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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] 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 Identification No.)
incorporation or organization)
12401 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064-1022
(Address of principal executive offices and zip code)
(310) 584-6500
(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
Preferred Stock Purchase Rights
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 August 9, 2000, there were outstanding 15,875,646 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 ($14.25 per share) of
the Registrant's Common Stock on the NASDAQ National Market, was $226,227,956.
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
NONE
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PART I
ITEM 1. BUSINESS
GENERAL
Veterinary Centers of America, Inc. and subsidiaries ("VCA" or the
"Company") was founded in 1986 and is a leading animal health care company. The
Company has established a premier position in two core businesses, animal
hospitals ("Animal Hospitals") and veterinary diagnostic laboratories
("Laboratories"). In addition, the Company owns a partnership interest in a
joint venture, Vet's Choice, with Heinz Pet Products ("HPP"), which markets and
distributes premium pet foods. The Company operates the largest network of
free-standing, full-service animal hospitals in the country and the largest
network of veterinary-exclusive laboratories in the nation.
The Company's animal hospitals offer a full range of general medical and
surgical services for companion 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, 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.
THE ANIMAL HEALTH CARE INDUSTRY
The animal hospital and veterinary laboratory markets in which the
Company operates had total domestic revenues in 1996 of approximately $11
billion. The Company's two market segments, Animal Hospitals and Laboratories,
represented approximately 70% and 30%, respectively, of the Company's revenues
for the year ended December 31, 1999.
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 by type of animal. The United States market
for veterinary services is highly fragmented with approximately 124 million
dogs, cats and birds 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 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, urine or tissue samples and other specimens.
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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. Also, the Company's laboratories are staffed by
highly trained individuals who specialize in the detection and diagnosis of
diseases. 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 access to professional consultation services,
rapid test reporting, 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.
BUSINESS STRATEGY
The Company's goal is to strengthen its position as a leading 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 Hospitals and Laboratories businesses through internal
growth and acquisitions; (ii) achieve cost savings by consolidating operations
and realizing economies of scale in marketing, purchasing and administrative
support functions, and by implementing the Company's standard management
programs; (iii) establish brand identification with the VCA name through
signage, marketing and association with its pet healthcare publication, VCA
Family Pet(TM); (iv) take advantage of its unique opportunity to deliver its
products and services through multiple channels to its customers, primarily
veterinarians and pet owners; and (v) capitalize on its leadership position
within the 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 1986 the Company has expanded rapidly from a single animal
hospital in Los Angeles to a nationwide network of 197 animal hospitals in 29
states at March 15, 2000. 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 diagnostics laboratory business. Since March 1994 the Company has
acquired the businesses of 18 veterinary diagnostic laboratories, which have
been consolidated into 13 facilities, making it the nation's largest network of
veterinary-exclusive diagnostic laboratories serving over 13,000 animal
hospitals located in all 50 states. The Company plans to continue its aggressive
hospital acquisition program. The Company will also consider acquiring multiple
hospital organizations and veterinary diagnostic laboratories, as opportunities
arise.
CONSOLIDATE AND STANDARDIZE OPERATIONS TO ENHANCE PROFITABILITY
Upon the acquisition of an animal hospital or veterinary diagnostic
laboratory, the Company immediately implements 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:
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- PROVIDE MARKETING MATERIALS - The Company seeks to market
additional services to clients at its animal hospitals by
providing marketing and educational materials promoting pet
health and quality pet care programs to its animal hospitals.
- CENTRALIZE ADMINISTRATIVE FUNCTIONS - The Company centralizes
most administrative functions at its corporate office,
including: purchasing, accounting, payroll, data processing,
personnel, accounts payable, information services, marketing,
budgeting and other administrative functions.
- CONSOLIDATE PURCHASING - The Company seeks advantageous
circumstances where it can purchase 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 animal hospitals and
laboratories.
INTERNAL REVENUE GROWTH
The Company also seeks to expand through internal growth. To achieve
growth, the Company: (i) increases veterinarian productivity by freeing the
veterinarian from administrative tasks, 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 client
education and marketing materials promoting pet health and quality pet health
care programs; (iv) provides its facilities with access to medical specialists;
(v) adds VCA's name to the acquired facilities to enhance customer awareness;
(vi) implements sales programs to attract new customers; and (vii) publishes and
distributes to over 800,000 of its clients a pet care magazine, VCA Family
Pet(TM), which builds brand loyalty, educates consumers on the value of
preventive pet health care and promotes utilization of the Company's animal
hospitals. By implementing these strategies, VCA seeks to become the most
convenient and most recognized provider of veterinary services in its markets.
UPGRADE AND EXPAND FACILITIES
The Company seeks to enhance client satisfaction by providing a
pleasant, attractive and state-of-the-art hospital environment. The Company
continually evaluates its facilities and seeks opportunities to upgrade or
expand its animal hospitals in order to increase capacity, improve visibility
and/or enhance its attractiveness. The Company is currently rebuilding or
performing an extensive remodeling of 13 of its hospitals for a total projected
cost of approximately $10.8 million.
CONTINUE TO CAPITALIZE ON EXISTING RELATIONSHIPS TO LEVERAGE LINES OF BUSINESS
The Company believes that its two lines of business -- Animal Hospitals
and Laboratories -- 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. 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.
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ACQUISITION STRATEGY
ANIMAL HOSPITALS
The Company seeks to enter a new geographic 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 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
$1 million and $2 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 internal growth and
selective acquisitions. The Company seeks acquisition opportunities in the
veterinary diagnostics laboratory industry that will complement its existing
business or will expand the geographic area that it services. Although the
Company continues to evaluate laboratory acquisition opportunities, the Company
anticipates that the pace of laboratory acquisitions will slow down in future
periods when compared to historical activity. 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 believes it is competitively positioned to continue to service its
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 typically executes non-competition and employment
agreements with the selling owners. 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 successfully integrate the acquisitions into the operations of
VCA. See further discussion in "Risk Factors" in "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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OPERATIONS AND MARKETING
ANIMAL HOSPITALS
The Company operates the largest network of free-standing, full-service
animal hospitals in the United States. At December 31, 1999, the Company
operated 194 animal hospitals. From January 1, 2000 through March 15, 2000, the
Company acquired six animal hospitals (two of which were merged into existing
VCA facilities upon acquisition) and closed three animal hospitals. At March 15,
2000, the Company operated 197 animal hospitals in 29 states, as detailed in the
following tables:
<TABLE>
<CAPTION>
Western States Central States Eastern States
------------------- ------------------ ------------------------
<S> <C> <C> <C> <C> <C>
Alaska 4 Illinois 15 Alabama 1
Arizona 1 Indiana 7 Connecticut 2
California 40 Michigan 12 Delaware 3
Colorado 2 Missouri 1 Florida 18
Hawaii 1 Nebraska 1 Georgia 1
Nevada 6 Ohio 5 Maryland 8
New Mexico 3 Massachusetts 8
Texas 9 New Jersey 9
Utah 2 New York 19
North Carolina 2
Pennsylvania 10
South Carolina 1
Virginia 5
West Virginia 1
--- --- ---
Totals 68 41 88
=== === ===
</TABLE>
The Company's animal hospitals offer a full range of general medical and
surgical services for companion animals, including: dogs, cats, birds and other
household pets. In addition to treating disease and injury, animal hospitals
emphasize pet wellness through pet health education and preventative care. The
Company's animal hospital programs encourage routine vaccinations, health
examinations, spaying, neutering and dental care. The Company also publishes and
mails to its client base a magazine promoting the benefits of preventative pet
health 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 broad range of uniform quality veterinary
services. 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 post-graduate teaching
programs for veterinarians at seven of its facilities, which trains
approximately 40 doctors per year. 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.
VCA has established a Medical Advisory Board to support its operations.
The Medical Advisory Board's function, under the direction of the Company's
Chief Medical Officer, is to recommend medical standards for local animal
hospitals. The committee is comprised of leading veterinarians representing
different geographic regions and medical specialties served by the Company.
Currently, four members of the Medical Advisory Board are esteemed faculty
members at leading veterinary colleges in the U.S. They serve as medical
consultants to VCA.
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The Company seeks to provide state-of-the-art medical care in a clean,
attractive environment, by renovating facilities and upgrading its equipment on
a periodic basis. A broad range of services are available at the Company's
facilities. 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.
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 animal hospitals and laboratories. Financial control is
maintained through uniform fiscal and accounting policies, which are established
at the corporate level for use by operations. 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 significantly from quarter to quarter.
Historically, 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. The Company believes
such programs, services and products may increase the opportunities to expand
the Company's market share in the regional markets for veterinary services in
which it competes.
The Company provides management services to certain professional
corporations ("PCs") in states with laws that prohibit veterinarians from
splitting fees with non-veterinarians and prohibit business corporations from
providing veterinary services through the direct employment of veterinarians. As
of March 15, 2000, the Company has established operations in seven of such
states and believes these operations comply in all material respects with
applicable laws. In these states, the Company has long-term management
agreements ("Management Agreements") with PCs, ranging from 10 to 40 years with
non-binding renewal options available. The PCs are owned by veterinarians who
provide veterinary medical services at the animal hospitals located in their
particular state. Pursuant to the Management Agreements, the PCs are each solely
responsible for all aspects of the practice of veterinary medicine, as defined
by their respective state. The Company is responsible for providing the
following: (i) day-to-day financial and administrative supervision and
management; (ii) non-veterinarian personnel needed to operate and support the
animal hospital; (iii) maintenance of patient records; (iv) recruitment of
veterinary staff; (v) marketing; and (vi) malpractice and general insurance. As
compensation for these services, the Company receives management fees, which are
included in revenues. The amount of such fees are not specifically defined in
the Management Agreements. In most instances, the PCs receive a salary for its
services, and the Company enjoys the risks and rewards related to the overall
profitability of the animal hospital.
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VETERINARY DIAGNOSTIC LABORATORIES
The Company operates the largest network of veterinary-exclusive
diagnostic laboratories in the United States, servicing over 13,000 animal
hospitals located in all 50 states. The Company operates 13 full-service
laboratories located in Irvine, California; Chicago, Illinois; Phoenix, Arizona;
Farmingdale, New York; Dallas and Houston, Texas; Tampa, Florida; Portland,
Oregon; San Jose, California; Atlanta, Georgia; Honolulu, Hawaii; Memphis,
Tennessee; and Denver, Colorado.
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 performed at night and the test results are automatically
transmitted via fax machine to the veterinarian before the start of business the
next morning.
In addition to diagnostic laboratory testing, the Company provides a
variety of laboratory services to its veterinarian clients which the Company
believes enhances its competitive position. Laboratory services include:
- 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. Animal hospital
clients located outside the areas serviced by the Company's
pickup and delivery network are serviced using the Company's
Test Express service whereby specimens are sent via Federal
Express to the Company's Memphis, Tennessee laboratory.
- RESULTS REPORTING - Rapid turn-around 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 fax machine before 8:00 a.m.
the following day.
- STAT RESULTS REPORTING - The Company performs certain routine
tests quickly and reports results to veterinarians within hours
of being picked up from the veterinarian. The turn-around time
for such STAT reporting is generally three hours or less. The
laboratories that provide STAT reporting are located in
geographic areas where there is a high concentration of
veterinarians and an airline hub operation. The Company may
establish or close laboratories with STAT reporting capabilities
depending upon the volume of tests performed and the needs of
its veterinarian clients.
- CLIENT SERVICE - Veterinarians are not obligated to use the
services of any particular laboratory and can change their
laboratory service provider at any time. Therefore, the
timeliness and quality of 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 in interpreting the lab's
results and diagnosing or treating
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diseases. Accordingly, the laboratories' professional staff
include board certified specialists in pathology, internal
medicine, oncology, cardiology, dermatology, neurology and
endocrinology.
- QUALITY ASSURANCE - The Company has quality assurance programs
intended to: (i) ensure that specimens are collected and
transported properly; (ii) tests are performed accurately; and
(iii) client, patient and test information is reported and
billed correctly. The quality assurance programs include quality
control testing of 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 31 full-time sales and field service representatives who
market laboratory services and maintain relationships with existing customers.
The Company supports its marketing efforts by developing marketing literature,
attending trade shows, involving itself in trade associations and providing
educational services, among other activities.
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 on
customary commercial terms, requiring payment within 30 days of the date the
service is performed. The Company is not dependent upon third-party payors for
collection of its fees.
SYSTEMS
The Company realized the importance of hospital management information
systems in the past and thus has made a significant investment in these systems.
Substantially all of the Company's animal hospitals utilize consistent patient
accounting/point-of-sale software. 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.
The Company intends to further upgrade and integrate its hospital
management information system creating a data warehouse. 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 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 allow
veterinarians to perform their own laboratory tests.
JOINT VENTURE AND INVESTMENT
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.
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Profits and losses are allocated 99.9% to HPP and 0.1% to the Company.
Additionally, the Company agreed to provide certain consulting and management
services for a three-year period that commenced on February 1, 1997 for an
aggregate fee of $15.3 million, payable in semi-annual installments over a
five-year period (the "Consulting Fees"). The Consulting Fees earned for the
1999, 1998 and 1997 twelve-month periods ended December 31, of $5.1 million,
$5.1 million and $4.7 million, respectively, are included in Animal Hospitals
revenues. The Company ceased to earn these consulting fees on February 1, 2000.
In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc. (VPI), the
largest provider of pet health insurance in the United States. The Company
accounts for this investment using the cost method. The Company sold its
investment in VPI and received $8.25 million in cash in February 2000 resulting
in a one-time gain of approximately $3.25 million.
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. 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, 1999, the Company had approximately 3,465
full-time-equivalent employees, including approximately 650 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 are
located in West Los Angeles, California, in approximately 30,000 square feet of
leased space costing $47,712 per month. The Company maintains leased and owned
facilities at 239 other locations which house its animal hospitals and
laboratories. The Company owns 64 facilities and the remainder are leased. For
the year ended December 31, 1999, the Company had lease costs of approximately
$9,527,000 and the Company expects to have lease costs at facilities existing at
December 31, 1999 of approximately $9,842,000 in 2000. Lease costs for the
hospitals acquired between December 31, 1999 and March 15, 2000, will amount to
approximately $105,000 in 2000. The Company believes that its real property
facilities are adequate for its current needs.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
We are aware of six complaints that have been filed relating to the
Merger (as defined in Item 7 below under the heading "Recent Developments").
The Company and members of the Board of Directors have been named as defendants
in class actions lawsuits filed in the Delaware Court of Chancery and the
California Superior Court.
While the allegations contained in each complaint are not identical,
the complaints generally assert that the $15.00 per share price to be paid to
our public stockholders is inadequate and does not represent the value of the
assets and future prospects of the Company. The complaints also generally
allege that the defendants engaged in self-dealing without regard to conflicts
of interest and that the defendants breached their fiduciary duties in
approving the Merger Agreement (as defined in Item 7 below under the heading
"Recent Developments").
The complaints seek certification of a class of all our stockholders
whose stock will be acquired in connection with the Merger and seek injunctive
relief that would, if granted, prevent the completion of the Merger. The
complaints also seek unspecified damages, attorneys' fees and other relief. We
believe that the allegations contained in the complaints are without merit and
intend to contest the actions vigorously. The individual defendants have
advised us that they also believe that the allegations in the complaints are
without merit and that they intend to contest the actions vigorously.
We cannot assure you that we will successfully defend the allegations
included in the complaints or that a motion to enjoin the transactions
contemplated by the Merger Agreement will not be made, and if made, that it
would not be granted. The inability of the Company to resolve the claims that
are the basis for the lawsuits or to prevail in any related litigation could
result in the Company being required to pay substantial monetary damages for
which the Company may not be adequately insured, which could have a material
adverse effect on the Company's business, financial position and results of
operations. Regardless of whether the Merger is consummated or the outcome of
the lawsuits, the Company may incur significant related expenses and costs that
could have an adverse effect on the Company's business and operations.
Furthermore, the cases could involve a substantial diversion of the time of some
members of management. Accordingly, we are unable to estimate the impact of any
potential liabilities associated with the complaints.
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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades 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 1998 by Quarter
First ............................ 16 1/2 13 5/16
Second ........................... 19 7/16 15 1/2
Third ............................ 20 5/8 16 1/2
Fourth ........................... 20 3/16 13 3/8
Fiscal 1999 by Quarter
First ............................ 20 1/8 14 1/8
Second ........................... 15 13
Third ............................ 14 7/16 10 15/16
Fourth ........................... 13 3/8 9 5/16
</TABLE>
At August 9, 2000, the closing price of the common stock on the Nasdaq
Stock Market was $14 1/4.
At August 9, 2000, there were approximately 642 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
On June 19, 1996, VCA completed the merger with Pets' Rx, Inc. ("Pets'
Rx"). This transaction has been 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, 1999 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, 1996 is 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.
11
<PAGE> 12
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(In thousands, except for per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ............................................ $ 320,560 $ 281,039 $ 235,913 $ 181,428 $ 107,694
Gross profit ........................................ 86,902 71,659 57,283 42,574 27,595
Selling, general and administrative expense ......... 22,457 19,693 17,676 19,735 13,684
Depreciation and amortization expense ............... 15,496 13,132 11,199 7,496 4,144
Year 2000 remediation expenses ...................... 2,839 -- -- -- --
Year 2000 accelerated depreciation .................. 967 -- -- -- --
Merger costs ........................................ -- -- -- 2,901 --
Restructuring charges and write-down of
assets ........................................... -- -- 2,074 15,213 3,234
Reversal of restructuring charges ................... (1,873) -- (2,074) -- --
Operating income (loss) ............................. 47,016 38,834 28,408 (2,771) 6,533
Interest income ..................................... 1,194 2,357 4,182 4,487 828
Interest expense .................................... 10,643 11,189 11,593 7,812 3,377
Minority interest in income of subsidiaries ......... 850 780 424 6,577 2,960
Provision for income taxes .......................... 16,462 12,954 9,347 1,959 2,238
Income tax adjustment ............................... (2,102) -- -- -- --
Net income (loss) ................................... 22,357 16,268 11,226 (14,632) (1,214)
Diluted earnings per share:
Net earnings (loss) per common share ............. $ 1.02 $ 0.74 $ 0.53 $ (0.92) $ (0.13)
Shares used for computing
diluted earnings (loss) per share ............. 21,985 21,940 21,013 15,942 9,224
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
(In thousands)
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ........................... $ 10,620 $ 8,977 $ 19,882 $ 29,621 $ 5,396
Marketable securities ............................... 5,313 33,358 51,371 73,306 42,155
Total assets ........................................ 426,500 393,960 386,089 354,009 153,416
Current portion of long-term obligations
and notes payable ................................ 21,901 17,431 19,369 14,055 7,496
Long-term obligations, less current portion ......... 139,634 142,356 154,506 134,767 36,778
Total stockholders' equity .......................... 231,229 202,685 180,851 167,350 90,217
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Veterinary Centers of America, Inc. and subsidiaries ("VCA" or the
"Company") is a leading animal health care company. The Company has established
a premier position in its two core businesses, Animal Hospitals and
Laboratories. In addition, the Company owns a partnership interest in a joint
venture with Heinz Pet Products ("HPP"), which markets and distributes premium
pet foods. The Company operates the largest network of free-standing, full
service animal hospitals and veterinary-exclusive laboratories in the nation.
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
1995, 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
12
<PAGE> 13
with the acquisition of 53 additional animal hospitals. In 1996, the Company
completed two significant acquisitions which more than doubled the Company's
animal hospital operations. Pets' Rx, Inc. ("Pets' Rx") was acquired in June
1996 (16 hospitals) in a business combination accounted for as a pooling of
interests, and The Pet Practice, Inc. ("Pet Practice") was acquired in July 1996
(84 hospitals). The Company made these acquisitions in order to promote the
growth of the Company's hospital network, broaden the geographic scope of the
Company's operations, and to take advantage of synergies that the Company
believes exist between its business lines. In addition to the two significant
1996 acquisitions, the Company has acquired 85 animal hospitals during the four
years ended December 31, 1999. At December 31, 1999, the Company owned or
operated 194 animal hospitals, throughout 28 states.
In 1993, the Company began to expand the scope of its operations by
launching into the veterinary diagnostic laboratory markets. The integration of
the veterinary care, veterinary diagnostic laboratory and premium pet food
markets is the foundation of the Company's business strategy to leverage its
access to its primary customers, veterinarians and pet owners.
In 1994, the Company expanded its veterinary diagnostic laboratory
operations by acquiring a 70% interest in Professional Animal Laboratory
("PAL"). In 1995, the Company acquired the remaining 30% of PAL. Also in 1995,
the Company acquired a 51% interest in Vet Research Laboratories, LLC ("Vet
Research"), and acquired three smaller regional veterinary diagnostic
laboratories. The Company's laboratory operations continued to grow with the
acquisition of Southwest Veterinary Diagnostics Laboratory, Inc. ("Southwest")
in 1996. Throughout 1996 and 1997, an additional eight laboratories were
acquired, as well as the remaining interest in Vet Research in January 1997. In
February 1998, the Company acquired certain assets of the veterinary diagnostic
laboratory business of Laboratory Corporation of America Holdings ("LabCorp")
for $10.9 million. This purchase from LabCorp has enhanced the Laboratories
operations' presence in the Midwest and East coast and helped in the growth of
the Test Express laboratory business. Test Express is a segment of the
Laboratories operations that utilizes Federal Express to service our clients in
remote areas. In 1999, the Company continued to expand its veterinary diagnostic
laboratory operations by acquiring two additional laboratories, which were
merged into existing VCA facilities upon acquisition. At December 31, 1999, the
Company's network of veterinary diagnostic laboratories consisted of 13
full-service laboratories located throughout the United States.
The Company entered into a joint venture, Vet's Choice, with HPP in 1993
to develop, manufacture and market a full-line of premium pet food. 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 1994 with the launch of Select Balance. In 1995, Vet's Choice began
selling its second product line, Select Care. Through 1996, the Company, as
majority owner and managing general partner, exercised day-to-day operating
control for all aspects of Vet's Choice, including sales, marketing,
administration and distribution. As a result of the acquisition of two other
premium pet food companies during 1996, HPP obtained expanded capabilities to
manufacture, market and distribute premium pet foods. In order for the Vet's
Choice business to benefit from the economies of scale in marketing, sales and
distribution that HPP had attained with the acquisitions in 1996, the joint
venture agreement was restructured effective February 1, 1997. Under the terms
of the restructuring, HPP was made managing partner and assumed the day-to-day
control of the joint venture. The operations of Vet's Choice were merged into
HPP's other premium pet food business. In connection with the restructuring, the
Company agreed to provide certain consulting and management services for a
three-year period that commenced on February 1, 1997, for an aggregate fee of
$15.3 million, payable in semi-annual installments over a five-year period (the
"Consulting Fees"). The Consulting Fees earned during 1999, 1998 and 1997, of
$5.1 million, $5.1 million and $4.7 million, respectively, are included in
Animal Hospitals revenues. The Company ceased to earn these consulting fees on
February 1, 2000.
RECENT DEVELOPMENTS
On August 11, 2000, the Company entered into an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") with Vicar Recap, Inc.
("Recap"), a Delaware corporation and wholly owned by Green Equity Investors
III, L.P. ("GEIII"), and Vicar Operating Company, Inc., a Delaware corporation
and wholly owned subsidiary of the Company. According to the terms of the Merger
Agreement, the Company will be merged with and into Recap, with the Company as
the surviving corporation (the "Merger"). In the Merger, each outstanding share
of the Company's stock, par value $.001 per share, (other than shares held by
certain members of management and employees that are retained as shares of the
surviving company, shares held by dissenting stockholders, Recap, GEIII and in
the Company's treasury) will be converted into the right to receive a cash
payment of $15.00, without interest. Certain members of management and employees
of the Company will retain shares of common stock of the Company as common stock
of the surviving corporation or provide other consideration of equivalent value
to acquire, in aggregate, approximately 266,666 shares of common stock of the
surviving company. The Board of Directors, relying on the recommendation of a
special committee of the Board of Directors, comprised of directors who have no
financial interest in the Merger that is different from the interests of the
company's public stockholders, unanimously approved the Merger Agreement. The
Merger is subject to stockholder approval and other customary closing
conditions.
Completion of the proposed Merger is subject to, among other things, the
condition that all financing necessary in connection with the completion of the
transactions contemplated by the Merger Agreement shall have been obtained. The
total amount expected to be required is approximately $540 million, to be
comprised of approximately $251 million of credit facilities, $120 million of
debentures, $156 million of equity contributions and $13 million of cash from
the Company.
During the second quarter of 2000, the Company invested $5.0 million in
convertible preferred stock of yopet.com inc., a start-up corporation
majority-owned and controlled by Robert A. Antin, the Chief Executive Officer
and a director of the Company.
On June 15, 2000, the Company entered into a credit agreement with Wells
Fargo Bank, National Association to provide a $15 million line of credit. The
proceeds from advances on the credit line are to be used to finance acquisitions
and up to $3 million for working capital needs. The outstanding principal
balance will bear interest at an annual rate equal to the prime rate minus
one-quarter percent. The credit agreement expires on November 30, 2000. As of
August 9, 2000, no advances had been drawn by the Company under this credit
agreement.
During 1999, the Company purchased 24 individual animal hospitals and
two veterinary diagnostic laboratories all of which were accounted for as
purchases. Of the purchases, five of the hospitals and both laboratories were
merged upon acquisition into existing VCA facilities. Including acquisition
costs, VCA paid an aggregate consideration of $24,240,000, consisting of
$10,394,000 in cash, $12,402,000 in debt, 70,712 shares of
13
<PAGE> 14
common stock of the Company with a value of $1,075,000, and the assumption of
liabilities totaling $369,000. The aggregated purchase price was allocated as
follows: $1,930,000 to tangible assets, $21,351,000 to goodwill and $959,000 to
other intangibles. In addition to the 24 individual animal hospitals purchased,
on April 1, 1999, the Company completed the acquisition of AAH Management Corp.
("AAH") for a total consideration (including acquisition costs) of $28,969,000,
consisting of 517,585 shares of VCA common stock, with a value at the date of
acquisition of $7,753,000, $9,103,000 in cash and acquisition costs, $1,192,000
in debt and the assumption of $10,921,000 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 of fixed assets: $6,340,000 to tangible assets and
$22,629,000 to goodwill and other intangibles.
From January 1, 2000 through August 9, 2000, the Company purchased 11
animal hospitals, three of which were merged into existing VCA facilities, and
one veterinary diagnostic laboratory, which was also merged into an existing VCA
facility, for an aggregate consideration (including acquisition costs) of
$13,924,000, consisting of $5,897,000 in cash, $7,802,000 in debt and the
assumption of liabilities totaling $225,000. The $13,924,000 aggregate purchase
price was allocated as follows: $503,000 to tangible assets, $12,792,000 to
goodwill and $629,000 to other intangible assets.
BASIS OF REPORTING
The Company reports its operations in two business lines -- Animal
Hospitals and Laboratories. Animal Hospitals operations include the operations
of the Company's animal hospitals. Laboratories operations include the
operations of the Company's veterinary diagnostic laboratories.
In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc. (VPI), the
largest provider of pet health insurance in the United States. The Company
accounts for this investment using the cost method. The Company sold its
investment in VPI and received $8.25 million in cash in February 2000 resulting
in a one-time gain in 2000 of approximately $3.25 million.
The Company's animal hospitals use the Company's veterinary diagnostic
laboratory services. Revenue and the corresponding expense from intercompany
sales included in consolidated operating results, totaled $5,810,000, $5,845,000
and $4,696,000 in 1999, 1998 and 1997, respectively, have been eliminated from
the Company's operating results.
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board has recently issued its Consensus Opinion 97-2 ("EITF 97-2").
EITF 97-2 addresses certain specific matters pertaining to the contractual
management relationships between entities that operate in the health care
industry, which includes the practices of medicine, dentistry and veterinary
science. EITF 97-2 has been adopted by the Company for its year ending December
31, 1998. EITF 97-2 addresses the ability of EITF 97-2 management companies to
consolidate the results of practices with which it has an existing relationship.
The Company has not met the EITF consolidation requirements for the 44 animal
hospitals it manages. Management fees received pursuant to certain management
agreements are included in revenues. The Company's financial statements for the
year ended December 31, 1997 have been restated to conform to the 1998 and 1999
presentation. The adoption of EITF 97-2 had no effect on the Company's
previously reported operating income (loss) or net income (loss).
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 and involve risks and
uncertainties, and that actual results may differ materially from those
projected in this filing,
14
<PAGE> 15
including, without limitation, the information set forth under the heading "Risk
Factors," as well as the information set forth below.
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,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 100.0%
Direct costs ................................ 72.9 74.5 75.7
----- ----- -----
Gross profit ............................. 27.1 25.5 24.3
Selling, general and administrative expense . 7.0 7.0 7.5
Depreciation and amortization expense ....... 4.8 4.7 4.7
Year 2000 remediation expense ............... 0.9 -- --
Year 2000 accelerated depreciation .......... 0.3 -- --
Restructuring charges ....................... -- -- 0.9
Reversal of restructuring charges ........... (0.6) -- (0.9)
----- ----- -----
Operating income ......................... 14.7 13.8 12.1
Interest income ............................. 0.4 0.8 1.8
Interest expense ............................ 3.3 4.0 4.9
----- ----- -----
Income before minority interest and income
taxes ................................. 11.8 10.6 9.0
Minority interest in income of subsidiaries . 0.3 0.3 0.2
----- ----- -----
Income before income taxes ............... 11.5 10.3 8.8
Provision for income taxes .................. 5.1 4.6 4.0
Income tax adjustment ....................... (0.6) -- --
----- ----- -----
Net income ............................... 7.0% 5.7% 4.8%
===== ===== =====
</TABLE>
REVENUES
Animal Hospitals represented 69.6%, 70.1% and 72.3% of total Company
revenues in 1999, 1998 and 1997, respectively. Laboratories represented 30.4%,
29.9% and 27.3% of total Company revenues in 1999, 1998 and 1997, respectively.
Premium Pet Food operations represented 0.4% of total Company revenues in 1997.
The Company's consolidated revenues in 1997 only include one month of revenue
from Premium Pet Food operations, as the Company ceased consolidating the
results of operations of Vet's Choice, effective February 1, 1997. The Company
anticipates that Animal Hospitals revenues as a percentage of total revenues
will increase in future periods as a result of the expansion of the Animal
Hospitals.
The reported revenues of Animal Hospitals consists of the revenues of
animal hospitals owned by the Company and the management fees charged to
independent professional corporations ("PCs"). At December 31, 1999, the Company
owned and managed 194 animal hospitals, of which 44 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 PCs
who provide all veterinary medical care. The Company provides all administrative
functions with respect to these 44 animal hospitals. In return for its services,
the Company receives management fees from the PCs, which have been included in
the reported revenues for Animal Hospitals. The Company does not consolidate the
operations of the PCs.
The following are the components in the table below. When added
together, the components equal the reported revenues of Animal Hospitals:
VETERINARY PRACTICES OWNED AND MANAGED -- represents the aggregate of
revenues for animal hospitals owned directly by the Company and the
unconsolidated revenues of the PCs. This aggregate would be the total reported
Animal Hospitals revenues if the Company recognized and consolidated the
revenues of the PCs.
15
<PAGE> 16
REVENUES OF PCS -- represents the unconsolidated and unrecognized
revenues of the PCs.
MANAGEMENT FEES CHARGED TO PCS -- represents the fees that the PCs pay
to the Company in return for the Company's services.
The following table summarizes the Company's revenues for each of the
three years ended December 31, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
1999 1998 1997 Increase Increase
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Veterinary Practices Owned and Managed ......... 235,715 202,577 174,024 16.4% 16.4%
Less: Revenues of PCs .......................... (42,829) (24,914) (15,603) 71.9% 59.7%
Add: Management fees charged to PC's ........... 30,202 19,325 12,127 56.3% 59.4%
--------- --------- ---------
Animal Hospitals, reported ..................... 223,088 196,988 170,548 13.2% 15.5%
Laboratories ................................... 103,282 89,896 68,997 14.9% 30.3%
Premium Pet Food ............................... -- -- 1,064 -- --
Intercompany Sales ............................. (5,810) (5,845) (4,696) -- --
--------- --------- ---------
$ 320,560 $ 281,039 $ 235,913 14.1% 19.1%
========= ========= =========
</TABLE>
Revenues of PCs and the corresponding management fees have increased
from 1997 through 1999 due to an increase in PCs. The Company managed 44, 22 and
20 veterinary practices owned by PCs in 1999, 1998 and 1997, respectively.
The increases in reported Animal Hospitals revenues from 1997 through
1999 were primarily the result of the increase in the number of facilities owned
and the number of PCs managed by the Company. The results for 1999 include the
revenues and management fees of an additional 39 veterinary practices added
subsequent to December 31, 1998. The results for 1998 include the revenues and
management fees of an additional 11 veterinary practices added subsequent to
December 31, 1997. 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, were approximately 2.5% and 5.9% for the years ended
December 31, 1999 and 1998, respectively. Same-store facilities are animal
hospitals that were owned as of the beginning of the prior-year periods.
Had the revenues of the PCs been consolidated with owned veterinary
practices, the increases in combined revenues resulting from changes in volume
or prices at same-store facilities, as compared to the corresponding period in
the prior year, would have been 2.6% and 5.8% for the years ended December 31,
1999 and 1998, respectively.
The increase in Laboratories' revenues for the year ended December 31,
1999 is primarily due to success achieved with increased marketing efforts and
the acquisition of the business of two veterinary diagnostic laboratories since
December 31, 1998. In addition to the these items revenues have primarily
increased due to the $10.9 million acquisition on February 26, 1998, of certain
assets of the veterinary diagnostics laboratory business from LabCorp, which
generated revenues beginning April 1998.
Effective February 1, 1997, Vet's Choice was no longer reported as part
of the Company's consolidated results of operations. 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 that commenced 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 (the "Consulting Fees"). The Consulting Fees earned and recognized in the
years ended December 31, 1999, 1998 and 1997 of $5.1 million for both 1999 and
1998 and $4.7 million for 1997, are included in Animal Hospitals revenues.
16
<PAGE> 17
GROSS PROFIT
The following table summarizes the Company's gross profit for each of
the three years ended December 31, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
1999 % 1998 %
1999 1998 1997 Increase Increase
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Animal Hospitals ......... $49,019 $41,969 $32,390 16.8% 29.6%
Laboratories ............. 37,883 29,690 24,325 27.6% 22.1%
Premium Pet Food ......... -- -- 568 -- --
------- ------- -------
$86,902 $71,659 $57,283 21.3% 25.1%
======= ======= =======
</TABLE>
Gross profit for 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, medical supply costs and costs of goods sold associated
with the retail sales of pet food and pet supplies. Animal Hospitals gross
profit represented 22.0%, 21.3% and 19.0% of Animal Hospitals revenues for the
years ended December 31, 1999, 1998 and 1997, respectively. The increase in the
1999 gross profit margin from 1998 and the increase in the 1998 gross profit
margin from 1997 is the result of internal revenue growth, better prices
obtained for medical supplies and improved inventory management procedures. The
Company continues to take actions designed to improve gross margins at the
animal hospitals. However, there can be no assurance that in the future the
Company will be successful in its efforts to improve gross profit margins at
these facilities.
The gross profit margin for "same-store" hospitals owned by the Company
prior to January 1, 1998 was 20.2% and 19.1% for the years ended December 31,
1999 and 1998, respectively. The gross profit margin for "newly acquired"
hospitals, those acquired by the Company after January 1, 1998, was 19.4% for
the year ended December 31, 1999. Gross profit margins for "same-store" and
"newly acquired" hospitals have been calculated excluding the Consulting Fees of
$5,100,000 earned and recognized in each of the years ended December 31, 1999
and 1998, respectively.
Had the PCs' operations been consolidated with owned veterinary
practices ("Combined Hospital Operations"), gross profit margins would have been
20.8% and 20.7% for the years ended December 31, 1999 and 1998, respectively.
"Same-store" gross profit margins from the Combined Hospital Operations was
19.1% and 18.6% for the years ended December 31, 1999 and 1998, respectively.
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 and
occupancy costs and supply costs. Laboratories gross profit represented 36.7%,
33.0% and 35.3% of Laboratories revenues for the years ended December 31, 1999,
1998 and 1997, respectively. The increase in the gross profit margin for 1999
compared to 1998 was primarily attributable to the completed integration of
operations from the acquisition of LabCorp's veterinary diagnostic laboratory
business. The decrease in the gross profit margin for 1998 compared to 1997 was
primarily attributable to costs incurred in connection with the phase-in of
operations from the acquisition of LabCorp's veterinary diagnostic laboratory
business.
Premium Pet Food gross profit is comprised of revenues less cost of
goods sold, including freight and distribution costs. Premium Pet Food gross
profit, as a percentage of revenues, was 53.4% in 1997.
The Company's Animal Hospitals business historically has realized gross
profit margins that are lower than that of the Laboratories business. As the
portion of the Company's revenues attributable to its Animal Hospitals
operations grow 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.
17
<PAGE> 18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
VCA Corporate selling, general and administrative expense consists of
administrative expense at the Company's headquarters, including the salaries of
corporate officers, accounting, legal and other professional expenses, rent and
occupancy costs. Laboratories selling, general and administrative expense
consists primarily of sales and administrative personnel and selling, marketing
and promotional expense. Selling, general and administrative expense ("SG&A")
for the three years ended December 31, 1999, is comprised of the following
(amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
VCA Corporate ............ $16,847 $14,218 $13,093
Laboratories ............. 5,610 5,475 4,183
Premium Pet Food ......... -- -- 400
------- ------- -------
$22,457 $19,693 $17,676
======= ======= =======
</TABLE>
SG&A, as a percentage of total revenues, was 7.0%, 7.0% and 7.5% for the
years ended December 31, 1999, 1998 and 1997, respectively. The 1998 decrease in
SG&A as a percentage of revenues from 1997 was primarily attributable to an
increase in revenues without a comparable increase in expenses.
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 did not
exist after 1997, due to the assumption of management responsibilities for Vet's
Choice by HPP in February 1997.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense primarily relates to the
depreciation of capital assets and the amortization of goodwill (excess cost
over the fair value of net assets acquired) and certain other intangibles.
Depreciation and amortization expense increased $2,364,000, or 18%, from 1998 to
1999, and $1,933,000, or 17.3%, from 1997 to 1998. 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 WRITE-DOWN
During 1996, the Company adopted and implemented a restructuring plan
(the "1996 Plan") and recorded a restructuring charge of $5,701,000 and an asset
write-down charge of $9,512,000. The major components of the 1996 Plan included:
(1) the termination of leases, the write-down of intangibles, property and
equipment, and employee terminations in connection with the closure, sale or
consolidation of 12 animal hospitals; (2) the termination of contracts and
leases, the write-down of certain property and equipment, and the termination of
employees in connection with the restructuring of the Company's laboratory
operations; and (3) contract terminations and write-down of assets in connection
with the migration to common communications and computer systems. Collectively,
the 12 hospitals had aggregate revenue of $6,814,000 and net operating loss of
$350,000 for the year ended December 31, 1996. The restructuring of the
laboratory operations consisted primarily of: (i) plans to relocate the
Company's facility in Indiana to Chicago; (ii) the downsizing of its Arizona
operations; (iii) the standardization of laboratory and testing methods
throughout all the Company's laboratories, resulting in the write-down of
equipment that will no longer be utilized; and (iv) the shut-down of another of
its facilities in the Midwest.
During 1999, pursuant to the 1996 Plan, the Company incurred the
following:
(a) Cash expenditures of $345,000 for lease and other contractual
obligations.
(b) Non-cash asset write-downs of $157,000, primarily pertaining to
hospitals previously closed and to the Company's shut-down of
certain computer systems.
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<PAGE> 19
(c) The Company recognized a $321,000 favorable settlement related
to a laboratory operations' contract that was terminated as part
of the 1996 Plan.
(d) During the fourth quarter of 1999, the Company was released from
its contractual obligation pertaining to certain facility leases
for hospitals that were sold in 1997. In addition, the Company
reached a favorable settlement on contractual obligations
pertaining to its migration to common communications and
computer systems, a component of the 1996 Plan. As a result of
these two favorable outcomes, the Company reversed $889,000 of
restructuring charges.
During 1998, the actions taken pursuant to the 1996 Plan were as
follows:
(a) The Company closed one animal hospital.
(b) The Company shut-down certain computer hardware and software, as
part of its migration to common computer systems.
(c) The Company decided that two hospitals will continue to be
operated instead of closed as was originally outlined in the
1996 Plan. The hospitals' local markets improved since the 1996
Plan was determined, causing the Company's management to revise
its plan.
(d) The Company terminated its attempts to sell one hospital because
it has been unable to negotiate a fair sales price based on the
hospital's operating results.
Reserves of $593,000 related to the three hospitals discussed in (c) and
(d) above, were utilized to offset increases in the expected cost to extinguish
lease commitments and contract obligations that were part of the 1996 Plan.
The activity that occurred within the 1996 Plan during 1997 was as
follows:
(a) The Company sold four of its animal hospitals.
(b) The Company's laboratory division relocated its facility in
Indiana to Illinois, downsized its Arizona operations,
substantially completed its standardization of laboratory and
testing methods, and replaced its communications system.
(c) The Company's hospital division completed its evaluation of the
property value at one of its hospitals and replaced certain
equipment and software.
(d) At September 30, 1997, the Company reversed $2,074,000 of the
restructuring reserve established for the 1996 Plan. The events
that triggered the need to reverse a portion of the 1996 Plan
charge were as follows:
(i) A favorable termination of a communications system
contract was negotiated and became effective October 1,
1997.
(ii) A hospital practice was acquired on May 15, 1997 and was
merged into an animal hospital that was scheduled to be
closed. The Company evaluated the performance of the
merged practices during the 1997 third quarter and
decided to rescind its decision to close the animal
hospital.
(iii) The Company completed negotiations to terminate a lease
agreement early for one of the hospitals scheduled to be
closed at a favorable amount.
(iv) The Company rescinded its decision to close three other
animal hospitals due to their improved performance.
19
<PAGE> 20
As of December 31, 1999, all phases of the 1996 Plan were complete and
no restructuring reserves remain on the Company's balance sheet.
During 1997, the Company reviewed the financial performance of its
hospitals. As a result of this review, an additional 12 hospitals were
determined not to meet the Company's performance standards. Accordingly, the
Company adopted phase two of its restructuring plan (the "1997 Plan"), resulting
in restructuring and asset write-down charges of $2,074,000. The major
components of the 1997 Plan consisted of the termination of leases, amounting to
$1,198,000, and the write-down of intangibles, property and equipment, amounting
to $876,000, in connection with the closure or sale of 12 animal hospitals.
Collectively, the 12 hospitals had aggregate revenue of $5,378,000 and net
operating income of $176,000 for the year ended December 31, 1997.
During 1999, the actions taken pursuant to the 1997 Plan were as
follows:
(a) The Company sold one hospital resulting in cash expenditures of
$2,000 and non-cash asset write-downs of $64,000.
(b) The Company closed three hospitals resulting in cash
expenditures of $4,000 and non-cash asset write-downs of
$53,000.
(c) The Company incurred cash expenditures of $71,000 for lease and
other contractual obligations.
(d) The Company recorded an additional $28,000 non-cash asset
write-down pertaining to a hospital previously closed.
(e) During the fourth quarter of 1999 the Company reached favorable
outcomes from the sale and/or closure of the hospitals noted in
(a) and (b) above. As a result the Company reversed $663,000 of
restructuring charges.
During 1998, the Company closed three animal hospitals pursuant to the
1997 Plan, resulting in the write-off of $299,000 of property and equipment and
cash expenditures of $81,000 for lease obligations and closing costs. Also
during 1998, the Company determined that five of the animal hospitals that were
to be sold as part of the 1997 Plan would be kept due to their improved
performance.
During 1997, the Company, as part of the 1997 Plan, recorded $466,000 of
non-cash asset write-downs, consisting primarily of a write-down of intangibles.
At December 31, 1999, $343,000 of the restructuring reserve from the
1997 Plan remains on the Company's balance sheet, consisting primarily of lease
and other contractual obligations. All significant phases of the 1997 Plan have
been completed as of December 31, 1999, although certain lease obligations will
continue through 2005.
OPERATING INCOME
Operating income increased to $47,016,000 for 1999 from $38,834,000 for
1998, which had increased from $28,408,000 for 1997. The operating income in
1999 includes a reversal of restructuring charges, Year 2000 remediation
expenses and Year 2000 accelerated depreciation totaling $1,933,000. Excluding
these items, operating income would have been $48,949,000 for 1999, a
$10,115,000, or 26% increase from 1998 to 1999. The increases experienced in
1999, excluding the reversal of restructuring charges, Year 2000 remediation
expenses and Year 2000 accelerated depreciation, and 1998 are primarily the
result of the increased number of animal hospitals and veterinary diagnostic
laboratories owned and operated by the Company. As a percentage of revenues,
operating income, excluding the restructuring credit, Year 2000 remediation
expenses and Year 2000 accelerated depreciation, would have been 15.3% for 1999,
13.8% for 1998 and 11.9% for 1997.
20
<PAGE> 21
INTEREST INCOME
Interest income decreased to $1,194,000 in 1999 from $2,357,000 for 1998
and $4,182,000 for 1997. The decreases over the three-year period were the
result of decreases in the Company's cash and marketable securities balances
resulting primarily from cash used in capital expenditures and acquisitions.
INTEREST EXPENSE
Interest expense was $10,643,000 for 1999, $11,189,000 for 1998 and
$11,593,000 for 1997, representing a decrease of $546,000, or 4.9%, in 1999 and
$404,000, or 3.5%, in 1998. The decrease in 1998 from 1997 is the result in a
decrease in total debt. Interest expense also decreased in 1999 relative to 1998
resulting from debt paydowns throughout 1999. The debt balance did not decrease
from December 31, 1998 to December 31, 1999 due to additional long-term debt
issued in connection with animal hospital acquisitions in December 1999.
INCOME TAXES
Income tax expense was $14,360,000, $12,954,000, and $9,347,000 for
1999, 1998 and 1997, respectively. A reconciliation of the provision for income
taxes to the amount computed at the Federal statutory rate for each of the three
years in the period ended December 31, 1999 is included in Note 11 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 certain goodwill. 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 of $2,102,000 in
1999.
MINORITY INTEREST
Minority interest in income of the consolidated subsidiaries was
$850,000, $780,000 and $424,000 for 1999, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires continued access to cash, primarily to fund
acquisitions, to reduce long-term debt obligations, and to fund capital
expenditures.
Cash provided by operations during the years ended December 31, 1999,
1998 and 1997 was $38,467,000, $27,123,000 and $22,674,000, respectively. The
increases are primarily attributable to increases in income as a result of the
growth in the number of facilities operated by the Company and increases in
operating margins.
During 1999, 1998 and 1997, in connection with acquisitions, the Company
used cash in the amounts of $20,320,000 (acquisition of 39 hospitals and two
veterinary diagnostic laboratories), $21,378,000, (acquisition of 11 hospitals
and one veterinary diagnostic laboratory) and $28,988,000 (acquisition of 15
hospitals, three veterinary diagnostic laboratories and the remaining interest
in Vet Research), respectively. From January 1, 2000 through March 15, 2000, the
Company used cash of approximately $2,275,000 to acquire six animal hospitals
and one veterinary diagnostic laboratory.
During 1999, 1998 and 1997, the Company used $21,803,000, $11,678,000
and $7,241,000, respectively, to purchase property and equipment and
$18,922,000, $20,591,000 and $16,198,000 to reduce long-term obligations,
respectively.
At December 31, 1999, the Company had cash and cash equivalents of
$10,620,000 and no bank or institutional indebtedness. 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 for cash, stock and notes.
The Company anticipates it will complete the acquisition of an additional 15 to
20 individual animal hospitals in 2000, which will require cash
21
<PAGE> 22
of up to $15 million. In addition, the Company continues to examine acquisition
opportunities in the veterinary laboratory field, which may impose additional
cash requirements. Although the Company does not have sufficient cash reserves
at March 15, 2000 to fund this growth plan, the Company believes that it can
access sufficient debt financing to fund its planned growth for more than the
next 12 months.
The Company has debt payment obligations related to the Animal Hospitals
and Laboratories operations owned as of December 31, 1999, of approximately
$21.9 million and $17.5 million in the years ended December 31, 2000 and 2001,
respectively. Interest payments on the convertible debentures amount to
$4,430,000 annually. In addition, the Company is building or has plans to
upgrade, expand or replace facilities for 13 animal hospitals for a total cost
of approximately $10.8 million, as well as to replace or upgrade equipment, as
needed. The Company also expects to continue to upgrade its management
information systems in 2000 for approximately $3.0 million.
On March 23, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $15 million of its common stock on the open market.
As of March 15, 2000, the Company has acquired 393,000 shares for a total
consideration of $4,761,000.
During the first quarter of 2000, the Company committed to loan up to
$5.0 million to Yopet.com, Inc., a start-up corporation founded and controlled
by Robert A. Antin, the Chief Executive Officer and a director of the Company.
The Company believes it is able to fund its future operational cash
requirements primarily from cash on hand, the sale of its marketable securities,
new debt financing 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. However, a
significant portion of the Company's cash requirements is determined by the pace
and size of its acquisitions. The Company believes that it can access sufficient
funding from financial institutions, if needed.
In connection with certain acquisitions, the Company assumed certain
contractual arrangements whereby additional shares of the Company's common stock
and/or cash ("Earn-Out Payments") 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 (the "Earn-Out
Arrangements"). The Earn-Out Arrangements provide for contingent Earn-Out
Payments if the acquired entity achieves or exceeds contractually defined
revenue targets during the defined earn-out period. The payments are either
fixed in amount or are based on a multiplier of revenue. When the contingency is
resolved and the additional consideration is distributed, the Company records
the consideration issued as an additional cost of the acquired entity. The
additional consideration of affected assets, usually goodwill, is amortized over
the remaining life of the asset. Earn-Out Payments in 1999 amounted to
approximately $326,000 consisting entirely of cash. Earn-Out Payments in 1998
amounted to approximately $358,000 consisting of $311,000 in cash and 2,394
shares of common stock valued on the date of issuance at $47,000.
At March 15, 2000, the Company was obligated under four Earn-Out Arrangements,
two of which expire in 2000 and the remaining two expire in 2001 with payment
due dates extending into 2002.
The following table summarizes projected annual payments, based upon historical
activity and management's estimates of future operating results, to be made
under existing Earn-Out Arrangements (in thousands):
<TABLE>
<S> <C>
2000 ....................... $293
2001 ....................... 158
2002 ....................... 55
</TABLE>
IMPACT OF YEAR 2000
The Company did not experience any system failures or any material
effects as a result of the Year 2000 issues. The Company also did not experience
any business disruptions with its material third parties as a result of
22
<PAGE> 23
the Year 2000 issues. Consequently, there were no Year 2000 problems that
materially impacted the Company's financial condition or results of operations.
The Company did not postpone any significant information technology projects or
other capital expenditures in 1999 due to the Year 2000 compliance.
The Company originally estimated $7.7 million in Year 2000 compliance
expenditures. However, the Company's expenditures relating to the Year 2000
compliance in 1999 amounted to approximately $6.3 million. Expenditures for Year
2000 compliance costs approximated $365,000 in 1998. Total depreciation on
certain software, hardware, equipment and building operating systems in 1999
approximated $1.6 million, which includes approximately $1.0 million of
additional accelerated depreciation as a result of the shorter projected useful
lives.
The Company has assessed its Year 2000 position and does not foresee any
future problems relating to any Year 2000 issues that would have a material
impact on the Company's operations and financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American 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 in the
first quarter of 1999 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 ("FASB") 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. The Company has not yet assessed the impact of the
adoption of SFAS 133.
On October 25, 1999, the FASB's Emerging Issues Task Force ("EITF")
reached consensus in Issue 99-15, "Accounting for Decreases in Deferred Tax
Asset Valuation Allowances Established in a Purchase Business Combination as a
Result of a Change in Tax Regulations" ("Issue No. 99-15"). Issue No. 99-15 is
the EITF's response to the Internal Revenue Service's June 25, 1999 ruling, as
stated in Section 1.1502-21 Treasury Regulations, reducing the requirements for
using certain net operating loss carryovers and carrybacks ("NOLs"). As a
result, the Company recorded a deferred tax benefit during the year ended
December 31, 1999 equal to $2,102,000. In the future, the Company will continue
to evaluate its NOLs based on the above rulings and future circumstances.
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 and Laboratories operations 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. 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.
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<PAGE> 24
The following table sets forth revenues, gross profit, net income and
diluted earnings per share for each of the quarters in 1999 and 1998 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 Quarter Ended,
-------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
Revenues ........................... $73,838 $86,164 $83,590 $76,968
Gross profit ....................... 18,561 25,345 23,426 19,570
Net income ......................... 3,700 6,890 7,462 4,305
Diluted earnings per share ......... 0.17 0.31 0.34 0.20
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended,
-------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenues ........................... $62,069 $74,680 $74,599 $69,691
Gross profit ....................... 14,805 21,021 19,414 16,419
Net income ......................... 2,307 6,082 4,841 3,038
Diluted earnings per share ......... 0.11 0.28 0.22 0.14
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended,
-------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
1997
Revenues ........................... $55,428 $62,348 $61,230 $56,907
Gross profit ....................... 12,503 17,412 15,670 11,698
Net income ......................... 1,410 4,351 3,415 2,050
Diluted earnings per share ......... 0.07 0.21 0.16 0.10
</TABLE>
Net income reported during 1999 includes Year 2000 remediation expenses,
Year 2000 accelerated depreciation, a reversal of restructuring charges and an
income tax adjustment, aggregating a beneficial after tax effect on net income
of approximately $961,000 for the 12 months ended December 31, 1999. Excluding
these items, net income and diluted earnings per share would have been
$3,883,000 or $0.18, $7,571,000 or $0.34, $6,139,000 or $0.28, and $3,803,000,
or $0.18 for the quarters ended March 31, June 30, September 30, and December
31, 1999, respectively.
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
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. In 1999, we acquired 39 animal hospitals
and two veterinary diagnostic laboratories. As a result of these acquisitions,
our revenues grew from $235.9 million in 1997 to $281.0 million in 1998 to
$320.6 million in 1999. In 2000, through August 9, 2000, we acquired 11 animal
hospitals, of which three were merged upon acquisition into existing VCA
facilities, and one veterinary diagnostic laboratory, which was also merged upon
acquisition into an existing VCA facility.
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<PAGE> 25
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:
- 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 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 25 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.
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 December 31, 1999, we have consolidated
long-term obligations (including current portion) of $161.5 million and our
ratio of long-term debt (including current portion) to total stockholders'
equity was 70%. 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 December 31, 1999,
our balance sheet reflected $295.7 million of intangible assets of these types,
which is a substantial portion of
25
<PAGE> 26
our total assets of $426.5 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 will 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. We recognized a write-down of goodwill and related assets
in the amount of $9.5 million as part of our restructuring plan adopted during
the third and fourth quarters of 1996. We may have further write-downs in future
periods.
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.
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
26
<PAGE> 27
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 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 financing, 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.
In addition, we have adopted a Stockholder Rights Plan (see Note 6 of
Notes to Consolidated Financial Statements). Under the Rights Plan, 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.
27
<PAGE> 28
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 August 9, 2000, VCA had
21,321,124 shares of common stock outstanding, most of which are either freely
tradable in the public market without restriction or tradable in accordance with
Rule 144 under the Securities Act. In addition, there are 620,511 shares held in
treasury. There are also 3,734,482 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.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................................................ 30
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................... 31
Consolidated Income Statements For the Years Ended December 31, 1999, 1998 and 1997............................. 32
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997............................................................................. 33
Consolidated Statements of Cash Flows For the Years Ended December 31, 1999, 1998 and 1997...................... 34
Notes to Consolidated Financial Statements...................................................................... 36
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders 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, 1999 and 1998, and the related consolidated income statements,
stockholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 1999. 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 in the United States. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
February 21, 2000
30
<PAGE> 31
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PAR VALUES)
A S S E T S
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 10,620 $ 8,977
Marketable securities ................................................. 5,313 33,358
Trade accounts receivable, less allowance for uncollectible accounts of
$7,162 and $6,407 at December 31, 1999 and 1998, respectively ..... 15,276 11,561
Inventory ............................................................. 5,455 4,608
Prepaid expenses and other ............................................ 4,544 4,366
Deferred income taxes ................................................. 4,213 4,111
Prepaid income taxes .................................................. 3,986 5,040
--------- ---------
Total current assets ............................................... 49,407 72,021
PROPERTY AND EQUIPMENT, NET ............................................ 70,336 50,140
OTHER ASSETS:
Goodwill, net ......................................................... 291,286 256,505
Covenants not to compete, net ......................................... 4,450 4,722
Notes receivable, net ................................................. 1,891 1,963
Investment in Veterinary Pet Insurance ................................ 5,000 5,000
Deferred costs and other, net ......................................... 4,130 3,609
--------- ---------
$ 426,500 $ 393,960
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations .............................. $ 21,901 $ 17,431
Accounts payable ...................................................... 8,715 5,208
Accrued payroll and related liabilities ............................... 7,258 5,426
Accrued restructuring costs ........................................... 478 2,834
Other accrued liabilities ............................................. 7,418 9,524
--------- ---------
Total current liabilities .......................................... 45,770 40,423
LONG-TERM OBLIGATIONS, less current portion ............................ 139,634 142,356
DEFERRED INCOME TAXES .................................................. 6,655 5,800
MINORITY INTEREST ...................................................... 3,212 2,696
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value; authorized -- 60,000 shares:
Issued and outstanding, including shares in treasury -- 21,708 and
20,816 at December 31, 1999 and 1998, respectively ........... 20 20
Additional paid-in capital ........................................... 213,728 202,850
Retained earnings .................................................... 25,737 3,380
Other comprehensive income - unrealized loss on investment ........... (361) (468)
Notes receivable from stockholders ................................... (654) (617)
Less cost of common stock held in treasury -- 620 and 227 shares at
December 31, 1999 and 1998, respectively ........................ (7,241) (2,480)
--------- ---------
Total stockholders' equity ......................................... 231,229 202,685
--------- ---------
$ 426,500 $ 393,960
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
31
<PAGE> 32
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues .......................................................... $ 320,560 $ 281,039 $ 235,913
Direct costs ...................................................... 233,658 209,380 178,630
--------- --------- ---------
Gross profit ................................................. 86,902 71,659 57,283
Selling, general and administrative expense ....................... 22,457 19,693 17,676
Depreciation and amortization expense ............................. 15,496 13,132 11,199
Year 2000 remediation expenses .................................... 2,839 -- --
Year 2000 accelerated depreciation ................................ 967 -- --
Reversal of restructuring charges ................................. (1,873) -- (2,074)
Restructuring charges ............................................. -- -- 2,074
--------- --------- ---------
Operating income ............................................. 47,016 38,834 28,408
Interest income ................................................... 1,194 2,357 4,182
Interest expense .................................................. 10,643 11,189 11,593
--------- --------- ---------
Income before minority interest and provision for
income taxes .............................................. 37,567 30,002 20,997
Minority interest in income of subsidiaries ....................... 850 780 424
--------- --------- ---------
Income before provision for income taxes ..................... 36,717 29,222 20,573
Provision for income taxes ........................................ 16,462 12,954 9,347
Income tax adjustment ............................................. (2,102) -- --
--------- --------- ---------
Net income ................................................... $ 22,357 $ 16,268 $ 11,226
========= ========= =========
Basic earnings per common share .............................. $ 1.06 $ 0.80 $ 0.57
========= ========= =========
Diluted earnings per common share ............................ $ 1.02 $ 0.74 $ 0.53
========= ========= =========
Shares used for computing basic earnings per share ........... 21,063 20,350 19,626
========= ========= =========
Shares used for computing diluted earnings per share ......... 21,985 21,940 21,013
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
32
<PAGE> 33
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------------- Paid-In -------------------------
Shares Amount Capital Shares Amount
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 ......................... 19,249 $ 20 $192,167 (78) $ (724)
Net and comprehensive income ...................... -- -- -- -- --
Exercise of stock options ......................... 278 -- 2,455 -- --
Business acquisitions and earn-outs ............... 176 -- 2,122 -- --
Settlement of guaranteed purchase price ........... -- -- --
contingently payable in cash or common stock..... 34 -- -- -- --
Conversion of preferred stock to common stock...... 583 -- 1 -- --
Purchase of treasury shares ....................... -- -- -- (149) (1,756)
-------- -------- -------- -------- --------
BALANCES, December 31, 1997 ......................... 20,320 20 196,745 (227) (2,480)
Net income ........................................ -- -- -- -- --
Other comprehensive income - unrealized loss on
investments (no tax benefit recognized)..........
Unrealized loss recognized on investments .........
Comprehensive income ..............................
Exercise of stock options ......................... 194 -- 2,037 -- --
Interest on notes ................................. -- -- -- -- --
Business acquisitions and earnouts ................ 174 -- 3,147 -- --
Conversion of convertible debt .................... 12 -- 85 -- --
Settlement of guaranteed purchase price
contingently payable in cash or common stock..... 21 -- -- -- --
Restricted stock bonus ............................ 95 -- 836 -- --
-------- -------- -------- -------- --------
BALANCES, December 31, 1998 ......................... 20,816 20 202,850 (227) (2,480)
Net income .......................................... -- -- -- -- --
Other comprehensive income - unrealized loss on
investments (no tax benefit recognized) ......... -- -- -- -- --
Unrealized loss recognized on investments ...........
Comprehensive income ................................ -- -- -- -- --
Exercise of stock options ......................... 50 -- 535 -- --
Exercise of warrants .............................. 3 -- -- -- --
Interest on notes ................................. -- -- -- -- --
Business acquisitions ............................. 588 -- 8,828 -- --
Conversion of convertible debt .................... 10 -- 74 -- --
Restricted stock bonus ............................ 241 -- 1,441 -- --
Purchase of treasury shares ....................... -- -- -- (393) (4,761)
-------- -------- -------- -------- --------
BALANCES, December 31, 1999 ......................... 21,708 $ 20 $213,728 (620) $ (7,241)
======== ======== ======== ======== ========
<CAPTION> Notes
Receivable Retained Other
From Earnings Comprehensive Comprehensive
Stockholders (Deficit) Income Income
------------ -------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996 ......................... -- $(24,114) $--
Net and comprehensive income ...................... -- 11,226 -- $ 11,226
========
Exercise of stock options ......................... (546) -- --
Business acquisitions and earn-outs ............... -- -- --
Settlement of guaranteed purchase price
contingently payable in cash or common stock..... -- -- --
Conversion of preferred stock to common stock ..... -- -- --
Purchase of treasury shares ....................... -- -- --
-------- -------- --------
BALANCES, December 31, 1997 ......................... (546) (12,888)
Net income ........................................ -- 16,268 -- 16,268
Other comprehensive income - unrealized loss on (870) (870)
investments (no tax benefit recognized)..........
Unrealized loss recognized on investments ......... 402 402
--------
Comprehensive income .............................. 15,800
========
Exercise of stock options ......................... -- -- --
Interest on notes ................................. (71) -- --
Business acquisitions and earnouts ................ -- -- --
Conversion of convertible debt .................... -- -- --
Settlement of guaranteed purchase price
contingently payable in cash or common stock .... -- -- --
Restricted stock bonus ............................ -- -- --
-------- -------- --------
BALANCES, December 31, 1998 ......................... (617) 3,380 (468)
Net income .......................................... -- 22,357 -- 22,357
Other comprehensive income - unrealized loss on
investments (no tax benefit recognized) ......... -- -- (218) (218)
Unrealized loss recognized on investments ........... 325 325
--------
Comprehensive income ................................ -- -- -- $ 22,464
========
Exercise of stock options ......................... -- -- --
Exercise of warrants .............................. -- -- --
Interest on notes ................................. (37) -- --
Business acquisitions ............................. -- -- --
Conversion of convertible debt .................... -- -- --
Restricted stock bonus ............................ -- -- --
Purchase of treasury shares ....................... -- -- --
-------- -------- --------
BALANCES, December 31, 1999 ......................... $ (654) $ 25,737 $ (361)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
33
<PAGE> 34
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 22,357 $ 16,268 $ 11,226
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................................... 16,463 13,132 11,199
Provision for uncollectible accounts .................................... 2,515 2,898 2,726
Amortization of debt discount ........................................... 241 431 392
Reversal of restructuring charges ....................................... (1,552) -- --
Minority interest in income of subsidiaries ............................. 850 780 424
Distributions to minority interest partners ............................. (926) (627) (424)
Increase in accounts receivable, net .................................... (5,535) (3,749) (3,176)
Decrease (increase) in inventory ........................................ (347) (242) 201
Decrease (increase) in prepaid income taxes ............................. 1,054 594 (3,497)
Decrease (increase) in prepaid expenses and other ....................... (414) (1,061) 655
Decrease (increase) in deferred income tax asset ........................ (102) (1,043) 615
Increase (decrease) in accounts payable and accrued liabilities ......... 169 (4,872) 1,147
Increase (decrease) in deferred income tax liability .................... 3,694 4,614 1,186
--------- --------- ---------
Net cash provided by operating activities ............................... 38,467 27,123 22,674
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired ............................. (20,320) (21,378) (28,988)
Property and equipment additions, net ................................... (21,803) (11,678) (7,241)
Investments in marketable securities .................................... (58,258) (44,902) (102,363)
Proceeds from sales or maturities of marketable securities .............. 86,410 62,447 124,298
Proceeds from the sale of property and equipment ........................ 198 239 153
Capital contribution of minority interest partners ...................... -- 13 246
Capital distribution to minority interest partner ....................... -- -- (1,318)
Investment in Veterinary Pet Insurance .................................. -- (4,000) (1,000)
Other ................................................................... 97 (215) (155)
--------- --------- ---------
Net cash used in investing activities ................................... (13,676) (19,474) (16,368)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term obligations and notes payable .................... (18,922) (20,591) (16,198)
Proceeds from issuance of common stock under stock option plans ......... 535 2,037 1,909
Purchase of treasury stock .............................................. (4,761) -- (1,756)
--------- --------- ---------
Net cash used in financing activities ................................... (23,148) (18,554) (16,045)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............................. 1,643 (10,905) (9,739)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 8,977 19,882 29,621
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................................... $ 10,620 $ 8,977 $ 19,882
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
34
<PAGE> 35
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid ............................................................... $ 10,517 $ 11,301 $ 10,900
Income taxes paid ........................................................... 9,603 10,944 9,664
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 .............................................. $ 53,209 $ 30,740 $ 72,331
Less consideration given:
Cash paid and acquisition costs .......................................... (19,497) (20,255) (28,880)
Cash paid in settlement of assumed liabilities ........................... (517) (812) (108)
Common stock issued ...................................................... (8,828) (3,100) (2,122)
-------- -------- --------
Liabilities assumed including notes payable issued ......................... $ 24,367 $ 6,573 $ 41,221
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE> 36
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. THE COMPANY
Veterinary Centers of America, Inc. ("VCA" or the "Company"), a Delaware
corporation, was founded in 1986 and is a leading animal health care company.
The Company has established a premier position in two core businesses, animal
hospitals and veterinary diagnostic laboratories. In addition, the Company owns
a partnership interest in a joint venture with Heinz Pet Products ("HPP"), which
markets and distributes premium pet foods. The Company also has an investment in
Veterinary Pet Insurance, Inc., the nation's largest pet health insurance
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.
In 1993, the Company began to expand the scope of its operations by
launching into the veterinary diagnostic laboratory and premium pet food
markets. The integration of the veterinary care, veterinary diagnostic
laboratory and premium pet food markets is the foundation of the Company's
business strategy to leverage its access to its primary customers, veterinarians
and pet owners. From 1993 through 1995, the Company acquired and integrated into
its operations 36 animal hospitals. In 1996, the Company completed two
significant acquisitions, which more than doubled the Company's animal hospital
operations. Pets' Rx, Inc. ("Pets' Rx") was acquired in June 1996 (16 hospitals)
in a business combination accounted for as a pooling of interests, and The Pet
Practice, Inc. ("Pet Practice") was acquired in July 1996 (84 hospitals). The
Company made these acquisitions in order to promote the growth of the Company's
hospital network, broaden the geographic scope of the Company's operations, and
to take advantage of synergies that the Company believes exist between its
business lines. In addition to the two significant 1996 acquisitions, the
Company has purchased 85 animal hospitals in the four years ended December 31,
1999. At December 31, 1999, the Company owned or operated 194 animal hospitals,
throughout 28 states, as detailed in the following tables:
<TABLE>
<CAPTION>
Western States Central States Eastern States
-------------------- ---------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Alaska 4 Illinois 15 Connecticut 2
Arizona 1 Indiana 7 Delaware 3
California 40 Michigan 12 Florida 18
Colorado 2 Missouri 1 Georgia 1
Hawaii 1 Nebraska 1 Maryland 8
Nevada 6 Ohio 5 Massachusetts 7
New Mexico 3 New Jersey 9
Texas 9 New York 18
Utah 2 North Carolina 2
Pennsylvania 10
South Carolina 1
Virginia 5
West Virginia 1
-- -- --
Totals 68 41 85
== == ==
</TABLE>
In 1994, the Company expanded its veterinary diagnostic laboratory
operations by acquiring a 70% interest in Professional Animal Laboratory
("PAL"). In 1995, the Company acquired the remaining 30% of PAL. Also in 1995,
the Company acquired a 51% interest in Vet Research Laboratories, LLC ("Vet
Research"), and acquired three smaller regional veterinary diagnostic
laboratories. The Company's laboratory operations continued to grow with the
acquisition of Southwest Veterinary Diagnostics Laboratory, Inc. ("Southwest")
in 1996. Throughout 1996 and 1997, an additional eight laboratories were
acquired, as well as the remaining 49% interest in Vet Research in January 1997.
In February 1998, the Company acquired certain assets of the veterinary
diagnostic laboratory business of Laboratory Corporation of America Holdings
("LabCorp") for $10.9 million. This purchase from LabCorp has enhanced the
Company's laboratory operations' presence in the Midwest and East coast and
helped in the growth of the Test Express laboratory business. Test Express is a
component of the Company's laboratory operations that utilizes Federal Express
to pick-up lab specimens from clients in remote areas. In 1999, the
36
<PAGE> 37
Company continued to expand its veterinary diagnostic laboratory operations by
acquiring two additional laboratories, which were merged into existing VCA
facilities upon acquisition. At December 31, 1999, the Company's network of
veterinary diagnostic laboratories consisted of 13 full-service laboratories
located throughout the country.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all those majority-owned subsidiaries where the Company has control.
Significant intercompany transactions and balances have been eliminated.
The Company provides management services to certain professional
corporation ("PCs") in states with laws that prohibit veterinarians from
splitting fees with non-veterinarians and prohibit business corporations from
providing veterinary services through the direct employment of veterinarians. As
of December 31, 1999, the Company has established operations in six of such
states that it believes comply in all material respects with applicable laws. In
these states, the Company has long-term management agreements ("Management
Agreements") with PCs, ranging from 10 to 40 years with non-binding renewal
options available. The PCs are owned by veterinarians who provide veterinary
medical services at the animal hospitals located in their particular state.
Pursuant to the Management Agreements, the PCs are each solely responsible for
all aspects of the practice of veterinary medicine, as defined by their
respective state. The Company is responsible for providing the following: (i)
day-to-day financial and administrative supervision and management; (ii)
non-veterinarian personnel needed to operate and support the animal hospital;
(iii) maintenance of patient records; (iv) recruitment of veterinary staff; (v)
marketing; and (vi) malpractice and general insurance. As compensation for these
services, the Company receives a monthly management fee. The amount of such fees
are not specifically defined in the Management Agreements. In most instances,
the PCs receive a salary for its services, and the Company enjoys the risks and
rewards related to the overall profitability of the animal hospital. The Company
has adopted EITF 97-2 and has not met the requirements to consolidate 44 animal
hospitals it manages. Management fees received pursuant to the Management
Agreements are included in revenues. The Company's financial statements for the
years ended December 31, 1998 and 1997 have been restated to conform to the 1999
presentation.
b. Cash and Cash Equivalents
For purposes of the balance sheets and statements of cash flows, the
Company considers only highly liquid investments to be cash equivalents.
Cash and cash equivalents at December 31 consisted of (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash ....................... $ 8,160 $ 5,526
Money market funds ......... 2,460 3,451
------- -------
$10,620 $ 8,977
======= =======
</TABLE>
37
<PAGE> 38
c. Marketable Securities
All marketable securities are classified as available for sale and are
recorded at market value with unrealized gains and losses reported as a separate
component of stockholders' equity. Marketable securities are available to
support current operations and acquisitions. The following table details
specific characteristics of the Company's investment portfolio at December 31
(in thousands):
<TABLE>
<CAPTION>
Portfolio Composition
----------------------------------- Gross Gross
High Quality Higher Yielding Unrealized Unrealized
Short-term Short-term Losses Gains
------------ --------------- ---------- ------------
<S> <C> <C> <C> <C>
1999 57% 43% $361 $ --
1998 90% 10% $468 $ --
</TABLE>
There were no significant realized gains or losses for the years ended
December 31, 1999 and 1998. Additionally, $325,000 and $402,000 in unrealized
losses were recognized for the years ended December 31, 1999 and 1998,
respectively. These losses resulted from management's determination that
impairments on certain investments may not be recoverable. The Company considers
gain or losses based on the specific identification method.
Marketable securities at fair market value at December 31, consisted of
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Corporate bonds ............................................. $ 522 $ 4,918
Mutual funds - municipalities ............................... 2,005 20,178
Municipal bonds ............................................. 203 623
Short-term notes ............................................ 306 1,530
Mutual funds - taxable auction securities ................... -- 2,804
Preferred stock ............................................. -- 865
Mutual funds - corporate bonds .............................. 2,277 2,440
------- -------
$ 5,313 $33,358
======= =======
</TABLE>
Investments in marketable securities were $58,258,000, $44,902,000 and
$102,363,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Gross proceeds on sales and maturities of marketable securities were
$86,410,000, $62,447,000 and $124,298,000 for the years ended December 31, 1999,
1998 and 1997, respectively. As of December 31, 1999, maturity dates for
corporate bonds, municipal bonds and short-term notes were June 28, 2000, July
1, 2020 and June 30, 2000, respectively.
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, and are shown net of valuation
allowances of $270,000 and $125,000 as of December 31, 1999 and 1998,
respectively. The notes bear interest at rates varying from 7% to 9% per annum.
f. Property and Equipment
Property and equipment is recorded at cost. Equipment held under capital
leases is 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.
38
<PAGE> 39
Depreciation and amortization are provided for on the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements ................. 5 to 30 years
Leasehold improvements ..................... Lesser of lease term or 15 years
Furniture and equipment .................... 5 to 7 years
Property held under capital leases ......... 5 to 30 years
</TABLE>
Property and equipment at December 31, consisted of (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land ...................................................... $ 14,423 $ 10,976
Building and improvements ................................. 24,615 19,005
Leasehold improvements .................................... 13,428 8,095
Construction in progress .................................. 4,479 1,853
Furniture and equipment ................................... 35,206 24,261
Equipment held under capital leases ....................... 1,552 1,552
-------- --------
Total fixed assets ........................................ 93,703 65,742
Less -- Accumulated depreciation and amortization ......... (23,367) (15,602)
-------- --------
$ 70,336 $ 50,140
======== ========
</TABLE>
Accumulated depreciation on equipment held under capital leases amounted
to $1,162,000 and $946,000 at December 31, 1999 and 1998, respectively.
g. Goodwill and Other Intangible Assets
Goodwill relating to acquisitions represents the purchase price paid and
liabilities assumed in excess of the fair market value of net assets acquired.
Goodwill is amortized on a straight-line basis over the expected period to be
benefited, not exceeding 40 years.
The Company continually evaluates whether events, circumstances or net
losses on the entity level 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, tax adjusted net income over the remaining life of the
goodwill to measure whether the goodwill is recoverable. If it is determined
that goodwill on a given entity is partially or totally unrecoverable, losses
will be recognized to the extent that projected aggregate tax adjusted net
income over the life of the goodwill does not cover the goodwill balance at the
date of impairment.
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, 1999 was $37,792,000 and $7,761,000, respectively. Accumulated
amortization of goodwill and covenants not to compete at December 31, 1998 was
$30,315,000 and $6,577,000, respectively.
In connection with the restructuring plans adopted and implemented by
the Company in 1996 and 1997, $432,000 of goodwill and other intangibles were
written-off during the year ended December 31, 1997.
h. Investment in Veterinary Pet Insurance
In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc. ("VPI"), a
provider of pet health insurance in the United States. The Company accounts for
this investment on a cost basis. The Company periodically evaluates this
investment for potential
39
<PAGE> 40
impairment of value and has determined that fair market value of the initial
investments has not been impaired as of December 31, 1999.
i. Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying amount reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximates fair value
because of the immediate or short-term maturity of these financial instruments.
Concentration of credit risk with respect to accounts receivable are limited due
to the diversity of the Company's client base.
j. 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 contingent 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.
k. Recent Accounting Pronouncements
In March 1998, the American 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 in the
first quarter of 1999 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 ("FASB") 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. The Company has not yet assessed the impact of the
adoption of SFAS 133.
On October 25, 1999, the FASB's Emerging Issues Task Force ("EITF")
reached consensus in Issue 99-15, "Accounting for Decreases in Deferred Tax
Asset Valuation Allowances Established in a Purchase Business Combination as a
Result of a Change in Tax Regulations" ("Issue No. 99-15"). Issue No. 99-15 is
the EITF's response to the Internal Revenue Service's June 25, 1999 ruling, as
stated in Treasury Regulation 1.1502-21, reducing the requirements for using
certain net operating loss carryovers and carrybacks ("NOLs"). As a result, the
Company recorded a deferred tax benefit during the year ended December 31, 1999
equal to $2,102,000. In the future, the Company will continue to evaluate its
NOLs based on the above rulings and future circumstances.
l. Reclassifications
Certain 1998 and 1997 balances have been reclassified to conform with
the 1999 financial statement presentation.
m. Revenue
Revenue is recognized only after the following criteria are met: there
exists adequate evidence of the transactions, delivery of goods has occurred or
services have been rendered, the price is not contingent on future activity and
collectibility is reasonably assured.
40
<PAGE> 41
n. Related Party Transactions
As part of an often-used acquisition strategy, the Company hires the
selling doctor upon sale of their practice. The Company issues notes payable as
a component of the purchase price and the Company may lease facilities from the
selling doctor. These arrangements are negotiated, arm's-length transactions
that take place as part of the acquisition process before the doctor is hired.
These arrangements are not contingent upon the current or future employment of
the doctors.
o. Marketing and Advertising
Marketing and advertising production costs are expensed as incurred or
the first time the advertisement is run. Media (primarily print) placement costs
are expensed in the month the advertising appears. Total marketing and
advertising expense is included in direct costs and amounted to $4.3 million,
$3.2 million and $3.3 million for the years ended December 31, 1999, 1998 and
1997, respectively.
3. ACQUISITIONS
During 1999, the Company purchased 24 animal hospitals and two
veterinary diagnostic laboratories all of which were accounted for as purchases.
Five of the acquired animal hospitals and both laboratories were merged into
existing VCA facilities upon acquisition. Including acquisition costs, VCA paid
an aggregate consideration of $24,240,000, consisting of $10,394,000 in cash and
acquisition costs, $12,402,000 in debt, 70,712 shares of common stock of the
Company with a value of $1,075,000, and the assumption of liabilities totaling
$369,000. The aggregated purchase price was allocated as follows: $1,930,000 to
tangible assets, $21,351,000 to goodwill and $959,000 to other intangibles.
In addition, on April 1, 1999, the Company completed the acquisition of
AAH Management Corp. ("AAH") for a total consideration (including acquisition
costs) of $28,969,000, consisting of 517,585 shares of VCA common stock, with a
value at the date of acquisition of $7,753,000, $9,103,000 in cash and
acquisition costs, $1,192,000 in notes payable and the assumption of $10,921,000
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: $6,340,000 to tangible assets, $21,904,000
to goodwill, and $725,000 to other intangible assets.
During 1998, the Company purchased 11 animal hospitals and one
veterinary diagnostic laboratory for an aggregate consideration (including
acquisition costs) of $30,740,000, consisting of $20,255,000 in cash, $6,482,000
in debt, 171,564 shares of VCA common stock with a value of $3,100,000, and the
assumption of liabilities totaling $903,000. The $30,740,000 aggregate purchase
price was allocated $6,156,000 to tangible assets, $23,395,000 to goodwill and
$1,189,000 to other intangible assets.
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 $18,703,000 in cash and a $29,002,000 note,
payable in quarterly installments over six years. During 1997, the Company
purchased 15 animal hospitals and three veterinary diagnostic laboratories for
an aggregate consideration (including acquisition costs) of $22,198,000,
consisting of $9,358,000 in cash, $10,531,000 in debt, 155,924 shares of VCA
common stock with a value of $1,900,000, and the assumption of liabilities
totaling $409,000. The $69,903,000 aggregate purchase price was allocated
$5,099,000 to tangible assets, $64,012,000 to goodwill and $792,000 to other
intangible assets.
The pro forma results listed below are unaudited and reflect purchase
price accounting adjustments assuming 1999 and 1998 acquisitions occurred at
January 1, 1998. 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.
41
<PAGE> 42
<TABLE>
<CAPTION>
For the Years Ended December 31,
(In thousands, except per share amounts)
(Unaudited)
1999 1998
-------- --------
<S> <C> <C>
Revenues .................................. $338,704 $329,828
Net income ................................ $ 22,339 $ 17,541
Diluted earnings per share ................ $ 1.02 $ 0.80
Shares used for computing diluted
earnings per share .................... 21,985 21,940
</TABLE>
In connection with certain acquisitions, the Company assumed certain
contractual arrangements whereby additional shares of the Company's common stock
and/or cash ("Earn-Out Payments") 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 (the "Earn-Out
Arrangements"). The Earn-Out Arrangements provide for contingent Earn-Out
Payments if the acquired entity achieves or exceeds contractually defined
revenue targets during the defined earn-out period. The payments are either
fixed in amount or are based on a multiplier of revenue. When the contingency is
resolved and the additional consideration is distributed, the Company records
the consideration issued as an additional cost of the acquired entity. The
additional consideration of affected assets, usually goodwill, is amortized over
the remaining life of the asset. Earn-Out Payments in 1999 amounted to
approximately $326,000, consisting entirely of cash. Earn-Out Payments in 1998
amounted to approximately $358,000, consisting of $311,000 in cash and 2,394
shares of common stock valued on the date of issuance at $47,000.
4. JOINT VENTURES AND INVESTMENT
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, 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 five-year period. Consulting and management fees earned
under this agreement are included in revenues and amounted to $5.1 million, $5.1
million and $4.7 million, for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company will cease to earn these consulting fees on February
1, 2000. 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 joint
venture at a purchase price equal to 51% of 1.3 times the annual sales of all
products bearing the Select Balance or Select Care brand (the "annual sales")
less $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 joint venture at a
purchase price equal to 49.5% of 1.3 times the annual sales plus $4.5 million.
The estimated purchase price for HPP to purchase all of the Company's interest
in the joint venture will range from $2 million to $3 million based on projected
annual sales of the Select Balance and Select Care products. Effective
February 1, 1997, the Company no longer reports the results of operations of
Vet's Choice on a consolidated basis.
In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc. (VPI), the
largest provider of pet health insurance in the United States. The Company
accounts for this investment using the cost method. The Company sold its
investment in VPI and received $8.25 million in cash in February 2000 resulting
in a one-time gain of approximately $3.25 million.
42
<PAGE> 43
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C> <C>
Mortgage debt Notes payable and other obligations, various maturities
through 2008, secured by land and buildings of certain
subsidiaries, various interest rates ranging from 7.0%
to 9.0% with a weighted average of 8.3% and 7.6% at
December 31, 1999 and 1998, respectively............................ $ 3,212 $ 1,961
Secured debt Notes payable and other obligations, various maturities
through 2014, secured by assets and stock of certain
subsidiaries, various interest rates ranging from 5.3%
to 12.0% with a weighted average of 7.8% at both
December 31, 1999 and 1998 ......................................... 69,213 69,964
Convertible debt Notes payable, convertible into VCA common stock at
prices ranging from $7.00 to $15.00 per share, due
through 2013, secured by stock of certain subsidiaries
at interests rates ranging from 7.0% to 10.0% with a
weighted average of 9.7% and 8.3% at December 31, 1999
and 1998, respectively ............................................. 1,803 816
Unsecured debt Notes payable, various maturities through 2004,
adjustable interest rates of 6.2% and fixed interest
rates ranging from 7.0% to 12.0% with a weighted
average of 6.4% and 6.1% at December 31, 1999 and 1998,
respectively ....................................................... 2,982 2,843
Debentures Convertible subordinated 5.25% debentures, due in 2006,
convertible into approximately 2.5 million shares of
VCA common stock at $34.35 per share ............................... 84,385 84,385
-------- --------
Total debt obligations ............................................. 161,595 159,969
Capital lease obligations .......................................... 187 306
Less - unamortized discount ........................................ (247) (488)
-------- --------
161,535 159,787
Less--current portion .............................................. (21,901) (17,431)
-------- --------
$139,634 $142,356
======== ========
</TABLE>
The annual aggregate scheduled maturities of debt obligations for the
five years subsequent to December 31, 1999 are presented below (in thousands):
<TABLE>
<S> <C>
2000 ........................... $ 21,901
2001 ........................... 17,466
2002 ........................... 16,467
2003 ........................... 8,574
2004 ........................... 4,027
Thereafter ..................... 93,100
--------
$161,535
========
</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
$72,425,000 and $71,925,000 at December 31, 1999 and 1998, respectively, is
non-recourse debt secured solely by the assets or the stock of the
43
<PAGE> 44
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 at December 31, 1999 is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value, and the estimates provided herein are not necessarily
indicative of the amounts that could be realized in a current market exchange.
<TABLE>
<CAPTION>
(in thousands)
Carrying Fair
Amount Value
-------- --------
<S> <C> <C>
Fixed-rate long-term debt ...................... $160,172 $121,182
Variable-rate long-term debt ................... 1,363 1,363
</TABLE>
The estimated fair value of the Company's fixed-rate long-term debt is
based on market value or prime plus an estimated spread at December 31, 1999 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, 1997, the Company adopted a Stockholder Rights Plan (the
"Rights Agreement") and in connection therewith, out of its authorized but
unissued shares of preferred Stock, designated 400,000 shares as Series B
Preferred Stock, par value $0.001 per share (the "Series B Preferred Stock").
Pursuant to the Rights Agreement, the Company distributed to its stockholders
rights entitling the holders to purchase one one-hundredth of a share of Series
B Preferred Stock for each share of common stock then held at an exercise price
of $60.00. One one-hundredth of a share of Series B Preferred Stock is
functionally equivalent in all respects, including voting and dividend rights,
to one share of common stock. Upon the occurrence of certain "triggering
events," each right entitles its holder to purchase, at the rights then-current
exercise price, a number of one one-hundredths of a share of Series B Preferred
Stock having a market value equal to twice the exercise price. A triggering
event occurs ten days following the date a person or group (other than an
"Exempt Person"), without the consent of the Company's board of directors,
acquires 15% or more of the Company's common stock or upon the announcement of a
tender offer or an exchange offer, the consummation of which would result in the
ownership by a person or group of 15% or more of the Company's common stock. The
rights will expire on January 5, 2008.
The Company's Certificate of Incorporation initially authorized
1,000,000 shares of preferred stock. At the 1998 Annual Meeting, the
stockholders approved an amendment to the Certificate of Incorporation to
increase the authorized number of shares of preferred stock to 2,000,000. The
rights, preferences and privileges of the preferred stock are to be determined
by the board of directors and do not require stockholder approval. During 1997,
583,333 shares of Series A Preferred Stock, par value 0.001 per share (the
"Series A Preferred Stock"), were converted into 583,333 shares of common stock.
HPP held all shares of the Series A Preferred Stock. At December 31, 1999,
1,016,667 of the shares of preferred stock are authorized and remain unreserved
and unissued. The Series B Preferred Stock is not convertible into shares of
common stock.
7. COMMON STOCK
During 1999, the Company issued 588,297 shares of its common stock
valued at $8,828,000, the fair market value at the date of commitment, as a
portion of the consideration for certain acquisitions.
At December 31, 1999, the Company held two notes receivable with
balances totaling $654,000 from certain management stockholders of the Company.
These notes arose from transactions whereby the Company loaned funds to the
management stockholders to purchase an aggregate of 182,666 shares of the
Company's
44
<PAGE> 45
common stock. These notes, which bear interest at 6.1% per annum, mature on
January 22, 2001. The receivables are shown in the accompanying consolidated
balance sheets as a reduction of stockholders' equity.
During 1999, the Company repurchased 393,346 shares of its common stock
for $4,761,000.
During 1998, the Company issued 171,564 shares of its common stock
valued at $3,100,000, the fair market value at the date of commitment, as a
portion of the consideration for certain acquisitions.
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 25, 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" ("SFAS 123"). SFAS 123 recommends changes in accounting for
employee stock-based compensation plans and requires certain disclosures with
respect to these plans. SFAS 123 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 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported ....................... $ 22,357 $ 16,268 $ 11,226
Pro forma ......................... 19,214 12,040 8,276
Diluted earnings per share:
As reported ....................... $ 1.02 $ 0.74 $ 0.53
Pro forma ......................... 0.87 0.55 0.42
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 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:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Risk free interest rate .............. 5.8% 5.0% 6.4%
Dividend yield ....................... 0% 0% 0%
Expected volatility .................. 54.2% 64.5% 60.6%
Weighted fair value average .......... $ 7.97 $ 9.25 $ 6.85
Expected option life (years) ......... 7 7 7
</TABLE>
Under the provisions of the Company's non-qualified and incentive stock
option plans for officers and key employees, 1,789,281 shares of common stock
were reserved for issuance at December 31, 1999. 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.
In addition to the options granted under VCA's stock option plans, the
Company had 2,030,333 options outstanding at December 31, 1999 and 1998, to
certain members of the board of directors and to the previous
45
<PAGE> 46
owners of certain acquired companies. During 1997, the Company granted to
certain officers of the Company 2,025,000 options with an exercise price of
$10.25 per share. The options vest in 60 equal monthly installments commencing
in September 1997.
The table below summarizes the transactions in the Company's stock
option plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Options outstanding at beginning of year ......... 3,821 3,584 1,739
Granted .......................................... 166 485 2,171
Exercised ........................................ (50) (194) (278)
Canceled ......................................... (117) (54) (48)
------ ------ ------
Options outstanding at end of year
($3.25 to $36.79 per share) ................... 3,820 3,821 3,584
====== ====== ======
Exercisable at end of year ....................... 2,031 1,674 1,318
====== ====== ======
</TABLE>
The following table summarizes information about certain options in the
stock option plans outstanding (in thousands except weighted average) as of
December 31, 1999 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 $9.00 ............. 237 4.98 $ 4.98 237 $ 4.98
$9.00 to $19.00 ............. 3,551 7.05 10.79 1,792 10.44
Greater than $19.00 ......... 24 8.84 27.71 2 30.00
----- -----
3,812 2,031
===== =====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
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 future minimum lease payments on operating leases at December 31,
1999, including renewal option periods, are as follows (in thousands):
<TABLE>
<S> <C>
2000 ............................ $ 10,452
2001 ............................ 10,453
2002 ............................ 10,399
2003 ............................ 10,287
2004 ............................ 10,159
Thereafter ...................... 107,343
--------
$159,093
========
</TABLE>
Rent expense totaled $10,397,000, $9,122,000 and $8,624,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Rental income
totaled $310,000, $203,000 and $235,000 for the years ended December 31, 1999,
1998, and 1997, respectively.
46
<PAGE> 47
At December 31, 1999, the Company was obligated under three Earn-Out
Arrangements, two of which expire in the year 2000 and the remaining one
expiring in the year 2001 with payment due dates extending into 2002.
The following table summarizes projected annual payments, based upon
historical activity and management's estimates of future operating results, to
be made under existing Earn-Out Arrangements (unaudited and in thousands):
<TABLE>
<S> <C>
2000 ................................ $262
2001 ................................ 55
2001 ................................ 55
</TABLE>
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 $816,000 for
the year ended December 31, 1999. Any upward adjustment in the annual
compensation of the three officers of the Company is at the discretion of the
Compensation Committee of the Board of Directors. In establishing the amount of
any upward adjustment for these officers, the Compensation Committee will engage
a reputable compensation consulting firm to determine comparable compensation
packages provided to officers in similarly situated companies.
There is no set range for any upward adjustment of the three officers'
annual compensation.
10. CALCULATION OF PER SHARE AMOUNTS
A reconciliation of the income and shares used in the computations of
the basic and diluted earnings per share ("EPS") for each of the three years in
the period ended December 31, 1999 follows (amounts shown in thousands, except
earnings per share):
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
----------------------------------------
Per Share
Income Shares Amount
------- ------- --------
<S> <C> <C> <C>
Basic EPS
Net income ........................ $22,357 21,063 $ 1.06
=======
Effect of dilutive securities
Stock options ..................... -- 922
------- -------
Diluted EPS ........................... $22,357 21,985 $ 1.02
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------
Per Share
Income Shares Amount
------- ------- --------
<S> <C> <C> <C>
Basic EPS
Net income ........................ $16,268 20,350 $ 0.80
=======
Effect of dilutive securities
Convertible preferred stock ....... -- --
Stock options ..................... -- 1,545
Stock guarantees .................. 13 20
Convertible debt .................. -- 25
------- -------
Diluted EPS ........................... $16,281 21,940 $ 0.74
======= ======= =======
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------
Per Share
Income Shares Amount
------- ------- --------
<S> <C> <C> <C>
Basic EPS
Net income ........................ $11,226 19,626 $ 0.57
=======
Effect of dilutive securities
Convertible preferred stock ....... -- 451
Stock options ..................... -- 688
Stock guarantees .................. 13 25
Convertible debt .................. -- 223
------- -------
Diluted EPS ........................... $11,239 21,013 $ 0.53
======= ======= =======
</TABLE>
During 1999 and 1998, $84,385,000 of 5.25% convertible debentures,
convertible into 2,456,623 shares of common stock, were outstanding but were not
included in the computation of Diluted EPS because conversion would have an
antidilutive effect on Diluted EPS.
11. INCOME TAXES
The provision for income taxes is comprised of the following for
the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal:
Current ............................. $10,161 $ 8,064 $ 5,952
Deferred ............................ 515 2,080 1,534
------- ------- -------
10,676 10,144 7,486
------- ------- -------
State:
Current ............................. 2,850 2,157 1,594
Deferred ............................ 834 653 267
------- ------- -------
3,684 2,810 1,861
------- ------- -------
$14,360 $12,954 $ 9,347
======= ======= =======
</TABLE>
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards 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 for
the year in which the differences are expected to reverse.
The net deferred tax asset (liability) at December 31 is comprised of
(in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable ................................ $ 2,782 $ 2,827
State taxes ........................................ (457) (988)
Other liabilities and reserves ..................... 2,347 2,393
Start-up costs ..................................... 66 66
Restructuring charges .............................. 815 1,069
Other assets ....................................... (299) (216)
Inventory .......................................... 817 818
Valuation allowance ................................ (1,858) (1,858)
------- -------
Total current deferred tax asset, net ......... $ 4,213 $ 4,111
======= =======
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Non-current deferred tax (liabilities) assets:
Net operating loss carryforwards .................. $ 5,704 $ 7,996
Write-down of assets .............................. 1,433 1,479
Start-up costs .................................... 300 298
Other assets ...................................... 445 293
Intangible assets ................................. (9,204) (5,414)
Property and equipment ............................ (1,267) (1,131)
Unrealized loss on investments .................... 355 191
Valuation allowance ............................... (4,421) (9,512)
------- -------
Total non-current deferred tax liability, net ... $(6,655) $(5,800)
======= =======
</TABLE>
At December 31, 1999, the Company has federal net operating loss ("NOL")
carryforwards of approximately $15,323,000, 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.
As a result of a favorable change in the U.S. Tax regulations with
respect to limitations on the use of NOL carryforwards, the Company reduced its
valuation allowance by $5,091,000; $2,102,000 of income was recorded as Income
Tax Adjustment in the accompanying 1999 Income Statement, and the remainder was
recorded as a reduction of goodwill.
A reconciliation of the provision for income taxes to the amount
computed at the federal statutory rate for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate ...................................... 35% 35% 35%
Effect of amortization of goodwill ........................................ 4 3 4
State taxes, net of federal benefit ....................................... 7 6 6
Tax exempt income ......................................................... (1) (1) (1)
Change in valuation allowance associated with utilization of NOL,
certain write-down of assets, restructuring and acquisition
related costs and other ................................................ (6) -- --
Other ..................................................................... -- 1 1
--- --- ---
39% 44% 45%
=== === ===
</TABLE>
12. 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, those with at least six months of employment with the Company, and
provides for annual matching contributions by the Company at the discretion of
the Company's board of directors. In 1999, 1998 and 1997, the Company provided a
total matching contribution approximating $353,000, $942,000 and $496,000,
respectively.
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<PAGE> 50
13. RESTRUCTURING AND ASSET WRITE-DOWN
During 1996, the Company adopted and implemented a restructuring plan
(the "1996 Plan") and recorded a restructuring charge of $5,701,000 and an asset
write-down charge of $9,512,000. The major components of the 1996 Plan included:
(1) the termination of leases, the write-down of intangibles, property and
equipment, and employee terminations in connection with the closure, sale or
consolidation of 12 animal hospitals; (2) the termination of contracts and
leases, the write-down of certain property and equipment, and the termination of
employees in connection with the restructuring of the Company's laboratory
operations; and (3) contract terminations and write-down of assets in connection
with the migration to common communications and computer systems. Collectively,
the 12 hospitals had aggregate revenue of $6,814,000 and net operating loss of
$350,000 for the year ended December 31, 1996. The restructuring of the
laboratory operations consisted primarily of: (i) plans to relocate the
Company's facility in Indiana to Chicago; (ii) the downsizing of its Arizona
operations; (iii) the standardization of laboratory and testing methods
throughout all the Company's laboratories, resulting in the write-down of
equipment that will no longer be utilized; and (iv) the shut-down of another of
its facilities in the Midwest.
During 1999, pursuant to the 1996 Plan, the Company incurred the
following:
(a) Cash expenditures of $345,000 for lease and other contractual
obligations.
(b) Non-cash asset write-downs of $157,000, primarily pertaining to
hospitals previously closed and to the Company's shut-down of
certain computer systems.
(c) The Company recognized a $321,000 favorable settlement related
to a laboratory operations' contract that was terminated as part
of the 1996 Plan.
(d) During the fourth quarter of 1999, the Company was released from
its contractual obligation pertaining to certain facility leases
for hospitals that were sold in 1997. In addition, the Company
reached a favorable settlement on contractual obligations
pertaining to its migration to common communications and
computer systems, a component of the 1996 Plan. As a result of
these two favorable outcomes, the Company reversed $889,000 of
restructuring charges.
During 1998, the actions taken pursuant to the 1996 Plan were as
follows:
(a) The Company closed one animal hospital.
(b) The Company shut-down certain computer hardware and software, as
part of its migration to common computer systems.
(c) The Company decided that two hospitals will continue to be
operated instead of closed as was originally outlined in the
1996 Plan. The hospitals' local markets improved since the 1996
Plan was determined, causing the Company's management to revise
its plan.
(d) The Company terminated its attempts to sell one hospital because
it has been unable to negotiate a fair sales price based on the
hospital's operating results.
Reserves of $593,000 related to the three hospitals discussed in (c) and
(d) above, were utilized to offset increases in the expected cost to extinguish
lease commitments and contract obligations that were part of the 1996 Plan.
The activity that occurred within the 1996 Plan during 1997 was as
follows:
(a) The Company sold four of its animal hospitals.
50
<PAGE> 51
(b) The Company's laboratory division relocated its facility in
Indiana to Illinois, downsized its Arizona operations,
substantially completed its standardization of laboratory and
testing methods, and replaced its communications system.
(c) The Company's hospital division completed its evaluation of the
property value at one of its hospitals and replaced certain
equipment and software.
(d) At September 30, 1997, the Company reversed $2,074,000 of the
restructuring reserve established for the 1996 Plan. The events
that triggered the need to reverse a portion of the 1996 Plan
charge were as follows:
(i) A favorable termination of a communications system
contract was negotiated and became effective October 1,
1997.
(ii) A hospital practice was acquired on May 15, 1997 and was
merged into an animal hospital that was scheduled to be
closed. The Company evaluated the performance of the
merged practices during the 1997 third quarter and
decided to rescind its decision to close the animal
hospital.
(iii) The Company completed negotiations to terminate a lease
agreement early for one of the hospitals scheduled to be
closed at a favorable amount.
(iv) The Company rescinded its decision to close three other
animal hospitals due to their improved performance.
As of December 31, 1999, all phases of the 1996 Plan were complete and
no restructuring reserves remain on the Company's balance sheet.
During 1997, the Company reviewed the financial performance of its
hospitals. As a result of this review, an additional 12 hospitals were
determined not to meet the Company's performance standards. Accordingly, the
Company adopted phase two of its restructuring plan (the "1997 Plan"), resulting
in restructuring and asset write-down charges of $2,074,000. The major
components of the 1997 Plan consisted of the termination of leases, amounting to
$1,198,000, and the write-down of intangibles, property and equipment, amounting
to $876,000, in connection with the closure or sale of 12 animal hospitals.
Collectively, the 12 hospitals had aggregate revenue of $5,378,000 and net
operating income of $176,000 for the year ended December 31, 1997.
During 1999, the actions taken pursuant to the 1997 Plan were as
follows:
(a) The Company sold one hospital resulting in cash expenditures of
$2,000 and non-cash asset write-downs of $64,000.
(b) The Company closed three hospitals resulting in cash
expenditures of $4,000 and non-cash asset write-downs of
$53,000.
(c) The Company incurred cash expenditures of $71,000 for lease and
other contractual obligations.
(d) The Company recorded an additional $28,000 non-cash asset
write-down pertaining to a hospital previously closed.
(e) During the fourth quarter of 1999 the Company reached favorable
outcomes from the sale and/or closure of the hospitals noted in
(a) and (b) above. As a result the Company reversed $663,000 of
restructuring charges.
During 1998, the Company closed three animal hospitals pursuant to the
1997 Plan, resulting in the write-off of $299,000 of property and equipment and
cash expenditures of $81,000 for lease obligations and closing costs. Also
during 1998, the Company determined that five of the animal hospitals that were
to be sold as part of the 1997 Plan would be kept due to their improved
performance.
51
<PAGE> 52
During 1997, the Company, as part of the 1997 Plan, recorded $466,000 of
non-cash asset write-downs, consisting primarily of a write-down of intangibles.
At December 31, 1999, $343,000 of the restructuring reserve from the
1997 Plan remains on the Company's balance sheet, consisting primarily of lease
and other contractual obligations. All significant phases of the 1997 Plan have
been completed as of December 31, 1999, although certain lease obligations will
continue through 2005.
The following tables summarize the activity in the Company's
restructuring reserves (in thousands):
<TABLE>
<CAPTION>
The 1996 Plan
-------------
Cash Non-Cash
Charges Charges Total
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1996................................................... $ 5,690 $ 2,781 $ 8,471
Cash expenditures for lease and other contractual obligations.......... (1,264) -- (1,264)
Non-cash net assets write-downs........................................ -- (2,121) (2,121)
Reverse excess reserves for:
Communications system contract termination....................... (1,198) -- (1,198)
Net asset write-downs and closing costs.......................... (459) (283) (742)
Closed hospital facilities leases and other, net................. (134) -- (134)
------- ------- -------
Balance, December 31, 1997 .................................................. $ 2,635 $ 377 $ 3,012
Cash expenditures for lease and other contractual obligations ......... (989) -- (989)
Non-cash net assets write-downs ....................................... -- (632) (632)
Reclassifications ..................................................... (255) 255 --
------- ------- -------
Balance, December 31, 1998 .................................................. 1,391 -- 1,391
Cash expenditures for lease and other contractual obligations ......... (345) -- (345)
Non-cash net asset write-downs ........................................ -- (157) (157)
Reclassifications ..................................................... (157) 157 --
Reversal of restructuring reserves .................................... (889) -- (889)
------- ------- -------
Balance, December 31, 1999 .................................................. $ -- $ -- $ --
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The 1997 Plan
-------------
Cash Non-Cash
Charges Charges Total
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1996................................................... $ -- $ -- $ --
Restructuring charge reserve established............................... 842 1,232 2,074
Non-cash net assets write-downs........................................ -- (466) (466)
------- ------- -------
Balance, December 31, 1997 .................................................. $ 842 $ 766 $ 1,608
Cash expenditures for lease and other contractual obligations ......... (81) -- (81)
Non-cash net assets write-downs ....................................... -- (299) (299)
Reclassifications ..................................................... 105 (105) --
------- ------- -------
Balance, December 31, 1998 .................................................. 866 362 1,228
Cash expenditures for lease and other contractual obligations ......... (77) -- (77)
Non-cash net asset write-downs ........................................ -- (145) (145)
Reversal of restructuring reserves .................................... (446) (217) (663)
------- ------- -------
Balance, December 31, 1999 .................................................. $ (343) $ -- $ (343)
======= ======= =======
</TABLE>
14. LINES OF BUSINESS
During the three years ending December 31, 1999 the Company had four
reportable segments: Animal Hospitals, Laboratories, Premium Pet Food 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 segment provides veterinary services for
companion animals and sells related retail products. The Laboratories segment
provides testing services for veterinarians both associated with the Company and
independent of the Company. The Premium Pet Food segment manufactures and sells
premium pet food both to independent third parties and to the Company's animal
hospitals. Commencing February 1, 1997, the day-to-day management of the Premium
Pet Food segment was assumed by HPP, and the Company no longer reports the
results of operations for this segment on a consolidated basis. 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. 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
52
<PAGE> 53
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.
The following is a summary of certain financial data for each of the
four segments (in thousands):
<TABLE>
<CAPTION>
Inter-Segment
Animal Premium Sales
Hospitals Laboratories Pet Food Corporate Eliminations Total
--------- ------------ -------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues .......................... $223,088 $103,282 $ -- $ -- $ (5,810) $320,560
Operating income (loss) ........... 38,547 28,039 -- (19,570) -- 47,016
Year 2000 remediation costs ....... -- -- (3,806) (3,806)
Reversal of restructuring charges.. 1,873 1,873
Depreciation/amortization expense.. 10,472 4,234 -- 790 -- 15,496
Identifiable assets ............... 280,742 105,224 -- 40,534 -- 426,500
Capital expenditures .............. 15,970 1,997 -- 3,836 -- 21,803
1998
Revenues .......................... $196,988 $ 89,896 $ -- $ -- $ (5,845) $281,039
Operating income (loss) ........... 33,481 20,141 -- (14,788) -- 38,834
Depreciation/amortization expense.. 8,488 4,074 -- 570 -- 13,132
Identifiable assets ............... 226,182 106,217 -- 60,484 -- 392,883
Capital expenditures .............. 7,450 3,813 -- 415 -- 11,678
1997
Revenues .......................... $170,548 $ 68,997 $ 1,064 $ -- $ (4,696) $235,913
Operating income (loss) ........... 25,027 16,813 156 (13,588) -- 28,408
Depreciation/amortization expense.. 7,363 3,329 12 495 -- 11,199
Identifiable assets ............... 205,653 95,073 -- 85,363 -- 386,089
Capital expenditures .............. 5,578 1,088 -- 575 -- 7,241
</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, Laboratories and Premium Pet Food segments.
The following is a reconciliation between total segment operating income
after eliminations and consolidated income before provision for income taxes as
reported on the consolidated statements of operations.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Total segment operating income after
eliminations .................................. $47,016 $38,834 $28,408
Interest income .................................. 1,194 2,357 4,182
Interest expense ................................. 10,643 11,189 11,593
Minority interest ................................ 850 780 424
------- ------- -------
Income before provision for income taxes ......... $36,717 $29,222 $20,573
======= ======= =======
</TABLE>
15. SUBSEQUENT EVENTS
From January 1, 2000 through February 21, 2000, the Company has acquired
four animal hospitals, of which two were merged upon acquisition into existing
VCA facilities, for an aggregate consideration (including acquisition costs) of
$2,080,000, consisting of $1,000,000 in cash, $1,050,000 in debt and the
assumption of liabilities totaling $30,000.
In February 2000, the Company sold its investment in VPI for $8.25
million.
53
<PAGE> 54
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.
54
<PAGE> 55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of Veterinary Centers of America, Inc. (the
"Company" or "VCA") as of March 31, 2000:
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
APPOINTED
NAME AGE DIRECTOR PRINCIPAL OCCUPATION
---- --- ----------- --------------------
<S> <C> <C> <C>
Directors
Arthur J. Antin 53 1986 Chief Operating Officer, Senior Vice President,
Secretary and Director
Robert L. Antin 50 1986 Chairman of the Board and Chief Executive Officer
John B. Chickering, Jr. 51 1988 Director
Richard Gillespie, M.D. 66 1995 Director
John A. Heill 46 1995 Director
Neil Tauber 49 1992 Senior Vice president of Development and Director
EXECUTIVE OFFICERS
Tomas W. Fuller 42 Chief Financial Officer, Vice President and
Assistant Secretary
Dawn R. Olsen 41 Vice President, Controller
</TABLE>
The executive officers of VCA are appointed by and serve at the
discretion of the Board of Directors. Robert L. Antin and Arthur J. Antin are
brothers. There are no other family relationships between any director and/or
any executive officer of VCA.
DIRECTORS
MR. ARTHUR J. ANTIN, a founder of VCA, has served as Chief Operating
Officer, Senior Vice President, Secretary and a Director of VCA since its
inception, and currently is responsible for managing animal hospital and
veterinary laboratory operations for VCA. From October 1983 to September 1986,
Mr. Antin served as Director of Marketing/Investor Relations of AlternaCare
Corp. ("AlternaCare"), a publicly held company which owned, operated and
developed freestanding out-patient surgical centers. AlternaCare was acquired by
Medical Care International in 1988. At AlternaCare, Mr. Antin developed and
implemented marketing strategies for a network of outpatient surgical centers.
Mr. Antin received a MA degree in Community Health from New York University and
a Post Graduate Certificate in Structured Programming and Business Application
design from Columbia University.
MR. ROBERT L. ANTIN, a founder of VCA, has served as Chief Executive
Officer, President and Chairman of the Board of VCA since its inception. Mr.
Antin is responsible for directing all aspects of VCA's business. From September
1983 until founding VCA, Mr. Antin was President, Chief Executive Officer, a
director and co-found of AlternaCare. From July 1978 until September 1983, Mr.
Antin was employed as an officer by American Medical International, Inc.
("AMI"), an owner and operator of health care facilities. While at AMI, Mr.
Antin initially served as Director of Marketing of Professional Hospital
Services, then as Director of New Business Development responsible for
non-hospital related acquisitions and development, and most recently as a Vice
President of AMI and President of AMI Ambulatory Center, Inc., a subsidiary of
AMI operating a chain of ambulatory care centers. Mr. Antin received his MBA
degree with a certification in hospital and health adminstration from Cornell
University in 1975.
MR. JOHN B. CHICKERING, JR., a certified public accountant, currently is
a private investor and independent consultant. Mr. Chickering served in a
variety of executive positions within Time Warner, Inc. and Warner Bros.,
55
<PAGE> 56
Inc., most recently as the Vice President - Financial Administration for Warner
Bros. International Television Distribution until February 1996. Prior to his
employment at Warner Bros., Mr. Chickering served as a staff accountant at KPMG
Peat Marwick from August 1975 to June 1977. Mr. Chickering holds a MBA degree
with emphasis in accounting and finance from Cornell University.
RICHARD GILLESPIE, M.D., was elected to the Board of Directors in June
1995. Dr. Gillespie is a private investor who has investments in several
companies in the United States. From 1983 to 1987, Dr. Gillespie was Vice
president, a director and co-founder of AlternaCare. Dr. Gillespie also has
served as a director for several other companies, including Lansinoh
Laboratories, Inc. and Geriatric Medical Center, and as the general partner of
Outpatient Diagnostics Center. Dr. Gillespie holds a MD degree from the
University of Tennessee College of Medicine.
MR. JOHN A. HEIL, currently serves as the President - Heinz Specialty
Pet Food. Since 1978, Mr. Heil has served in various capacities with the H.J.
Heinz Company, including Vice President-Marketing for Heinz Pet Products,
General Manager, Marketing of Ore-Ida Foods, Inc. and Vice President - Marketing
and Sales of Star-Kist Foods, Inc. Mr. Heil holds a BA degree in economics from
Lycoming College.
MR. NEIL TAUBER, a founder of VCA, has served as Senior Vice President
of Development and a Director of VCA since its inception and is currently
responsible for identifying and effecting the acquisition of independent animal
hospitals and veterinary diagnostic laboratories. From 1984 to 1986, Mr. Tauber
served as the Director of Corporate Development at AlternaCare. At AlternaCare,
Mr. Tauber was responsible for the acquisition of new businesses and syndication
to hospitals and physician groups. From 1981 to 1984, Mr. Tauber served as Chief
Operating Officer of MDM Services, a wholly owned subsidiary of Mediq, a
publicly held health care company, where he was responsible for operating and
developing a network of retail dental centers and industrial medical clinics.
Mr. Tauber hold a MBA from Wagner College.
EXECUTIVE OFFICERS
MR. THOMAS W. FULLER joined VCA in January 1988 and served as Vice
President and Controller until November 1990 when he became Chief Financial
Officer. Prior to joining VCA, from 1980 to 1987, Mr. Fullter served as an audit
manager for Arthur Andersen LLP. Mr. Fuller holds a BA degree in
business/economics from the University of California at Los Angeles.
MS. DAWN R. OLSEN joined VCA in January 1997 as Vice President,
Controller. Prior to joining VCA, from November 1993 to March 1996, Ms. Olsen
served as Senior Vice President, Controller of OpTel, Inc., a privately held
telecommunications company. From 1987 to 1993, Ms. Olsen served as Assistant
Controller and later as Vice president, Controller of Qintex Entertainment,
Inc., a publicly held television film distribution and production company. From
1981 to 1987, Ms. Olsen served as an audit manager for Arthur Andersen LLP. Ms.
Olsen is a certified public accountant and holds a BS degree from California
State University, Northridge.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors, and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Executive officers, directors and greater-than-ten
percent stockholders are required by SEC regulations to furnish the Company with
all Section 16(a) forms they file. Based solely on its review of the copies of
the forms received by it and written representations from certain reporting
persons that they have complied with the relevant filing requirements, the
Company believes that, during the year ended December 31, 1999, all the
Company's executive officers, directors and greater-than-ten percent
stockholders complied with all Section 16(a) filing requirements, except that
each of the Named Executive Officers (as defined below in Item 11) did not
timely file a Form 5 with respect to Section 16(b) exempt restricted stock bonus
awards granted in February 1999.
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<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer and as
to each of the other four most highly compensated officers whose compensation
exceeded $100,000 during the last fiscal year (the "Named Executive Officers"),
information concerning all compensation paid for services to the Company in all
capacities for each of the three years ended December 31 indicated below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NUMBER OF
FISCAL YEAR ANNUAL COMPENSATION SECURITIES
ENDED ---------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) DECEMBER 31 SALARY BONUS OPTIONS (2) COMPENSATION (3)
------------------------------- ------------ -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Robert L. Antin 1999 $364,000 $327,600(4) -- $ 21,390
Chairman of the Board and 1998 350,000 315,000(5) -- 16,750
Chief Executive Officer 1997 296,385 315,000(6) 900,000 16,500
Arthur J. Antin 1999 $260,000 $208,000(4) -- $ 22,885
Chief Operating Officer, 1998 250,000 200,000(5) -- 18,510
Senior Vice President and 1997 211,523 190,000(6) 450,000 15,700
Secretary
Neil Tauber 1999 $197,600 $138,320(4) -- $ 19,467
Senior Vice President of 1998 190,000 70,989(5) -- 14,250
Development 1997 172,338 104,738(6) 360,000 14,200
Tomas W. Fuller 1999 $187,200 $131,040(4) -- $ 16,330
Chief Financial Officer, 1998 180,000 121,406(5) -- 9,750
Vice President and 1997 152,246 78,625(6) 315,000 12,000
Assistant Secretary
Dawn R. Olsen 1999 $131,000 $ 9,770(7) -- --
Vice President and 1998 125,000 13,300(5) 15,500 --
Controller 1997 103,231 16,500(6) 15,000 --
</TABLE>
---------------------------
(1) For a description of the employment contract between each officer and
the Company, see "Certain Relationships and Related Party Transactions",
below.
(2) All numbers reflect the number of shares of Common Stock subject to
options granted during the fiscal year.
(3) Includes automobile expense.
(4) Reflects the fair market value on January 20, 2000 of restricted stock
bonus awards granted in January 2000 for services rendered during the
fiscal year ended December 31, 1999. These shares vest in full on the
second anniversary of the date of grant.
(5) Reflects the fair market value on February 12, 1999 of restricted stock
bonus awards granted in February 1999 for services rendered during the
fiscal year ended December 31, 1998. These shares vest in full on the
second anniversary of the date of grant.
57
<PAGE> 58
(6) Reflects the fair market value on January 2, 1998 of restricted stock
bonus awards granted in January 1998 for services rendered during the
fiscal year ended December 31, 1997. These shares became fully vested on
the second anniversary of the date of grant.
(7) Reflects the fair market value on January 20, 2000 of restricted stock
bonus awards granted in January 2000 for services rendered during the
fiscal year ended December 31, 1999. These shares vest in equal
installments over three years commencing on the first anniversary of the
date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
The Company did not grant any stock options during the fiscal year ended
December 31, 1999 to the Named Executive Officers.
STOCK OPTIONS HELD AT FISCAL YEAR END
The following table sets forth, for each of the Name Executive Officers,
certain information regarding the exercise of stock options during the fiscal
year ended December 31, 1999, the number of shares of Common Stock underlying
stock options held at fiscal year end and the value of options held at fiscal
year end based upon the last reported sales price of the Common Stock on the
Nasdaq Stock Market's National Market on December 31, 1999 ($12.88 per share).
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1998
ON VALUE --------------------------------- ----------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Antin -- -- 755,000 450,000 $2,056,275 $1,183,500
Arthur J. Antin -- -- 453,000 225,000 1,683,875 591,750
Neil Tauber -- -- 345,000 180,000 1,099,375 473,400
Tomas W. Fuller -- -- 303,167 157,500 973,231 414,225
Dawn R. Olsen -- -- 10,938 19,562 19,725 19,725
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 30, 2000, certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of the Company's Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all of the Company's
executive officers and directors as a group. Except as may be indicated in the
footnotes to the table and subject to applicable community property laws, each
such person has the sole voting and investment power with respect to the shares
owned. The address of each person listed is in care of the Company, 12401 West
Olympic Boulevard, Los Angeles, California 90064, unless otherwise set forth
below such person's name.
58
<PAGE> 59
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Name and Address Beneficially Owned(1) Percent(1)
---------------- --------------------- ----------
<S> <C> <C>
Robert L. Antin (2) .............................. 1,794,259 8.1%
Arthur J. Antin (3) .............................. 776,131 3.6
Neil Tauber (4) .................................. 487,058 2.2
Tomas W. Fuller (5) .............................. 392,645 1.8
Dawn R. Olsen (6) ................................ 22,902 *
John B. Chickering, Jr. (7) ...................... 13,750 *
Richard Gillespie, M.D. (8) ...................... 48,075 *
John A. Heil (9) ................................. 26,667 *
ICM Asset Management, Inc. (10).................. 1,572,455 7.3
Merrill Lynch & Co., Inc. (11).................... 1,337,997 6.2
Dimensional Fund Advisory, Inc. (12).............. 1,272,400 5.9
Directors and executive officers
As a group (8 persons) (13) ................... 3,480,821 14.8%
</TABLE>
--------------------
* Less than one percent
(1) Under Rule 13d-3, certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to
vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right
to acquire the shares (for example, upon exercise of an option) within
60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of any person
as shown in this table does not necessarily reflect the person's actual
ownership or voting power with respect to the number of shares of Common
Stock actually outstanding at June 30, 2000.
(2) Includes (i) 146,866 shares held by Mr. Robert Antin's minor children
and (ii) 875,000 shares of Common Stock reserved for issuance upon
exercise of stock options which are or will become exercisable on or
prior to August 31, 2000.
(3) Includes (i) 80,666 shares which Mr. Arthur Antin holds as custodian for
Mr. Robert Antin's minor children under the California Uniform Gifts to
Minor's Act; (ii) 48,666 shares held by Mr. Arthur Antin's minor
children; and (iii) 513,500 shares of Common Stock reserved for issuance
upon exercise of stock options which are or will become exercisable on
or prior to August 31, 2000.
(4) Includes 393,000 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
(5) Includes 345,167 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
(6) Includes 17,361 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
(7) Consists of 13,750 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
(8) Includes 33,750 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
(9) Consists of 26,667 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 20000.
(10) Based on information contained in a Schedule 13G dated February 8, 2000.
ICM Asset Management, Inc. is Located at 601 West Main Avenue, Suite
600, Spokane, Washington 99201.
(11) Based on information contained in a Schedule 13G dated February 4, 2000.
Merrill Lynch & Co., Inc. is located at World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10381.
(12) Based on information contained in a Schedule 13G dated February 3, 2000.
Dimensional Fund Advisors Inc. is located at 1299 Ocean Avenue, 11th
floor, Santa Monica, California 90401.
(13) Includes 2,218,195 shares of Common Stock reserved for issuance upon
exercise of stock options, which are or will become exercisable on or
prior to August 31, 2000.
59
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On January 1, 1994, VCA entered into employment agreements (the
"Original Agreements") with each of Robert Antin, Arthur Antin, and Neil Tauber,
which were amended on February 1, 1997 and November 22, 1999 (the "Amended
Agreements"). Upon amendment to extend the term of each Original Agreement, base
salaries were not modified. Pursuant to the terms of the Amended Agreements, the
Compensation Committee of the Board retained a compensation consulting firm to
determine comparable compensation packages provided to executives in similarly
situated companies. In accordance with the recommendations of the compensation
consulting firm, the Compensation Committee increased the base salaries of each
of Robert Antin, Arthur Antin and Neil Tauber to $350,000, $250,000, $190,000,
respectively. In 1999 the Compensation Committee increased the base salaries of
each of Robert Antin, Arthur Antin and Neil Tauber to $364,000, $260,000 and
$197, 600, respectively. Pursuant to the Amended Agreements each of Robert
Antin, Arthur Antin and Neil Tauber were granted options to purchase 900,000,
450,000 and 360,000 shares of Common Stock of the Company, respectively, in
1997. These grants of stock options are expected to serve as long-term
compensation for these officers over the next five years. In addition, the Board
has determined that executive officers of VCA may earn bonuses during each
calendar year based upon management achieving performance goals established by
the Compensation Committee of the Board of Directors on an annual basis.
If employment is terminated due to the death or disability of the
employee, the agreements provide that VCA will pay the affected employee
severance pay equal to five years' base salary. If employment is terminated by
VCA without cause or by the employee for cause, the affected employee is
entitled to severance pay in an amount equal to five years' base salary plus an
amount equal to five times (a) in the event no previous bonus has been paid or
is payable to the affected employee, 20% of the affected employee's base salary,
and (b) in the event at least one bonus has been paid or is payable to the
affected employee, the average bonus based on all bonuses paid or payable to the
affected employee. If employment is terminated due to a change in control of
VCA, the affected employee is entitled to severance pay in an amount equal to
five years' base salary plus an amount equal to five times (a) in the event no
previous bonus has been paid or is payable to the affected employee, 20% of the
affected employee's salary, and (b) in the event at least one bonus has been
paid or is payable to the affected employee, the greater of (x) the last annual
bonus paid or payable to the affected employee, or (y) the average bonus based
on all bonuses paid or payable to the affected employee. If employment is
terminated due to the scheduled expiration of an employment agreement, the
affected employee is entitled to severance pay in an amount equal to five years'
base salary. Any shares of restricted common stock of VCA issued to the employee
in lieu of cash bonuses, for purposes of computing the amount of severance pay,
shall be valued at (x) in the case of a change of control, the per share price
paid or payable by the acquirer in the change of control transaction, or (y) in
all other cases, at the per share fair market value of the restricted common
stock (taking into account any restrictions imposed thereon) on the date such
shares were granted from VCA to the employee. In each of these employment
agreements, events constituting "termination by the employee for cause" include
(i) the willful breach of any of the material obligations of VCA to the employee
under his employment agreement; (ii) the relocation of the chief executive
offices of VCA outside of Los Angeles County, California; or (iii) in the case
of employees who also serve as members of the Board, the failure of the employee
to be reelected to, or the removal of the employee from, the Board. "Change of
control" is defined in each of these agreements to include (a) a consolidation
or merger of VCA into another entity in which VCA is not the continuing or
surviving corporation or pursuant to which shares of Common Stock of the Company
would be converted into cash, securities or other property, other than a merger
of VCA in which the stockholders of VCA immediately prior to the merger have the
same proportionate ownership of Common Stock of the surviving corporation
immediately after the merger, (b) any sale, lease or other transfer of all or a
significant portion of the assets of VCA, (c) the approval by the stockholders
of VCA of any plan or proposal for the liquidation or dissolution of VCA, (d)
the ownership by any person, who at the effective date of the employment
agreement owned less than 10% of the Common Stock of the Company, shall become
the beneficial owner of 20%, or more of the Common Stock of the Company or (e)
during any consecutive two-year periods, individuals who at the beginning of
such period constitute the entire Board of Directors shall cease for any reason
to constitute a majority thereof unless the election, or the nomination for
election by the stockholders of VCA, of each new director was approved by a vote
of at least two-thirds of the directors then still in office who were directors
at the beginning of the period.
60
<PAGE> 61
VCA has entered into agreements with Tomas Fuller, Chief Financial
Officer, Vice President and Assistant Secretary of VCA, pursuant to which VCA
will pay Mr. Fuller a severance payment (i) equal to six months salary if Mr.
Fuller's employment is terminated without cause (as defined above) and (ii) upon
the occurrence of a change of control of VCA with the same terms and conditions
as the Amended Agreements described above.
Pursuant to the Amended Agreements between the Company and each of
Messrs. Robert Antin and Arthur Antin on January 22, 1997, both of these
officers executed a promissory note in favor of the Company in the amounts of
$459,399 and $86,000, respectively, as payment for the exercise price of certain
stock options. Each note bears interest at the midterm applicable federal rate
and all outstanding principal and interest is due and payable on January 22,
2001. These officers executed a Security Agreement in favor of the Company
providing that the shares of Common Stock purchased upon exercise of the options
serve as collateral to secure each officer's obligations under his respective
note.
Mr. John A. Heil is a director of VCA and since 1978 has served in
various capacities with affiliates of the H.J. Heinz Company ("Heinz"). In
January 1993, VCA Specialty Pet Products, Inc., a wholly owned subsidiary of VCA
("VCA Pet Products"), and HPP Specialty Pet Products, Inc., an affiliate of
Heinz ("HPP"), entered into a Partnership Agreement (the "Partnership
Agreement") to develop, manufacture and market a full-line of premium pet food.
Through 1996, VCA Pet Products, as majority owner and managing general partner,
exercised day-to-day operating control for all aspects of the partnership. In
1997, the parties executed an amendment (the "Amendment") to the Partnership
Agreement pursuant to which HPP was made managing partner and assumed the
day-to-day control of the partnership. In connection with the Amendment, VCA Pet
Products, VCA and HPP entered into certain consulting and management services
agreements whereby VCA Pet Products and VCA will provide certain consulting and
marketing services and continue to support the Select Balance and Select Care
products in the veterinary marketplace. Mr. Heil did not participate in the VCA
Board of Directors' discussions regarding the Partnership Agreement, the
Amendment or the related documents and did not vote on any of these matters. The
disinterested members of the VCA Board of Directors unanimously adopted the
Partnership Agreement, the Amendment and the related documents.
On August 11, 2000, the Company entered into an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") with Vicar Recap, Inc.
("Recap"), a Delaware corporation and wholly owned by Green Equity Investors
III, L.P. ("GEIII"), and Vicar Operating Company, Inc., a Delaware corporation
and wholly owned subsidiary of the Company. According to the terms of the Merger
Agreement, the Company will be merged with and into Recap, with the Company as
the surviving corporation (the "Merger"). In the Merger, each outstanding share
of the Company's stock, par value $.001 per share, (other then shares held by
dissenting stockholders, Recap, GEIII and in the Company's treasury) will be
converted into the right to receive a cash payment of $15.00, without interest.
Prior to the consummation of the Merger, certain directors and officers of the
Company will exchange a certain number of their shares of Company stock in
exchange for shares of Recap stock. The Board of Directors, relying on the
recommendation of a special committee of the Board of Directors, comprised of
directors who have no financial interest in the Merger, unanimously approved the
Merger Agreement. The Merger is subject to shareholder approval and other
customary closing conditions.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits:
See attached exhibit index.
(b) Financial Statement Schedules:
Report of Independent Public Accounts
Schedules for the years ended December 31, 1999, 1998,
1997
II - Valuation and Qualifying Accounts
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
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 22nd
day of August, 2000.
VETERINARY CENTERS OF AMERICA, INC.
(Registrant)
By: /S/ Robert L. Antin
-------------------------------
Robert L. Antin
Its: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer
And Chairman of the Board
(Principal Executive
/S/ ROBERT L. ANTIN Officer and Director) August 22 , 2000
-------------------------------
Robert L. Antin
Senior Vice President,
Chief Operating Officer,
* Secretary and Director August 22, 2000
-------------------------------
Arthur J. Antin
Senior Vice President,
* Treasurer and Director August 22, 2000
-------------------------------
Neil Tauber
Vice President,
Chief Financial Officer
and Assistant Secretary
* (Principal Accounting Officer) August 22, 2000
-------------------------------
Tomas W. Fuller
</TABLE>
63
<PAGE> 64
<TABLE>
<S> <C> <C>
Director August 22, 2000
-------------------------------
John Heil
* Director August 22, 2000
-------------------------------
John Chickering
Director August 22, 2000
-------------------------------
Dr. Richard Gillespie
*By: /S/ ROBERT L. ANTIN
--------------------------
Robert L. Antin,
Attorney-In-Fact
</TABLE>
64
<PAGE> 65
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>
Signature Title Date
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive
/s/ Robert L. Antin Officer and Director) March 15, 2000
-------------------------------------
Robert L. Antin
Senior Vice President,
Chief Operating Officer,
/s/ Arthur J. Antin Secretary and Director March 15, 2000
-------------------------------------
Arthur J. Antin
Senior Vice President,
/s/ Neil Tauber Treasurer and Director March 15, 2000
-------------------------------------
Neil Tauber
Vice President,
Chief Financial Officer
and Assistant Secretary
/s/ Tomas W. Fuller (Principal Accounting Officer) March 15, 2000
-------------------------------------
Tomas W. Fuller
Director
-------------------------------------
John Heil
/s/ John Chickering Director March 15, 2000
-------------------------------------
John Chickering
Director
-------------------------------------
Dr. Richard Gillespie
</TABLE>
65
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM NO. EXHIBIT
--------- --------
<S> <C>
3.1 Certificate of Incorporation of Registrant, as amended to date
(1)
3.2 Certificate of Amendment of Certificate of Incorporation of
Registrant (8)
3.3 Bylaws of Registrant, as currently in effect (2)
4.1 Specimen certificate evidencing Common Stock of Registrant (3)
4.2 Indenture, dated as of April 17, 1996, between Veterinary
Centers of America, Inc. and the Chase Manhattan Bank, N.A. (4)
4.3 Form of Rights Agreement, dated as of December 30, 1997, between
the Corporation and Continental Stock Transfer & Trust Company
as Rights Agent (5)
4.4 Certificate of Designation of Rights, Preferences and Privileges
of Preferred Stock (5)
4.5 Form of Rights Certificate (5)
10.1 1987 Stock Option Plan of Company and form of Stock Option
Agreement used therewith, as amended (6)
10.2 Form of Indemnification Agreement between the Company and its
Directors (2)
10.3 Amended and Restated Employment Agreement made and entered into
as of February 1, 1997, by and between Robert L. Antin and the
Company (7)
10.4 Amended and Restated Employment Agreement made and entered into
as of February 1, 1997, by and between Arthur J. Antin and the
Company (7)
10.5 Amended and Restated Employment Agreement made and entered into
as of February 1, 1997, by and between Neil Tauber and the
Company (7)
10.6 Letter Agreement dated November 22, 1999, amending the Amended
and Restated Employment Agreement made and entered into as of
February 1, 1997, by and between Robert J. Antin and the Company
(8)
10.7 Letter Agreement dated November 22, 1999, amending the Amended
and Restated Employment Agreement made and entered into as of
February 1, 1997, by and between Arthur J. Antin and the Company
(8)
10.8 Letter Agreement dated November 22, 1999, amending the Amended
and Restated Employment Agreement made and entered into as of
February 1, 1997, by and between Neil Tauber and the Company (8)
10.9 Agreement made and entered into as of October 13, 1999, by and
between Tomas Fuller and the Company (8)
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C>
10.10 Partnership Agreement, dated January 1, 1993, of Specialty Pet
Products partners (6)
10.11 1993 Incentive Stock Plan of the Company and form of Stock Plan
Option Agreement used therewith (9)
10.12 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. (10)
10.13 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 (11)
10.14 Restructuring Agreement between HPP Specialty Products, Inc.,
Heinz Pet Products, VCA Specialty Products, Inc. and Veterinary
Centers of America, Inc. (11)
10.15 VCA 1996 Stock Incentive Plan (4)
10.16 VCA 1996 Employee Stock Purchase Plan (4)
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (12)
</TABLE>
--------------------
(1) Incorporated by reference from Registrant's Report on Form 10-K/A,
Amendment No. 1, for the year ended December 31, 1996
(2) Incorporated by reference for Registrant's Registration Statement on
Form S-1, File No. 33-40095
(3) Incorporated by reference from Registrant's Registration Statement on
Form S-1, File No. 33-42504
(4) Incorporated by reference from Registrant's Registration Statement on
Form S-4, File No. 333-6667
(5) Incorporated by reference from Registrant's Report on Form 8-K filed on
January 5, 1998
(6) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the year ended December 31, 1992
(7) Incorporated by reference from Registrant's Report on Form 10-K/A,
Amendment No. 1, for the year ended December 31, 1998
(8) Incorporated by reference from Registrant's Report on Form 10-K/A,
Amendment No. 1, for the year ended December 31, 1999.
(9) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the year ended December 31, 1993
(10) Incorporated by reference from Registrant's Report on Form 10-KSB, for
the year ended December 31, 1994
(11) Incorporated by reference from Registrant's Report on Form 10-K, for the
year ended December 31, 1996
(12) Incorporated by reference from Registrant's Report on Form 10-K, for the
year ended December 31, 1999
67
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Veterinary Centers of America,
Inc.:
We have audited in accordance with generally accepted auditing standards
in the United States, 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 February 21, 2000. 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
relation to the basic consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
February 21, 2000
68
<PAGE> 69
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Balance at
of period expenses Write-offs Other (1) end of period
---------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999 .................... $ 6,532 $ 2,515 $(2,252) $ 637 $ 7,432
Allowance for uncollectible accounts
Year ended December 31, 1998 .................... 5,128 2,898 (1,831) 337 6,532
Allowance for uncollectible accounts
Year ended December 31, 1997 .................... 4,212 2,726 (2,184) 374 5,128
Allowance for uncollectible accounts
</TABLE>
(1) "Other" changes in the allowance for uncollectible accounts include
allowances acquired with Animal Hospitals and Laboratories acquisitions.
69
