for certain specialty services reliant on
medical computer equipment.
- VCA Corporate's payroll system is administered by a third
party who has provided written assurance that they are Year
2000 compliant. VCA Corporate can manually relay payroll
data to the third party vendor. Other accounting functions
could be processed manually or outsourced.
- Alternative vendors can be utilized for most significant
products and services.
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<PAGE> 17
RISK FACTORS
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH
Since January 1, 1996, we have experienced rapid growth and
expansion. In 1996, we acquired The Pet Practice Inc. ("Pet Practice"), Pets'
Rx, Inc. ("Pets' Rx"), as well as 22 individual animal hospitals and six
veterinary diagnostic laboratories. In 1997, we acquired 15 animal hospitals and
three veterinary diagnostic laboratories. In 1998, we acquired 11 animal
hospitals and one veterinary diagnostic laboratory. As a result of these
acquisitions, our revenues grew from $181.4 million in 1996 to $235.9 million in
1997 to $281.0 million in 1998. In 1999 through September 30, we acquired 29
animal hospitals and two veterinary diagnostic laboratories.
We have experienced, and will continue to experience, a strain on
our administrative and operating resources. Our growth has also increased the
demands on our information systems and controls. We cannot guarantee that we
will be able to identify, consummate and integrate acquired companies without
substantial delays, costs or other problems. Once integrated, these acquired
companies may not be profitable. In addition, acquisitions involve several other
risks including:
- adverse short-term effects on our 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 risks associated with
- unanticipated problems or legal liabilities
Our failure to manage our growth effectively will have a material
adverse effect on our results of operations and our ability to execute our
business strategy.
DEPENDENCE ON ACQUISITIONS FOR GROWTH - IF WE DO NOT ACHIEVE OUR ACQUISITION
PROGRAM STRATEGY OUR GROWTH WILL BE DIMINISHED.
We plan to grow primarily by acquisitions of established animal
hospitals. Our acquisition strategy involves 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 the
- satisfactory completion of negotiations minimal disruption to
- our existing operations
Also, our acquisitions may be subject to pre-merger or post-merger
review by governmental authorities for antitrust and other legal and regulatory
compliance. Any adverse regulatory decision may negatively affect our operations
by assessing fines or penalties or requiring us to divest one or more of our
operations.
Our acquisition strategy may cause us to divert our time from
operating matters, which may cause the loss of business and personnel. There are
also possible adverse effects on earnings resulting from the possible loss of
acquired customer bases, amortization of goodwill created in purchase
transactions and the contingent and latent risks associated with the past
operations of, and other unanticipated problems arising in, the acquired
business. If we have sufficient capital, our acquisition strategy involves the
acquisition of at least 15 to 20 facilities per year. Our success is dependent
upon our ability to timely identify, acquire, integrate and manage profitability
of acquired businesses. If we cannot do this, our business and growth may be
harmed.
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<PAGE> 18
SUBSTANTIAL LEVERAGE - OUR SIGNIFICANT AMOUNT OF INDEBTEDNESS COULD ADVERSELY
AFFECT OUR FINANCIAL HEALTH.
We have a significant amount of indebtedness. We incurred our debt
primarily in connection with the acquisition of our animal hospitals and
veterinary diagnostic laboratories and through the sale of the $84,385,000 of
5.25% convertible debentures in April 1996. In certain instances, the debt we
incur in connection with the acquisition of animal hospitals is secured by the
assets of the acquired hospital. At September 30, 1999, we have consolidated
long-term obligations (including current portion) of $159.0 million and our
ratio of long-term debt (including current portion) to total stockholders'
equity was .70 to 1.0. We will require substantial capital to finance our
anticipated growth, so we expect to incur additional debt in the future.
WE HAVE RISKS ASSOCIATED WITH OUR INTANGIBLE ASSETS
A substantial portion of our assets consists of intangible assets,
including goodwill and covenants not to compete relating to the acquisition of
animal hospitals and veterinary diagnostic laboratories. At September 30, 1999,
our balance sheet reflected $287.2 million of intangible assets of these types,
which is a substantial portion of our total assets of $416.8 million at that
date. We expect that the aggregate amount of goodwill and other intangible
assets on our balance sheet will increase as a result of future acquisitions. An
increase may have an adverse impact on earnings because goodwill and other
intangible assets will be amortized against earnings. If VCA is sold or
liquidated, we cannot assure you that the value of these intangible assets will
be realized.
We continually evaluate whether events and circumstances have
occurred that suggest that we may not be able to recover the remaining balance
of our intangible assets or that the estimated useful lives of our intangible
assets has changed. If we determine that certain intangible assets have been
impaired, we will reduce the carrying value of those intangible assets, which
could have a material adverse effect on our results of operations during the
period in which we recognize the reduction. Also, if we determine that the
estimated useful life of certain intangible assets has decreased, we will
accelerate depreciation or amortization of that asset, which could have a
material adverse effect on our results of operations.
FLUCTUATIONS IN QUARTERLY RESULTS - OUR OPERATING RESULTS VARY SIGNIFICANTLY
FROM QUARTER TO QUARTER WHICH COULD IMPACT OUR STOCK PRICE.
Our operating results may fluctuate significantly in the future. We
believe that quarter to quarter or annual comparisons of our operating results
are not a good indication of our future performance. Historically, we have
experienced higher sales in the second and third quarters than in the first and
fourth quarters. The demand for our veterinary services is 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. Also,
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 our costs are fixed and do not
vary with the level of demand for our services. Therefore, net income for the
second and third quarters at individual animal hospitals and veterinary
diagnostic laboratories generally is higher than in the first and fourth
quarters.
OUR SUCCESS DEPENDS ON KEY MEMBERS OF MANAGEMENT
Our success will continue to depend on our executive officers and
other key management personnel, particularly our Chief Executive Officer, Robert
L. Antin. VCA has employment contracts with Mr. Robert Antin, Mr. Arthur Antin,
Chief Operating Officer and Mr. Neil Tauber, Senior Vice President. Each of
these agreements terminates in January 2002. VCA has no other employment
contracts with its officers. None of VCA's officers is a party to
non-competition covenants which extend beyond the term of their employment with
VCA. VCA does not maintain any key man life insurance coverage on the lives of
its senior management. As we continue to grow, we will continue to hire, appoint
or otherwise change senior managers and other key executives. We cannot assure
you that we will be able to retain our executive officers and key personnel or
attract additional qualified members to management in the future. Also, the
success of certain of our acquisitions may depend on our ability to retain
selling veterinarians of the acquired companies. If we lose the services of any
key manager or selling veterinarian, our business may be materially adversely
affected.
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<PAGE> 19
COMPETITION
The animal health care industry is highly competitive. We believe
that the primary competitive factors in connection with animal hospitals
include:
- convenient location
- recommendation of friends
- reasonable fees
- quality of care
- convenient hours
Our primary competitors for our animal hospitals in most markets are
individual practitioners or small, regional multi-clinic practices. Also,
regional pet care companies and certain national companies, including operators
of super-stores, are developing multi-regional networks of animal hospitals in
markets in which we operate. We believe that the primary competitive factors in
connection with veterinary diagnostic laboratories include:
- quality
- price
- time required to report results
There are many clinical laboratory companies which provide a broad
range of laboratory testing services in the same markets we service. Also,
several national companies provide on-site diagnostic equipment that allows
veterinarians to perform their own laboratory tests.
OUR BUSINESS IS SUBJECT TO 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 state or local courts and by
regulatory authorities with broad discretion. While we seek to comply with these
laws in each state in which we operate, we cannot assure you that, given varying
and uncertain interpretations of these laws, we are in compliance with these
restrictions in all states. A determination that we violate any applicable
restriction on the practice of veterinary medicine in any state in which we
operate could have a material adverse effect on our operations if we are unable
to restructure our operations to comply with the requirements of those states.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS
The Board of Directors is authorized to issue up to 2,000,000 shares
of preferred stock. The Board also is authorized to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of any preferred stock may adversely
affect the rights of holders of common stock. Our ability to issue preferred
stock gives us flexibility concerning possible acquisitions and financings, but
it could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, any preferred stock to be issued may have
other rights, including economic rights, senior to the common stock which could
have a material adverse effect on the market value of the common stock.
We are subject to Delaware laws that could have the effect of
delaying, deterring or preventing a change in control of the Company. One of
these laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless some conditions are met. In addition,
provisions of our Certificate of Incorporation and By-laws could have the effect
of discouraging potential takeover attempts or making it more difficult for
stockholders to change management. Also, H.J. Heinz Company has an option to
purchase our interest in the Vet's Choice joint venture if there is a change in
control (as defined in that agreement), which may have the same effect. As a
result, stockholders may not have the opportunity to sell their shares at a
substantial premium over the market price of the shares.
19
<PAGE> 20
In addition, we have adopted a Stockholder Rights Plan, under which
we distributed a dividend of one right for each outstanding share of our common
stock. These rights will cause substantial dilution to the ownership of a person
or group that attempts to acquire us on terms not approved by our Board of
Directors and may have the effect of deterring hostile takeover attempts.
SHARES ELIGIBLE FOR FUTURE SALE MAY IMPACT OUR STOCK PRICE
Future sales by existing stockholders could adversely affect the
prevailing market price of the common stock. As of November 5, 1999, VCA had
21,580,422 shares of common stock outstanding (including 583,365 shares held in
treasury), most of which are either freely tradable in the public market without
restriction or tradable in accordance with Rule 144 under the Securities Act.
There are also 7,110 shares which VCA is obligated to issue in connection with
the Pets' Rx and Pet Practice mergers and certain acquisitions; 3,674,771 shares
of common stock issuable upon exercise of outstanding stock options; and
2,456,623 shares issuable upon conversion of convertible debentures. Shares may
also be issued under price guarantees delivered in connection with acquisitions.
VOLATILITY OF STOCK PRICE
Historically, our stock price has been volatile. Factors that may
have significant impact on the market price of our stock include:
- variations in quarterly operating results
- litigation involving VCA
- announcements by VCA or its competitors
- general conditions in the animal health care industry
The stock market in recent years has fluctuated in price and volume
significantly. These fluctuations have been unrelated or disproportionate to the
operating performance of publicly traded companies. Our future earnings and
stock price may be subject to significant volatility, particularly on a
quarterly basis. Shortfalls in our revenues or earnings in any given period
relative to the levels expected by securities analysts could immediately,
significantly and adversely affect the trading price of our common stock.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion on legal proceedings, see Footnote 5 - "Stockholder
Lawsuits". In addition to the legal proceedings described herein, the Company is
a party to other litigation which arises in the ordinary course of its business,
none of which is material.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
21
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VETERINARY CENTERS OF AMERICA, INC
Date: November 5, 1999 /s/ TOMAS W. FULLER
-----------------------------------------
Tomas W. Fuller
Chief Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM EXHIBIT PAGE
- ---- ------- ----
<S> <C> <C>
27.1 Financial Data Schedule 24
</TABLE>
23
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,991
<SECURITIES> 19,006
<RECEIVABLES> 14,931
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,219
<PP&E> 65,134
<DEPRECIATION> 0
<TOTAL-ASSETS> 416,774
<CURRENT-LIABILITIES> 46,175
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 226,734
<TOTAL-LIABILITY-AND-EQUITY> 416,774
<SALES> 0
<TOTAL-REVENUES> 243,592
<CGS> 0
<TOTAL-COSTS> 176,260
<OTHER-EXPENSES> 31,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,943
<INCOME-PRETAX> 28,849
<INCOME-TAX> 10,797
<INCOME-CONTINUING> 18,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,052
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.82
</TABLE>
