<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10787
VETERINARY CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4097995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12401 WEST OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064-1022
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 584-6500
Former name, address and fiscal year, if changed since last report: NONE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's class of
common stock as of the latest practicable date: Common Stock, $.001 Par Value
21,937,069 shares as of August 8, 2000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
2000 1999
---------- ---------
<S> <C> <C>
Current assets:
Cash and equivalents ..................................................... $ 1,099 $ 10,620
Marketable securities .................................................... 17,408 5,313
Trade accounts receivable, less allowance for uncollectible accounts of
$7,899 and $7,162 at June 30, 2000 and December 31, 1999, respectively 19,964 15,276
Inventory, prepaid expenses and other .................................... 11,469 9,999
Deferred income taxes .................................................... 4,213 4,213
Prepaid income taxes ..................................................... -- 3,986
--------- ---------
Total current assets ................................................. 54,153 49,407
Property and equipment, net ................................................. 77,104 70,336
Goodwill and covenants not to compete, net .................................. 304,817 295,736
Other assets ................................................................ 10,815 11,021
--------- ---------
$ 446,889 $ 426,500
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations ................................. $ 18,468 $ 21,901
Accounts payable ......................................................... 8,370 8,715
Income taxes payable ..................................................... 5,664 --
Other accrued liabilities ................................................ 18,221 15,154
--------- ---------
Total current liabilities ............................................ 50,723 45,770
Long-term obligations, less current portion ................................. 138,039 139,634
Deferred income taxes ....................................................... 6,655 6,655
Minority interest ........................................................... 3,780 3,212
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001 ........................................... 20 20
Additional paid-in capital ............................................... 215,120 213,728
Notes receivable from stockholders ....................................... (672) (654)
Retained earnings ........................................................ 40,565 25,737
Other comprehensive income, unrealized loss on investments ............... (100) (361)
Less cost of common stock held in treasury, 620 shares at both June 30,
2000 and December 31, 1999 ......................................... (7,241) (7,241)
--------- ---------
Total stockholders' equity ........................................... 247,692 231,229
--------- ---------
$ 446,889 $ 426,500
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
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<PAGE> 3
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................................. $ 93,934 $ 86,164 $177,285 $160,002
Direct costs ............................................. 65,655 60,819 127,321 116,096
-------- -------- -------- --------
Gross profit ......................................... 28,279 25,345 49,964 43,906
Selling, general and administrative ...................... 6,299 5,369 12,758 10,891
Depreciation and amortization ............................ 4,456 3,907 8,607 7,460
Year 2000 remediation expenses ........................... -- 884 -- 1,171
Year 2000 accelerated depreciation ....................... -- 270 -- 614
1996 restructuring plan favorable settlement ............. -- -- -- 320
-------- -------- -------- --------
Operating income ..................................... 17,524 14,915 28,599 24,090
Interest income .......................................... 324 402 439 868
Interest expense ......................................... 2,602 2,733 5,139 5,388
Gain on sale of investment in Veterinary Pet Ins., Inc.... -- -- 3,200 --
-------- -------- -------- --------
Income before minority interest and provision for
income taxes ..................................... 15,246 12,584 27,099 19,570
Minority interest in income of subsidiaries .............. 325 269 515 405
-------- -------- -------- --------
Income before provision for income taxes ............. 14,921 12,315 26,584 19,165
Provision for income taxes ............................... 6,485 5,425 11,756 8,575
-------- -------- -------- --------
Net income ........................................... $ 8,436 $ 6,890 $ 14,828 $ 10,590
======== ======== ======== ========
Basic earnings per common share ..................... $ 0.40 $ 0.32 $ 0.70 $ 0.50
======== ======== ======== ========
Diluted earnings per common share ................... $ 0.37 $ 0.31 $ 0.67 $ 0.48
======== ======== ======== ========
Shares used for computing basic earnings per share.... 21,308 21,288 21,226 20,975
======== ======== ======== ========
Shares used for computing diluted earnings per share.. 24,619 22,254 24,355 22,162
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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<PAGE> 4
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 14,828 $ 10,590
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ........................................... 8,607 8,074
Gain on sale of investment in Veterinary Pet Insurance, Inc. ............ (3,200) --
Minority interest in income of subsidiaries ............................. 516 405
Distributions to minority interest partners ............................. (697) (380)
Provision for uncollectible accounts .................................... 1,666 1,469
Increase in accounts receivable, net .................................... (6,137) (4,827)
Decrease (increase) in inventory, prepaid expenses and other assets ..... (1,376) 18
Decrease in prepaid income taxes ........................................ 3,986 5,040
Increase in taxes payable ........................................... 5,664 1,063
Increase in accounts payable and accrued liabilities .................... 2,564 3,959
-------- --------
Net cash provided by operating activities ............................. 26,421 25,411
-------- --------
Cash flows from investing activities:
Property and equipment additions ............................................. (9,799) (7,834)
Business acquisitions, net of cash acquired .................................. (5,590) (13,196)
Proceeds from sales of marketable securities, net ............................ (83,276) (34,391)
Investments in marketable securities, net .................................... 71,442 44,280
Net proceeds from sale of investment in Veterinary Pet Insurance, Inc. ....... 8,200 --
Investment in yopet.com inc .................................................. (5,000) --
Other ........................................................................ 151 328
-------- --------
Net cash used in investing activities ................................. (23,872) (10,813)
-------- --------
Cash flows from financing activities:
Repayment of long-term obligations ........................................... (12,360) (9,168)
Proceeds from issuance of common stock under stock option plans .............. 290 382
Purchase of treasury stock ................................................... -- (910)
-------- --------
Net cash used in financing activities ................................. (12,070) (9,696)
-------- --------
Increase (decrease) in cash and equivalents .................................... (9,521) 4,902
Cash and equivalents at beginning of period .................................... 10,620 8,977
-------- --------
Cash and equivalents at end of period .......................................... $ 1,099 $ 13,879
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) GENERAL
The accompanying unaudited condensed consolidated financial statements of
Veterinary Centers of America, Inc. and subsidiaries (the "Company" or "VCA")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the rules and
regulations of the United States Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements as
permitted under applicable rules and regulations. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included.
The results of operations for the three and six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's 1999 Annual Report on Form 10-K, as
amended.
(2) ACQUISITIONS
During the second quarter of 2000, the Company purchased four animal
hospitals for an aggregate consideration (including acquisition costs) of
$5,768,000, consisting of $2,882,000 in cash, $2,846,000 in debt and the
assumption of liabilities totaling $40,000. The $5,768,000 aggregate purchase
price was allocated as follows: $282,000 to tangible assets, $5,254,000 to
goodwill and $232,000 to other intangible assets.
During the first quarter of 2000, the Company purchased five animal
hospitals, two 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
$6,335,000, consisting of $2,125,000 in cash, $4,050,000 in debt and the
assumption of liabilities totaling $160,000. The $6,335,000 aggregate purchase
price was allocated as follows: $166,000 to tangible assets, $5,860,000 to
goodwill and $309,000 to other intangible assets.
(3) 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, Heinz Pet Products ("HPP"). Pursuant to a restructuring agreement, the
Company maintains its 50.5% equity interest in Vet's Choice. Profits and losses
are allocated 99.9% to HPP and 0.1% to the Company, and all management control
has been transferred from the Company to HPP. Additionally, the Company agreed
to provide certain consulting and management services for a three-year period
commencing on February 1, 1997, for an aggregate fee of $15.3 million, payable
in semi-annual installments over a five-year period (the "Consulting Fees"). The
Consulting Fees earned in each of the six months ended June 30, 2000 and 1999,
of $425,000 and $2,550,000, respectively, are included in revenues. The Company
ceased earning these consulting fees on February 1, 2000. On or after the
earlier of a change of control in the Company or January 1, 2001, 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. The
estimated purchase price for HPP to purchase all of the Company's interest in
the joint venture will range from $3 to $4 million based on projected annual
sales of the Select Balance and Select Care products. If HPP fails to exercise
its option prior to January 1, 2002, 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.
In June 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
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Company. The Company accounts for this investment on a cost basis. The Company
will periodically evaluate this investment for potential impairment of value.
In December 1997 and January 1998, the Company made a combined $5.0 million
strategic investment in Veterinary Pet Insurance, Inc. ("VPI"), the largest
provider of pet health insurance in the United States. The Company accounted for
this investment using the cost method. The Company sold its investment in VPI
and received $8.2 million in cash, net of $50,000 in related transaction costs,
in February 2000, resulting in a one-time gain of approximately $3.2 million.
(4) RESTRUCTURING RESERVES
During 1997, the Company reviewed the financial performance of its animal
hospitals. As a result of this review, certain animal hospitals were determined
not to meet the Company's performance standards. Accordingly, the Company
adopted a restructuring plan (the "1997 Plan"). During the six months ended June
30, 2000, pursuant to the 1997 Plan, the Company incurred $55,000 of cash
expenditures for lease and other contractual obligations.
At June 30, 2000, the 1997 Plan restructuring reserve balance was $288,000,
consisting primarily of lease obligations. Activities included in the 1997 Plan
were completed in 1999, although certain lease obligations will continue through
2005.
(5) MERGER AGREEMENT AND RECAPITALIZATION
On March 30, 2000, the Company entered into an Agreement and Plan of Merger
with Vicar Recap, Inc. ("Vicar Recap"), a Delaware corporation and wholly owned
by Green Equity Investors III, L.P. ("Green"), 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 Vicar Recap, with the Company as the surviving corporation. As a result
of the merger, Green and a group of the Company's directors, officers and
employees will become the owners of 100% of the Company's common stock. In the
merger, each outstanding share of the Company's common stock, par value $0.001
per share, (other then shares held by dissenting stockholders, Vicar Recap,
Green Equity Investors III, certain members of management and in treasury) will
be converted into the right to receive a cash payment of $15.00, without
interest.
Completion of the transaction is subject to various conditions, including
stockholder approval, receipt of regulatory approvals and the completion of debt
financing. Stockholder approval will be solicited by means of a proxy statement,
which will be mailed to stockholders upon completion of the required United
States Securities and Exchange Commission filing and review process.
(6) STOCKHOLDER LAWSUITS
As a result of the proposed merger described in Footnote (5), six
complaints have been filed as of May 8, 2000. The Company and members of the
Board of Directors have been named as defendants in class action lawsuits filed
in the Delaware Court of Chancery and the California Superior Court. The
complaints seek certification of a class of all the Company's 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. The Company
believes that the allegations contained in the complaints are without merit and
intends 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.
The Company cannot be assured that the allegations included in the
complaints will be successfully defended. 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
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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, the Company is unable to estimate the impact
of any potential liabilities associated with the complaints.
(7) CALCULATION OF PER SHARE AMOUNTS
Below is a reconciliation of the income and shares used in the computations
of the basic and diluted earnings per share ("EPS") (amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
---------------------------- ------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income ................ $ 8,436 21,308 $0.40 $14,828 21,226 $ 0.70
===== =========
Effect of dilutive securities:
Stock options ............. 854 672
Converted debt ............ 688 2,457 1,376 2,457
------- ------ ------- ------
Diluted EPS .................. $ 9,124 24,619 $0.37 $16,204 24,355 $ 0.67
======= ====== ===== ======= ====== =========
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
---------------------------- ------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income ..................... $ 6,890 21,288 $0.32 $10,590 20,975 $ 0.50
===== ======
Effect of dilutive stock options... -- 966 -- 1,187
------- ------- ------- ------
Diluted EPS ....................... $ 6,890 22,254 $0.31 $10,590 22,162 $ 0.48
======= ======= ===== ======= ======= =======
</TABLE>
(8) COMPREHENSIVE INCOME
Below is a calculation of comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ........................................... $ 8,436 $ 6,890 $14,828 $10,590
Decrease (increase) in unrealized loss on investment . 274 (49) 261 107
------- ------- ------- -------
Net comprehensive income ............................. $ 8,710 $ 6,841 $15,089 $10,697
======= ======= ======= =======
</TABLE>
No income tax benefit related to the unrealized loss on investment was
recognized due to potential tax treatment of investment losses.
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(9) LINES OF BUSINESS
During the three and six months ended June 30, 2000 and 1999, the Company
had three reportable segments: Animal Hospitals, Laboratories and Corporate.
These segments are strategic business units that have different products,
services and functions. The segments are managed separately because each is a
distinct and different business venture with unique challenges, rewards and
risks. The Animal Hospitals provide veterinary services for companion animals
and sell related retail products. The Laboratories provide testing services for
veterinarians both associated with the Company and independent of the Company.
Corporate provides selling, general and administrative support for the Animal
Hospitals and Laboratories segments. The Corporate segment includes the costs of
the executive, finance, accounting, human resources, marketing, purchasing and
regional operational management functions. Though Corporate does not generate
revenue, it is being included as a reportable segment to provide a better
understanding of the Company as a whole.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies as detailed in the Company's 1999
Annual Report Form 10-K, as amended. The Company evaluates performance of
segments based on profit or loss before income taxes, interest income, interest
expense and minority interest, which are evaluated on a consolidated level. For
purposes of reviewing the operating performance of the segments, all
inter-segment sales and purchases are accounted for as if they were transactions
with independent third parties at current market prices.
Below is a summary of certain financial data for each of the three
segments (in thousands):
<TABLE>
<CAPTION>
Inter-Segment
Animal Sales
Hospitals Laboratories Corporate Eliminations Totals
--------- ------------ --------- ------------ ------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Revenues .................... $ 63,472 $ 31,921 $ -- $ (1,459) $ 93,934
Operating income (loss) ..... 12,163 10,216 (4,855) -- 17,524
Depreciation/amortization
expense ..................... 3,094 1,126 236 -- 4,456
Capital expenditures ........ 3,579 593 478 -- 4,650
THREE MONTHS ENDED JUNE 30, 1999
Revenues .................... $ 60,434 $ 27,276 $ -- $ (1,546) $ 86,164
Operating income (loss) ..... 11,295 7,868 (4,248) -- 14,915
Depreciation/amortization
expense ..................... 2,915 1,093 169 -- 4,177
Capital expenditures ........ 4,114 510 379 -- 5,003
SIX MONTHS ENDED JUNE 30, 2000
Revenues .................... $119,692 $ 60,726 $ -- $ (3,133) $177,285
Operating income (loss) ..... 20,156 18,472 (10,029) -- 28,599
Depreciation/amortization
expense ..................... 5,949 2,207 451 -- 8,607
Capital expenditures ........ 7,750 980 1,069 -- 9,799
SIX MONTHS ENDED JUNE 30, 1999
Revenues .................... $110,160 $ 52,845 $ -- $ (3,003) $160,002
Operating income (loss) ..... 17,510 14,874 (8,294) -- 24,090
Depreciation/amortization
expense ..................... 5,477 2,192 405 -- 8,074
Capital expenditures ........ 6,198 1,140 496 -- 7,834
AT JUNE 30, 2000
Identifiable assets ......... $291,339 $111,369 $ 41,965 $ -- $446,889
AT JUNE 30, 1999
Identifiable assets ......... $262,274 $107,482 $ 53,999 $ -- $423,755
AT DECEMBER 31, 1999
Identifiable assets ......... $280,742 $105,224 $ 40,534 $ -- $426,500
</TABLE>
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Below is a reconciliation between total segment operating income after
eliminations and consolidated income before provision for income taxes as
reported on the condensed consolidated statements of operations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total segment operating income after eliminations $17,524 $14,915 $28,599 $24,090
Interest income .............................. 324 402 439 868
Interest expense ............................. 2,602 2,733 5,139 5,388
Gain on sale of VPI .......................... -- -- 3,200 --
Minority interest ............................ 325 269 515 405
------- ------- ------- -------
Income before provision for income taxes ........ $14,921 $12,315 $26,584 $19,165
======= ======= ======= =======
</TABLE>
(10) RECLASSIFICATIONS
Certain 1999 balances have been reclassified to conform with the 2000
financial statement presentation.
(11) ACCOUNTING PRONOUNCEMENTS
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, based on the
guidance 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 recognizes 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Veterinary Centers of America, Inc. and subsidiaries ("VCA" or the
"Company") is one of the nation's largest animal health care companies. The
Company has established a premier position in two core businesses, animal
hospitals ("Animal Hospitals") and veterinary diagnostic laboratories
("Laboratories"). The Company operates the largest nationwide networks of
free-standing, full-service animal hospitals and veterinary-exclusive
laboratories.
Over the past several years, the Company has expanded its animal hospital
network and veterinary diagnostic laboratory operations through acquisitions.
Animal hospitals and veterinary diagnostic laboratories have been acquired
through issuing a combination of common stock, notes payable and cash.
On March 30, 2000, we entered into an Agreement and Plan of Merger ("Merger
Agreement") with Vicar Recap, Inc. ("Vicar Recap"), a Delaware corporation and
wholly owned by Green Equity Investors III, L.P. ("Green"), and Vicar Operating
Company, Inc., a Delaware corporation and wholly owned subsidiary of our
company. According to the terms of the Merger Agreement, we will be merged with
and into Vicar Recap, with the Company as the surviving corporation ("the
Merger"). As a result of the merger, Green and its affiliates and a group of the
Directors, officers and employees will become the owners of 100% of the
Company's common stock. In the merger, each outstanding share of the Company's
common stock, par value $0.001 per share, (other then shares held by dissenting
stockholders, Vicar Recap, Green, certain members of management and in our
treasury) will be converted into the right to receive a cash payment of $15.00,
without interest.
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Since certain members of management of our company have a direct financial
interest in the merger, the Board of Directors established a special committee,
comprised of members with no financial interest in the merger, to assess the
merger. The special committee retained two financial advisors, Jefferies &
Company, Inc. and Houlihan Lokey Howard & Zukin Capital, to assess the fairness
of the merger. Both financial advisors found the $15.00 per share price to be
fair, from a financial point of view, to the Company's public stockholders.
Relying on the special committee's unanimous approval of the merger agreement
and related transactions, the Board of Directors approved the merger agreement
and related transactions.
Completion of the merger is subject to various conditions, including
stockholder approval, securing the financing necessary in connection with the
consummation of the merger and obtaining all necessary permits and approvals. In
addition, the completion of the merger is subject to the execution of certain
agreements including, a management services agreement, a stockholders' agreement
and various employment agreements.
The merger agreement provides that under certain conditions, we may
terminate the merger agreement and accept a proposal determined by the Board of
Directors to be superior, from a financial point of view, to the Company's
stockholders (other then to the management stockholders), subject to the payment
of a termination fee to Vicar Recap of $10 million. The merger agreement further
provides that in the event the Company is not required to pay the $10 million
termination fee and the merger is terminated because we breached a covenant or
representation or warranty contained in the merger agreement or are unable to
obtain stockholder approval of the merger agreement and related transactions,
the Company may be required to pay Vicar Recap fees and expenses, up to $1
million, incurred in connection with the merger. Either party may terminate the
merger agreement if the merger is not consummated on or before September 30,
2000, subject to certain conditions.
FUTURE OPERATING RESULTS
This filing contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "expect", "estimate", "anticipate", "predict", "believe" and
similar expressions and variations thereof are intended to identify
forward-looking statements. Such statements appear in a number of places in this
filing and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations, and (ii) the Company's business and growth strategies.
The readers of this filing are cautioned that any such forward-looking
statements are not guarantees of future performance, involve risks and
uncertainties, and that actual results may differ materially from those
projected in this filing, including, without limitation, the information set
forth under the heading "Risk Factors", as well as the information set forth
below.
RESULTS OF OPERATIONS
REVENUES
Animal Hospitals represented 67.6% and 70.1% of total Company revenues for
the three months ended June 30, 2000 and 1999, respectively. Animal Hospitals
represented 67.5% and 68.8% of total Company revenues for the six months ended
June 30, 2000 and 1999, respectively. Laboratories represented 32.4% and 29.9%
of total Company revenues for the three months ended June 30, 2000 and 1999,
respectively. Laboratories represented 32.5% and 31.2% of total Company revenues
for the six months ended June 30, 2000 and 1999, respectively.
The reported revenues of Animal Hospitals consist of the revenues of animal
hospitals owned by the Company and the management fees charged by the Company to
independent professional corporations ("PCs"). At June 30, 2000, the Company
owned and managed 201 animal hospitals, of which 49 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 administrative
functions with respect to these 49 animal hospitals. In return for its services,
the Company receives management fees from the PCs, which have
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<PAGE> 11
been included in the reported revenues for Animal Hospitals. The Company does
not consolidate the operations of the PCs.
The following are components of reported revenues of Animal Hospitals
included in the table below:
ANIMAL HOSPITALS 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 equal the total reported Animal
Hospitals revenues if the Company recognized and consolidated the revenues of
the PCs.
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 both the three
and six months ended June 30, 2000 and 1999 (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
% Increase/ % Increase/
2000 1999 (Decrease) 2000 1999 (Decrease)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Animal Hospitals Owned and
Managed .................. $ 70,928 $ 63,386 11.9% $ 133,642 $ 114,724 16.5%
Less: Revenues of PCs .... (15,937) (12,593) 26.6% (29,268) (19,074) 53.4%
Add: Management Fees
Charged to PCs ..... 8,481 9,641 (12.0%) 15,318 14,510 5.6%
--------- --------- --------- --------- ----
Animal Hospitals Reported $ 63,472 $ 60,434 5.0% $ 119,692 $ 110,160 8.7%
Laboratories ............. 31,921 27,276 17.0% 60,726 52,845 14.9%
Intercompany Sales ....... (1,459) (1,546) -- (3,133) (3,003)
--------- --------- --------- --------- ----
$ 93,934 $ 86,164 9.0% $ 177,285 $ 160,002 10.8%
========= ========= ========= ========= ====
</TABLE>
The increases in Animal Hospitals revenues for the 2000 periods from the
1999 comparable periods were primarily the result of the increase in the number
of facilities owned and the number of animal hospitals managed by the Company.
The results for 2000 include the revenues of 13 animal hospitals acquired and an
additional 11 animal hospitals managed subsequent to June 30, 1999.
Pursuant to the restructuring agreement and other related agreements
between Heinz Pet Products and the Company, the Company agreed to provide
certain consulting and management services for a three-year period that
commenced February 1, 1997 and ended January 31, 2000. The agreements call for
the Company to receive an aggregate fee of $15.3 million, payable in semi-annual
installments over a five-year period (the "Consulting Fees"). For the three and
six months ended June 30, 1999, Animal Hospital revenue included the Consulting
Fees of $1,275,000 and $2,550,000, respectively. For the six months ended June
30, 2000, Animal Hospital revenue included the Consulting Fees of $425,000.
There were no Consulting Fees earned during the three months ended June 30, 2000
as the three year service period ended in the first quarter of 2000. Had the
Consulting Fees not been included, Animal Hospitals' revenues would have been
$59,159,000 for the three months ended June 30, 1999 and the increase for the
comparable period, the three months ended June 30, 2000, would have been 7.3%.
In addition, Animal Hospitals' revenues would have been $119,267,000 and
$107,610,000 for the six month periods ended June 30, 2000 and 1999,
respectively, for an increase that would have been 10.8%.
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<PAGE> 12
The increase in Animal Hospitals revenues that resulted from increases in
volume or prices at same-store facilities, as compared to the corresponding
period in the prior year, was approximately 7.2% and 7.7% for the three and six
months ended June 30, 2000, respectively. Same-store facilities are animal
hospitals that were owned as of the beginning of the prior-year period.
Had the PCs operations been consolidated with owned veterinary practices
("Combined Hospital Operations"), 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 6.6% and 7.4% for the
three and six months ended June 30, 2000, respectively.
Effective October 1, 1999 for the independent professional corporation
located in Texas and January 1, 2000 for all other PCs, non-veterinarian
employees ceased working directly for the Company and were hired by the PCs. The
PCs bear all labor costs directly associated with the managed animal hospitals.
Before this change, only veterinarians were employed by the PCs, and the Company
provided non-veterinarian labor as part of its management agreement with the
PCs. As a result, the management fees charged to the PCs by the Company have
decreased. Had this change not occurred and had the Company provided the
non-veterinarian labor for the PCs, the management fees for the three and six
months ended June 30, 2000 would have been $11,819,000 and $21,723,000,
respectively, reflecting an increase of 22.6% and 49.7 % from the prior year
period.
The increase in Laboratories' revenues for the three and six months ended
June 30, 2000 is primarily due to success achieved with increased marketing
efforts, a pricing increase and the revenues from one veterinary diagnostic
laboratories acquired since June 30, 1999.
GROSS PROFIT
The following table summarizes the Company's gross profit for both the
three and six months ended June 30, 2000 and 1999 (amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 % Increase 2000 1999 % Increase
--------- --------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Animal Hospitals ............. $ 15,257 $ 15,057 1.3% $ 26,105 $ 24,085 8.4%
Laboratories ................. 13,022 10,288 26.6% 23,859 19,821 20.4%
--------- ---------- ---------- ---------
$ 28,279 $ 25,345 11.6% $ 49,964 $ 43,906 13.8%
========= ========== ========== =========
</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, supply costs and costs of goods sold associated with the retail sales of
pet food and pet supplies. Animal Hospitals' gross profit represented 24.0% and
24.9% of Animal Hospitals' revenues for the three months ended June 30, 2000 and
1999, respectively, and 21.8% and 21.9% for the six months ended June 30, 2000
and 1999, respectively. For the three and six months ended June 30, 1999, Animal
Hospital revenue and gross profit included the Consulting Fees of $1,275,000 and
$2,550,000, respectively. For the six months ended June 30, 2000, Animal
Hospital revenue and gross profit included the Consulting Fees of $425,000.
There were no Consulting Fees earned during the three months ended June 30, 2000
as the agreement ended January 31, 2000. Had the Consulting Fees not been
included in Animal Hospital revenues and gross profit, Animal Hospitals' gross
profit would have represented 23.3% of Animal Hospitals' revenues for the three
months ended June 30, 1999 and 21.5% and 20.0% for the six months ended June 30,
2000 and 1999, respectively.
As discussed previously under REVENUES, the Company no longer provides
non-veterinarian labor as part of its management agreement with the PCs. As a
result, the management fees charged to the PCs have decreased in 2000 compared
to the comparable 1999 periods. Had this change not occurred and had the Company
provided the non-veterinarian labor for the PCs, the gross profit margin for the
three and six month periods ended June 30, 2000 would have been 22.8 % and 20.7
%, respectively.
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<PAGE> 13
Gross profit margins for the Combined Hospital Operations would have been
21.5% and 23.8% for the three months ended June 30, 2000 and 1999, respectively,
and 19.5 % and 21.0 % for the six months ended June 30, 2000 and 1999,
respectively.
The gross profit margin for same-store hospitals owned by the Company prior
to April 1, 1999 was 23.7% and 24.8% for the three months ended June 30, 2000
and 1999, respectively, and for those owned by the Company prior to January 1,
1999 was 21.3% and 20.7% for six months ended June 30, 2000 and 1999,
respectively. The gross profit margin for newly acquired hospitals (those
acquired by the Company after the beginning of the period presented) was 26.1%
and 23.9% for the three and six months ended June 30, 2000, respectively. Gross
profit margins for same-store and newly acquired hospitals have been calculated
excluding the Consulting Fees of $1,275,000 earned in and recognized during the
three months ended June 30, 1999 and $425,000 and $2,550,000 earned and
recognized during the six months ended June 30, 2000 and 1999, respectively.
Same-store gross profit margins for the Combined Hospital Operations would
have been 22.3% and 23.2% for the three months ended June 30, 2000 and 1999,
respectively, and 20.0% and 19.6% for the six months ended June 30, 2000 and
1999, 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, occupancy
costs, and supply costs. Laboratories gross profit represented 40.8% and 37.7%
of Laboratories revenues for the three months ended June 30, 2000 and 1999,
respectively, and 39.3% and 37.5 % for the six months ended June 30, 2000 and
1999, respectively.
The Company's Animal Hospitals have historically realized lower gross
profit margins than that of its Laboratories business. If the portion of the
Company's revenues attributable to its Animal Hospitals operations grows in the
future, the historical gross profit margins for the Company as a whole may not
be indicative of those to be expected in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
VCA Corporate selling, general and administrative expenses consist of
administrative expense, including the salaries of corporate officers, other
professional expenses, rent and occupancy costs associated with the Company's
headquarters.
Selling, general and administrative expense for the three and six months
ended June 30, 2000 and 1999 is comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
VCA Corporate ...................... $ 4,619 $ 4,079 $ 9,578 $ 8,210
Laboratories ...................... 1,680 1,290 3,180 2,681
--------- --------- --------- ---------
$ 6,299 $ 5,369 $ 12,758 $ 10,891
========= ========= ========= ========
</TABLE>
Selling, general and administrative expense as a percentage of total
revenues was 6.7% and 6.2% for the three months ended June 30, 2000 and 1999,
respectively, and 7.2% and 6.8% for the six months ended June 30, 2000 and 1999,
respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense primarily relates to the depreciation
of capital assets and the amortization of excess cost over the fair value of net
assets acquired (goodwill) and certain other intangibles. Depreciation and
amortization expense increased to $4,456,000 for the three months ended June 30,
2000 from $3,907,000 for the three months ended June 30, 1999, and increased to
$8,607,000 for the six months ended June
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<PAGE> 14
30, 2000 from $7,460,000 for the six months ended June 30, 1999. The increase in
depreciation and amortization expense is due to the purchase of property and
equipment and the acquisition of animal hospitals and laboratories since June
30, 1999. The Company's policy is to amortize goodwill over the expected period
to be benefited, not exceeding 40 years.
RESTRUCTURING RESERVES
During 1997, the Company reviewed the financial performance of its animal
hospitals. As a result of this review, certain animal hospitals were determined
not to meet the Company's performance standards. Accordingly, the Company
adopted a restructuring plan (the "1997 Plan"). During the three months ended
June 30, 2000, pursuant to the 1997 Plan, the Company incurred $31,000 of cash
expenditures for lease and other contractual obligations. During the six months
ended June 30, 2000, pursuant to the 1997 Plan, the Company incurred $55,000 of
cash expenditures for lease and other contractual obligations.
At June 30, 2000, the 1997 Plan restructuring reserve liability balance was
$288,000, consisting primarily of lease obligations. Activities included in the
1997 Plan were completed in 1999, although certain lease obligations will
continue through 2005.
GAIN ON SALE OF INVESTMENT IN VETERINARY PET INSURANCE, INC.
In December 1997 and January 1998, the Company made a combined $5.0 million
strategic investment in Veterinary Pet Insurance, Inc. ("VPI"), the largest
provider of pet health insurance in the United States. The Company accounted for
this investment using the cost method. The Company sold its investment in VPI
and received $8.2 million in cash, net of $50,000 in related transaction costs,
in February 2000, resulting in a one-time gain of approximately $3.2 million.
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 six months ended June 30, 2000 was
$26,421,000 compared to $25,411,000 for the comparable period ended June 30,
1999, for an increase of $1,010,000. The most significant component of this
increase relates to the increase in net income.
During the six months ended June 30, 2000, the Company used cash of
$5,590,000 to acquire 9 animal hospitals and one veterinary diagnostic
laboratory. During the six months ended June 30, 1999, the Company used cash of
$13,196,000 to acquire 19 animal hospitals and two veterinary diagnostic
laboratory, respectively. From July 1, 2000 through August 8, 2000, the Company
used cash of approximately $941,000 to acquire two animal hospitals, one of
which was merged upon acquisition into an existing VCA facility.
During the six months ended June 30, 2000 and 1999, the Company used
$9,799,000 and $7,834,000, respectively, to purchase property and equipment and
$12,360,000 and $9,168,000 to reduce long-term obligations, respectively.
The Company has current debt payment obligations related to the Animal
Hospitals and Laboratories operations owned as of June 30, 2000 of approximately
$18.5 million. 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 10 animal hospitals for a total cost
of approximately $9 million, as well as to replace or upgrade equipment, as
needed.
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.
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<PAGE> 15
At June 30, 2000, the Company had cash and cash equivalents of $1,099,000
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 during the next twelve months, which will require
cash 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.
On June 15, 2000, the Company entered into a credit agreement with a bank
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 principle 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 8, 2000, no advances had
been drawn by the Company under this credit agreement.
Completion of the proposed Merger is subject to, among other things, the
condition that all financing that is 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.
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.
RISK FACTORS
Readers should consider carefully the following factors, in addition to the
other information contained in this prospectus, in evaluating us and our
business.
CERTAIN RISKS ASSOCIATED WITH THE MERGER
On March 30, 2000, we entered into an Agreement and Plan of Merger with
Vicar Recap, Inc., a Delaware corporation and wholly owned by Green Equity
Investors III, L.P., and Vicar Operating Company, Inc., a Delaware corporation
and wholly owned subsidiary of our company. According to the terms of the merger
agreement, we will be merged with and into Vicar Recap, with our company as the
surviving corporation. As a result of the merger, Green Equity Investors III and
its affiliates and a group of our directors, officers and employees will become
the owners of 100% of our common stock. In the merger, each outstanding share of
our common stock, par value $0.001 per share, (other then shares held by
dissenting stockholders, Vicar Recap, Green Equity Investors III, certain
members of management and in our treasury) will be converted into the right to
receive a cash payment of $15.00, without interest. We retained two financial
advisors to assess the fairness of the merger. Both financial advisors found the
$15.00 per share price to be fair, from a financial point of view, to our public
stockholders.
Consummation of the merger is subject to various conditions, including
approval of the merger by our stockholders, securing the financing necessary to
consummate the merger and related transactions and obtaining all necessary
permits and approvals. Although Recap has obtained binding commitments for the
required financing, these commitments also contain a variety of conditions. As a
result of the various conditions to complete the merger, we cannot assure you
that the merger will be consummated.
It is expected that if the merger is not consummated for any reason, our
current management, under the direction of the Board of Directors, will continue
to manage our Company as an on-going business. Currently, we
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<PAGE> 16
are not considering any other merger proposals as alternatives to the merger.
If, for any reason, the merger is not consummated, we cannot assure you that any
other transaction acceptable to us will be offered or that our operations will
not be adversely impacted.
If the merger is consummated, we will be a privately held corporation. The
public stockholders will cease to have any ownership interest in, or rights as,
stockholders of our company, including the payment of any dividends on our
common stock. Further, the public stockholders will not benefit from any
increase or bear the risk of any decrease in the value of our company.
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., Pets' Rx, Inc., 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 $181.4
million in 1996 to $320.6 million in 1999. In 2000 through August 8, we acquired
11 animal hospitals and one veterinary diagnostic laboratory. Three of the
hospitals and the laboratory purchased in 2000 were merged upon acquisition into
existing facilities.
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:
o adverse short-term effects on our reported operating results
o impairments of goodwill and other intangible assets
o the diversion of management's attention
o the dependence on retention, hiring and training of key personnel
o the amortization of intangible assets
o 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:
o the identification of potential acquisition candidates
o the willingness of the owners to sell on reasonable terms
o the satisfactory completion of negotiations
o minimal disruption to our existing operations
Also, our acquisitions may be subject to pre-merger or post-merger review
by governmental authorities for antitrust and other legal and regulatory
compliance. Any adverse regulatory decision may negatively affect our operations
by assessing fines or penalties or requiring us to divest one or more of our
operations.
Our acquisition strategy may cause us to divert our time from operating
matters, which may cause the loss of business and personnel. There are also
possible adverse effects on earnings resulting from the possible loss of
acquired customer bases, amortization of goodwill created in purchase
transactions and the contingent and latent
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<PAGE> 17
risks associated with the past operations of, and other unanticipated problems
arising in, the acquired business. If we have sufficient capital, our
acquisition strategy involves the acquisition of at least 15 to 20 facilities
per year. We currently do not have commitments to effect any material
acquisitions but may enter into agreements to do so in the future. We intend to
fund additional animal hospital and veterinary diagnostic laboratory
acquisitions with a combination of cash, assumption of liabilities, promissory
notes and shares of our common stock. 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 June 30, 2000, we had consolidated long-term
obligations (including current portion) of $156 million and our ratio of
long-term debt (including current portion) to total stockholders' equity was
0.63 to 1. 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 June 30, 2000, our
balance sheet reflected $305 million of intangible assets of these types, which
is a substantial portion of our total assets of $447 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 our Company 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 impairment. 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.
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<PAGE> 18
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.
Our company 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. We have no other employment
contracts with our officers. None of our officers is a party to non-competition
covenants which extend beyond the term of their employment with us. We do not
maintain any key man life insurance coverage on the lives of our 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:
o convenient location
o recommendation of friends
o reasonable fees
o quality of care
o convenient hours
Our primary competitors for our animal hospitals in most markets are
individual practitioners or small, regional multi-clinic practices. Also,
regional pet care companies and certain national companies, including operators
of super-stores, are developing multi-regional networks of animal hospitals in
markets in which we operate. We believe that the primary competitive factors in
connection with veterinary diagnostic laboratories include:
o quality
o price
o 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.
LITIGATION RELATING TO THE MERGER
We are aware of six complaints that have been filed relating to the merger.
Our Company and members of the Board of Directors have been named as defendants
in class action 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 our 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.
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
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<PAGE> 19
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, we may incur significant related expenses and costs that could
have an adverse effect on our 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.
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
Our Board of Directors is authorized to issue up to 2,000,000 shares of
preferred stock. Our 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 our 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 our common stock which could
have a material adverse effect on the market value of our common stock.
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of our 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, under which we
distributed a dividend of one right for each outstanding share of our common
stock. These rights will cause substantial dilution to the ownership of a person
or group that attempts to acquire us on terms not approved by our Board of
Directors and may have the effect of deterring hostile takeover attempts.
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SHARES ELIGIBLE FOR FUTURE SALE MAY IMPACT OUR STOCK PRICE
Future sales by existing stockholders could adversely affect the prevailing
market price of our common stock. As of August 8, 2000, we had 21,937,069 shares
of common stock outstanding (including 620,511 shares held in treasury), most of
which are either freely tradable in the public market without restriction or
tradable in accordance with Rule 144 under the Securities Act of 1933 as
amended. As of August 8, 2000, 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:
o variations in quarterly operating results
o litigation involving us
o announcements by us or our competitors
o 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For discussion on legal proceedings, see Risk Factors - "Litigation
Relating to the Merger". In addition to the legal proceedings described herein,
the Company is a party to other litigation which arises in the ordinary course
of its business, none of which is material.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
---------
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
Current Report on Form 8-K, Item 5 filed April 4,
2000. Current Report on Form 8-K, Item 5 filed April
6, 2000. Current Report on Form 8-K, Item 5 filed
April 14, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VETERINARY CENTERS OF AMERICA, INC
Date: August 8, 2000 /s/ Tomas W. Fuller
---------------------------------------
Tomas W. Fuller
Chief Financial Officer
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EXHIBIT INDEX
ITEM EXHIBIT PAGE
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27.1 Financial Data Schedule 23
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