0000898430-01-503189.txt : 20011101 0000898430-01-503189.hdr.sgml : 20011101 ACCESSION NUMBER: 0000898430-01-503189 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20011031 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VCA ANTECH INC CENTRAL INDEX KEY: 0000817366 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 954097995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-67128 FILM NUMBER: 1771387 BUSINESS ADDRESS: STREET 1: 12401 WEST OLYMPIC BOULEVARD CITY: LOS ANGELES STATE: CA ZIP: 90064-1022 BUSINESS PHONE: 310-584-65 MAIL ADDRESS: STREET 1: 12401 WEST OLYMPIC BOULEVARD CITY: LOS ANGELES STATE: CA ZIP: 90064-1022 FORMER COMPANY: FORMER CONFORMED NAME: VETERINARY CENTERS OF AMERICA INC DATE OF NAME CHANGE: 19940328 S-1/A 1 ds1a.txt FORM S-1/AMENDMENT #2 As filed with the Securities and Exchange Commission on October 31, 2001 Registration No. 333-67128 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- Amendment No. 2 to FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ----------------- VCA ANTECH, INC. (Exact Name of Registrant as Specified in its Charter) ----------------- Delaware 0742 95-4097995 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Industrial Identification No.) Incorporation or Classification Code Organization) Number) 12401 West Olympic Boulevard Los Angeles, California 90064-1022 (310) 571-6500 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ----------------- Robert L. Antin Chief Executive Officer and President 12401 West Olympic Boulevard Los Angeles, California 90064-1022 (310) 571-6500 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ----------------- Copies to: C.N. Franklin Reddick III, Esq. Gregg A. Noel, Esq. Julie M. Kaufer, Esq. Skadden, Arps, Slate, Meagher & Flom LLP James Tsai, Esq. 300 South Grand Avenue Akin, Gump, Strauss, Hauer & Feld, LLP Los Angeles, California 90071 2029 Century Park East (213) 687-5000 Los Angeles, California 90067 (310) 229-1000
----------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered in this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ----------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 31, 2001 14,000,000 Shares [LOGO] VCA ANTECH Common Stock ------------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $12.00 and $14.00 per share. We have applied to have our common stock approved for quotation on The Nasdaq Stock Market's National Market under the symbol "WOOF." The underwriters have an option to purchase a maximum of 2,100,000 additional shares to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 9.
Underwriting Proceeds to Price to Discounts and VCA Antech, Public Commissions Inc. -------- ------------- ----------- Per Share $ $ $ Total.... $ $ $
Delivery of the shares of common stock will be made on or about , 2001. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------- Credit Suisse First Boston Goldman, Sachs & Co. ------------- Banc of America Securities LLC Jefferies & Company, Inc. Wells Fargo Van Kasper, LLC The date of this prospectus is , 2001. TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY..................... 1 RISK FACTORS........................... 9 CAUTIONARY NOTE REGARDING FORWARD- LOOKING STATEMENTS................... 16 USE OF PROCEEDS........................ 17 DIVIDEND POLICY........................ 17 DILUTION............................... 18 CAPITALIZATION......................... 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA....................... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 23 BUSINESS............................... 48
Page ---- MANAGEMENT......................... 59 PRINCIPAL STOCKHOLDERS............. 68 RELATED PARTY TRANSACTIONS......... 70 DESCRIPTION OF CAPITAL STOCK....... 73 SHARES ELIGIBLE FOR FUTURE SALE.... 76 UNDERWRITING....................... 78 NOTICE TO CANADIAN RESIDENTS....... 82 LEGAL MATTERS...................... 83 EXPERTS............................ 83 WHERE YOU CAN FIND MORE INFORMATION 83 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................... F-1
----------------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. We use market data and industry forecasts and projections throughout this prospectus, which we have obtained from market research, publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers' experience in the industry and there is no assurance that any of the projected amounts will be achieved. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified this information. Dealer Prospectus Delivery Obligation Until , 2001 (25 days after commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. i PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company and the common stock sold in this offering and our consolidated financial statements and notes to those statements appearing elsewhere in this prospectus. We urge you to read this entire prospectus carefully, including the "Risk Factors" section. VCA Antech, Inc. Our Business We are a leading animal health care services company and operate the largest networks of veterinary diagnostic laboratories and free-standing, full-service animal hospitals in the United States. Our veterinary diagnostic laboratories provide sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, provide pharmaceutical products and offer a variety of pet wellness programs, including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care. Diagnostic Laboratories We operate the only full-service, veterinary diagnostic laboratory network serving all 50 states and have a client base over two times that of our largest competitor. Our 15 state-of-the-art, automated diagnostic laboratories service a diverse customer base of over 13,000 animal hospitals, and non-affiliated animal hospitals generated approximately 95% of our laboratory revenue in 2000. We support our laboratories with what we believe is the industry's largest transportation network, which picks up an average of 20,000 to 25,000 samples daily. In the nine months ended September 30, 2001, we derived approximately 69.4% of our laboratory revenue from our customers in major metropolitan areas, where we offer twice-a-day pick-up service and same-day results. Outside of these areas, we typically provide test results to veterinarians before 8:00 a.m. the following day. Our diagnostic spectrum includes over 300 different tests in the areas of chemistry, pathology, serology, endocrinology, hematology and microbiology, as well as tests specific to particular diseases. In 2000, we handled approximately 6.4 million requisitions and performed approximately 19.8 million tests. Although modified to address the particular requirements of the species tested, the tests performed in our veterinary laboratories are similar to those performed in human clinical laboratories and utilize similar laboratory equipment and technologies. From 1998 through the twelve months ended September 30, 2001, our laboratory revenue, laboratory operating income before depreciation and amortization, and laboratory operating income increased at compounded annual growth rates of 14.5%, 23.8% and 27.2%, respectively. We will refer to operating income before depreciation and amortization as "EBITDA." In the twelve months ended September 30, 2001, our laboratory EBITDA was $43.6 million, or 33.5% of our laboratory revenue, and our laboratory operating income was $39.0 million, or 29.9% of our laboratory revenue. Animal Hospitals At September 30, 2001, we operated 214 animal hospitals in 33 states that were supported by over 750 veterinarians. In addition to general medical and surgical services, we offer specialized treatments for companion animals, including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. We also provide pharmaceutical products for use in the delivery of treatments by our veterinarians and pet owners. Our facilities typically are located in high-traffic, densely populated areas and have an established reputation in the community with a stable customer base. Since 2000, our animal hospitals have been connected to an enterprise-wide management information system. This system provides us opportunities to manage our animal hospitals more effectively and to implement throughout our animal hospital network 1 veterinarian practices and procedures which we have identified, tested and believe to provide a high level of customer care. From 1998 through the twelve months ended September 30, 2001, our animal hospital revenue, animal hospital EBITDA and our animal hospital operating income increased at compounded annual growth rates of 12.5%, 19.2% and 19.2%, respectively. In the twelve months ended September 30, 2001, our animal hospital EBITDA was $51.9 million, or 19.5% of our animal hospital revenue, and our animal hospital operating income was $38.0 million, or 14.3% of our animal hospital revenue. Our Opportunity We intend to continue to grow by capitalizing on the following market opportunities: . Large, Growing Market. According to the 2001-2002 American Pet Products Manufacturers Association Pet Owners Survey, the ownership of pets is widespread, with over 62% of U.S. households owning at least one pet, including companion and other animals. The U.S. population of companion animals is approximately 188 million, including about 141 million dogs and cats. According to the U.S. Pet Ownership & Demographics Sourcebook published by the American Veterinary Medical Association, over $11 billion was spent on companion animal health care services in 1996, with an annual growth rate of over 9.5% from 1991 through 1996 for spending on dogs and cats. We believe this growth has continued, primarily driven by an increased emphasis on pet health and wellness, continued technological developments driving new and previously unconsidered diagnostic tests, procedures and treatments, and favorable demographic trends supporting a growing pet population. . Rapidly Growing Veterinary Diagnostic Testing Services. We believe that outsourced diagnostic testing is among the fastest growing segments of the animal health care services industry. Reflecting this trend, our laboratory internal revenue growth has averaged 11.3% over the last three fiscal years. The growth in outsourced diagnostic testing resulted from an overall increase in the number of tests requisitioned by veterinarians and from veterinarians' increased reliance on outsourced diagnostic testing rather than in-house testing. The overall increase in the number of tests performed is primarily due to the growing focus by veterinarians on wellness and monitoring programs, the emphasis in veterinary education on utilizing diagnostic tests for more accurate diagnoses and continued technological developments in veterinary medicine leading to new and improved tests. The increased utilization of outsourced testing is primarily due to the relative low cost and high accuracy rates provided by outside laboratories and the diagnostic consulting provided by experts employed by the leading outside laboratories. . Attractive Customer Payment Dynamics. The animal health care services industry does not experience the problems of extended payment collection cycles or pricing pressures from third-party payors faced by human health care providers. Outsourced laboratory testing is a wholesale business that collects payments directly from animal hospitals, generally on terms requiring payment within 30 days of the date the charge is invoiced. Fees for animal hospital services are due and typically paid for at the time of the service. For example, over 95% of our animal hospital services are paid for in cash or by credit card at the time of the service. In addition, over the past three fiscal years, our bad debt expense has averaged only 1% of total revenue. 2 Competitive Strengths We believe we are well positioned for profitable growth due to the following competitive strengths: . Market Leader. We are a market leader in each of the business segments in which we operate. We believe that it would be difficult, time consuming and expensive for new entrants or existing competitors to assemble a comparable nationwide laboratory or animal hospital network. It would be particularly difficult to replicate our team of specialists, transportation network, management and systems infrastructure, the size of our veterinarian group and our customer relationships. . Compelling Business Model. Our business is characterized by a stable, recurring and diversified revenue base, high operating margins and strong cash flow. The growth in our laboratory revenue, combined with greater utilization of our infrastructure, enabled us to improve our laboratory EBITDA margin from 26.9% in 1998 to 33.5% for the twelve months ended September 30, 2001, and our laboratory operating margin from 22.4% to 29.9% over the same period. Our animal hospitals have generated six consecutive years of positive annual same-facility revenue growth. Due to the operating leverage in our animal hospitals, the increase in animal hospital revenue enabled us to improve our animal hospital EBITDA margin from 16.7% in 1998 to 19.5% for the twelve months ended September 30, 2001, and our animal hospital operating margin from 12.2% to 14.3% over the same period. These high margins, combined with our modest working capital needs and low maintenance capital expenditures, provide cash that we can use for acquisitions or to reduce indebtedness. . Leading Team of Specialists. Our network of 85 veterinary medicine experts, which we refer to as specialists, provides us with a significant competitive advantage. Our specialists include veterinarians, chemists and other scientists with expertise in pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology. These specialists are available to consult with our laboratory customers, providing a compelling reason for them to use our laboratories rather than those of our competitors, most of whom offer no comparable service. Our team of specialists represents the largest interactive source for readily available diagnostic advice in the veterinary industry and interacts with animal health care professionals over 90,000 times a year. . High Quality Service Provider. We believe we have built a reputation as a valuable diagnostic resource for veterinarians and a trusted animal health brand among pet owners. In our laboratories, we maintain rigorous quality assurance programs to ensure the accuracy of the reported results. We calibrate our laboratory equipment several times daily, use only qualified personnel to perform testing and our specialists review all test results outside the range of established norms. As a result, we believe our diagnostic accuracy rate is over 99%. In our animal hospitals, we provide continuing education programs, promote the sharing of professional knowledge and expertise and have developed and implemented a program of best practices to promote quality medical care. . Shared Expertise Among Veterinarians. We believe the continued accumulation of veterinary medical knowledge and experience among our veterinarian group enables us to offer new services more rapidly than our competitors, offer higher quality services and remain the leading source of veterinary information for interested companies such as pharmaceutical and pet food companies. Business Strategy Our business strategy is to continue to expand our market leadership in animal health care services through our diagnostic laboratories and animal hospitals. Key elements of our strategy include: . Capitalizing on our Leading Market Position to Generate Revenue Growth. Our leading market position in each of our business segments positions us to take advantage of favorable growth trends in the animal health care services industry. In our laboratories, we seek to generate revenue growth by capitalizing on the growing number of outsourced diagnostic tests and by increasing our market share. In our animal hospitals, we seek to generate revenue growth by capitalizing on the growing emphasis 3 on pet health and wellness and favorable demographic trends supporting a growing pet population. For example, in 2000 we implemented a senior pet wellness program. The program seeks to promote recurring visits and to increase the average amount spent per visit by bundling laboratory tests and animal hospital services. . Leveraging Established Infrastructure to Improve Margins. Due to our established networks and the fixed cost nature of our business model, we are able to realize higher margins on incremental revenue from both laboratory and animal hospital customers. For example, given that our nationwide transportation network servicing our laboratory customers is a relatively fixed cost, we are able to achieve significantly higher margins on most incremental tests ordered by the same customer when picked up by our couriers at the same time. We estimate that in most cases, we realize an operating and EBITDA margin between 60% and 75% on these incremental tests. . Utilizing Enterprise-Wide System to Improve Operating Efficiencies. We recently completed the migration of all animal hospital operations to an enterprise-wide management information system. We believe that this common system will enable us to more effectively manage the key operating metrics that drive our business. With the aid of this system, we seek to standardize pricing, expand the services our veterinarians provide, capture unbilled services, increase volume and implement targeted marketing programs. . Pursuing Selected Acquisitions. Although we have substantially completed our laboratory infrastructure, we may make selective, strategic laboratory acquisitions. Additionally, the fragmentation of the animal hospital industry provides us with significant expansion opportunities in our animal hospital segment. Depending upon the attractiveness of candidates and the strategic fit with our existing operations, we intend to acquire approximately 15-25 animal hospitals per year primarily utilizing internally generated cash. Business Risks Some of the key risks associated with our business strategy include: . Continued Growth. Our success depends in part on our ability to build on our position as a leading animal health care services company through a balanced program of internal growth initiatives and selective acquisitions of established animal hospitals and laboratories. We may be unable to successfully execute our growth strategy and, as a result, our business may be harmed. . Management of Growth. Our business and results of operations may be adversely affected if we are unable to manage our growth effectively, which may increase our costs of operations and hinder our ability to execute our business strategy. . Substantial Debt. Our substantial amount of debt could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. . Concentration of Ownership. Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions. These stockholders will be able to exercise control over all matters requiring stockholder approval and will have significant control over our management and policies. . Fixed Costs. A significant percentage of our expense, particularly rent and personnel costs, are fixed costs and are based in part on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenues. Our principal offices are located at 12401 West Olympic Boulevard, Los Angeles, California 90064. Our telephone number is (310) 571-6500. We recently changed our name from Veterinary Centers of America, Inc. 4 The Offering Common stock offered............... 14,000,000 shares Common stock to be outstanding after this offering.............. 32,216,212 shares Use of proceeds.................... We intend to use the net proceeds from this offering and our concurrent note offering described below to redeem our outstanding shares of preferred stock and to repay indebtedness. If we do not consummate the concurrent note offering, we intend to increase the size of the initial public offering, redeem in full all outstanding shares of our preferred stock and use the additional net proceeds to reduce our indebtedness. Proposed Nasdaq Stock Market Symbol WOOF
-------- Unless otherwise indicated, all share information in this prospectus is based on the number of shares outstanding as of September 30, 2001 and: . excludes 631,800 shares of common stock issuable upon exercise of outstanding options under our stock incentive plans, at an exercise price of $1.00 per share; . excludes 1,149,990 shares of common stock issuable upon exercise of outstanding warrants, at an exercise price of $0.0007 per share, which, if not exercised, terminate upon the closing of this offering; . excludes 2,000,000 shares available for future issuance under our stock incentive plans; and . assumes no exercise of the underwriters' over-allotment option. The Concurrent Note Offering Concurrently, we are separately offering $150,000,000 principal amount of senior subordinated notes due 2009. The consummation of this offering is not conditioned upon the consummation of the offering of these notes. The concurrent note offering is not being registered under the Securities Act, and the notes offered thereby may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 5 Summary Consolidated Financial and Other Data The summary financial data for the years in the period ended December 31, 2000, 1999 and 1998 have been derived from our audited financial statements. The summary financial data for the nine months ended September 30, 2001 and 2000 and as of September 30, 2001 have been derived from our unaudited interim financial statements and include, in the opinion of management, all adjustments necessary for a fair presentation of our financial position and operating results for these periods and as of such date. Our results for interim periods are not necessarily indicative of our results for a full year's operations. The pro forma data adjusts the financial data to give effect to this offering, the concurrent note offering and the application of the net proceeds therefrom, the use of $12.0 million of cash on hand and the transactions associated with our September 20, 2000 recapitalization, as more fully described in note (2) below. You should read the following information together with "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.
Nine Months Ended September 30, Year Ended December 31, ------------------ ---------------------------- 2001 2000 2000 1999 1998 -------- -------- -------- -------- -------- (in thousands, except per share amounts) Statements of Operations Data: Laboratory revenue.............................................. $101,855 $ 90,831 $119,300 $103,282 $ 89,896 Animal hospital revenue......................................... 207,665 182,716 240,624 217,988 191,888 Total revenue (1)............................................... 305,365 269,281 354,687 320,560 281,039 Operating income................................................ 40,909 9,524 19,205 47,016 38,834 Net income (loss) available to common stockholders.............. (15,139) (2,424) (13,802) $ 22,357 $ 16,268 Pro forma net income (loss) available to common stockholders (2) 1,853 (20,686) Pro forma diluted net income (loss) per share (2)............... $ 0.06 $ (0.66) Shares used for computing pro forma diluted net income (loss) per share (2)........................ 33,013 31,524 Other Financial Data: Adjusted EBITDA (3)(4).......................................... $ 71,017 $ 57,547 $ 73,526 $ 64,445 $ 51,966 Adjusted EBITDA margin (5)...................................... 23.3% 21.4% 20.7% 20.1% 18.5% Laboratory EBITDA............................................... $ 35,264 $ 30,495 $ 38,827 $ 32,273 $ 24,215 Laboratory EBITDA margin (5).................................... 34.6% 33.6% 32.5% 31.2% 26.9% Animal hospital EBITDA.......................................... $ 43,159 $ 34,287 $ 42,985 $ 37,237 $ 31,975 Animal hospital EBITDA margin (5)............................... 20.8% 18.8% 17.9% 17.1% 16.7% Net cash provided by operating activities....................... $ 49,316 $ 46,975 $ 60,054 $ 38,467 $ 27,123 Capital expenditures............................................ 10,604 13,686 22,555 21,803 11,678 Operating Data: Laboratory internal revenue growth (6).......................... 11.5% 12.9% 12.6% 9.1% 12.2% Animal hospital same-facility revenue growth (7)..................................................... 4.4% 7.7% 7.0% 2.6% 5.8%
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As of September 30, 2001 ------------------------ Pro Forma Actual As Adjusted(2) -------- -------------- Balance Sheet Data: Cash and cash equivalents..................... $ 23,631 $ 11,631 Total assets.................................. 501,227 487,448 Total debt.................................... 371,365 373,763 Total redeemable preferred stock.............. 170,205 -- Total stockholders' equity (deficit).......... (97,946) 61,671
-------- (1) Includes other revenue of $1.5 million and $425,000 for the nine months ended September 30, 2001 and 2000, and of $925,000, $5.1 million and $5.1 million for the years ended December 31, 2000, 1999 and 1998. Total revenue is net of intercompany eliminations of $5.7 million and $4.7 million for the nine months ended September 30, 2001 and 2000, and of $6.2 million, $5.8 million and $5.8 million for the years ended December 31, 2000, 1999 and 1998. (2) The pro forma statement of operations data for the nine months ended September 30, 2001 and the pro forma as adjusted balance sheet data are presented as if this offering, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of cash on hand occurred on January 1, 2001 for such pro forma statement of operations data and at September 30, 2001 for the pro forma as adjusted balance sheet data. The pro forma statement of operations data for the year ended December 31, 2000 are presented as if (a) this offering, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of our cash on hand and (b) the transactions associated with our September 20, 2000 recapitalization (as described in the notes to our consolidated financial statements) occurred on January 1, 2000. The consummation of this offering is not conditioned upon the consummation of the concurrent note offering. (3) EBITDA is operating income (loss) before depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to exclude management fees, recapitalization costs, Year 2000 remediation expense and other non-cash operating items. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. Although EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity, we understand that EBITDA and Adjusted EBITDA are widely used by financial analysts as a measure of financial performance. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. The calculation of EBITDA and Adjusted EBITDA are shown below (dollars in thousands):
Nine Months Ended September 30, Year Ended December 31, --------------- ------------------------ 2001 2000 2000 1999 1998 ------- ------- ------- ------- ------- Operating income..................... $40,909 $ 9,524 $19,205 $47,016 $38,834 Depreciation and amortization........ 19,121 13,200 18,878 16,463 13,132 ------- ------- ------- ------- ------- EBITDA............................ 60,030 22,724 38,083 63,479 51,966 Management fees (a).................. 1,860 -- 620 -- -- Recapitalization costs............... -- 34,823 34,823 -- -- Year 2000 remediation expense........ -- -- -- 2,839 -- Other non-cash operating items (b)... 9,127 -- -- (1,873) -- ------- ------- ------- ------- ------- Adjusted EBITDA (c)............... $71,017 $57,547 $73,526 $64,445 $51,966 ======= ======= ======= ======= =======
----- (a) Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. 7 (b)Other non-cash operating items include a write-down and loss on sale of assets of $8.7 million and stock-based compensation expense of $382,000 for the nine months ended September 30, 2001 as well as a reversal of restructuring charges of $1.9 million for the year ended December 31, 1999. (c)Numbers may not add due to rounding. (4)Adjusted EBITDA is the sum of laboratory EBITDA, animal hospital EBITDA and other revenue, less corporate selling, general and administrative expense, excluding management fees, as shown below (dollars in thousands):
Nine Months Ended September 30, Year Ended December 31, ----------------- -------------------------- 2001 2000 2000 1999 1998 -------- ------- ------- -------- ------- Laboratory EBITDA............. $ 35,264 $30,495 $38,827 $ 32,273 $24,215 Animal hospital EBITDA........ 43,159 34,287 42,985 37,237 31,975 Other revenue................. 1,500 425 925 5,100 5,100 Corporate selling, general and administrative............... (10,766) (7,660) (9,831) (10,165) (9,324) Management fees (a)........... 1,860 -- 620 -- -- -------- ------- ------- -------- ------- Adjusted EBITDA............ $ 71,017 $57,547 $73,526 $ 64,445 $51,966 ======== ======= ======= ======== =======
----- (a)Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. (5)Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by total revenue. Laboratory EBITDA margin is calculated by dividing laboratory EBITDA by laboratory revenue. Animal hospital EBITDA margin is calculated by dividing animal hospital EBITDA by animal hospital revenue. (6)Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude estimated laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates for those laboratories that we did not own for the entire periods presented. We have estimated our laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates based on pre-acquisition historical laboratory revenue information provided to us by the seller. We then increase that amount by our laboratory internal revenue growth rate for the fiscal year prior to acquisition to determine our estimated laboratory revenue of acquired laboratories. To determine our laboratory internal revenue growth rate for the applicable period, we compare our laboratory revenue net of estimated laboratory revenue of acquired laboratories to our laboratory revenue as reported for the prior comparable period. We believe this fairly presents our laboratory internal revenue growth for the periods presented, although our calculation may not be comparable to similarly titled measures reported by other companies. (7)Animal hospital same-facility revenue growth is calculated using the combined revenue of the animal hospitals we owned and managed for the entire periods presented. 8 RISK FACTORS The value of an investment in VCA will be subject to significant risks inherent in our business. You should carefully consider the risks and uncertainties described below and other information included in this prospectus before purchasing our common stock. If any of the events described below occur, our business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly. Risks Related to Our Business We may be unable to successfully execute our growth strategy and, as a result, our business may be harmed. Our success depends in part on our ability to build on our position as a leading animal health care services company through a balanced program of internal growth initiatives and selective acquisitions of established animal hospitals and laboratories. If we cannot implement or are not successful in executing these initiatives, our results of operations will be adversely affected. Our internal growth rate may decline and could become negative. Our laboratory internal revenue growth has fluctuated between 9.1% and 12.6% for each fiscal year since 1998. Similarly, our animal hospital same-facility revenue growth has fluctuated between 2.6% and 7.0% over the same periods. Even if we are successful implementing our growth strategy, we may not achieve the economies of scale that we have experienced in the past or that we anticipate. Our internal growth may continue to fluctuate and may be below our historical rates. Any reductions in the rate of our internal growth may cause our revenue and margins to decrease. Our historical growth rates and margins are not necessarily indicative of future results. Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude estimated laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates for those laboratories that we did not own for the entire periods presented. We estimate our laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates based on pre-acquisition historical laboratory revenue information provided to us by the seller. We then increase that amount by our laboratory internal revenue growth rate for the fiscal year prior to acquisition to determine our estimated laboratory revenue of acquired laboratories. To determine our laboratory internal revenue growth rate for the applicable period, we compare our laboratory revenue net of estimated laboratory revenue of acquired laboratories to our laboratory revenue as reported for the prior comparable period. We calculate our animal hospital same-facility revenue growth using the combined revenue of the animal hospitals we owned and managed for the entire periods presented. These calculations involve a number of assumptions, and our internal growth may not be calculated in the same manner as those of comparable companies. Our business and results of operations may be adversely affected if we are unable to manage our growth effectively. Since January 1, 1996, we have experienced rapid growth and expansion. Our failure to manage our growth effectively may increase our costs of operations and hinder our ability to execute our business strategy. Our rapid growth has placed, and will continue to place, a significant strain on our management and operational systems and resources. If our business grows, we will need to improve and enhance our overall financial and managerial controls, reporting systems and procedures, and expand, train and manage our workforce. We will also need to increase the capacity of our current systems to meet additional demands. Difficulties with the integration of new acquisitions may impose substantial costs and delays and cause other problems for us. Acquisitions involve a number of risks relating to our ability to integrate an acquired business into our existing operations. The process of integrating the operations of an acquired business, including its personnel, could cause interruptions to our business. Some of the risks we face include: . negative effects on our operating results; 9 . impairments of goodwill and other intangible assets; . dependence on retention, hiring and training of key personnel, including specialists; . amortization of intangible assets; and . contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, an acquired business. The process of integration may require a disproportionate amount of the time and attention of our management, which may distract management's attention from its day-to-day responsibilities. In addition, any interruption or deterioration in service resulting from an acquisition may result in a customer's decision to stop using us. For these reasons, we may not realize the anticipated benefits of an acquisition, either at all or in a timely manner. If that happens and we incur significant costs, it could have a material adverse impact on our business. A prolonged economic downturn could materially adversely affect our business. Our business may be materially adversely affected by prolonged, negative trends in the general economy that reduce consumer spending. Our business depends on the ability and willingness of animal owners to pay for our services. This dependence could make us more vulnerable to any reduction in consumer confidence or disposable income than companies in other industries that are less reliant on consumer spending, such as the human health care industry, in which a large portion of payments are made by insurance programs. Our substantial amount of debt could adversely affect our ability to run our business. We have, and will continue to have, a substantial amount of debt. At September 30, 2001, our debt, excluding unamortized discount, consisted primarily of: . $246.5 million of outstanding borrowings under our credit facility; . $136.6 million of outstanding senior notes and senior subordinated notes; and . $1.5 million of other debt. Our substantial amount of debt, including senior and secured debt, as well as the guarantees of our subsidiaries and the security interests in our assets, could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. For example, our indentures and credit facility: . limit our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments and general corporate purposes; . require us to dedicate a substantial portion of our cash flow from operations to pay down our indebtedness, thereby reducing the funds available to use for working capital, capital expenditures, acquisitions and general corporate purposes; . limit our ability to dispose of our assets, create liens on our assets or to extend credit; . make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business and economic conditions; . limit our flexibility in planning for, or reacting to, changes in our business or industry; . place us at a competitive disadvantage to our competitors with less debt; and . restrict our ability to pay dividends, repurchase or redeem our capital stock or debt, or merge or consolidate with another entity. 10 The terms of our indentures and credit facility allow us, under specified conditions, to incur further indebtedness, which would heighten the foregoing risks. If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer. We require a significant amount of cash to service our debt and expand our business as planned. Our ability to make payments on our debt, and to fund acquisitions, will depend on our ability to generate cash in the future. Insufficient cash flow could place us at risk of default under our debt agreements or could prevent us from expanding our business as planned. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations, our strategy to increase operating efficiencies may not be realized and future borrowings may not be available to us under our credit facility in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. In order to meet our debt obligations, we may need to refinance all or a portion of our debt. We may not be able to refinance any of our debt, on commercially reasonable terms or at all. Our failure to satisfy covenants in our debt instruments will cause a default under those instruments. In addition to imposing restrictions on our business and operations, our debt instruments include a number of covenants relating to financial ratios and tests. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants would result in a default under these instruments. An event of default would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. Moreover, these lenders would have the option to terminate any obligation to make further extensions of credit under these instruments. If we are unable to repay debt to our senior lenders, these lenders could proceed against our assets. Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect our operating income. Approximately 56.5% of our expense, particularly rent and personnel costs, are fixed costs and are based in part on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenue. Accordingly, shortfalls in revenue may adversely affect our operating income. The significant competition in the animal health care services industry could cause us to reduce prices or lose market share. The animal health care services industry is highly competitive. To compete successfully, we may be required to reduce prices, increase our operating costs or take other measures that could have an adverse effect on our financial condition, results of operations, margins and cash flow. If we are unable to compete successfully, we may lose market share. There are many clinical laboratory companies that provide a broad range of laboratory testing services in the same markets we service. Our largest competitor for outsourced laboratory testing services is Idexx Laboratories, Inc. Also, Idexx and several other national companies provide on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests. 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 some national companies, including operators of super-stores, are developing multi-regional networks of animal hospitals in markets in which we operate. 11 We may experience difficulties hiring skilled veterinarians due to periodic shortages which could disrupt our business. Skilled veterinarians are in shortage from time to time in particular regional markets in which we operate animal hospitals. During these shortages, we may be unable to hire enough qualified veterinarians to adequately staff our animal hospitals in these regions, in which event we may lose market share and our revenues and profitability may decline. If we fail to comply with governmental regulations applicable to our business, various governmental agencies may impose fines, institute litigation or preclude us from operating in certain states. The laws of many states 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. We operate 53 animal hospitals in 11 states with these laws, including 21 in New York. We may experience difficulty in expanding our operations into other states with similar laws. Given varying and uncertain interpretations of the veterinary laws of each state, we may not be in compliance with restrictions on the corporate practice of veterinary medicine in all states. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any state in which we operate could have a material adverse effect on us, particularly if we were unable to restructure our operations to comply with the requirements of that state. For example, we currently are a party to a lawsuit in the State of Ohio in which that State has alleged that our management of a veterinary medical group licensed to practice veterinary medicine in that state violates the Ohio statute prohibiting business corporations from providing or holding themselves out as providers of veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining us from operating in the State of Ohio in a manner that is in violation of the state statute. In response, we have restructured our operations in the State of Ohio in a manner that we believe conforms to the state law and the court's order. The Attorney General of the State of Ohio has informed us that it disagrees with our position that we are in compliance with the court's order. We are currently in discussions with the Attorney General's office in the State of Ohio in an attempt to resolve this matter. We may not be able to reach a settlement, in which case we would be required to discontinue our operations in the state. Our five animal hospitals in the State of Ohio have a book value of $6.1 million as of September 30, 2001. If we were required to discontinue our operations in the State of Ohio, we may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue, EBITDA and operating income of $2.2 million, $754,000 and $513,000, respectively, in the twelve months ended December 31, 2000 and $1.7 million, $575,000 and $376,000, respectively, in the nine months ended September 30, 2001. All of the states in which we operate impose various registration requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinary doctors practicing in our clinics are required to maintain valid state licenses to practice. Any failure in our information technology systems could significantly increase testing turn-around time, reduce our production capacity and otherwise disrupt our operations. Our laboratory operations depend, in part, on the continued and uninterrupted performance of our information technology systems. Our growth has necessitated continued expansion and upgrade of our information technology infrastructure. Sustained system failures or interruption in one or more of our laboratory operations could disrupt our ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. We could lose customers and revenue as a result of a system failure. 12 Our computer systems are vulnerable to damage or interruption from a variety of sources, including telecommunications failures, electricity brownouts or blackouts, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems affecting our systems could cause interruptions in our information technology systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems. The loss of Mr. Robert L. Antin, our Chairman, President and Chief Executive Officer, could materially and adversely affect our business. We are dependent upon the management and leadership of our Chairman, President and Chief Executive Officer, Robert L. Antin. We have an employment contract with Mr. Antin which may be terminated at the option of Mr. Antin. We do not maintain any key man life insurance coverage for Mr. Antin. The loss of Mr. Antin could materially adversely affect our business. Risks Associated with this Offering Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions. Upon completion of this offering, our executive officers, directors and principal stockholders will beneficially own, in the aggregate, approximately 52.2% of our outstanding common stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions and will have significant control over our management and policies. The directors elected by these stockholders will be able to make decisions affecting our capital structure, including decisions to issue additional capital stock, implement stock repurchase programs and incur indebtedness. This control may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interests. Future sales of shares of our common stock in the public market may depress our stock price and make it difficult for you to recover the full value of your investment in our shares. If our existing stockholders sell substantial amounts of our common stock in the public market following this offering or if there is a perception that these sales may occur, the market price of our common stock could decline. Based on shares outstanding as of September 30, 2001, upon completion of this offering we will have outstanding approximately 32,216,212 shares of common stock. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market. After the lockup agreements pertaining to this offering expire 180 days from the date of this prospectus unless waived, an additional 18,216,212 shares will be eligible for sale in the public market at various times, subject to volume limitations under Rule 144 of the Securities Act of 1933. See "Shares Eligible for Future Sale" for more information regarding shares of our common stock that may be sold by existing stockholders after the closing of this offering. Because our common stock is not currently traded on a public market, the initial public offering price may not be indicative of the market price of our common stock after this offering. You may be unable to resell your shares at or above the initial public offering price. There is currently no public market for our common stock. An active public market may not develop for our common stock following this offering. If a market does develop, the market price of our common stock may be less than the public offering price. The public offering price will be determined by negotiations between us and the representatives of the underwriters and will not necessarily be indicative of the market price of the common 13 stock after the offering. The prices at which the common stock will trade after the offering will be determined by the marketplace and may be influenced by many factors, including: . the information included in this prospectus and otherwise available to the representatives; . the history and the prospects of the industry in which we compete; . the ability of our management; . our past and present operations; . our prospects for future earnings; . the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; . market conditions for initial public offerings; and . the general condition of the securities markets at the time of this offering. The price of our common stock may be volatile. Following this offering, the price at which our common stock will trade may be volatile. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods of volatility in the market price of a particular company's securities, securities class-action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive to defend and may divert management's attention and resources from the operation of our business. Terrorism and the uncertainty of war may have a material adverse effect on our operating results. Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, the response by the United States on October 7, 2001 and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, our operations and profitability and your investment. Further terrorist attacks against the United States or United States businesses may occur. The potential near-term and long-term effect these attacks may have for our customers, the market for our common stock, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets, our business or your investment. Our stock price may be adversely affected because our results of operations may fluctuate significantly from quarter to quarter. Our operating results may fluctuate significantly in the future. If our quarterly revenue and operating results fall below the expectations of securities analysts and investors, the market price of our common stock could fall substantially. We believe that quarter to quarter or annual comparisons of our operating results are not a good indication of our future performance. Historically, when you eliminate the effect of acquisitions, we have experienced higher revenue 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. 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. 14 Operating results also may vary depending on a number of factors, many of which are outside our control, including: . demand for our tests; . changes in our pricing policies or those of our competitors; . the hiring and retention of key personnel; . wage and cost pressures; . changes in fuel prices or electrical rates; . costs related to acquisitions of technologies or businesses; and . seasonal and general economic factors. You will incur immediate and substantial dilution as a result of this offering. The initial public offering price is substantially higher than the book value per share of the common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $21.87 per share in the tangible book value of the common stock from the initial public offering price. Takeover defense provisions may adversely affect the market price of our common stock. Various provisions of Delaware corporation law and of our corporate governance documents may inhibit changes in control not approved by our board of directors and may have the effect of depriving you of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include: . a classified board of directors; . a prohibition on stockholder action through written consents; . a requirement that special meetings of stockholders be called only by our the board of directors; . advance notice requirements for stockholder proposals and nominations; and . availability of "blank check" preferred stock. 15 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," and elsewhere in this prospectus are forward-looking statements. We generally identify forward-looking statements in this prospectus using words like "believe," "intend," "expect," "estimate," "may," "should," "plan," "project," "contemplate," "anticipate," "predict," or similar expressions. These statements involve known and unknown risks, uncertainties, and other factors, including those described in this "Risk Factors" section, that may cause our or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise. 16 USE OF PROCEEDS We expect to receive $182.0 million in gross proceeds from the sale of shares of our common stock in this offering based on the sale of 14,000,000 shares at an assumed initial public offering price of $13.00 per share, the midpoint of the offering range set forth on the cover page of this prospectus. We expect our net proceeds from this offering and the concurrent note offering to be approximately $315.0 million and $340.4 million if the underwriters exercise their over-allotment option in full. We intend to use the net proceeds from these offerings and our cash on hand to: . repay approximately $104.2 million of our credit facility; . repay approximately $47.8 million of the outstanding principal amount of our 15.5% senior notes due 2010 at a redemption price of 110% of the principal amount, for an aggregate of $52.6 million, plus accrued and unpaid interest; . redeem in full, all outstanding shares of our 14% series A redeemable preferred stock and our 12% series B redeemable preferred stock having an aggregate liquidation preference of $86.3 million and $83.9 million, respectively, plus accrued and unpaid dividends. If the underwriters exercise their over-allotment option, we will receive additional net proceeds of $25.4 million which we intend to use to reduce indebtedness. This offering is not contingent on the consummation of the concurrent note offering. If we do not consummate the concurrent note offering, we intend to increase the size of this offering, redeem in full all outstanding shares of our preferred stock and use the additional net proceeds to reduce our indebtedness. Pending application of the net proceeds as described above, we intend to invest the net proceeds in short-term investment grade securities. DIVIDEND POLICY We have not paid cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. In addition, our credit facility and the indentures governing our outstanding senior and senior subordinated notes place limitations on our ability to pay dividends or make other distributions in respect of our common stock. Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the board of directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net profits. The terms of our series A and series B redeemable preferred stock require us to pay dividends whether or not declared by our board of directors, out of funds legally available. Dividends on the series A and series B redeemable preferred stock accrue at the rates of 14% and 12% per annum of the liquidation preference. Dividends are payable in cash on a quarterly basis. If dividends are not paid when due, the amount payable is added to the liquidation preference. At September 30, 2001, dividends earned but not paid were $11.4 million and $9.6 million for the series A and series B redeemable preferred stock, respectively. 17 DILUTION At September 30, 2001, we had net tangible book value of $(441.6) million, or $(24.24) per share. Net tangible book value per share is equal to our total tangible assets less our total liabilities, divided by the total number of shares of our common stock outstanding. After giving effect to this offering at an assumed initial public offering price of $13.00 per share, the mid-point of the offering range set forth on the cover of this prospectus, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of cash on hand, our as adjusted pro forma net tangible book value at September 30, 2001 would have been $(285.8) million or $(8.87) per share. This represents an immediate increase in net tangible book value of $15.37 per share to existing stockholders and an immediate dilution of $21.87 per share to new investors purchasing shares of our common stock in this offering. The following table illustrates the per share dilution to the new investors. Assumed initial public offering price................................................. $13.00 Net tangible book value per share at September 30, 2001............................ $(24.24) Increase per share attributable to this offering, the concurrent note offering and the use of $12.0 million of our cash on hand..................................... 15.37 ------- As adjusted pro forma net tangible book value per share after this offering, the concurrent note offering and the use of $12.0 million of cash on hand............... (8.87) ------ Dilution per share to new investors in this offering.................................. $21.87 ======
The following table summarizes, on an as adjusted basis, as of September 30, 2001, the total number of shares of our common stock, the total cash consideration paid and the average price per share paid by the existing stockholders and by the new investors in this offering before deducting the underwriting discount and estimated offering expenses:
Shares Purchased Total Consideration Average ------------------ ------------------- Price Per Number Percent Amount Percent Share ----------- ------- ------------ ------- --------- Existing stockholders 18,216,212 56.5% $ 17,662,712 8.8% $ 0.97 New investors........ 14,000,000 43.5 182,000,000 91.2 13.00 ----------- ----- ------------ ----- Total............. 32,216,212 100.0% $199,662,712 100.0% =========== ===== ============ =====
The foregoing discussion and table assume no exercise of any stock options or warrants outstanding as of September 30, 2001. As of September 30, 2001, there were options or warrants outstanding to purchase a total of 1,781,790 shares of our common stock and 2,000,000 shares reserved for issuance pursuant to future grants of options under our 1996 Stock Incentive Plan and our 2001 Stock Incentive Plan. To the extent that any of these shares are issued, there will be further dilution to new investors. See "Capitalization," "Management" and Note 10 to our Consolidated Financial Statements. 18 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2001: . on an actual basis; and . on a pro forma as adjusted basis, giving effect to this offering at an assumed initial public offering price of $13.00 per share, which is the mid-point in the offering range set forth on the cover page of this prospectus, the concurrent note offering and the intended application of the net proceeds therefrom and the use of $12.0 million of our cash on hand.
As of September 30, 2001 ----------------------- Pro Forma Actual As Adjusted(1) ------- -------------- (dollars in millions) Total debt: Credit facility: Revolving credit facility (2)................................................ $ -- $ -- Term loan A.................................................................. 49.0 28.3 Term loan B.................................................................. 197.5 114.0 % senior subordinated notes offered concurrently with this offering........... -- 150.0 13.5% senior subordinated notes.................................................. 20.0 20.0 Senior notes..................................................................... 116.6 68.8 Other debt....................................................................... 1.5 1.5 Unamortized discount............................................................. (13.2) (8.8) ------- ------- Total debt................................................................... 371.4 373.8 ------- ------- Series A redeemable preferred stock, $.01 par value, 3,000,000 shares authorized; 2,998,408 shares issued and outstanding, actual; no shares issued and outstanding, pro forma as adjusted............................................................. 86.3 -- Series B redeemable preferred stock, $.01 par value, 3,000,000 shares authorized; 2,970,822 shares issued and outstanding, actual; no shares issued and outstanding, pro forma as adjusted............................................................. 83.9 -- Stockholders' equity:............................................................... Common stock, $.01 par value; 24,000,000 shares authorized, 18,216,212 shares issued and outstanding, actual; 75,000,000 shares authorized and 32,216,212 shares issued and outstanding, pro forma as adjusted (3)............ 0.2 0.3 Additional paid-in capital....................................................... 19.6 187.4 Notes receivable from stockholders............................................... (0.5) (0.5) Accumulated deficit.............................................................. (115.2) (123.5) Accumulated comprehensive loss................................................... (2.0) (2.0) ------- ------- Total stockholders' equity (deficit)......................................... (97.9) 61.7 ------- ------- Total capitalization......................................................... $ 443.7 $ 435.5 ======= =======
-------- (1) The pro forma as adjusted data are presented as if this offering, the concurrent note offering and the application of the net proceeds therefrom and the use of $12.0 million of cash on hand had occurred at September 30, 2001. The consummation of this offering is not conditioned upon the consummation of the concurrent note offering. (2) The revolving credit facility provides for borrowings of up to $50.0 million. (3) Share information is based on the number of shares outstanding as of September 30, 2001 and: . excludes 631,800 shares of common stock issuable upon exercise of outstanding options under our stock incentive plans, at an exercise price of $1.00 per share; . excludes 1,149,990 shares of common stock issuable upon exercise of outstanding warrants, at an exercise price of $0.0007 per share, which, if not exercised, terminate upon the closing of this offering; . excludes 2,000,000 shares available for future issuance under our stock incentive plans; and . assumes no exercise of the underwriters' over-allotment option. 19 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data as of and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from our audited financial statements. These financial statements were audited by Arthur Andersen LLP. The selected historical consolidated financial data as of and for the nine months ended September 30, 2001 and 2000 have been derived from our unaudited interim financial statements and include, in the opinion of management, all adjustments necessary for a fair presentation of our financial position and operating results for those periods and as of those dates. Our results for interim periods are not necessarily indicative of our results for a full year's operations. You should read the selected financial data presented below together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes. Our audited consolidated financial statements as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and our unaudited, consolidated financial statements as of and for the nine months ended September 30, 2001 and for the nine months ended September 30, 2000 are included in this prospectus.
Nine Months Ended September 30, Year Ended December 31, ------------------ ------------------------------------------------ 2001 2000 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- (in thousands, except per share amounts) Statements of Operations Data: Laboratory revenue........................ $101,855 $ 90,831 $119,300 $103,282 $ 89,896 $ 68,997 $ 56,774 Animal hospital revenue................... 207,665 182,716 240,624 217,988 191,888 165,848 120,110 Other revenue (1)......................... 1,500 425 925 5,100 5,100 5,764 8,674 Intercompany.............................. (5,655) (4,691) (6,162) (5,810) (5,845) (4,696) (4,130) -------- -------- -------- -------- -------- -------- -------- Total revenue............................. 305,365 269,281 354,687 320,560 281,039 235,913 181,428 Direct costs.............................. 212,042 191,269 254,787 232,493 209,380 178,630 138,854 Selling, general and administrative....... 24,166 20,465 26,994 23,622 19,693 17,676 19,735 Depreciation and amortization............. 19,121 13,200 18,878 16,463 13,132 11,199 7,496 Recapitalization costs.................... -- 34,823 34,823 -- -- -- -- Year 2000 remediation expense............. -- -- -- 2,839 -- -- -- Restructuring and merger costs............ -- -- -- -- -- -- 5,690 Other non-cash operating items............ 9,127 -- -- (1,873) -- -- 12,424 -------- -------- -------- -------- -------- -------- -------- Operating income (loss)................ 40,909 9,524 19,205 47,016 38,834 28,408 (2,771) Net interest expense...................... 32,387 8,433 19,892 9,449 8,832 7,411 3,325 Other (income) expense.................... 233 (3,200) 1,800 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interest, provision for income taxes and extraordinary item.......... 8,289 4,291 (2,487) 37,567 30,002 20,997 (6,096) Minority interest in income of subsidiaries............................. 1,104 808 1,066 850 780 424 6,577 Provision for income taxes................ 6,741 2,709 2,199 14,360 12,954 9,347 1,959 Extraordinary loss on early extinguishment of debt (net of taxes).... -- 2,659 2,659 -- -- -- -- Increase in carrying amount of redeemable preferred stock............... 15,583 539 5,391 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common stockholders................... $(15,139) $ (2,424) $(13,802) $ 22,357 $ 16,268 $ 11,226 $(14,632) ======== ======== ======== ======== ======== ======== ======== Basic earnings (loss) per share........... $ (0.86) $ (0.01) $ (0.06) $ 0.07 $ 0.05 $ 0.04 $ (0.06) Diluted earnings (loss) per share......... $ (0.86) $ (0.01) $ (0.06) $ 0.07 $ 0.05 $ 0.04 $ (0.06) Shares used for computing basic earnings (loss) per share......................... 17,643 306,718 234,055 315,945 305,250 294,390 239,130 Shares used for computing diluted earnings (loss) per share......................... 17,643 306,718 234,055 329,775 329,100 315,195 239,130
20
Nine Months Ended September 30, Year Ended December 31, ------------------ ------------------------------------------------ 2001 2000 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- -------- -------- (dollars in thousands, except per share amounts) Other Financial Data: Adjusted EBITDA (2)(3).............. $ 71,017 $ 57,547 $ 73,526 $ 64,445 $ 51,966 $ 39,607 $ 22,839 Adjusted EBITDA margin (4).......... 23.3% 21.4% 20.7% 20.1% 18.5% 16.8% 12.6% Laboratory EBITDA................... $ 35,264 $ 30,495 $ 38,827 $ 32,273 $ 24,215 $ 20,142 $ 16,565 Laboratory margin (4)............... 34.6% 33.6% 32.5% 31.2% 26.9% 29.2% 29.2% Animal hospital EBITDA.............. $ 43,159 $ 34,287 $ 42,985 $ 37,237 $ 31,975 $ 23,243 $ 15,794 Animal hospital margin (4).......... 20.8% 18.8% 17.9% 17.1% 16.7% 14.0% 13.1% Net cash provided by operating activities......................... $ 49,316 $ 46,975 $ 60,054 $ 38,467 $ 27,123 $ 22,674 $ 1,603 Capital expenditures................ 10,604 13,686 22,555 21,803 11,678 7,241 6,962 Balance Sheet Data (at period end): Cash and cash equivalents........... $ 23,631 $ 17,031 $ 10,519 $ 10,620 $ 8,977 $ 19,882 $ 29,621 Net working capital................. 2,175 7,685 4,734 9,605 6,694 (4,454) (10,221) Total assets........................ 501,227 481,709 483,070 426,500 393,960 386,089 354,009 Total debt.......................... 371,365 358,908 362,749 161,535 159,787 173,875 148,822 Total redeemable preferred stock.... 170,205 149,771 154,622 -- -- -- -- Total stockholders' equity (deficit) (97,946) (70,489) (81,865) 231,229 202,685 180,851 167,350
-------- (1)Other revenue includes consulting fees of $1.5 million and $425,000 for the nine months ended September 30, 2001 and 2000; and of $925,000, $5.1 million, $5.1 million and $4.7 million for the years ended December 31, 2000, 1999, 1998 and 1997. For the years ended December 31, 1997 and 1996 other revenue also includes revenue from our pet product joint venture; we transferred the control of the joint venture to our joint venture partner in February 1997. (2)EBITDA is operating income (loss) before depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude management fees, recapitalization costs, Year 2000 remediation expense and other non-cash operating items. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. Although EBITDA and Adjusted EBITDA should not be considered in isolation or as substitutes for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity, we understand that EBITDA and Adjusted EBITDA are widely used by financial analysts as a measure of financial performance. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. The calculation of EBITDA and Adjusted EBITDA is shown below (dollars in thousands):
Nine Months Ended September 30, Year Ended December 31, ----------------- ---------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- Operating income (loss).......... $40,909 $ 9,524 $19,205 $47,016 $38,834 $28,408 $(2,771) Depreciation and amortization.... 19,121 13,200 18,878 16,463 13,132 11,199 7,496 ------- ------- ------- ------- ------- ------- ------- EBITDA........................ 60,030 22,724 38,083 63,479 51,966 39,607 4,725 Management fees(a)............... 1,860 -- 620 -- -- -- -- Recapitalization costs........... -- 34,823 34,823 -- -- -- -- Year 2000 remediation expense.... -- -- -- 2,839 -- -- -- Restructuring and merger costs... -- -- -- -- -- -- 5,690 Other non-cash operating items(b) 9,127 -- -- (1,873) -- -- 12,424 ------- ------- ------- ------- ------- ------- ------- Adjusted EBITDA............... $71,017 $57,547 $73,526 $64,445 $51,966 $39,607 $22,839 ======= ======= ======= ======= ======= ======= =======
-------- (a)Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. (b)Other non-cash operating items include a write-down and loss on sale of assets of $8.7 million and stock-based compensation expense of $382,000 for the nine months ended September 30, 2001; reversal of restructuring charges of $1.9 million for the year ended December 31, 1999; reversal of restructuring charges of $2.1 million and restructuring charges of $2.1 million for the year ended December 31, 1997; and restructuring charges of $2.9 million and a write-down of assets of $9.5 million for the year ended December 31, 1996. Numbers may not add due to rounding. (3)Adjusted EBITDA is the sum of laboratory EBITDA, animal hospital EBITDA and other revenue, less corporate selling, general and administrative expense, excluding management fees. For the years ended December 31, 1997 and 1996, Adjusted EBITDA also includes EBITDA of our pet products joint venture of $168,000 and a loss of $1.1 million. 21 The calculation of Adjusted EBITDA is shown below (dollars in thousands):
Nine Months Ended September 30, Year Ended December 31, ----------------- -------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 -------- ------- ------- -------- ------- ------- ------- Laboratory EBITDA.................... $ 35,264 $30,495 $38,827 $ 32,273 $24,215 $20,142 $16,565 Animal hospital EBITDA............... 43,159 34,287 42,985 37,237 31,975 23,243 15,794 Other revenue........................ 1,500 425 925 5,100 5,100 4,700 -- Corporate, selling and administrative expense............................. (10,766) (7,660) (9,831) (10,165) (9,324) (8,646) (8,386) Management fees (a).................. 1,860 -- 620 -- -- -- -- Pet products joint venture EBITDA.... -- -- -- -- -- 168 (1,134) -------- ------- ------- -------- ------- ------- ------- Adjusted EBITDA................... $ 71,017 $57,547 $73,526 $ 64,445 $51,966 $39,607 $22,839 ======== ======= ======= ======== ======= ======= =======
-------- (a)Management fees are paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. (4)Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by total revenue. Laboratory EBITDA margin is calculated by dividing laboratory EBITDA by laboratory revenue. Animal hospital EBITDA margin is calculated by dividing animal hospital EBITDA by animal hospital revenue. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risk and uncertainties. You should review the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein. Overview We are a leading animal health care services company and operate the largest networks of veterinary diagnostic laboratories and free-standing, full-service animal hospitals in the United States. Our network of veterinary diagnostic laboratories provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer pharmaceutical products and perform a variety of pet wellness programs, including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care. Our company was formed in 1986 by Robert Antin, Arthur Antin and Neil Tauber, who have served since our inception as our Chief Executive Officer, Chief Operating Officer and Senior Vice President of Development, respectively. During the 1990s, we established a premier position in the veterinary diagnostic laboratory and animal hospital markets through both internal growth and acquisitions. By 1997, we achieved a critical mass, building a laboratory network of 12 laboratories servicing animal hospitals in all 50 states and completing acquisitions for a total of 160 animal hospitals. At September 30, 2001, our laboratory network consisted of 15 laboratories serving all 50 states and our animal hospital network consisted of 214 animal hospitals in 33 states. We are focusing primarily on generating internal growth to increase revenue and profitability. In order to augment internal growth, we may selectively acquire laboratories and intend to acquire approximately 15-25 animal hospitals per year, depending upon the attractiveness of candidates and the strategic fit with our existing operations. The following table summarizes our growth in facilities for the periods presented:
Nine Months Ended Year Ended September 30, December 31, ---------------- ------------- 2001 2000 2000 1999 1998 ---- ---- ---- ---- ---- Laboratories: Beginning of period...................... 15 13 13 12 12 Acquisitions & new facilities............ -- 2 3 3 1 Relocated into other labs operated by us. -- (1) (1) (2) (1) --- --- --- --- --- End of period............................ 15 14 15 13 12 === === === === === Animal hospitals: Beginning of period...................... 209 194 194 168 160 Acquisitions............................. 18 16 24 39 11 Relocated into hospitals operated by us.. (10) (5) (8) (11) (1) Sold or closed........................... (3) -- (1) (2) (2) --- --- --- --- --- End of period............................ 214 205 209 194 168 === === === === === Owned at end of period................... 161 151 157 149 145 Managed at end of period................. 53 54 52 45 23
23 We were a publicly traded company from 1991 until September 2000, when we completed a recapitalization with an entity controlled by Leonard Green & Partners. The recapitalization was completed in a financial market which we believed did not adequately value companies of our size and type because the market's focus and attention was largely on technology and internet based companies. Our subsequent performance and the changing market dynamics support the determination by our Board of Directors to re-enter the public sector. The recapitalization was financed by: . the contribution of $155.0 million by a group of investors led by Leonard Green & Partners, . borrowings of $250.0 million under a $300.0 million credit facility, . the issuance of an aggregate of $100.0 million of senior notes, and . the issuance of an aggregate of $20.0 million of senior subordinated notes. Upon consummation of this offering, the parties have agreed to terminate non-competition agreements with four members of our senior management and the management services agreement with Leonard Green & Partners. In connection with the termination of these agreements, we will take a non-cash charge of approximately $10.4 million and a cash charge of $8.0 million. In addition, we are considering terminating a portion of our collar agreement in the fourth quarter of 2001 which may result in a cash charge of approximately $2.5 million. For a description of these agreements, see "Related Party Transactions--Non-Competition Agreements," "Related Party Transactions--Management Services Agreement" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--New Accounting Pronouncements--Derivatives--Our Collar Agreement." Basis of Reporting General We report our operations in three segments: laboratory, animal hospital and corporate. Revenue Recognition Revenue is recognized only after the following criteria are met: . there exists adequate evidence of the transaction; . delivery of goods has occurred or services have been rendered; and . the price is not contingent on future activity and collectibility is reasonably assured. Laboratory Revenue A portion of laboratory revenue is intercompany revenue that was generated by providing laboratory services to our animal hospitals. Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude estimated laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates for those laboratories we did not own for the entire periods presented. We estimate our laboratory revenue of acquired laboratories for the 12 months subsequent to the respective acquisition dates based on pre-acquisition historical laboratory revenue information provided to us by the seller. We then increase that amount by our laboratory internal revenue growth rate for the fiscal year prior to acquisition. To determine our laboratory internal revenue growth rate for the applicable period, we compare our laboratory revenue net of estimated laboratory revenue of acquired laboratories to our laboratory revenue as reported for the prior comparable period. We believe this fairly presents our laboratory internal revenue growth for the periods presented, although our calculation may not be comparable to similarly titled measures reported by other companies. Animal Hospital Revenue Animal hospital revenue is comprised of revenue of the animal hospitals that we own and the management fees of animal hospitals that we manage. Certain states prohibit business corporations from providing or holding themselves out as providers of veterinary medical care. In these states, we enter into arrangements with a 24 veterinary medical group that provides all veterinary medical care, although we manage the administrative functions associated with the operation of the animal hospitals. In return for our services, the veterinary medical group pays us a management fee. We do not consolidate the operations of animal hospitals that we manage. However, for purposes of calculating same-facility revenue growth in our animal hospitals, we use the combined revenue of animal hospitals owned and managed for the entire periods presented. Other Revenue Other revenue is comprised of consulting fees from Heinz Pet Products relating to the marketing of its proprietary pet food. Direct Costs Laboratory direct costs are comprised of all costs of laboratory services, including salaries of veterinarians, technicians and other non-administrative, laboratory-based personnel, facilities rent, occupancy costs and supply costs. Animal hospital direct costs are comprised of all costs of services and products at the hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel employed by the hospitals we own, facilities rent, occupancy costs, supply costs and costs of goods sold associated with the retail sales of pet food and pet supplies. Selling, General and Administrative Our selling, general and administrative expense is divided between our laboratory, animal hospital and corporate segments. Laboratory selling, general and administrative expense consists primarily of sales and administrative personnel and selling, marketing and promotional expense. Animal hospital selling, general and administrative expense consists primarily of field management and administrative personnel, recruiting and marketing expense. Corporate selling, general and administrative expense consists of administrative expense at our headquarters, including the salaries of corporate officers, professional expense, rent and occupancy costs. EBITDA and Adjusted EBITDA EBITDA is operating income (loss) before depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude management fees paid pursuant to our management services agreement, recapitalization costs, Year 2000 remediation expense and other non-cash operating items. Corporate EBITDA is comprised of other revenue less corporate selling, general and administrative expense. EBITDA and Adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. Although EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity, we understand that EBITDA and Adjusted EBITDA are widely used by financial analysts as a measure of financial performance. Our calculation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. 25 Results of Operations The following table sets forth components of our statements of operations data expressed as a percentage of revenue for the indicated periods:
Nine Months Ended September 30, Year Ended December 31, --------------- ---------------------- 2001 2000 2000 1999 1998 ----- ----- ----- ----- ----- Revenue: Laboratory............................. 33.4% 33.7% 33.6% 32.2% 32.0% Animal hospital........................ 68.0 67.8 67.8 68.0 68.3 Other.................................. 0.5 0.2 0.3 1.6 1.8 Intercompany........................... (1.9) (1.7) (1.7) (1.8) (2.1) ----- ----- ----- ----- ----- Total revenue...................... 100.0 100.0 100.0 100.0 100.0 Direct costs.............................. 69.4 71.0 71.8 72.5 74.5 Selling, general and administrative....... 7.9 7.6 7.6 7.4 7.0 Depreciation and amortization............. 6.3 4.9 5.4 5.1 4.7 Recapitalization costs.................... -- 13.0 9.8 -- -- Year 2000 remediation expense............. -- -- -- 0.9 -- Other non-cash operating items............ 3.0 -- -- (0.6) -- ----- ----- ----- ----- ----- Operating income....................... 13.4 3.5 5.4 14.7 13.8 Interest expense, net..................... 10.6 3.1 5.6 2.9 3.1 Other (income) expense.................... -- (1.2) 0.5 -- -- Minority interest......................... 0.4 0.3 0.3 0.3 0.3 Income tax provision...................... 2.2 1.0 0.6 4.5 4.6 Extraordinary loss on early extinguishment -- 1.0 0.8 -- -- ----- ----- ----- ----- ----- Net income (loss).................. 0.2% (0.7)% (2.4)% 7.0% 5.8% ===== ===== ===== ===== =====
Nine Months Ended September 30, 2001 and 2000 Revenue The following table summarizes our revenue for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
Percentage 2001 2000 Change -------- -------- ---------- Laboratory................... $101,855 $ 90,831 12.1% Animal hospital.............. 207,665 182,716 13.7% Other........................ 1,500 425 Intercompany................. (5,655) (4,691) -------- -------- Total revenue............. $305,365 $269,281 13.4% ======== ========
Laboratory Revenue Laboratory revenue increased $11.0 million, or 12.1%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase primarily was due to internal growth of 11.5%, which resulted from an increase in the overall number of tests and requisitions and an increase in the average revenue per requisition. These increases primarily were due to the continued emphasis on selling our pet health and wellness programs and the implementation of a price increase for most tests in February 2001. 26 Animal Hospital Revenue The following table summarizes our animal hospital revenue as reported and the combined revenue of animal hospitals that we owned and managed had we consolidated the operating results of the animal hospitals we manage into our operating results for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
Percentage 2001 2000 Change -------- -------- ---------- Animal hospital revenue as reported........... $207,665 $182,716 13.7% Less: Management fees paid to us by veterinary medical groups.............................. (28,270) (23,965) Add: Revenue of animal hospitals managed...... 52,580 45,745 -------- -------- Combined revenue of animal hospitals owned and managed.............................. $231,975 $204,496 13.4% ======== ========
Animal hospital revenue as reported increased $24.9 million, or 13.7%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in animal hospital revenue as reported during this period resulted primarily from the net addition of nine animal hospitals that we owned or managed subsequent to September 30, 2000. The increase also was due to same-facility revenue growth of 4.4% for the nine months ended September 30, 2001. Same-facility revenue growth primarily was due to an increase in the average amount spent per visit and revenue generated by customers referred from our relocated animal hospitals. Other Revenue Other revenue increased $1.1 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Our consulting agreement with Heinz Pet Products expired February 1, 2000. Under this agreement, we had received monthly consulting fees of $425,000. We entered into a new agreement with Heinz Pet Products effective October 1, 2000, which provides for monthly consulting fees of $167,000 over a term of 24 months. Consequently, for the nine months ended September 30, 2001, other revenue includes consulting fees for nine months as compared to one month for the period ended September 30, 2000. Direct Costs The following table summarizes our direct costs and our direct costs as a percentage of applicable revenue for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
2001 2000 ---------------- ---------------- % of % of Percentage $ Revenue $ Revenue Change -------- ------- -------- ------- ---------- Laboratory............ $ 60,154 59.1% $ 54,348 59.8% 10.7% Animal hospital....... 157,543 75.9% 141,612 77.5% 11.2% Other................. -- -- Intercompany.......... (5,655) (4,691) 20.5% -------- -------- Total direct costs. $212,042 69.4% $191,269 71.0% 10.9% ======== ========
Laboratory Direct Costs Laboratory direct costs increased $5.8 million, or 10.7%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Laboratory direct costs as a percentage of laboratory 27 revenue decreased to 59.1% for the nine months ended September 30, 2001 from 59.8% for the nine months ended September 30, 2000. The decrease in laboratory direct costs as a percentage of laboratory revenue during this period primarily was attributable to the increase in laboratory revenue combined with the operating leverage associated with the laboratory business, as a majority of the costs associated with the laboratory business are relatively fixed and the remaining costs do not increase proportionately with an increase in volume of tests. Animal Hospital Direct Costs The following table summarizes our animal hospital direct costs as reported and the combined direct costs of animal hospitals that we owned and managed had we consolidated the operating results of the animal hospitals we manage into our operating results for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
2001 2000 ----------------- ----------------- % of % of Combined Combined Percentage $ Revenue $ Revenue Change -------- -------- -------- -------- ---------- Animal hospital direct costs as reported..................... $157,543 75.9% $141,612 77.5% 11.2% Add: Direct costs of animal hospitals managed............ 52,580 45,745 Less: Management fees charged by us to veterinary medical groups....................... (28,270) (23,965) -------- -------- Combined direct costs of animal hospitals owned and managed.. $181,853 78.4% $163,392 79.9% 11.3% ======== ========
Animal hospital direct costs as reported increased $15.9 million, or 11.2%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Animal hospital direct costs as a percentage of animal hospital revenue decreased to 75.9% for the nine months ended September 30, 2001 from 77.5% for the nine months ended September 30, 2000. The decrease in animal hospital direct costs as a percentage of animal hospital revenue during this period primarily was attributable to the increase in animal hospital revenue combined with the operating leverage associated with the animal hospital business, as most of the costs associated with this business do not increase proportionately with increases in the volume of services rendered. Selling, General and Administrative The following table summarizes our selling, general and administrative expense and our selling, general and administrative expense as a percentage of applicable revenue for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
2001 2000 -------------- -------------- % of % of Percentage $ Revenue $ Revenue Change ------- ------- ------- ------- ---------- Laboratory.................... $ 6,437 6.3% $ 5,988 6.6% 7.5% Animal hospital............... 6,963 3.4% 6,817 3.7% 2.1% Corporate..................... 10,766 3.5% 7,660 2.8% 40.5% ------- ------- Total selling, general and administrative........... $24,166 7.9% $20,465 7.6% 18.1% ======= =======
Laboratory Selling, General and Administrative Laboratory selling, general and administrative expense increased $449,000, or 7.5%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase primarily was 28 due to an increase in commission payments to sales representatives, which was caused by an increase in sales. Laboratory selling, general and administrative expense as a percentage of laboratory revenue was 6.3% for the nine months ended September 30, 2001, compared to 6.6% for the nine months ended September 30, 2000. Animal Hospital Selling, General and Administrative Animal hospital selling, general and administrative expense increased $146,000, or 2.1%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in animal hospital selling, general and administrative expense primarily was due to cost of living increases in salaries. Animal hospital selling, general and administrative expense as a percentage of animal hospital revenue was 3.4% for the nine months ended September 30, 2001 compared to 3.7% for the nine months ended September 30, 2000. The decrease in animal hospital selling, general and administrative expense as a percentage of animal hospital revenue primarily was due to operating efficiencies associated with our infrastructure. Corporate Selling, General and Administrative Corporate selling, general and administrative expense increased $3.1 million, or 40.5%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. Corporate selling, general and administrative expense as a percentage of total revenue was 3.5% for the nine months ended September 30, 2001 compared to 2.8% for the nine months ended September 30, 2000. The increase in corporate selling, general and administrative expense primarily was the result of management fees of $1.9 million for the nine months ended September 30, 2001 paid pursuant to our management services agreement, dated as of September 20, 2000. For a description of the management services agreement, see "Related Party Transactions--Management Services Agreement." Excluding the management fees, corporate selling, general and administrative expense increased 16.3% for the nine months ended September 30, 2001 compared to the comparable prior period and represented 2.9% of total revenue for the nine months ended September 30, 2001. Adjusted EBITDA The following table summarizes our Adjusted EBITDA and our Adjusted EBITDA as a percentage of applicable revenue for the nine months ended September 30, 2001 and 2000 (dollars in thousands, unaudited):
2001 2000 --------------- --------------- % of % of Percentage $ Revenue $ Revenue Change ------- ------- ------- ------- ---------- Laboratory............... $35,264 34.6% $30,495 33.6% 15.6% Animal hospital.......... 43,159 20.8% 34,287 18.8% 25.9% Corporate................ (7,406) (7,235) ------- ------- Total Adjusted EBITDA. $71,017 23.3% $57,547 21.4% 23.4% ======= =======
Depreciation and Amortization Depreciation and amortization expense increased $5.9 million, or 44.9%, for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in depreciation and amortization expense primarily was due to the amortization over a three-year period of $15.6 million paid to our executives pursuant to non-competition agreements entered into in September 2000, the purchase of property and equipment and the acquisition of animal hospitals. 29 Other Non-Cash Operating Items Other non-cash operating items for the nine months ended September 30, 2001 consisted of an $8.7 million write-down and loss on sale of assets and $382,000 of stock-based compensation expense. The write-down of assets was attributable to the relocation of five of our animal hospitals into existing animal hospitals we operated, the determination that goodwill was impaired at one of our existing animal hospitals and the write-down of real property available for sale to fair market value. The stock-based compensation expense resulted from the effect of the increase in the fair market value of our common stock on our stock options with variable accounting treatment during the nine months ended September 30, 2001. Net Interest Expense Net interest expense increased $24.0 million, or 284.1%, to $32.4 million for the nine months ended September 30, 2001 from $8.4 million for the nine months ended September 30, 2000. The increase in net interest expense primarily was due to debt we incurred in connection with our recapitalization. Other (Income) Expense Other expense was $233,000 for the nine months ended September 30, 2001 and consisted of a non-cash loss on a hedging instrument, pertaining to the changes in the time value of our collar agreement. Other income was $3.2 million for the nine months ended September 30, 2000 and consisted of the gain on sale of our investment in Veterinary Pet Insurance, Inc. Income Taxes Provision for income taxes was $6.7 million and $2.7 million for the nine months ended September 30, 2001 and 2000. The effective income tax rate for the nine months ended September 30, 2001 was higher than the statutory rate primarily due to the non-deductibility for income tax purposes of the amortization of a portion of goodwill, the write-down of assets and the stock-based compensation expense. Minority Interest Minority interest in income of our consolidated subsidiaries was $1.1 million and $808,000 for the nine months ended September 30, 2001 and 2000, respectively. Minority interest in income represents our partners' proportionate share of net income generated by our subsidiaries that we do not wholly own. Increase in Carrying Amount of Redeemable Preferred Stock The holders of our series A preferred stock and our series B preferred stock are entitled to receive dividends at a rate of 14% and 12%, respectively. We are not required to pay these dividends in cash. The dividends that are not paid in cash compound quarterly. The dividends earned in the nine months ended September 30, 2001 have been added to the liquidation preference of the preferred stock. 30 Years Ended December 31, 2000, 1999 and 1998 Revenue The following table summarizes our revenue for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
Percentage Change ----------------- 2000 1999 1998 2000 1999 -------- -------- -------- ----- ----- Laboratory....... $119,300 $103,282 $ 89,896 15.5% 14.9% Animal hospital.. 240,624 217,988 191,888 10.4% 13.6% Other............ 925 5,100 5,100 Intercompany..... (6,162) (5,810) (5,845) -------- -------- -------- Total revenue. $354,687 $320,560 $281,039 10.6% 14.1% ======== ======== ========
Laboratory Revenue Laboratory revenue increased $16.0 million, or 15.5%, for the year ended December 31, 2000 compared to the year ended December 31, 1999, which increased $13.4 million, or 14.9%, compared to the year ended December 31, 1998. The increase in laboratory revenue for the year ended December 31, 2000 compared to the comparable prior period primarily was due to internal growth of 12.6%. This internal laboratory revenue growth resulted primarily from an increase in the overall number of tests and requisitions and an increase in the average revenue per requisition. These increases primarily were due to the development and sale of new programs, the implementation of a price increase for most tests in February 2000 and the continued growth of our Test Express business. The increase in laboratory revenue for the year ended December 31, 1999 compared to the comparable prior period primarily was due to internal growth of 9.1%. This internal laboratory revenue growth resulted primarily from an increase in the overall number of tests due in part to the development of our Test Express business. Animal Hospital Revenue The following table summarizes our animal hospital revenue as reported and the combined revenue of animal hospitals that we owned and managed had we consolidated the operating results of the animal hospitals we manage into our operating results for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
Percentage Change ----------------- 2000 1999 1998 2000 1999 -------- -------- -------- ----- ----- Animal hospital revenue as reported........... $240,624 $217,988 $191,888 10.4% 13.6% Less: Management fees paid to us by veterinary medical groups.............................. (31,133) (30,202) (19,325) Add: Revenue of animal hospitals managed...... 60,380 42,829 24,914 -------- -------- -------- Combined revenue of animal hospitals owned and managed.......................... $269,871 $230,615 $197,477 17.0% 16.8% ======== ======== ========
Animal hospital revenue increased $22.6 million, or 10.4%, for the year ended December 31, 2000 compared to the year ended December 31, 1999, which increased $26.1 million, or 13.6%, compared to the year ended December 31, 1998. The increase in animal hospital revenue for the year ended December 31, 2000 as compared to the comparable prior period resulted primarily from the net addition of 15 animal hospitals that we owned or managed subsequent to December 31, 1999. Similarly, the increase for the year ended December 31, 1999 as compared to the comparable prior period resulted primarily from the net addition of 26 animal hospitals that we owned or managed subsequent to December 31, 1998. The increase in animal hospital revenue for the year ended December 31, 2000 also was due to same-facility revenue growth of 7.0%, and the increase in animal 31 hospital revenue for the year ended December 31, 1999 also was due to same-facility revenue growth of 2.6%. Same-facility revenue growth in both years primarily was due to increases in the average amount spent per visit and revenue generated by customers referred from our relocated animal hospitals. Other Revenue Other revenue decreased $4.2 million for the year ended December 31, 2000 compared to each of the years ended December 31, 1999 and 1998. Our consulting agreement with Heinz Pet Products expired February 1, 2000. Under this agreement we had received monthly consulting fees of $425,000. We entered into a new agreement with Heinz Pet Products effective October 1, 2000 which provides for monthly consulting fees of $167,000 over a term of 24 months. Consequently, for the year ended December 31, 2000, other revenue includes consulting fees for an aggregate of four months as compared to the entire periods in each of the years ended December 31, 1999 and 1998. Direct Costs The following table summarizes our direct costs and our direct costs as a percentage of applicable revenue for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998 Percentage Change ----------------- ----------------- ----------------- ----------------- % of % of % of $ Revenue $ Revenue $ Revenue 2000 1999 -------- ------- -------- ------- -------- ------- ----- ------- Laboratory............ $ 72,559 60.8% $ 64,234 62.2% $ 60,206 67.0% 13.0% 6.7% Animal hospital....... 188,390 78.3% 174,069 79.9% 155,019 80.8% 8.2% 12.3% Other................. -- -- -- Intercompany.......... (6,162) (5,810) (5,845) 6.1% (0.6)% -------- -------- -------- Total direct costs. $254,787 71.8% $232,493 72.5% $209,380 74.5% 9.6% 11.0% ======== ======== ========
Laboratory Direct Costs Laboratory direct costs increased $8.3 million, or 13.0%, for the year ended December 31, 2000 compared to the year ended December 31, 1999, which increased $4.0 million, or 6.7%, compared to the year ended December 31, 1998. Laboratory direct costs as a percentage of laboratory revenue decreased to 60.8% for the year ended December 31, 2000 from 62.2% for the year ended December 31, 1999, which decreased from 67.0% for the year ended December 31, 1998. The decreases in laboratory direct costs as a percentage of laboratory revenue during these periods primarily were attributable to increases in laboratory revenue combined with operating leverage associated with our laboratory business. Animal Hospital Direct Costs The following table summarizes our animal hospital direct costs as reported and the combined direct costs of animal hospitals owned and managed had we consolidated the operating results of the animal hospitals we manage into our operating results for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998 Percentage Change ------------------ ------------------ ------------------ ----------------- % of % of % of Combined Combined Combined $ Revenue $ Revenue $ Revenue 2000 1999 -------- -------- -------- -------- -------- -------- ------ ------- Animal hospital direct costs as reported $188,390 78.3% $174,069 79.9% $155,019 80.8% 8.2% 12.3% Add: Direct costs of animal hospitals managed...................... 60,380 42,829 24,914 Less: Management fees charged by us to veterinary medical groups................................. (31,133) (30,202) (19,325) -------- -------- -------- Combined direct costs of animal hospitals owned and managed............ $217,637 80.6% $186,696 81.0% $160,608 81.3% 16.6% 16.2% ======== ======== ========
32 Animal hospital direct costs increased $14.3 million, or 8.2%, for the year ended December 31, 2000 compared to the year ended December 31, 1999, which increased $19.1 million, or 12.3%, compared to the year ended December 31, 1998. Animal hospital direct costs as a percentage of animal hospital revenue decreased to 78.3% for the year ended December 31, 2000 from 79.9% for the year ended December 31, 1999, which decreased from 80.8% for the year ended December 31, 1998. The decreases in animal hospital direct costs as a percentage of animal hospital revenue during these periods primarily were due to a reduction in some of our obligations to the animal hospitals we manage which reduced our costs, together with a corresponding reduction in our management fees. These decreases also were attributable to the increase in revenue combined with the operating leverage associated with the animal hospital business, as most of the costs associated with this business do not increase proportionately with increases in the volume of services rendered. Selling, General and Administrative The following table summarizes our selling, general and our administrative expense and expense as a percentage of applicable revenue for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
Percentage 2000 1999 1998 Change --------------- --------------- --------------- ------------ % of % of % of $ Revenue $ Revenue $ Revenue 2000 1999 ------- ------- ------- ------- ------- ------- ------ ----- Laboratory.................... $ 7,914 6.6% $ 6,775 6.6% $ 5,475 6.1% 16.8% 23.7% Animal hospital............... 9,249 3.8% 6,682 3.1% 4,894 2.6% 38.4% 36.5% Corporate..................... 9,831 2.8% 10,165 3.2% 9,324 3.3% (3.3)% 9.0% ------- ------- ------- Total selling, general and administrative........... $26,994 7.6% $23,622 7.4% $19,693 7.0% 14.3% 20.0% ======= ======= =======
Laboratory Selling, General and Administrative Laboratory selling, general and administrative expense for the year ended December 31, 2000 increased $1.1 million, or 16.8%, compared to the year ended December 31, 1999, which increased $1.3 million, or 23.7%, compared to the year ended December 31, 1998. The increase in laboratory selling, general and administrative expense for the year ended December 31, 2000 compared to the comparable prior period primarily was due to an increase in commission payments to sales representatives, which was caused by an increase in sales, and salaries attributable to new sales representatives. The increase in laboratory selling, general and administrative expense for the year ended December 31, 1999 compared to the comparable prior period primarily was due to centralizing certain administrative functions that previously were handled by and charged as a direct cost to the individual laboratories. Animal Hospital Selling, General and Administrative Animal hospital selling, general and administrative expense for the year ended December 31, 2000 increased $2.6 million, or 38.4%, compared to the year ended December 31, 1999, which increased $1.8 million, or 36.5%, compared to the year ended December 31, 1998. The increases in animal hospital selling, general and administrative expense for the years ended December 31, 2000 and 1999 primarily were attributable to salaries associated with new personnel hired in connection with the expansion of our management and administrative infrastructure to support the additional number of animal hospitals we owned and managed. The increases in animal hospital selling, general and administrative expense as a percentage of animal hospital revenue in the years ended December 31, 2000 and 1999 primarily were due to increases in the expense associated with our management and administrative infrastructure without a proportionate increase in animal hospital revenue. Corporate Selling, General and Administrative Corporate selling, general and administrative expense for the year ended December 31, 2000 decreased $334,000, or 3.3%, compared to the year ended December 31, 1999, which increased $841,000, or 9.0%, 33 compared to the year ended December 31, 1998. The decrease in corporate selling, general and administrative expense for the year ended December 31, 2000 compared to the comparable prior period primarily due to efficiencies realized in our information systems, accounting and finance departments that resulted from our systems upgrade. The increase in corporate selling, general and administrative expense for the year ended December 31, 1999 compared to the comparable prior period primarily was due to the expansion of our information systems and accounting departments. Adjusted EBITDA The following table summarizes our Adjusted EBITDA and our Adjusted EBITDA as a percentage of applicable revenue of the years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
Percentage 2000 1999 1998 Change ---------------- ---------------- ---------------- ----------- % of % of % of $ Revenue $ Revenue $ Revenue 2000 1999 ------- ------- ------- ------- ------- ------- ----- ----- Laboratory............... $38,827 32.5% $32,273 31.2% $24,215 26.9% 20.3% 33.3% Animal hospital.......... 42,985 17.9% 37,237 17.1% 31,975 16.7% 15.4% 16.5% Corporate................ (8,286) (5,065) (4,224) ------- ------- ------- Total Adjusted EBITDA. $73,526 20.7% $64,445 20.1% $51,966 18.5% 14.1% 24.0% ======= ======= =======
Depreciation and Amortization Depreciation and amortization expense increased $2.4 million, or 14.7%, for the year ended December 31, 2000 compared to the year ended December 31, 1999, which increased $3.3 million, or 25.4%, compared to the year ended December 31, 1998. The increases in depreciation and amortization expense primarily were due to the amortization over a three-year period of $15.6 million paid to our executives pursuant to non-competition agreements entered into in September 2000, the purchase of property and equipment and the acquisition of animal hospitals and diagnostic laboratories. Recapitalization Costs We incurred $34.8 million of recapitalization costs for the year ended December 31, 2000 pertaining to our recapitalization in September 2000. These costs consisted of $24.1 million associated with the buy-out of stock options held by employees, $1.2 million paid to our employees for services rendered in connection with our recapitalization, $7.6 million of professional fees and $1.9 million of other expenses. Other Non-Cash Operating Items Other non-cash operating items for the year ended December 31, 1999 consisted of a $1.9 million reversal of restructuring charges pertaining to our 1996 and 1997 restructuring plans. Net Interest Expense Net interest expense increased $10.4 million, or 110.5% to $19.9 million for the year ended December 31, 2000 from $9.4 million for the year ended December 31, 1999, which represented an increase of $617,000, or 7.0%, from $8.8 million for the year ended December 31, 1998. The increase in net interest expense in 2000 primarily was due to debt we incurred in connection with the recapitalization. Other (Income) Expense Other (income) expense was $1.8 million for the year ended December 31, 2000, consisting of a $3.2 million gain on sale of our investment in Veterinary Pet Insurance, Inc. and a $5.0 million loss resulting from the write-down of our investment in Zoasis.com, Inc. 34 Income Taxes Provision for income taxes was $2.2 million, $14.4 million and $13.0 million for the years ended December 31, 2000, 1999 and 1998. Our effective income tax rate for each year was higher than the statutory rate primarily due to the non-deductibility for income tax purposes of the amortization of a portion of goodwill. In 2000, our effective income tax rate also was impacted by the change in valuation allowance associated with our recapitalization and our write-down of the Zoasis investment. 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, we recorded a deferred tax benefit of $2.1 million in 1999. Minority Interest Minority interest in income of the consolidated subsidiaries was $1.1 million, $850,000 and $780,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Minority interest in income represents our partners' proportionate share of net income generated by our subsidiaries that we do not wholly own. Increase in Carrying Amount of Redeemable Preferred Stock The holders of our series A preferred stock and our series B preferred stock are entitled to receive dividends at a rate of 14% and 12%, respectively. We are not required to pay these dividends in cash. The dividends that are not paid in cash compound quarterly. The dividends earned from September 20, 2000 through December 31, 2000 were added to the liquidation preference of the preferred stock. Quarterly Results The following tables set forth selected unaudited quarterly results for the eleven quarters commencing January 1, 1999 and ending September 30, 2001. The quarterly financial data as of each period presented below have been derived from our unaudited consolidated financial statements for those periods. Results for these periods are not necessarily indicative of results for the full year. The quarterly financial data should be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
2001 Quarter Ended, 2000 Quarter Ended, 1999 Quarter Ended, ----------------------------- -------------------------------------- ------------------------------------- Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 -------- -------- ------- ------- -------- ------- ------- ------- -------- ------- ------- (dollars in thousands, except per share amounts, unaudited) Revenue: Laboratory..... $ 33,471 $ 35,707 $32,677 $28,469 $ 30,105 $31,921 $28,805 $24,846 $25,591 $27,276 $25,569 Animal hospital 70,531 72,780 64,354 57,908 63,449 63,472 55,795 52,228 58,150 59,159 48,451 Other.......... 500 500 500 500 -- -- 425 1,275 1,275 1,275 1,275 Intercompany... (1, 866) (1,938) (1,851) (1,471) (1,558) (1,459) (1,674) (1,381) (1,426) (1,546) (1,457) -------- -------- ------- ------- -------- ------- ------- ------- ------- ------- ------- Total revenue... 102,636 107,049 95,680 85,406 91,996 93,934 83,351 76,968 83,590 86,164 73,838 Adjusted EBITDA. 24,507 27,186 19,324 15,986 20,334 21,980 15,226 13,794 17,663 19,949 13,039 Operating income (loss).. 17,547 11,055 12,307 9,681 (19,075) 17,524 11,075 10,512 12,414 14,915 9,175 Net income (loss)......... 3,547 (3,158) 55 (6,526) (16,713) 8,436 6,392 4,305 7,462 6,890 3,700 Diluted EPS..... $ (0.10) $ (0.48) $ (0.28) $ (0.65) $ (0.06) $ 0.02 $ 0.02 $ 0.01 $ 0.02 $ 0.02 $ 0.01 2001 Quarter Ended, 2000 Quarter Ended, 1999 Quarter Ended, ----------------------------- -------------------------------------- ------------------------------------- Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 Mar. 31 -------- -------- ------- ------- -------- ------- ------- ------- -------- ------- ------- Revenue: Laboratory..... 32.6% 33.3% 34.1% 33.3% 32.7% 34.0% 34.6% 32.2% 30.6% 31.6% 34.7% Animal hospital 68.7% 68.0% 67.3% 67.8% 69.0% 67.6% 66.9% 67.9% 69.6% 68.7% 65.6% Other.......... 0.5% 0.5% 0.5% 0.6% -- -- 0.5% 1.7% 1.5% 1.5% 1.7% Intercompany... (1.8)% (1.8)% (1.9)% (1.7)% (1.7)% (1.6)% (2.0)% (1.8)% (1.7)% (1.8)% (2.0)% -------- -------- ------- ------- -------- ------- ------- ------- ------- ------- ------- Total revenue... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Adjusted EBITDA. 23.9% 25.4% 20.2% 18.7% 22.1% 23.4% 18.3% 17.9% 21.1% 23.2% 17.7% Operating income (loss).. 17.1% 10.3% 12.9% 11.3% (20.7)% 18.7% 13.3% 13.7% 14.9% 17.3% 12.4% Net income (loss)......... 3.5% (3.0)% 0.1% (7.6)% (18.2)% 9.0% 7.7% 5.6% 8.9% 8.0% 5.0%
35 Although not readily detectable because of the impact of acquisitions, our operations are subject to seasonal fluctuation. In particular, our revenue historically has been greater in the second and third quarters than in the first and fourth quarters. The demand for our veterinary services are significantly higher during warmer months because pets spend a greater amount of time outdoors, where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of infestation of fleas, heartworms and ticks and the number of daylight hours. A substantial portion of our costs are fixed and do not vary with the level of demand. Consequently, our EBITDA, Adjusted EBITDA and operating income, as well as our EBITDA, Adjusted EBITDA and operating margins, generally have been higher for the second and third quarters than that experienced in the first and fourth quarters. Liquidity and Capital Resources Net cash provided by operations for the nine months ended September 30, 2001 and 2000 was $49.3 million and $47.0 million, and for the years ended December 31, 2000, 1999 and 1998 was $60.1 million, $38.5 million and $27.1 million. The increases are primarily attributable to increases in revenue and operating margins. Net cash used by investing activities for the nine months ended September 30, 2001 and 2000 was $30.3 million and $29.1 million, and for the years ended December 31, 2000, 1999 and 1998 was $47.7 million, $13.7 million and $19.5 million. In the nine months ended September 30, 2001 and 2000, and in the years ended December 31, 2000, 1999 and 1998, we used cash of $10.6 million, $13.7 million, $22.6 million, $21.8 million and $11.7 million for property and equipment additions. In these same periods, we used $20.6 million to acquire 18 animal hospitals, $9.0 million to acquire 16 hospitals, $18.2 million to acquire 24 animal hospitals and one laboratory, $16.1 million to acquire 39 animal hospitals and two laboratories and $17.1 million to acquire 11 animal hospitals and one laboratory. In the nine months ended September 30, 2001, we did not purchase any real estate in connection with our acquisitions and in the years ended December 31, 2000, 1999 and 1998, we used $1.8 million, $4.2 million and $4.3 million to purchase real estate in connection with our acquisitions. In connection with the recapitalization transaction, we received $149.2 million from the issuance of preferred stock, $14.4 million from the issuance of common stock, $1.1 million from the issuance of stock warrants and $356.7 million from the issuance of long-term debt. These proceeds were primarily used to repay long-term obligations in the amount of $172.9 million, to repurchase common stock in the amount of $314.5 million and to make non-competition payments in the aggregate amount of $15.6 million to four of our executive officers including: Robert L. Antin, our Chief Executive Officer, President and founder; Arthur J. Antin, our Chief Operating Officer, Senior Vice President and founder; Neil Tauber, our Senior Vice President of Development and founder; and Tomas W. Fuller, our Chief Financial Officer. For a description of these non-competition agreements, see "Related Party Transactions--Non-Competition Agreements." For the year ended December 31, 1999 and 1998, cash used in financing activities was $23.1 million and $18.6 million in each year primarily for repayment of long term debt. At September 30, 2001, we had cash and cash equivalents of $23.6 million and indebtedness of $371.4 million. The aggregate maturities of principal of our debt obligations for 2001 is $5.8 million. We intend to continue our growth through the selective acquisition of animal hospitals primarily for cash. We anticipate acquiring additional animal hospitals in 2001. As of September 30, 2001, in accordance with specified covenants in our credit facility, we anticipate spending $2.6 million for additional acquisitions in 2001. In the fourth quarter of 2001, we will pay approximately $422,000 related to acquisition costs on completed acquisitions and we expect to spend approximately $5.0 million for additions to property and equipment. We continue to examine acquisition opportunities in the laboratory field, which may impose additional cash requirements. 36 We review the financial performance of our animal hospitals each year in conjunction with our annual budgeting process, or if there occur unfavorable events in regard to a particular facility. The review process involves an assessment of both financial performance and relevant operational factors including, but not limited to, staffing, capacity and local economy. The cash costs we typically incur to sell or close are not significant. However, we may incur non-cash operating costs consisting primarily of the write-down of some of our assets, including real estate, leasehold improvements and covenants not to compete, to fair market value. We believe we will be able to fund our future cash requirements for operations primarily from operating cash flows, cash on hand and, if needed, borrowings under the $50.0 million revolving credit facility, which we have not yet utilized as of September 30, 2001. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures and satisfy our scheduled principal and interest payments under debt and capital lease obligations for at least the next 12 months. However, a significant portion of our cash requirements will be determined by the pace and size of our acquisitions. For a description of the application of the proceeds from this offering and the concurrent note offering, please refer to "Use of Proceeds." Description of Indebtedness Concurrent Note Offering We anticipate that the notes to be issued in the concurrent note offering will have terms substantially similar to the terms of our senior subordinated notes. Credit Facility We, through our wholly owned subsidiary, have a $300.0 million credit facility, dated as of September 20, 2000, with the lenders party thereto, Goldman Sachs Credit Partners, L.P., as syndication agent, and Wells Fargo Bank, N.A., as administrative agent. Structure. The credit facility consists of a $50.0 million revolving facility, a $50.0 million term loan A facility and a $200.0 million term loan B facility. Under the revolving facility, up to $50.0 million may be used and the lesser of (1) $5.0 million, or (2) the aggregate unused amount of the revolving facility then in effect may be borrowed under a "swing line" facility on same-day notice to the lenders. As of the date of this prospectus, we have no borrowings under the revolving facility. Maturity. We are required to repay the amounts borrowed under the term loan A facility in quarterly installments. Quarterly payments equal $250,000 per quarter in year one, $1.5 million per quarter in year two, $1.75 million per quarter in year three, $2 million per quarter in year four, $2.75 million per quarter in year five and $4.25 million per quarter in year six. The term loan A facility matures on September 20, 2006. We are required to repay the amounts borrowed under the term loan B facility in quarterly installments. Quarterly payments equal $625,000 per quarter in years one through six and $23.125 million per quarter in years seven and eight. The term loan B facility matures on September 20, 2008. The entire outstanding principal amount under the revolving facility is due on September 20, 2006. Mandatory prepayments under the term loan facilities are applied pro rata to each required quarterly payment, subject to a lender's ability to waive a term loan B facility payment and have it applied to other facilities. The term facilities and the revolving facility may be voluntarily prepaid in whole or in part without premium or penalty. Since September 20, 2000, quarterly payments have reduced the outstanding principal amount under the credit facility to $49.0 million for the term loan A facility and $197.5 million for the term loan B facility. 37 Upon the consummation of this offering and the concurrent note offering we intend to repay approximately $104.2 million of borrowings under our credit facility. Guarantees and Security. Our obligations under the credit facility are guaranteed by us and our wholly owned, consolidated subsidiaries. The borrowings under the credit facility and the subsidiary guarantees are secured by substantially all of our consolidated assets. In addition, borrowings under the credit facility are secured by a pledge of substantially all of the capital stock, or similar equity interests, of our wholly owned, consolidated subsidiaries. Interest Rate. In general, borrowings under the credit facility bear interest based, at our option, on either: . the base rate (as defined below) plus a margin ranging from 1.00% to 2.25% per annum for the term loan A facility and the revolving facility and a margin of 2.75% per annum for the term loan B facility; or . the adjusted eurodollar rate (as defined below) plus a margin ranging from 2.00% to 3.25% per annum for the term loan A facility and the revolving facility and a margin of 3.75% per annum for the term loan B facility. The base rate is the higher of Wells Fargo's prime rate or the federal funds rate plus 0.5%. The adjusted eurodollar rate is defined as the rate per annum obtained by dividing (1) the rate of interest offered to Wells Fargo on the London interbank market by (2) a percentage equal to 100% minus the stated maximum rate of all reserve requirements applicable to any member bank of the Federal Reserve System in respect of "eurocurrency liabilities." Swing line borrowings bear interest at the base rate, plus a margin ranging from 1.00% to 2.25%. Covenants. The credit facility contains financial covenants that require us to satisfy, on a consolidated basis, specified quarterly financial tests, including: . a minimum consolidated interest expense coverage ratio; . a minimum fixed charge coverage ratio; . a maximum consolidated senior leverage ratio; and . a maximum consolidated total leverage ratio. The credit facility also contains a number of other customary covenants that, among other things, restrict our ability to: . dispose of assets; . incur additional debt; . prepay other debt, subject to specified exceptions, or amend specified debt instruments; . pay dividends; . create liens on assets; . make investments, loans or advances; . make acquisitions; . engage in mergers or consolidations; . change the business conducted by us; . engage in sale and leaseback transactions; 38 . purchase shares of the outstanding common stock of our wholly owned subsidiary; . make capital expenditures or engage in transactions with affiliates; and . otherwise undertake various corporate activities. Events of Default. The credit facility also contains customary events of default, including defaults based on: . nonpayment of principal, interest or fees when due, subject to specified grace periods; . cross-defaults to other debt; . breach of specified covenants; . material inaccuracy of representations and warranties; . specified other defaults under other credit documents; . events of bankruptcy and insolvency; . material judgments; . dissolution and liquidation; . specified occurrences relating to subordinated debt; . change in control; and . invalidity of any guaranty or security interest. Change of Control. The parties to the credit facility are currently negotiating modifications to certain covenants in the credit facility, including the change of control provision, which will take effect upon the application of the proceeds from this offering. The change of control provision, as modified, will trigger an event of default and permit the acceleration of the credit facility debt in the event that: . prior to the consummation of our proposed initial public offering, specified persons, including Leonard Green & Partners, its affiliated co-investors and management investors, collectively cease to own and control at least 51% of the voting interests of our capital stock and concurrently with or at any time after the consummation of our proposed initial public offering, specified persons, including Leonard Green & Partners, its affiliated co-investors and management investors, collectively cease to own and control at least 35% of the voting interests of our capital stock; . prior to our proposed initial public offering, another person or group has acquired 35% or more of the voting interests in our capital stock and concurrently with or at any time after our proposed initial public offering has acquired ownership of a percentage greater than that owned by Leonard Green & Partners, its affiliated co-investors and management investors collectively, of the voting interests in our capital stock; . at any time, another person or group has obtained the power to elect a majority of the members of our board of directors; . Leonard Green & Partners and its affiliated co-investors have collectively ceased to own and control a percentage of the voting interests in our capital stock greater than any other person or group; . we have ceased to beneficially own and control 100% of the capital stock of our wholly owned subsidiary; . the majority of the seats on the board of directors of our wholly-owned subsidiary cease to be occupied by persons who were either members of its board of directors on September 20, 2000 or nominated for election by its board of directors, a majority of whom were directors on September 20, 2000 or whose election or nomination for election was previously approved by a majority of such directors; or 39 . any change of control has occurred under our senior notes, our outstanding senior subordinated notes or the notes being offered in our concurrent note offering. Senior Subordinated Notes On September 20, 2000, we, through our wholly owned subsidiary, issued $20.0 million principal amount of senior subordinated notes due 2010 pursuant to an indenture of the same date with Chase Manhattan Bank and Trust Company, National Association, as trustee. Interest Rate. Interest on the senior subordinated notes is payable in cash, semi-annually in arrears, commencing March 31, 2001, at the rate of 13.5% per annum; provided, however, that if we fail timely to meet specified obligations to holders of the senior subordinated notes as set forth in an exchange and registration rights agreement dated as of September 20, 2000, interest on the senior subordinated notes may increase by up to 1% per annum. Guarantee. The senior subordinated notes are general unsecured and subordinated obligations, and are guaranteed by our wholly owned, consolidated subsidiaries, that mature on September 20, 2010. Redemption. The senior subordinated notes have specified optional redemption provisions. An aggregate principal amount of at least $5.0 million of the senior subordinated notes may be prepaid, at our option: . in whole or in part, at any time on or after September 20, 2003, initially at 106.75% of their principal amount at maturity and declining in annual increments to 101.35% of such principal amount on and after September 20, 2009, in each case plus accrued interest; provided that, so long as certain initial purchasers own a majority of the principal amount of the senior subordinated notes outstanding, our senior notes must be prepaid first; . in their entirety, concurrently with the consummation of a public offering of our common stock or a change of control, on or after September 20, 2002 and prior to September 20, 2003, at a price of 110% of the principal amount plus accrued interest; provided that, so long as certain initial purchasers own a majority of the principal amount of the senior subordinated notes outstanding, our senior notes must be prepaid first; and . up to 35% of the aggregate principal amount of the senior subordinated notes, at any time prior to September 20, 2002 from the proceeds of a public offering of our common stock at a price of 110% of the principal amount plus accrued interest; provided that, so long as certain initial purchasers own a majority of the principal amount of the senior subordinated notes outstanding, our senior notes must be prepaid first; provided further that, after giving effect to the prepayment, at least 65% of the original principal amount of the senior subordinated notes issued on September 20, 2000 remains outstanding. Covenants. The indenture contains a number of covenants, including a provision regarding a change of control. The provision defines a change of control event as . the sale, lease, transfer, conveyance or other disposition of substantially all of our assets and our subsidiaries to a person other than specified persons affiliated with Leonard Green & Partners, specified equity investors and management investors; . the adoption of a plan relating to our liquidation or dissolution or the liquidation or dissolution of our wholly owned subsidiary; . the consummation of any transaction as result of which, . prior to the senior subordinated notes being registered or exchanged for registered notes, . specified persons, including Leonard Green & Partners, its affiliated co-investors and management investors, collectively cease to own at least 51% of the voting interests in our capital stock, or 40 . Leonard Green & Partners and its affiliates cease to own voting interests of at least 25% in our capital stock, . we cease to own directly 100% of the outstanding equity of our wholly owned subsidiary, or . any person or group other than specified persons affiliated with Leonard Green & Partners, specified equity investors and management investors have acquired beneficial ownership of 35% or more of the aggregate voting interest attributable to all of our outstanding capital stock; or . the first day on which a majority of our board of directors were not directors on September 20, 2000 or whose election or nomination was previously approved by a majority of such directors. We are currently negotiating modifications to our senior subordinated notes, including the change of control provision. The change of control provision, as modified, will not be triggered by this offering. In the event of a change of control event, or in the event of specified dispositions of assets by us or our subsidiaries, the proceeds of which are neither used to repay the credit facility, the senior subordinated notes or to acquire long term assets, our wholly owned subsidiary is required to offer to repurchase the senior subordinated notes at a purchase price equal to 101% (in the case of a specified change of control) or 100% (in the case of specified disposition of assets) of the principal amount thereof, in each case plus accrued interest. The indenture governing the senior subordinated notes also contains covenants that restrict the ability of our wholly owned subsidiary and our other indirect wholly owned subsidiaries to: . incur additional debt; . incur specified liens on our assets; . pay dividends on stock or repurchase stock; . make investments; . engage in specified transactions with affiliates; . create or permit to exist specified dividend or payment restrictions affecting subsidiaries; . sell assets; . engage in specified sale/lease-back transactions; . sell all or substantially all of their assets or merge with or into other companies; and . engage in business activities unrelated to activities engaged in at the original date of issuance of the senior subordinated notes. Events of Default. The indenture governing the senior subordinated notes also provides for various defaults, including . failure to pay interest on the senior subordinated notes when due (after a specified grace period); . failure to pay any principal on the senior subordinated notes when the same becomes due at maturity upon redemption or otherwise; . failure to observe or perform any other covenant or agreement in the indenture governing the senior subordinated notes where such failure continues for thirty (30) days after actual knowledge thereof by a senior officer; and . failure to pay at final maturity or other default leading to actual acceleration with respect to other indebtedness having an aggregate principal amount of $7.5 million or more. 41 Senior Notes On September 20, 2000, we issued $100.0 million principal amount of senior notes due 2010 pursuant to an indenture of the same date with Chase Manhattan Bank and Trust Company, National Association, as trustee. Interest Rate. Interest on the senior notes is payable semi-annually in arrears, commencing March 31, 2001, at the rate of 15.5% per annum; provided that on any semi-annual interest payment date prior to September 20, 2005, we have the option to pay all or any portion of the interest payable on said date by issuing additional senior notes in a principal amount equal to the interest we elect not to pay in cash on such date; and further provided, however, that if we fail timely to meet specified obligations to holders of the senior notes as set forth in an exchange and registration rights agreement dated as of September 20, 2000, interest on the senior notes may increase by up to 1% per annum. We have issued an aggregate of $16.6 million in additional senior notes to pay interest since the issue date. Guarantee. The senior notes are general unsecured and unsubordinated obligations that mature on September 20, 2010. Redemption. The senior notes have specified optional redemption provisions. An aggregate principal amount of at least $5.0 million of the senior notes may be prepaid, at our option: . in whole or in part, at any time on or after September 20, 2003, initially at 107.5% of their principal amount at maturity and declining in annual increments to 101.55% of such principal amount on and after September 20, 2009, in each case plus accrued interest; . in their entirety, concurrently with the consummation of a public offering of our common stock or a change of control, on or after September 20, 2002 and prior to September 20, 2003, at a price of 110% of the principal amount plus accrued interest; and . up to 35% of the aggregate principal amount of the senior notes, at any time prior to September 20, 2002 from the proceeds of a public offering of our common stock at a price of 110% of the principal amount plus accrued interest; provided that, after giving effect to the prepayment, at least 65% of the original principal amount of the senior notes issued on September 20, 2000, plus all senior notes issued in lieu of cash interest thereon, remains outstanding. Upon the consummation of this offering and the concurrent note offering, we intend to use $52.6 million to pay $4.8 million in prepayment premiums and reduce the outstanding principal amount of the senior notes to approximately $68.8 million. The senior notes are also subject to partial mandatory redemption, without premium, on any interest payment date occurring after September 20, 2005, in an aggregate amount equal to the difference, if any, between . the aggregate amount which would be includable in the holders' gross income for federal income tax purposes with respect to the senior notes before such interest payment date, and . the sum of the following: . the aggregate amount of interest paid in cash under the senior notes before such interest payment date, and . the product of the issue price of all of the senior notes (as determined under United States Treasury Regulations Sections 1.1273-2(a)) multiplied by 17.25%. Any such partial mandatory redemption has been expressly subordinated in time and right of payment by the holders of the senior notes to the prior payment in full of all obligations under the credit facility, as it may be supplemented, replaced, restructured, refinanced or otherwise modified from time to time. 42 Covenants. The indenture contains a number of covenants, including a provision regarding a change of control. The provision defines a change of control event as . the sale, lease, transfer, conveyance or other disposition of substantially all of our assets and our subsidiaries to a person other than persons affiliated with Leonard Green & Partners, specified equity investors and management investors; . the adoption of a plan relating to our liquidation or dissolution or the liquidation or dissolution of our wholly owned subsidiary; . the consummation of any transaction as result of which, . prior to the senior notes being registered or exchanged for registered notes, . persons, including Leonard Green & Partners, its affiliated co-investors management investors, collectively cease to own at least 51% of the voting interests in our capital stock, or . Leonard Green & Partners and its affiliates cease to own voting interests of at least 25% in our capital stock, . we cease to own directly 100% of the outstanding equity of our wholly owned subsidiary or . any person or group other than persons affiliated with Leonard Green & Partners, specified equity investors and management investors have acquired beneficial ownership of 35% or more of the aggregate voting interest attributable to all our outstanding capital stock; or . the first day on which a majority of our board of directors were not directors on September 20, 2000 or whose election or nomination was previously approved by a majority of such directors. We are currently negotiating modifications to our senior notes, including the change of control provision. The change of control provision, as modified, will not be triggered by this offering. In the event of a change of control event, or in the event of specified dispositions of the assets by us or ours subsidiaries, the proceeds of which are neither used to repay the credit facility, the senior notes or to acquire long term assets, we are required to offer to repurchase the senior notes at a purchase price equal to 101% (in the case of a specified change of control) or 100% (in the case of a specified disposition of assets) of the principal amount thereof, in each case plus accrued interest. The indenture governing the senior notes also contains covenants that restrict the ability of us and our subsidiaries to: . incur additional debt; . incur specified liens on our assets; . pay dividends on stock or repurchase stock; . make investments; . engage in specified transactions with affiliates; . create or permit to exist specified dividend or payment restrictions affecting subsidiaries; . sell assets; . engage in specified sale/lease-back transactions; . sell all or substantially all of their assets or merge with or into other companies; and . engage in business activities unrelated to activities engaged in at the original date of issuance of the senior notes. 43 Events of Default. The indenture governing the senior notes also provides for various defaults, including . failure to pay interest on the senior notes when due after a specified grace period; . failure to pay any principal on the senior notes when the same becomes due at maturity, upon redemption or otherwise; . failure to observe or perform any other covenant or agreement in the indenture governing the senior notes where such failure continues for thirty (30) days after actual knowledge thereof by a senior officer; and . failure to pay at final maturity or other default leading to actual acceleration with respect to other indebtedness having an aggregate principal amount of $7.5 million or more. New Accounting Pronouncements Derivatives Effective January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value with offsets to other comprehensive income or earnings, depending on the type of derivative and/or the underlying cause for the change in fair value. Our Collar Agreement On November 13, 2000, we entered into a no-fee interest rate collar agreement with Wells Fargo Bank, N.A. effective November 15, 2000 and expiring November 15, 2002. Our collar agreement is based on LIBOR, pays out monthly, resets monthly and has a cap and floor notional amount of $62.5 million, with a cap rate of 7.5% and floor rate of 5.9%. Under SFAS 133, the actual cash paid by us as a result of LIBOR rates being below the floor of our collar agreement are recorded as a component of earnings. As of September 30, 2001, we have paid $600,000 because of LIBOR rates being below the floor of 5.9%. These payments were all made for the nine months ended September 30, 2001 and are included in interest expense. Our collar agreement is considered a cash flow hedge. Because LIBOR rates at September 30, 2001 were below the floor rate in the collar agreement of 5.9% and are projected to remain below the floor rate through the term of the collar agreement, the fair value of our collar agreement is a net liability to us of $2.2 million at September 30, 2001. It is recorded in our balance sheet as part of other accrued liabilities. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 142, Goodwill and Other Intangible Assets, which changes the way companies account for intangible assets and goodwill associated with business combinations. The principal changes of SFAS 142 are as follows: . All goodwill amortization will cease effective January 1, 2002. For the nine months ended September 30, 2001, we recorded $6.9 million of goodwill amortization. . All of the goodwill on our balance sheet at June 30, 2001 will continue to be amortized through the remaining months of 2001, in accordance with their current amortization schedules. . All goodwill acquired in acquisitions after June 30, 2001 is not subject to amortization in 2001 or in the future. 44 . All goodwill will be reviewed annually, or as circumstances warrant, using the fair-value-based goodwill impairment tests discussed in SFAS 142. As of September 30, 2001, our net goodwill balance was $316.3 million. Any impairment recognized associated with the adoption of SFAS 142 will be accounted for as a cumulative effect of change in accounting principle. We have not yet determined what the impact of SFAS 142 will be on our financial statements. In July, 2001, the FASB issued SFAS 141, Business Combinations, which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. We do not expect the adoption of SFAS 141 to have a material impact on our financial statements or our operations. Impairment of Long-Lived Assets In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30. SFAS 144 is intended to establish a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale, and to resolve certain implementation issues related to SFAS 121. The provisions of SFAS 144 generally are to be applied prospectively. We will adopt SFAS 144 in the first quarter of 2002. We have not yet determined what the impact of SFAS 144 will be on our financial statements. Restructuring and Asset Write-Down During 1996, we adopted and implemented a restructuring plan and recorded a restructuring charge of $5.7 million and an asset write-down charge of $9.5 million. The major components of the 1996 restructuring plan included: . 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; . 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 our laboratory operations; and . 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 $6.8 million and net operating loss of $350,000 for the year ended December 31, 1996. The restructuring of our laboratory operations consisted primarily of: . plans to relocate our facility in Indiana to Chicago; . the downsizing of our Arizona laboratory operations; . the standardization of laboratory and testing methods throughout all of our laboratories, resulting in the write-down of equipment that will no longer be utilized; and . the shutdown of a laboratory facility in the Midwest. During 1999, pursuant to the 1996 restructuring plan, we incurred the following: . Cash expenditures of $345,000 for lease and other contractual obligations. . Non-cash asset write-downs of $157,000, primarily pertaining to hospitals previously closed and our shutdown of certain computer systems. . We recognized a $321,000 favorable settlement related to a laboratory operations' contract that was terminated as part of the 1996 restructuring plan. 45 . During the fourth quarter of 1999, we were released from our contractual obligation pertaining to certain facility leases for hospitals that were sold in 1997. In addition, we reached a favorable settlement on contractual obligations pertaining to our migration to common communications and computer systems, a component of the 1996 restructuring plan. As a result of these two favorable outcomes, we reversed $889,000 of restructuring charges. During 1998, we took the following actions pursuant to the 1996 restructuring plan: . We closed one animal hospital. . We shut down certain computer hardware and software, as part of our migration to common computer systems. . We decided that two hospitals would continue to be operated instead of closed as was originally outlined in the 1996 restructuring plan. The hospitals' local markets improved since the 1996 restructuring plan was determined, causing our management to revise its plan. . We terminated our attempt 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 we ultimately retained, were utilized to offset increases in the expected cost to extinguish lease commitments and contract obligations that were part of the 1996 restructuring plan. As of December 31, 1999, all phases of the 1996 restructuring plan were complete and no restructuring reserves remained on our balance sheet. During 1997, we reviewed the financial performance of our hospitals. As a result of this review, an additional 12 hospitals were determined not to meet our performance standards. Accordingly, we adopted phase two of our restructuring plan resulting in restructuring and asset write-down charges of $2.1 million. The major components of the 1997 restructuring plan consisted of the termination of leases, amounting to $1.2 million, 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 $5.4 million and net operating income of $176,000 for the year ended December 31, 1997. For the nine months ended September 30, 2001 and the year ended December 31, 2000, we incurred $52,000 and $190,000, of expenditures for lease and other contractual obligations resulting from the 1997 restructuring plan. During 1999, the actions taken pursuant to the 1997 restructuring plan were as follows: . We sold one hospital resulting in cash expenditures of $2,000 and non-cash asset write-downs of $64,000. . We closed three hospitals resulting in cash expenditures of $4,000 and non-cash asset write-downs of $53,000. . We incurred cash expenditures of $71,000 for lease and other contractual obligations. . We recorded an additional $28,000 non-cash asset write-down pertaining to a hospital previously closed. . During the fourth quarter of 1999, we reached favorable settlements from the sale and/or closure of the hospitals noted in the first two bullet points above. As a result we reversed $663,000 of restructuring charges. 46 During 1998, we closed three animal hospitals pursuant to the 1997 restructuring plan, resulting in the write-off of $299,000 of property and equipment and cash expenditures of $81,000 for lease obligations and costs. Also during 1998, we determined that five of the animal hospitals that were to be sold as part of the 1997 restructuring plan would be kept due to their improved performance. At September 30, 2001 and December 31, 2000, $101,000 and $153,000, respectively, of the restructuring reserves from the 1997 restructuring plan remain on our balance sheet, consisting primarily of lease and other contractual obligations. All significant phases of the 1997 restructuring plan were complete as of December 31, 1999, although certain lease obligations will continue through 2005. Quantitative and Qualitative Disclosures about Market Risk Our market risk exposure is confined to interest rate exposure of our debt obligations that bear interest based on floating rates. Our revolving credit facility and certain other debt obligations are subject to variable rate interest which could be adversely affected by an increase in interest rates. As of September 30, 2001, we had borrowings of $246.5 million under a $300.0 million credit facility. Interest on amounts borrowed under the credit facility is subject to adjustment based on certain levels of financial performance. For LIBOR borrowings, the applicable margin added to LIBOR can range from 2.00% to 3.25% for the term loan A facility and revolving loans, and is 3.75% for the term loan B facility. For every one-half percent rise in interest rates on our variable rate obligations held at September 30, 2001, interest expense would increase by approximately $1.2 million for the twelve months ended September 30, 2002. For every one-half percent decline in interest rates below the floor rate of 5.9% on our collar agreement for $62.5 million of our variable rate obligations, interest expense would increase by approximately $313,000 for the twelve months ended September 30, 2002. We will repay a portion of our existing indebtedness with the proceeds from this offering. We invest our cash in money market securities, which are subject to minimal credit and market risk. In addition, our operations are solely in the United States and accordingly we do not have any exposure to foreign currency rate fluctuations. Inflation Historically, our operations have not been materially affected by inflation. We cannot assure you that our operations will not be affected by inflation in the future. 47 BUSINESS General We are a leading animal health care services company and operate the largest networks of veterinary diagnostic laboratories and free-standing, full-service animal hospitals in the United States. Our network of veterinary diagnostic laboratories provides sophisticated testing and consulting services to the veterinarian comparable to that provided by the human diagnostic laboratory to the physician. Veterinarians use these services in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. With the only nationwide veterinary laboratory network serving all 50 states, we provide diagnostic testing for an estimated 13,000 animal hospitals, a customer base over twice the size of our next largest competitor. Our network of animal hospitals offers a full range of general medical and surgical services for companion animals, as well as specialized treatments including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. In addition, we provide pharmaceutical products and perform a variety of pet wellness programs including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care. The more than 750 veterinarians supporting our 214 animal hospitals had over 3 million patient visits in 2000. Industry Overview The U.S. population of companion animals has reached approximately 188 million, including about 141 million dogs and cats. The most recent industry data show that over $11 billion was spent on animal health care services in 1996, with an annual growth rate of over 9.5% from 1991 through 1996 for spending on dogs and cats. The ownership of pets is widespread, with over 62% of U.S. households owning at least one pet, including companion and other animals. Pet ownership is highest among households with children under 18 and empty nesters whose pets have become their new "children." We believe the pet population and the number of pet-owning households should continue to grow, given that the number of households with children under 18 was projected to increase and then remain relatively stable between 1995 and 2010 and the number of empty-nest households was projected to increase. Among this expanding number of pet owners is a growing awareness of pet health and wellness, including the benefits of preventive care and specialized services. As technology continues to migrate from the human healthcare sector into the practice of veterinary medicine, more sophisticated treatments and diagnostic tests are becoming available to treat companion animals. These new and increasingly complex procedures, diagnostic tests and pharmaceuticals are gaining wider acceptance as pet owners are exposed to these previously unconsidered treatment programs through literature and marketing programs sponsored by large pharmaceutical and pet nutrition companies. We believe this is evidenced by an industry survey revealing that 70% of pet owners view their animals as important members of the family and are willing to pay for more veterinary services to promote the good health and extend the life of their pet. Even as treatments available in veterinary medicine become more complex, prices for veterinary services typically remain a low percentage of a pet-owner's income, facilitating payment at the time of service. Unlike the human health care industry, providers of veterinary services are not dependent on third-party payors in order to collect fees. As a consequence, providers of veterinary services do not have the problems of extended payment collection cycles or pricing pressures from third party-payors faced by human health care providers. Outsourced laboratory testing is a wholesale business that collects payments directly from animal hospitals, generally on terms requiring payment within 30 days of the date the charge is invoiced. Fees for animal hospital services are due at the time of the service. For example, over 95% of our animal hospital services are paid for in cash or by credit card at that time. In addition, over the past three fiscal years, our bad debt expense has averaged only 1% of total revenue. 48 The practice of veterinary medicine is subject to seasonal fluctuation. In particular, demand for veterinary services is significantly higher during the warmer months because pets spend a greater amount of time outdoors, where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of infestation of fleas, heartworms and ticks and the number of daylight hours. Diagnostic Laboratories. Laboratory tests are used by veterinarians to diagnose, monitor and treat illnesses and conditions in animals through the detection of substances in urine, tissue, fecal and blood samples and other specimens. As is the case with the physician treating a human patient, laboratory diagnostic testing is becoming a routine diagnostic tool used by the veterinarian. Veterinary laboratory tests are performed primarily at free-standing veterinary diagnostic laboratories, universities or animal hospitals using on-site diagnostic equipment. For particular types of tests, on-site diagnostic equipment can provide more timely results than outside laboratories, but this in-house testing requires the animal hospital or veterinarian to purchase the equipment, maintain and calibrate the equipment periodically to avoid testing errors, and employ trained personnel to operate it. Conversely, veterinary diagnostic laboratories can provide a wider range of tests than generally are 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, leading veterinary diagnostic laboratories employ highly trained individuals who specialize in the detection and diagnosis of diseases and thus are a valuable resource for the veterinarian. Within the outsourcing market, our laboratories specialize in the veterinary market and offer a broad spectrum of standard and customized tests, convenient sample pick-up times, rapid test reporting and access to professional consulting services provided by trained specialists. Providing the customer with this level of service at competitive prices requires high throughput volumes due to the operating leverage associated with the laboratory business. As a result, larger laboratories likely maintain a competitive advantage relative to smaller laboratories. We believe that the outsourced laboratory testing market is one of the fastest growing segments of the animal health care services industry, and expect continued growth as a result of: . the increased focus on wellness and monitoring programs in veterinary medicine, which is increasing the overall number of tests being performed; . the emphasis in veterinary education on diagnostic tests and the trend toward specialization in veterinary medicine, which are causing veterinarians to increasingly rely on tests for more accurate diagnoses; . continued technological developments in veterinary medicine, which are increasing the breadth of tests offered; and . the trend toward outsourcing tests because of the relative low cost, the high accuracy rates and the diagnostic support provided by specialists employed by the laboratory. Animal Hospitals. Animal health care services are provided predominately by the veterinarian practicing as a sole practitioner, or as part of a larger animal medical group or hospital. 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. Others focus on a particular type of animal. The principal factors in a pet owner's decision as to which veterinarian to use include convenient location, recommendation of friends, reasonable fees, convenient hours and quality of care. 49 The U.S. market for veterinary services is highly fragmented, with more than 35,000 veterinarians practicing at over 18,000 companion animal hospitals. Although most animal hospitals are single site, sole practitioner facilities, we believe veterinarians are increasingly gravitating toward animal hospitals that provide state-of-the-art facilities, treatments, methods and pharmaceuticals to enhance the services they can provide their clients. Well capitalized animal hospital operators have the opportunity to supplement their internal growth with selective acquisitions. We believe the extremely fragmented animal hospital industry is consolidating due to: . the purchasing, marketing and administrative cost advantages that can be realized by a large, multiple location, multi-practitioner veterinary provider; . the cost of financing equipment purchases and upgrading technology necessary for a successful practice; . the desire of veterinarians to focus on practicing veterinary medicine, rather than spending large portions of their time at work on performing the administrative tasks necessary to operate an animal hospital; . the choice of some owners of animal hospitals to diversify their investment portfolio by selling all or a portion of their investment in the animal hospital; and . the appeal to many veterinarians of the benefits and work scheduling flexibility that are not typically available to a sole practitioner or single site provider. Competitive Strengths We believe that we are well-positioned for profitable growth due to the following competitive strengths: . Market Leader. We are a market leader in each of the business segments in which we operate. We maintain the only veterinary diagnostic laboratory network serving all 50 states, which is supported by the largest group of consulting veterinary specialists in the industry. Our network of animal hospitals and veterinarians is the largest in the United States. We believe that it would be difficult, time consuming and expensive for new entrants or existing competitors to assemble a comparable nationwide laboratory or animal hospital network. It would be particularly difficult to replicate our team of specialists, transportation network, management and systems infrastructure, size of our veterinarian group and our customer relationships. . Compelling Business Model. We believe our business model enables us to generate consistent growth and increasing cash flows. The fixed cost nature of our business allows us to generate strong margins, particularly on incremental revenues. In each quarter since 1998, we have generated positive laboratory internal revenue growth. The growth in our laboratory revenue, combined with greater utilization of our infrastructure, has enabled us to improve our laboratory EBITDA margin from 26.9% in 1998 to 33.5% for the twelve months ended September 30, 2001, and our laboratory operating margin from 22.4% to 29.9% over the same period. In each quarter since 1998, we have generated positive animal hospital same-facility revenue growth. Due to the operating leverage associated with our animal hospital business, the increase in animal hospital revenue has enabled us to improve our animal hospital EBITDA margin from 16.7% in 1998 to 19.5% for the twelve months ended September 30, 2001, and our animal hospital operating margin from 12.2% to 14.3% over the same period. These high margins, combined with our modest working capital needs and low maintenance capital expenditures, provide cash that we can use for acquisitions or to reduce indebtedness. . Leading Team of Specialists. We believe our laboratories are a valuable diagnostic resource for veterinarians. Due to the trend towards offering specialized services in veterinary medicine, our network of 85 specialists, which includes veterinarians, chemists and other scientists with expertise in fields such as pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology, provides us with a significant competitive advantage. These specialists are available to 50 consult with our laboratory customers, providing a compelling reason for them to use our laboratories rather than those of our competitors, most of whom offer no comparable service. Our team of specialists represents the largest interactive source for readily available diagnostic advice in the veterinary industry and interact with animal health care professionals over 90,000 times a year. . High Quality Service Provider. We believe that we have built a reputation as a trusted animal health brand among veterinarians and pet owners alike. In our laboratories, we maintain rigorous quality assurance programs to ensure the accuracy of reported results. We calibrate our laboratory equipment several times daily, test specimens of known concentration or reactivity to assure accuracy and use only qualified personnel to perform testing. Further, our specialists review all test results outside of the range of established norms. As a result of these measures, we believe our diagnostic accuracy rate is over 99%. In our animal hospitals, we provide continuing education programs, promote the sharing of professional knowledge and expertise and have developed and implemented a program of best practices to promote quality medical care. . Shared Expertise Among Veterinarians. We believe our group of animal hospitals and veterinarians provide us with a competitive advantage through our collective expertise and experience. Our veterinarians consult with other veterinarians in our network to share information regarding the practice of veterinary medicine, which continues to expand our collective knowledge. We maintain an internal continuing education program for our veterinarians and have an established infrastructure for the dissemination of information on new developments in diagnostic testing, procedures and treatment programs. We believe the accumulation of veterinary medical knowledge and experience among our veterinarian group enables us to offer new services more rapidly than our competitors, offer our services at a higher level of quality and remain the leading source of veterinary information for interested companies such as pharmaceutical and pet food companies. Business Strategy Our business strategy is to continue to expand our market leadership in animal health care services through our diagnostic laboratories and animal hospitals. Key elements of our strategy include: . Capitalizing on our Leading Market Position to Generate Revenue Growth. Our leading market position in each of our business segments positions us to capitalize on favorable growth trends in the animal health care services industry. In our laboratories, we seek to generate revenue growth by taking advantage of the growing number of outsourced diagnostic tests and by increasing our market share. We continually educate veterinarians on new and existing technologies and test offerings available to diagnose medical conditions. Further, we leverage the knowledge of our specialists by providing veterinarians with extensive customer support in promoting and understanding these diagnostic tests. In our animal hospitals, we seek to generate revenue growth by capitalizing on the growing emphasis on pet health and wellness. For example, in 2000, we implemented a senior wellness program. This program bundles tests and animal hospital services, seeking to promote recurring visits and to increase the average amount spent per visit. . Leveraging Established Infrastructure to Improve Margins. We intend to leverage our established laboratory and animal hospital infrastructure to continue to increase our operating margins. Due to our established networks and the fixed cost nature of our business model, we are able to realize high margins on incremental revenues from both laboratory and animal hospital customers. For example, given that our nationwide transportation network servicing our laboratory customers is a relatively fixed cost, we are able to achieve significantly higher margins on most incremental tests ordered by the same customer when picked up by our couriers at the same time. We estimate that in most cases, we realize an operating and EBITDA margin between 60% and 75% on these incremental tests. 51 . Utilizing Enterprise-Wide Systems to Improve Operating Efficiencies. We recently completed the migration of all animal hospital operations to an enterprise-wide management information system. We believe that this common system will enable us to more effectively manage the key operating metrics that drive our business. With the aid of this system, we seek to standardize pricing, expand the services our veterinarians provide, capture unbilled service, increase volume and implement targeted marketing programs. . Pursue Selected Acquisitions. Although we have substantially completed our laboratory infrastructure, we may make selective, strategic laboratory acquisitions. Additionally, the fragmentation of the animal hospital industry provides us with significant expansion opportunities in our animal hospital segment. Depending on the attractiveness of the candidates and the strategic fit with our existing operations, we intend to acquire approximately 15 to 25 animals hospitals per year primarily using internally generated cash. Diagnostic Laboratories We operate the only full-service, veterinary diagnostic laboratory network serving all 50 states. We have a client base over two times that of our largest competitor. In 2000, we performed approximately 19.8 million tests and handled roughly 6.4 million requisitions in our state-of-the-art, automated diagnostic laboratories. Our laboratory network services a diverse customer base of over 13,000 animal hospitals, and non-affiliated animal hospitals generated approximately 95% of our laboratory revenue in 2000. Services. Our diagnostic spectrum includes over 300 different tests in the areas of chemistry, pathology, serotology, endocrinology, hematology, and microbiology, as well as tests specific to particular diseases. The average revenue per requisition is approximately $19. We do not conduct experiments on animals and are not engaged in animal research. Although modified to address the particular requirements of the species tested, the tests performed in our veterinary laboratories are similar to those performed in human clinical laboratories and utilize similar laboratory equipment and technologies. The growing concern for animal health, combined with the movement of veterinary medicine toward increasing specialization, should spur the migration of additional areas of human testing into the veterinary field. For example, we now provide cancer testing for household pets whereas several years ago, these tests were not available. Given the recent advancements in veterinary medical technology and the increased breadth and depth of knowledge required for the practice of veterinary medicine, many veterinarians solicit the knowledge and experience of our 85 specialists to interpret test results, consult on the diagnosis of illnesses and suggest treatment programs. This resource includes veterinarians, chemists, and other scientists with expertise in pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology. This depth of experience and expertise enables our specialists to suggest additional testing or provide diagnostic advice that assists the veterinarian in developing an appropriate treatment plan. Together with our specialist support, we believe the quality of our service further distinguishes our laboratory services. We maintain quality assurance programs to ensure that specimens are collected and transported properly, that tests are performed accurately and that client, patient and test information is reported and billed correctly. Our quality assurance programs include quality control testing of specimens of known concentration or reactivity to ensure accuracy and precision, routine checks and preventive maintenance of laboratory testing equipment, and personnel standards ensuring that only qualified personnel perform testing. As a result, we believe that our accuracy rate is over 99%. 52 [MAP] MAP OF UNITED STATES Our 15 laboratories enable us to service the entire United States. Our laboratory network includes: . two primary hubs that are open 24 hours per day and offer a full testing menu, including our most complex tests, . four secondary hubs that service large metropolitan areas, are open 24 hours per day and offer a wide testing menu, generally exclusive of our most complex tests; and . nine STAT laboratories that service other locations with demand sufficient to warrant nearby laboratory facilities and are open during daytime hours. We connect our laboratories to our customers with what we believe is the industry's largest transportation network, which picks up an average of 20,000 to 25,000 requisitions daily through an extensive network of drivers and independent couriers. For the nine months ended September 30, 2001, we derived approximately 69.4% of our laboratory revenue from major metropolitan areas, where we offer twice-a-day pick-up service and same-day results. In addition, in these areas, we generally offer to report results within three hours of pick-up. Outside of these areas, we typically provide test results to veterinarians before 8:00 a.m. the following day. Veterinarian customers located outside the areas covered by our transportation network are serviced using our Test Express service. Users of the Test Express service send patient specimens by Federal Express to our Memphis laboratory, the proximity of which to the Federal Express primary sorting facility permits speedy and cost-efficient testing. 53 Sales, Marketing and Customer Service. We employ 40 full-time sales and field service representatives who market laboratory services and maintain relationships with existing customers. The sales force is commissioned-based and organized along geographic regions. We support our sales efforts by strengthening our industry-leading team of specialists, developing marketing literature, attending trade shows, participating in trade associations and providing educational services to veterinarians. In addition, we employ over 90 customer service representatives who respond to customer inquiries, provide test results and, when appropriate, introduce the customer to other services offered by the laboratory. Given the high margins we enjoy on many of our incremental tests, our sales force is compensated primarily on its success in maximizing the amount of business from existing customers as well as adding new customers. Personnel. We employ a staff of approximately 1,000 full-time-equivalent employees in our laboratory network. We employ on average 310 employees at each of our primary laboratories. At a typical secondary laboratory, we employ on average 93 employees and at our typical STAT laboratory we employ on average 18 employees. We employ some of our specialists and enter into consulting arrangements with others. Our laboratory network consists of an eastern and western division and we employ a vice president to manage each region. We employ a manager at each of our laboratories and supervisors for each department within the laboratories. Animal Hospitals At September 30, 2001, we operated 214 animal hospitals in 33 states that were supported by over 750 veterinarians. Our nationwide network of free-standing, full-service animal hospitals has facilities located in the following states: California 44 Connecticut 3 New York* 21 New Mexico 3 Florida 17 Minnesota* 2 Illinois 16 North Carolina* 2 Michigan 12 Utah 2 Pennsylvania 11 Alabama* 1 Maryland 9 Arizona 1 New Jersey* 9 Georgia 1 Texas* 9 Hawaii 1 Indiana 7 Louisiana* 1 Massachusetts 7 Missouri 1 Virginia 6 Nebraska* 1 Colorado 5 South Carolina 1 Nevada 5 Washington* 1 Ohio* 5 West Virginia* 1 Alaska 4 Wisconsin 1 Delaware 4
-------- * States where we manage animal hospitals owned by veterinary medical groups. We seek to provide quality medical care in clean, attractive facilities that are open on average between 10 and 15 hours per day, six to seven days per week. Our typical animal hospital: . is located in a 4,000 to 6,000 square foot, free-standing facility in an attractive location; . has annual revenue between $1.0 million and $2.0 million; . is supported by three to five veterinarians; and . has an operating history of over ten years. 54 In addition to general medical and surgical services, we offer specialized treatments for companion animals, including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. We also provide pharmaceutical products for use in the delivery of treatments by our veterinarians and pet owners. Many of our animal hospitals offer additional services, including grooming, bathing and boarding. We also sell specialty pet products at our hospitals, including pet food, vitamins, therapeutic shampoos and conditioners, flea collars and sprays, and other accessory products. As part of the growth strategy of our hospital business, we intend to continue our disciplined acquisition strategy by identifying high quality practices that may have value to be unlocked through the services and scale we can provide. Our typical candidate mirrors the profile of our existing hospital base. Acquisitions will be used to both expand in existing markets and enter new geographical areas. By undertaking prudent acquisitions, we are able to grow our hospital business without diluting the local market for veterinary services. As of September 30, 2001, we had identified and were in negotiations to acquire three animal hospitals. Personnel. Our animal hospitals generally employ a staff of between 10 to 30 full-time equivalent employees, depending upon the facility's size and customer base. The staff includes administrative and technical support personnel, three to five veterinarians, an office manager who supervises the day-to-day activities of the facility, and a small office staff. We employ a relatively small corporate staff to provide centralized administrative services to all of our animal hospitals. We actively recruit highly qualified veterinarians and technicians and are committed to supporting continuing education for our professional staff. We operate post-graduate teaching programs for veterinarians at seven of our facilities, which train approximately 40 veterinarians each year. We believe that these programs enhance our reputation in the veterinary profession and further our ability to continue to recruit the most talented veterinarians. We seek to establish an environment that supports the veterinarian in the delivery of quality medicine and fosters professional growth through increased patient flow and a diverse case mix, continuing education, state-of-the-art equipment and access to specialists. We believe our hospitals offer attractive employment opportunities to veterinarians because of this professional environment, competitive compensation programs, management opportunities, employee benefits not generally available to a sole practitioner, scheduling flexibility to accommodate personal lifestyles and the ability to relocate to different regions of the country. Further, we permit some of our veterinarians to participate with us in the ownership and operation of an animal hospital. In these circumstances, the veterinarian purchases an equity position in our animal hospital and is our partner in its operation. As of September 30, 2001, we operated 24 hospitals under a partnership structure. Typically, the salary of the veterinarian partner is based on a percentage of the revenue of the animal hospital that is generated by the veterinarian. The operating income of the partnership that is distributed to the veterinarian partner is based on the veterinarian partner's percentage interest in the partnership, which is typically between 10% and 25%. We have established a Medical Advisory Board to support our operations. The Medical Advisory Board's function, under the direction of our Chief Medical Officer, is to recommend medical standards for our network of animal hospitals. The committee is comprised of leading veterinarians representing both the different geographic regions in which we operate and the medical specialties practiced by our veterinarians. Currently, four members of the Medical Advisory Board are faculty members at leading veterinary colleges in the United States. These members serve as medical consultants to us. Marketing. Our marketing efforts are primarily directed towards our existing clients through customer education efforts. We inform and educate our clients about pet wellness and quality care through mailings of the Healthy Pet Magazine, a magazine focused on pet care and wellness published by an affiliate of ours, targeted demographic mailings regarding specific pet health issues and collateral health material available at each animal hospital. With these internal marketing programs, we seek to leverage our existing customer base by increasing 55 the number of visits of existing clients and intensity of the services used during each visit. Further, reminder notices are used to increase awareness of the advantages of regular, comprehensive veterinary medical care, inlcuding preventive care such as vaccinations, dental screening and geriatric care. We also enter into referral arrangements with local pet shops and humane societies to increase our client base. In addition, we seek to obtain referrals from veterinarians by promoting our specialized diagnostic and treatment capabilities to veterinarians and veterinary practices that cannot offer their clients these services. Ownership Limitations. Some states have laws that prohibit business corporations from providing veterinary services through the direct employment of veterinarians. At September 30, 2001, we operated 53 animal hospitals in 11 states with these types of ownership restrictions. In these states, instead of owning an animal hospital, we provide management services to veterinary medical groups. We do not consolidate the operating results of these hospitals for financial statement purposes. We provide our management services pursuant to long-term management agreements with the veterinary medical groups, ranging from 10 to 40 years, with non-binding renewal options where allowable. Pursuant to the management agreements, the veterinary medical groups are each solely responsible for all aspects of the practice of veterinary medicine, as defined by their respective state. We are responsible for providing the following services: . availability of all facilities and equipment; . day-to-day financial and administrative supervision and management; . maintenance of patient records; . recruitment of veterinarians and animal hospital staff; . marketing; and . malpractice and general insurance. As compensation for these services, we receive management fees, which are included in animal hospital revenue. Systems We maintain a nationwide management information system to support our veterinary laboratories. In 2000, we completed the migration of our animal hospital operations onto an enterprise-wide management information network. All of our financial and customer records and laboratory results are stored in computer databases, most of which may be accessed by our management. Substantially all of our animal hospitals utilize consistent patient accounting/point-of-sale software, and we are able to track the performance of hospitals on a per service, per veterinarian basis. Laboratory technicians and specialists are able to electronically access test results from remote testing sites, enabling our specialists from varying fields of veterinary medicine to assist in the interpretation of test results and help structure potential treatment programs. We expect that this operational visibility will lead to increases in laboratory, veterinarian and hospital productivity. We are continuing to upgrade and integrate our management information systems. The upgrade of the laboratory system will enable us to communicate diagnostic test results to veterinarian customers online and via electronic mail, a service that we believe will provide additional tools for veterinarians in their practice and will help to solidify our relationship with these clients. The upgrade of the animal hospital system will allow us to track performance data on a per customer basis. We expect this upgrade and integration to cost approximately $250,000 and to be substantially complete in early 2002. Competition The companion animal health care services industry is highly competitive and subject to continual change in the manner in which services are delivered and providers are selected. We believe that the primary factors 56 influencing a customer's selection of an animal hospital are convenient location, recommendation of friends, reasonable fees, quality of care and convenient hours. Our primary competitors for our animal hospitals in most markets are individual practitioners or small, regional multi-clinic practices. In addition, some national companies in the pet care industry, including the operators of super-stores, are developing multi-regional networks of animal hospitals in markets that include our animal hospitals. Among veterinary diagnostic laboratories, we believe that quality, price, specialist support and the time required to report results are the major competitive factors. Although there are many individual clinical laboratories that provide a broad range of diagnostic testing services in the same markets serviced by us, few outsourced laboratory companies compete on a national level. Our client base is twice that of our primary competitor in the laboratory business. In addition to competing with dedicated veterinary laboratories, we face competition from several providers of on-site diagnostic equipment that allow veterinarians to perform their own laboratory tests. Government Regulation The laws of many states 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. We operate 53 hospitals in 11 states with these laws, including 21 in New York. Although we seek to structure our operations to comply with veterinary medicine laws of each state in which we operate, given the varying and uncertain interpretations of these laws, we may not be in compliance with restrictions on the corporate practice of veterinary medicine in all states. A determination that we are in violation of applicable restrictions on the practice of veterinary medicine in any state in which we operate could have a material adverse effect on us, particularly if we were unable to restructure our operations to comply with the requirements of that state. In addition, all of the states in which we operate impose various registration requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinary doctors practicing in our clinics are required to maintain valid state licenses to practice. Acquisitions may be subject to pre-merger or post-merger review by governmental authorities for antitrust and other legal compliance. Adverse regulatory action could negatively affect our operations through the assessment of fines or penalties against us or the possible requirement of divestiture of one or more of our operations. Employees At September 30, 2001, we had approximately 3,350 full-time-equivalent employees, including approximately 620 licensed veterinarians. None of our employees is a party to a collective bargaining agreement with the exception of our courier drivers in the State of New York. These employees are subject to a collective bargaining agreement expiring on July 10, 2003 with the Teamsters Local Union 813. We believe our employee relations to be good. Properties Our corporate headquarters and principal executive offices are located in West Los Angeles, California, in approximately 30,000 square feet of leased space. We maintain leased and owned facilities at 229 other locations that house our animal hospitals and laboratories. We own 64 facilities and the remainder are leased. We believe that our real property facilities are adequate for our current needs. Legal Proceedings The Ohio Attorney General's office filed a lawsuit on December 14, 1998, in the Franklin County Court of Common Pleas in the State of Ohio in which the state alleged that our management of a veterinary medical group 57 licensed to practice veterinary medicine in that state violates the Ohio statute prohibiting business corporations from providing, or holding themselves out as providers of, veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining us from operating in the State of Ohio in a manner that is in violation of the state statute. In response, we have restructured our operations in the State of Ohio in a manner that we believe conforms to the state law and the court's order. The Attorney General of the State of Ohio has informed us that it disagrees with our position that we are in compliance with the court's order. In June 2001, we appeared at a status conference before the trial court at which time the court directed the parties to meet together to attempt to settle this matter. Consistent with the trial court's directive, we currently are engaged in discussions with the Attorney General's office in the State of Ohio in an attempt to resolve this matter. An additional status conference was scheduled to occur in August 2001 to report to the court with regard to the terms of a settlement or, alternatively, that the parties cannot reach agreement, in which case we will be subject to further court proceedings to review our restructured operations under the Ohio statute. This status conference was postponed and a new date has not been set. Our five animal hospitals in the State of Ohio have a book value of $6.1 million as of September 30, 2001. If we were required to discontinue our operations in the State of Ohio, we may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue, EBITDA and operating income of $2.2 million, $754,000 and $513,000, respectively, in the twelve months ended December 31, 2000 and $1.7 million, $575,000 and $376,000, respectively, in the nine months ended September 30, 2001. We are a party to various other legal proceedings that arise in the ordinary course of our business. Although we cannot determine the ultimate disposition of these proceedings, we do not believe that adverse determinations in any or all of these proceedings would have a material adverse effect upon our financial condition, liquidity or results of operations. 58 MANAGEMENT Directors and Executive Officers The following persons are our directors and executive officers:
Directors Age Present Position --------- --- --------------------------------------------------------------- Robert L. Antin 51 Chief Executive Officer, President and Chairman of our Board of Directors Arthur J. Antin 54 Chief Operating Officer, Senior Vice President, Secretary and Director Neil Tauber.... 50 Senior Vice President of Development Tomas W. Fuller 43 Chief Financial Officer, Vice President and Assistant Secretary Dawn R. Olsen.. 42 Vice President, Controller John M. Baumer. 33 Director John G. Danhakl 45 Director Melina Higgins. 34 Director Peter J. Nolan. 43 Director
Our executive officers are appointed by and serve at the discretion of our board of directors. Robert L. Antin and Arthur J. Antin are brothers. There are no other family relationships between any of our directors and/or any executive officers. Robert L. Antin, one of our founders, has served as our Chief Executive Officer, President and Chairman since our inception in 1986. From September 1983 until our founding, Mr. Antin was President, Chief Executive Officer, a director and co-founder of AlternaCare Corp., a publicly held company that owned, operated and developed freestanding out-patient surgical centers. From July 1978 until September 1983, Mr. Antin was employed as an officer by American Medical International, Inc., an owner and operator of health care facilities. While at American Medical International, Inc., 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 then as a Vice President of American Medical International, Inc. and President of AMI Ambulatory Center, Inc., a subsidiary of American Medical International, Inc. operating a chain of ambulatory care centers. Mr. Antin received his MBA with a certification in hospital and health administration from Cornell University. Arthur J. Antin, one of our founders, has served as our Chief Operating Officer, Senior Vice President, Secretary and a director since our inception. From October 1983 to September 1986, Mr. Antin served as Director of Marketing/Investor Relations of AlternaCare Corp. At AlternaCare Corp., Mr. Antin developed and implemented marketing strategies for a network of outpatient surgical centers. Mr. Antin received an MA in Community Health from New York University. Neil Tauber, one of our founders, has served as our Senior Vice President of Development since our inception. 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 holds an MBA from Wagner College. Tomas W. Fuller joined us in January 1988 and served as our Vice President and Controller until November 1990 when he became Chief Financial Officer. From 1980 to 1987, Mr. Fuller worked at Arthur Andersen LLP, the last two years of which he served as audit manager. Mr. Fuller received his BA in business/economics from the University of California at Los Angeles. 59 Dawn R. Olsen joined us in January 1997 as Vice President, Controller. From April 1996 to December 1996, Ms. Olsen worked as an independent consultant at the Rand Corporation. 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 worked at Arthur Andersen LLP, the last year of which she served as audit manager. Ms. Olsen is a certified public accountant and received her BS in business/accounting from California State University, Northridge. John M. Baumer has served as a director since September 2000. Mr. Baumer is a partner in Leonard Green & Partners, where he has been employed since May 1999. Prior to joining Leonard Green & Partners, he served as a Vice President in the Corporate Finance Division of Donaldson, Lufkin & Jenrette Securities Corporation, or DLJ in Los Angeles. Prior to joining DLJ in 1995, Mr. Baumer worked at Fidelity Investments and Arthur Andersen. Mr. Baumer currently serves on the boards of directors of Intercontinental Art, Inc. and Petco Animal Supplies, Inc. Mr. Baumer is a 1990 graduate of the University of Notre Dame. He received his MBA from the Wharton School at the University of Pennsylvania. John G. Danhakl has served as a director since September 2000. Mr. Danhakl is a partner of Leonard Green & Partners. Prior to becoming a partner at Leonard Green & Partners in 1995, Mr. Danhakl was a Managing Director at DLJ and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert from 1985 to 1990. Mr. Danhakl presently serves on the boards of directors of The Arden Group, Inc., Big 5 Holdings Corp., Communications & Power Industries, Inc., TwinLab Corporation, Diamond Triumph Auto Glass, Inc., Liberty Group Publishing, Inc., Leslie's Poolmart, Inc. and Petco Animal Supplies, Inc., and on the board of managers of AsianMedia Group LLC. Mr. Danhakl is a graduate of the University of California at Berkeley. He received his MBA from the Harvard Business School. Melina Higgins has served as a director since September 2000. Ms. Higgins is Chief Financial Officer of GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P., leveraged mezzanine funds managed by Goldman, Sachs & Co. Ms. Higgins has been with Goldman Sachs for ten years and has been working with Goldman Sachs mezzanine funds since their inception in 1996. Ms. Higgins presently serves as a director on the boards of directors of the following companies in which GS Mezzanine Partners has invested: Kranson Industries, Inc. and Western Nonwovens Inc. Ms. Higgins holds an MBA from Harvard Business School and a BA from Colgate University. Peter J. Nolan has served as a director since September 2000. Mr. Nolan became a partner of Leonard Green & Partners in April 1997. Mr. Nolan previously served as Managing Director and Co-Head of DLJ's Los Angeles Investment Banking Division since 1990. Prior to that, Mr. Nolan had been a Vice President in corporate finance at Drexel Burnham Lambert since 1986. Prior to that, Mr. Nolan was a First Vice President at Prudential Securities, Inc. where he had worked from 1982 to 1986, after working as an Associate at Manufacturers Hanover Trust. He presently serves on the boards of directors of M2 Automotive, Liberty Group Publishing, Inc., Contractors Source, Inc. and White Cap Industries, Inc. and on the board of managers of AsianMedia Group LLC. Mr. Nolan is a graduate of Cornell University with a BS in Agricultural Economics and Finance. He received his MBA from Cornell University. Boardof Directors and Committees Upon the closing of this offering, we will have authorized six directors. In accordance with the terms of our certificate of incorporation, the terms of office of our board of directors will be divided into three classes. As a result, a portion of our board of directors will be elected each year. The division of the three classes and their respective election dates are as follows: . the class I directors' term will expire at the annual meeting of stockholders to be held in 2002; 60 . the class II directors' term will expire at the annual meeting of stockholders to be held in 2003; and . the class III directors' term will expire at the annual meeting of stockholders to be held in 2004. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. In addition, our bylaws provide that the authorized number of directors may be changed by an amendment to the bylaws duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to our certificate of incorporation. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. Our board of directors intends to create an audit committee and a compensation committee. We expect that our audit committee will be comprised of three independent directors whom it will appoint and will be charged with the following responsibilities: . recommending the engagement of our independent public accountants; . reviewing the scope of the audit to be conducted by the independent public accountants; . meeting periodically with the independent public accountants and our Chief Financial Officer to review matters relating to our financial statements, our accounting principles and our system of internal accounting controls; and . reporting its recommendations as to the approval of our financial statements to the board of directors. We anticipate that the compensation committee will be composed of at least two independent directors. The compensation committee will be responsible for considering and making recommendations to the board of directors regarding executive compensation and will be responsible for administering our stock option and executive incentive compensation plans. Director Compensation Our directors are not entitled to any compensation for serving as a director. Directors may be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings. Upon the closing of this offering, our directors who are not also our employees will receive $1,000 for each meeting of the board of directors that they attend plus reimbursement of all out-of-pocket expenses incurred in attending such meeting. Compensation Committee Interlocks and Insider Participation None of our executive officers or directors presently serves, or in the past has served, on the compensation committee of any other company with which we conduct business, nor do we expect any member of our compensation committee to serve, or in the past to have served, on the compensation committee of a company with which we conduct business. Executive Compensation The following table sets forth certain information with respect to compensation awarded to, earned by or paid to each person who served as our Chief Executive Officer or was one of our four other most highly compensated executive officers during the fiscal year ended December 31, 2000. We refer to these officers as our named executive officers. 61 Summary Compensation Table
Long Term Compensation; Awards; Annual Compensation Securities ----------------------------------- Underlying Other Annual Options/SARs All Other Name and Principal Position Year Salary Bonus Compensation(1) (#) (2) Compensation --------------------------- ---- -------- ---------- --------------- ------------- ------------- Robert L. Antin (3).................... 2000 $364,000 -- $2,377 15,000 $7,014,300(4) Chairman of the Board, President and 1999 358,077 286,816(5) 1,921 -- -- Chief Executive Officer 1998 350,000 315,000(6) 1,675 -- -- Arthur J. Antin (3).................... 2000 260,000 -- 2,543 32,845 4,545,225(4) Chief Operating Officer, 1999 255,769 182,108(5) 1,954 -- -- Senior Vice President and Secretary 1998 250,000 200,000(6) 1,851 -- -- Neil Tauber (3)........................ 2000 197,000 -- 2,163 30,000 2,863,950(4) Senior Vice President of Development 1999 194,385 121,102(5) 1,955 -- -- 1998 190,000 70,989(6) 1,425 -- -- Tomas W. Fuller (3).................... 2000 187,200 -- 1,815 20,000 2,948,750(4) Chief Financial Officer, Vice 1999 184,154 114,729(5) 1,921 -- -- President and Assistant Secretary 1998 180,000 121,406(6) 1,047 -- -- Dawn R. Olsen.......................... 2000 141,000 35,000 -- 42,995 -- Vice President and Controller 1999 130,808 9,773(5) -- -- -- 1998 125,000 13,090(6) -- 15,500 --
-------- (1)Represents amounts paid as automobile allowance. (2)All numbers reflect the number of shares of our common stock subject to options granted during the fiscal year. (3)For a description of the employment agreement between us and the officer, see below. (4)Consists of amounts paid to these officers in connection with the recapitalization which includes amounts paid under then existing employment agreements and in consideration of executing non-competition agreements. (5)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. (6)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. 62 Option/SAR Grants in the Last Fiscal Year The following table sets forth certain information regarding the grant of stock options to purchase shares of our common stock made during the fiscal year ended December 31, 2000 to our named executive officers.
Individual Grants --------------------------------------------------------------------------- Potential Realizable Value at Number of Assumed Rate of Stock Price Securities Percent of Total Appreciation for Option Term Underlying Options Granted to (1) Option/SARs Employees in Fiscal Exercise or Base Expiration ----------------------------- Name Granted (#) Year (2) Price ($/SH) (3) Date 5% 10% ---- ----------- ------------------- ---------------- ---------- -------- ------- Robert L. Antin 15,000(4) 1.1% $1.00 9/20/10 $ 9,433 $23,906 Arthur J. Antin 32,845(4) 2.5% 1.00 9/20/10 20,656 52,346 Neil Tauber 30,000(4) 2.3% 1.00 9/20/10 18,867 47,812 Tomas W. Fuller 20,000(4) 1.5% 1.00 9/20/10 12,578 31,875 Dawn R. Olsen 23,000(5) 1.7% 1.00 9/20/10 14,465 36,656 19,995(6) 1.5% 0.20 9/20/10 28,571 47,863
-------- (1)The potential realizable value is based on the assumption that our common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the expiration of the option term. These amounts are calculated pursuant to applicable requirements of the Commission and do not represent a forecast of the future appreciation of our common stock. (2)Options covering an aggregate of 1,325,670 shares were granted to eligible persons under our stock incentive plan during the fiscal year ended December 31, 2000. (3)The exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares, subject to specified conditions. (4)Options vest in 24 equal monthly installments commencing on October 1, 2001. (5)Options vest in 30 equal monthly installments commencing on July 1, 2002. (6)Options vested on September 20, 2000. Option Exercises in Last Fiscal Year and Year-End Option Values The following table sets forth, for each of our named executive officers, certain information regarding the exercise of stock options to purchase shares of our common stock during the fiscal year ended December 31, 2000, the number of shares of common stock underlying stock options held at fiscal year end and the value of options held at fiscal year end.
Number of Securities Underlying Unexercised Value of Unexercised In- Shares Options/SARs at Fiscal The-Money Options/SARs Acquired Year End (#) at Fiscal Year End ($)(1) Upon Value ------------------------- ------------------------- Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable ---- ------------ ---------- ----------- ------------- ----------- ------------- Robert L. Antin 1,205,000 $5,794,375 -- 15,000 -- -- Arthur J. Antin 678,500 3,714,042 -- 32,845 -- -- Neil Tauber.... 525,000 2,685,775 -- 30,000 -- -- Tomas W. Fuller 460,667 2,364,071 -- 20,000 -- -- Dawn R. Olsen.. 30,500 90,813 19,995 23,000 15,996 --
-------- (1)There was no public trading market for our common stock as of December 31, 2000. Accordingly, these values have been calculated based on our board of directors' determination of the fair market value of the underlying shares as of December 31, 2000 of $1.00 per share, less the applicable exercise price per share, multiplied by the number of underlying shares. 63 1996 Stock Incentive Plan On November 7, 1995, we adopted, and on July 19, 1996, our stockholders approved, the 1996 Stock Incentive Plan. On August 6, 2001, we adopted and our stockholders approved an amendment to the 1996 plan. The 1996 plan is intended to secure for us the benefits arising from stock ownership by selected key employees as our board of directors may from time to time determine. The following are the material terms of the 1996 plan: . Shares Subject to Plan. Effective as of August 6, 2001, no additional stock options may be granted under the 1996 plan. The number of shares of stock reserved and available for issuance under the 1996 plan is 631,800, which is the number of shares of stock underlying outstanding stock options as of August 6, 2001. The number of shares reserved for issuance is generally subject to equitable adjustment upon the occurrence of any stock dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, combination, repurchase, or share exchange, or other similar corporate transaction or event. . Administration. The 1996 plan is administered by our board of directors. Upon the closing of this offering, the 1996 plan will be administered by the compensation committee as designated by our board of directors. Each member of the committee is a "nonemployee director" (within the meaning of Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934) and an "outside director" (within the meaning of Section 162(m) of the Internal Revenue Code). The committee has authority to construe and interpret the 1996 plan and any awards made thereunder, to grant and determine the terms of awards and to make any necessary rules and regulations for the administration of the 1996 plan. . Eligibility. Effective as of August 6, 2001, no additional stock options may be granted under the 1996 plan. . Type of Awards. Outstanding awards granted under the 1996 plan include both incentive stock options, also known as ISOs, within the meaning of Section 422 of the Internal Revenue Code, and non-qualified stock options that do not qualify as ISOs. . Amendment and Termination. The 1996 plan may be amended by the board of directors, at any time, subject to stockholder approval, where necessary to satisfy federal tax or other applicable laws or stock exchange requirements, or to materially increase the shares of stock reserved for issuance under the 1996 plan, materially increase the benefits accruing to participants or materially modify eligibility requirements. . Exercisability, Vesting and Price of Awards. The stock options will vest at the times and upon the conditions that the committee may determine, but are exercisable at least as quickly as 20% per year beginning on the date of grant. The price at which shares subject to any stock options may be purchased are reflected in each particular stock option agreement. 2001 Stock Incentive Plan On August 6, 2001, we adopted, and our stockholders approved, the 2001 Stock Incentive Plan. The 2001 plan is intended to secure for us the benefits arising from stock ownership by selected key employees as our board of directors may from time to time determine. The following are the material terms of the 2001 plan: . Shares Subject to Plan. 2,000,000 shares of our common stock have been reserved for issuance under the 2001 plan. There are no options outstanding under the 2001 plan. Unexercised options or purchase rights that are subsequently reacquired by us, or shares issued under the 2001 plan that are reacquired by us through forfeiture or right of repurchase, may be available for reissuance under the 2001 plan. The number of shares reserved for issuance is generally subject to equitable adjustment upon the occurrence of any stock dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, combination, repurchase, or share exchange, or other similar corporate transaction or event. 64 . Administration. The 2001 plan is administered by our board of directors. Upon the closing of this offering, the 2001 plan will be administered by the compensation committee as designated by our board of directors. Each member of the committee is a "nonemployee director" (within the meaning of Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934) and an "outside director" (within the meaning of Section 162(m) of the Internal Revenue Code). The committee has authority to construe and interpret the 2001 plan and any awards made thereunder, to grant and determine the terms of awards and to make any necessary rules and regulations for the administration of the 2001 plan. . Eligibility. Options may be granted to our directors, officers, employees and consultants and those of our subsidiaries. The 2001 plan limits to 500,000 the number of shares that can be granted to any participant in any calendar year. . Type of Awards. Upon the closing of this offering, the 2001 plan will permit the compensation committee to grant stock options, stock purchase rights or a combination thereof. Stock options may be ISOs or non-qualified stock options that do not qualify as ISOs. . Amendment and Termination. The 2001 plan may be amended or terminated by the board of directors, at any time, subject to stockholder approval where necessary to satisfy federal tax or other applicable laws or stock exchange requirements. The 2001 plan will terminate no later than August 6, 2011. . Exercisability, Vesting and Price of Awards. Stock options will vest at the times and upon the conditions that the committee may determine, and the price at which shares subject to the stock option may be purchased will be reflected in each particular stock option agreement. The stock purchase price, right of repurchase by us, if any, and other conditions determined by the committee, will be reflected in each particular stock purchase right agreement. Employment Agreements We have employment agreements with Robert L. Antin, Arthur J. Antin, Neil Tauber and Tomas W. Fuller. Robert L. Antin. Mr. Antin's employment agreement will be amended effective upon the closing of this offering and will provide for Mr. Antin to serve as our Chairman of Board, Chief Executive Officer and President for a term five years from any given date, such that there shall always be a minimum of at least five years remaining under his employment agreement. The employment agreement provides for Mr. Antin to receive an annual base salary of $513,000, subject to annual increase based on comparable compensation packages provided to executives in similarly situated companies, and to participate in a bonus plan based on annual performance standards to be established by the compensation committee. Mr. Antin is also entitled to specified perquisites. If Mr. Antin's employment is terminated due to his death, the employment agreement provides that we will pay Mr. Antin's estate his remaining base salary during the remaining scheduled term of the employment agreement, accelerated vesting of options and the continuation of family medical benefits. If Mr. Antin's employment is terminated due to his disability, the employment agreement provides that we will pay Mr. Antin his remaining base salary during the remaining scheduled term of the employment agreement (reduced by any amounts paid under long-term disability insurance policy maintained by us for the benefit of Mr. Antin), accelerated vesting of options and the continuation of specified benefits and perquisites. In the case of termination due to death or disability, any unexercised options will remain exercisable for their full term. If Mr. Antin terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Antin terminates automatically, we will pay Mr. Antin his remaining base salary during the remaining scheduled term of the employment agreement and an amount based on his past bonuses, accelerated vesting of his options and continue to provide specified benefits and perquisites. In these circumstances, Mr. Antin may exercise his options immediately upon termination and thereafter during the full term of the option. 65 If Mr. Antin terminates the employment agreement without cause or we terminate the employment agreement for cause, Mr. Antin is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Antin upon termination qualify as "excess parachute payments" under the Internal Revenue Code, Mr. Antin also is entitled to an additional payment to cover the tax consequences associated with excess parachute payments. Arthur J. Antin. Mr. Antin's employment agreement will be amended effective upon the closing of this offering and will provide for Mr. Antin to serve as our Chief Operating Officer, Senior Vice President and Secretary for a term equal to three years from any given date, such that there shall always be a minimum of at least three years remaining under his employment agreement. The employment agreement provides for Mr. Antin to receive an annual base salary of $410,400, subject to annual increase based on comparable compensation packages provided to executives in similarly situated companies, and to participate in a bonus plan based on annual performance standards to be established by the compensation committee. Mr Antin is also entitled to specified perquisites. If Mr. Antin's employment is terminated due to his death, the employment agreement provides that we will pay Mr. Antin's estate his remaining base salary during the remaining scheduled term of the employment agreement, accelerated vesting of options and the continuation of family medical benefits. If Mr. Antin's employment is terminated due to his disability, the employment agreement provides that we will pay Mr. Antin his remaining base salary during the remaining scheduled term of the employment agreement (reduced by any amounts paid under long-term disability insurance policy maintained by us for the benefit of Mr. Antin), accelerated vesting of options and the continuation of specified benefits and perquisites. In the case of termination due to death or disability, any unexercised options will remain exercisable for their full term. If Mr. Antin terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Antin terminates automatically, we will pay Mr. Antin his remaining base salary during the remaining scheduled term of the employment agreement and an amount based on his past bonuses, accelerated vesting of his options and continue to provide specified benefits and perquisites. In these circumstances, Mr. Antin may exercise his options immediately upon termination and thereafter during the full term of the option. If Mr. Antin terminates the employment agreement without cause or we terminate the employment agreement for cause, Mr. Antin is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Antin upon termination qualify as "excess parachute payments" under the Internal Revenue Code, Mr. Antin also is entitled to an additional payment to cover the tax consequences associated with excess parachute payments. Neil Tauber. Mr. Tauber's employment agreement, dated as of September 20, 2000, provides for Mr. Tauber to serve as our Senior Vice President for a term of three years. The employment agreement provides for Mr. Tauber to receive an annual base salary and additional compensation of not less than $248,000, subject to annual increase based on the Consumer Price Index for Los Angeles County, and to participate in a bonus plan based on annual performance standards to be established by the board of directors. If Mr. Tauber's employment is terminated due to his death or disability, the employment agreement provides that we will pay Mr. Tauber or his estate, as applicable, the amount he would have earned as base salary during the 12 months following the termination date (reduced by any amounts paid under any life insurance policy or long-term disability insurance policy, as applicable, maintained by us for the benefit of Mr. Tauber), accelerated vesting of options and the continuation of specified benefits for the 12 months following the termination date. In these circumstances, Mr. Tauber may exercise his options during the remainder of their term. If Mr. Tauber terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Tauber terminates automatically, we will pay Mr. Tauber the amount he would have earned as base salary during the 12 months following the termination date (or a lesser amount if Mr. Tauber is terminated by us without cause and he had not 66 completed 15 months of consecutive service), an amount based on his past bonuses, accelerated vesting of his options and continue to provide specified benefits for the 12 months following the termination date. In these circumstances, Mr. Tauber may exercise his options during the full term of the option. Mr. Tauber may terminate his employment with us at any time in which event he is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Tauber upon termination qualify as "excess parachute payments" under the Internal Revenue Code, Mr. Tauber also is entitled to an additional payment to cover the tax consequences associated with excess parachute payments. Tomas W. Fuller. Mr. Fuller's employment agreement will be amended effective upon the closing of this offering and will provide for Mr. Fuller to serve as our Chief Financial Officer, Vice President and Assistant Secretary for a term equal to two years from any given date, such that there shall always be a minimum of at least two years remaining under his employment agreement. The employment agreement provides for Mr. Fuller to receive an annual base salary of not less than $205,200, subject to annual increase based on comparable compensation packages provided to executives in similarly situated companies, and to participate in a bonus plan based on annual performance standards to be established by the compensation committee. If Mr. Fuller's employment is terminated due to his death, the employment agreement provides that we will pay Mr. Fuller's estate his remaining base salary during the remaining scheduled term of the employment agreement, accelerated vesting of options and the continuation of family medical benefits. If Mr. Fuller's employment is terminated due to his disability, the employment agreement provides that we will pay Mr. Fuller his remaining base salary during the remaining scheduled term of the employment agreement (reduced by any amounts paid under long-term disability insurance policy maintained by us for the benefit of Mr. Fuller), accelerated vesting of options and the continuation of specified benefits and perquisites. In the case of termination due to death or disability, any unexercised options will remain exercisable for their full term. If Mr. Fuller terminates the employment agreement for cause, if we terminate the employment agreement without cause or in the event of a change of control, in which event the employment of Mr. Fuller terminates automatically, we will pay Mr. Fuller his remaining base salary during the remaining scheduled term of the employment agreement and an amount based on his past bonuses, accelerated vesting of his options and continue to provide specified benefits and perquisites. In these circumstances, Mr. Fuller may exercise his options immediately upon termination and thereafter for the full term of the option. If Mr. Fuller terminates the employment agreement without cause or we terminate the employment agreement for cause, Mr. Fuller is entitled to receive all accrued and unpaid salary and other compensation and all accrued and unused vacation and sick pay. If any of the payments due Mr. Fuller upon termination qualify as "excess parachute payments" under the Internal Revenue Code, Mr. Fuller also is entitled to an additional payment to cover the tax consequences associated with excess parachute payments. In the event of a change of control and at our request, each of Messrs. Robert L. Antin, Arthur J. Antin, Neil Tauber and Tomas W. Fuller is obligated to continue to serve under his employment agreement for a period of up to 180 days following the termination date at his then current base salary. 67 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of September 30, 2001 by: . each of our directors; . each of our named executive officers; . all of our directors and executive officers as a group; and . all other stockholders known by us to beneficially own more than 5% of our outstanding common stock. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of the date as of which this information is provided, and not subject to repurchase as of that date, are deemed outstanding. These shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the notes to this table, and except pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect to the shares shown as beneficially owned by them. Percentage ownership is based on 18,216,212 shares of common stock outstanding on September 30, 2001 and 32,216,212 shares of common stock outstanding after completion of this offering. This table assumes no exercise of the underwriters' over-allotment option. Unless otherwise indicated, the address for each of the stockholders listed below is c/o VCA Antech, Inc., 12401 West Olympic Boulevard, Los Angeles, California 90064.
Number of Shares of Common Stock Percent of Common Name and Address of Beneficial Owner Beneficially Owned Stock Outstanding ------------------------------------ ------------------ ---------------- Before After Offering Offering -------- -------- Green Equity Investors III, L.P.(1)(2)........................ 9,221,031 50.6% 28.6% Leonard Green & Partners, L.P. entities(2)(3)................. 3,263,468 17.9 10.1 VCA Co-Investment Fund I, LLC(1)(2)........................... 1,851,613 10.2 5.8 Robert L. Antin(4)............................................ 1,807,005 9.9 5.6 Arthur J. Antin(5)............................................ 401,374 2.2 1.3 Tomas W. Fuller(6)............................................ 200,843 1.1 * Neil Tauber(7)................................................ 51,245 * * Dawn R. Olsen................................................. 19,995 * * John M. Baumer(8)............................................. 14,336,112 78.7 44.5 John G. Danhakl(8)............................................ 14,336,112 78.7 44.5 Melina Higgins................................................ 0 * * Peter J. Nolan(8)............................................. 14,336,112 78.7 44.5 All directors and executive officers as a group (9 Persons)(9) 16,816,574 92.3% 52.2%
-------- * Indicates less than one percent (1)Green Equity Investors III, L.P. and VCA Co-Investment Fund I, LLC are managed by Leonard Green & Partners, L.P. (2)The address of Leonard Green & Partners, L.P. is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. 68 (3)Includes: (a) 833,220 shares of common stock held by VCA Co-Investment Fund II, LLC, (b) 833,220 shares of common stock held by VCA Co-Investment Fund III, LLC, (c) 462,900 shares of common stock held by VCA Co-Investment Fund IV, LLC, (d) 462,900 shares of common stock held by VCA Co-Investment Fund V, LLC, (e) 185,175 shares of common stock held by VCA Co-Investment Fund VI, LLC, (f) 462,900 shares of common stock held by VCA Co-Investment Fund VII, LLC, and (g) 23,145 shares of common stock held by VCA Co-Investment Fund VIII, LLC. Each VCA Co-Investment Fund LLC is managed by Leonard Green & Partners, L.P. (4)Includes: (a) 250,000 shares held by family trusts established for the benefit of Mr. Antin's family; (b) 60,000 shares held by Mr. Robert Antin's minor children; and (c) 625 shares of common stock reserved for issuance upon exercise of stock options that are or will be exercisable on or before November 29, 2001. (5)Includes 1,369 shares of common stock reserved for issuance upon exercise of stock options which are or will become exercisable on or before November 29, 2001. (6)Includes 833 shares of common stock reserved for issuance upon exercise of stock options which are or will become exercisable on or before November 29, 2001. (7)Includes 1,250 shares of common stock reserved for issuance upon exercise of stock options which are or will become exercisable on or before November 29, 2001. (8)Each of John M. Baumer, John G. Danhakl and Peter J. Nolan is a partner of Leonard Green & Partners, L.P. As such, Messrs. Baumer, Danhakl and Nolan may be deemed to have shared voting and investment power with respect to all shares held by Leonard Green & Partners, L.P. These individuals disclaim beneficial ownership of the securities held by Leonard Green & Partners, L.P., except to the extent of their respective pecuniary interests therein. (9)Includes: (a) 2,476,385 shares of common stock; and (b) 7,144 shares of common stock reserved for issuance upon exercise of options and are or will be exercisable on or before November 29, 2001. 69 RELATED PARTY TRANSACTIONS Recapitalization Transaction On September 20, 2000, we completed a recapitalization with an entity controlled by Leonard Green & Partners. In the recapitalization, each outstanding share of our common stock, other than shares retained by management and employees, was canceled and converted into the right to receive $1.00. The recapitalization was financed by: . the contribution of $155.0 million by a group of investors led by Leonard Green & Partners; . our issuance of an aggregate of $20.0 million of senior subordinated notes; . borrowings of $250.0 million under our $300.0 million credit facility; and . our issuance of an aggregate of $100.0 million of senior notes. Upon the completion of the recapitalization, Robert L. Antin, Arthur J. Antin, Neil Tauber, Tom Fuller, other stockholders and a group of investors led by Leonard Green & Partners acquired 17,524,337 shares of common stock at a purchase price of $1.00 per share. Goldman Sachs Credit Partners L.P. is a lender under our credit facility. GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P., affiliates of Goldman, Sachs & Co., purchased portions of our securities for an aggregate purchase price of $85.0 million. Melina Higgins, one of our directors, is the Chief Financial Officer of GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P. The following partners of Leonard Green & Partners also serve on our board of directors: John M. Baumer, John G. Danhakl and Peter J. Nolan. Stockholders Agreement On September 20, 2000, we entered into a stockholders agreement with each of our stockholders. Under the stockholders agreement, each party to the stockholders agreement has call rights with respect to shares of common stock and stock options held by members of management in the event of termination of employment for any reason. Upon the closing of an initial public offering of our shares of common stock, . Call rights will expire on one-half of Robert Antin's shares that initially were subject to the stockholders agreement. Of the remaining shares, call rights will expire ratably over a six month period commencing on the closing date as though the initial public offering had occurred on October 1, 2001; . Call rights will expire on one-half of Arthur Antin's, Neil Tauber's and Tomas Fuller's shares that initially were subject to the stockholders agreement. Of the amount remaining, call rights will expire on one-half of those shares six months following the closing date, and on the remaining one-half one year following the closing date, in each event as though the initial public offering had occurred on October 1, 2001; and . Call rights will expire on one-half of the other employee's shares that initially were subject to the stockholders agreement. Of the remaining shares, call rights will expire ratably over a 12-month period commencing seven months following the closing date as though the initial public offering had occurred on October 1, 2001. The stockholders agreement also provided for the discharge of $579,514 and $108,486 of indebtedness owing to us from Robert L. Antin and Arthur J. Antin, respectively, including interest accrued thereon. This indebtedness was incurred on January 22, 1997 in the form of promissory notes with principal amounts of $459,399 for Mr. Robert L. Antin and $86,000 for Mr. Arthur J. Antin as payment for the exercise price of stock options. Each note was subject to interest at the midterm applicable federal rate. This indebtedness was forgiven January 3, 2001. 70 Management Services Agreement On September 20, 2000, we entered into a 10-year management services agreement with Leonard Green & Partners. The agreement provides that Leonard Green & Partners will provide general investment-banking services, management, consulting and financial planning services and transaction-related financial advisory and investment banking services to us and our subsidiaries. We paid a one-time structuring fee of $7.5 million to Leonard Green & Partners in September 2000 under the agreement. Leonard Green & Partners receives an annual fee of $2.5 million as compensation for the general services and normal and customary fees for transaction-related services. If the group of investors led by Leonard Green & Partners invests any additional capital pursuant to the agreement, this annual fee will increase by 1.6% of the amount of the additional investment. We also agreed to indemnify Leonard Green & Partners and the other investors for any losses and liabilities arising out of the agreement. In 2000 and the nine months ended September 30, 2001, we paid management fees in an aggregate amount of $620,000 and $1.9 million. Upon the closing of this offering, the parties have agreed to terminate the management services agreement. In connection with the termination, we will pay Leonard Green & Partners $8.0 million. Non-Competition Agreements On September 20, 2000, Robert L. Antin, Arthur J. Antin, Neil Tauber and Tomas W. Fuller each entered into non-competition agreements with us for a term of three years. Generally, the non-competition agreements restrict these individuals from: . owning, operating, managing or controlling or in any way being connected with a veterinary medical or laboratory practice within certain geographical areas; . disclosing our confidential information; and . soliciting or diverting away our customers and employees. In consideration for the execution of the non-competition agreements, we paid approximately $6.2 million, $4.0 million, $2.7 million and $2.5 million to Robert L. Antin, Arthur J. Antin, Neil Tauber and Tomas W. Fuller, or their affiliates, respectively. Upon the closing of this offering, the parties have agreed to terminate these non-competition agreements. Investment in Zoasis During the year ended December 31, 2000, we made a $5.0 million investment in Zoasis.com, Inc., an internet start-up company, majority owned by Robert L. Antin, our Chief Executive Officer and Chairman of the Board. During the nine months ended September 30, 2001, we incurred $460,000 of marketing expense for services provided by Zoasis. During the year ended December 31, 2000, we incurred $81,000 of marketing expense for services provided by Zoasis. In December 2000, the Company determined that the value of this investment was impaired and, as a result, recognized a loss of $5.0 million on the write-down of its investment in Zoasis. Investment in Vet's Choice and the Wisdom Group, L.P. In September 2000, we sold our entire equity interest in Vet's Choice, which had zero cost basis, to Heinz Pet Products. We received $500,000 in the sale. At the time of the sale, one of our directors, Mr. John A. Heil, served as president of an affiliate of Heinz Pet Products. In connection with the sale, Heinz Pet Products also paid us $1.0 million which was transferred to the Wisdom Group, L.P. and used to redeem the limited partnership interests in the Wisdom Group, L.P. Members of our executive management had a 30.5% ownership interest in the Wisdom Group, L.P. as limited partners and a subsidiary of ours owned a 1% ownership interest as the general partner. The Wisdom Group, L.P. was dissolved in November 2000 upon redemption of all the partnership interests. The nature of the business of the Wisdom Group, L.P. was to provide consulting services to Vet's Choice with respect to the development, marketing and sale of premium pet food products. 71 We believe, based on our reasonable judgement, but without further investigation, that the terms of each of the foregoing transactions or arrangements between us on one hand and our affiliates, officers, directors or stockholders which were parties to the transactions on the other hand, were, on an overall basis, at least as favorable to us as could then have been obtained from unrelated parties. Receipt of Proceeds from this Offering and the Concurrent Note Offering Affiliates of Leonard Green & Partners own 2,826,000 shares of our 14% series A redeemable preferred stock and 2,800,000 shares of our 12% series B redeemable preferred stock. Affiliates of Goldman, Sachs & Co. own 122,123 shares of our 14% series A redeemable preferred stock and 121,000 shares of our 12% series B redeemable preferred stock and, as of September 30, 2001, held approximately $82.5 million aggregate principal amount of our senior notes and approximately $14.2 million aggregate principal amount of our senior subordinated notes. An affiliate of Goldman, Sachs & Co. is the syndication agent and a lender under our credit facility. Upon consummation of this offering and the concurrent note offering, we intend to repay $104.2 million of borrowings under our credit facility, $47.8 million aggregate principal amount of the senior notes and redeem all of the shares of preferred stock. See "Use of Proceeds." 72 DESCRIPTION OF CAPITAL STOCK This prospectus contains a summary of the material terms of our capital stock. The following description of our capital stock is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Following this offering, our certificate of incorporation will provide that our authorized capital stock will consist of 75,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share. As of the date of this prospectus, our authorized capital stock consists of 24,000,000 shares of common stock, of which 18,216,212 shares are outstanding and held of record by approximately 70 recordholders and 6,000,000 shares of preferred stock, of which 5,969,230 shares are outstanding. Common Stock Voting Rights. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. The common stock does not have cumulative voting rights. Dividends. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive ratably any dividends out of assets legally available therefor as our board of directors may from time to time determine. For a description of our dividend policy, please refer to the information in this prospectus under the heading "Dividend Policy." Liquidation and Dissolution. Upon our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of all liabilities and the liquidation preference of any then outstanding shares of preferred stock. No Preemptive or Similar Rights. Holders of our common stock have no right preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. Holders of shares of the common stock are not required to make additional capital contributions. All outstanding shares of common stock are fully paid and nonassessable. Preferred Stock As of September 30, 2001, we have outstanding the following shares of preferred stock: . 2,998,408 shares of 14% series A redeemable preferred stock, having an aggregate liquidation preference of $86.3 million; and . 2,970,822 shares of 12% series B redeemable preferred stock, having an aggregate liquidation preference of $83.9 million. Upon the consummation of this offering and the concurrent note offering, we intend to redeem all of our outstanding shares of series A and series B preferred stock. Following this offering, our certificate of incorporation will provide that our board of directors will have the authority, without further action by the stockholders, to issue up to 5.0 million shares of preferred stock in one or more series. Our board of directors will be able to fix the rights, preferences, privileges and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation 73 preferences, sinking fund terms and the number of shares constituting any series or the designation of this series. The issuance of preferred stock could adversely affect the voting power of holders of common stock, and the likelihood that holders of preferred stock will receive dividend payments and payments upon liquidation may have the effect of delaying, deferring or preventing a change in control of us, which could depress the market price of our common stock. Warrants As of September 30, 2001, warrants to purchase 1,149,990 shares of common stock were outstanding. The warrants are exercisable at any time prior to the closing of this offering with an exercise price of $0.0007 per share. Warrants not exercised prior to the closing of this offering will expire immediately upon the closing of this offering. Registration Rights Upon completion of this offering, under our stockholders agreement, the holders of 18,216,210 shares of common stock and warrants to purchase 1,149,990 shares of common stock, or their transferees, will be entitled to register these shares under the Securities Act. Under the stockholders agreement, holders may demand that we file a registration statement under the Securities Act covering some or all of the holder's registrable securities. The stockholder agreement limits the number of demand registrations that we are required to make on behalf of the holders. In an underwritten offering, the managing underwriter has the right, subject to specified conditions, to limit the number of registrable securities. In addition, holders have "piggyback" registration rights. If we propose to register any of our equity securities under the Securities Act other than pursuant to demand registration right noted above or specified excluded registrations, holders may require us to include all or a portion of their registrable securities in the registration and in any related underwriting. In an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of registrable securities. In general, we will bear all fees, costs and expenses of registrations, other than underwriting discounts and commissions. Anti-Takeover Provisions of Delaware Law We are subject to Section 203 of the Delaware General Corporation Law. Section 203 provides that specified persons who, together with affiliates and associates, own, or within three years did own, 15% or more of the outstanding voting stock of a corporation cannot engage in specified business combinations with the corporation for a period of three years after the date on which the person became an interested stockholder, unless: . prior to the date, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock of the corporation outstanding at the time the transaction commenced, excluding those shares owned by persons who are directors and also officers, and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to the date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. 74 Section 203 defines "business combination" to include: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; . subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Anti-Takeover Provisions of Our Charter On the closing of this offering, our bylaws will provide that candidates for director may be nominated only by the board of directors or by a stockholder who gives written notice to us no later than 90 days prior nor earlier than 120 days prior to the first anniversary of the last annual meeting of stockholders. The board of directors may consist of one or more members to be determined from time to time by the board of directors. The board of directors currently consists of six members divided into three different classes. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective terms. Between stockholder meetings, the board of directors may appoint new directors to fill vacancies or newly created directorships. On the closing of this offering, our certificate of incorporation will require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing. Our certificate of incorporation also will provide that the authorized number of directors may be changed only by resolution of the board of directors. Delaware law and these charter provisions may have the effect of deterring hostile takeovers or delaying changes in control of our management, which could depress the market price of our common stock. Indemnification of Directors and Officers and Limitation of Liability Our certificate of incorporation and bylaws allow us to eliminate the personal liability of our directors and to indemnify directors and officers to the fullest extent permitted by the Delaware General Corporation law. We also intend to enter into indemnity agreements with each of our directors and officers, which provide for mandatory indemnity of an officer or director made party to a "proceeding" by reason of the fact that he or she is or was a director of ours, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests. These agreements also obligate us to advance expenses to a director provided that he or she will repay advanced expenses in the event he or she is not entitled to indemnification. Directors are also entitled to partial indemnification, and indemnification for expenses incurred as a result of acting at our request as a director, officer or agent of an employee benefit plan or other partnership, corporation, joint venture, trust or other enterprise owned or controlled by us. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the above statutory provisions or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission that indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Transfer Agent and Registrar The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. Listing We have applied to have our common stock approved for quotation on The Nasdaq Stock Market's National Market under the symbol "WOOF." 75 SHARES ELIGIBLE FOR FUTURE SALE Prior to our September 2000 recapitalization, our common stock was listed on The Nasdaq Stock Market's National Market. In connection with the recapitalization, we terminated our listing, and there is currently no public market for our common stock. We can make no prediction as to the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price prevailing time to time. The sale of substantial amounts of common stock in the public market could adversely affect the prevailing market price of the common stock and our ability to raise equity capital in the future. Sale of Restricted Securities Upon completion of this offering, we will have outstanding an aggregate of 32,216,212 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants to purchase common stock. Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by affiliates. The remaining 18,216,212 shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, the restricted shares will be available for sale in the public market as follows: . 14,000,000 shares will be eligible for immediate sale on the date of this prospectus; . 18,216,212 shares will be eligible for sale upon the expiration of the lock-up agreements, described below, 180 days after the date of this prospectus; and . 254,471 shares will be eligible for sale upon the exercise of vested options or warrants 180 days after the date of this prospectus. If the outstanding warrants to purchase shares of common stock are exercised, there will be an additional 1,149,990 shares of common stock eligible for sale at times beginning more than 180 days after the date of this prospectus. If not exercised, these warrants will terminate on the closing of this offering. Lock-Up Agreements Our directors and officers and all of our security holders will sign lock-up agreements under which they agreed not to sell, dispose of, loan, pledge or grant any rights to any shares of common stock or any securities convertible into or exchangeable or exercisable for any shares of common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. Credit Suisse First Boston Corporation may choose to release some of these shares from these restrictions before the expiration of the 180-day period at any time without notice. Credit Suisse First Boston Corporation has no current intention to release any shares subject to lock-up agreements. In considering a request to release any shares, Credit Suisse First Boston Corporation would consider, among other factors, the particular circumstances surrounding the request, including, but not limited to, the number of shares requested to be released, the possible impact on the market for our common stock and the reasons for the request. Rule 144 In general, under Rule 144 as currently in effect, commencing 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including a person who is 76 an affiliate, is entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of our common stock then outstanding; or . the average weekly trading volume of our common stock on The Nasdaq Stock Market's National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale, subject to restrictions specified in Rule 144. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who has not been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell these shares without regard to the volume, manner of sale or other limitations contained in Rule 144. These shares are subject to the lock-up agreements and will be available for sale in the open market beginning 180 days after the date of this prospectus. Rule 701 In general, under Rule 701 of the Securities Act, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock plan or contract is eligible to resell the shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with various restrictions, including the holding period, contained in Rule 144 so long as they are not an affiliate of ours. If they are an affiliate, they are eligible to resell the shares 90 days after the effective date of this offering in reliance on Rule 144 but without compliance with the holding period contained in Rule 144. These shares are subject to the lock-up agreements and will be available for sale in the open market beginning 180 days after the date of this prospectus. Stock Options Immediately after this offering, we intend to file a registration statement under the Securities Act covering the shares of common stock reserved for issuance under our 1996 Stock Incentive Plan and our 2001 Stock Incentive Plan, including 631,800 shares of common stock underlying outstanding options. These registration statements are expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statements will, subject to any vesting provisions and Rule 144 volume limitations applicable to affiliates, be available for sale in the open market beginning 180 days after the date of this prospectus. Registration Rights Some of our existing stockholders are parties to a stockholders agreement with us that provides for registration rights to cause us to register under the Securities Act all or part of the shares of our common stock. Registration of the sale of these shares of our common stock would permit their sale into the market immediately. If our existing stockholders sell a large number of shares, the market price of our common stock could decline. These holders of registration rights are subject to lock-up periods of 180 days following the date of this prospectus. Please refer to the information in the prospectus under the heading "Description of Capital Stock-- Registration Rights" for a more detailed discussion of these registration rights. 77 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2001, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Banc of America Securities LLC, Jefferies & Company, Inc. and Wells Fargo Van Kasper, LLC are acting as representatives, the following respective numbers of shares of common stock:
Number Underwriter of Shares ----------- ---------- Credit Suisse First Boston Corporation Goldman, Sachs & Co................... Banc of America Securities LLC........ Jefferies & Company, Inc.............. Wells Fargo Van Kasper, LLC........... ---------- Total.............................. 14,000,000 ==========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 2,100,000 additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the representatives may change the public offering price and concession and discount to broker/dealers. The following table summarizes the compensation and estimated expenses we will pay:
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us . . . . . . . ........... $ $ $ $ Expenses payable by us . . . . . . . . $ $ $ $
The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The offering is being conducted in accordance with the applicable provisions of Rule 2720 of the National Association of Securities Dealers, Inc. Conduct Rules because affiliates of Goldman, Sachs & Co., one of the underwriters, own more than 10% of our subordinated debt. Rule 2720 requires that the initial public offering price of the shares of common stock not be higher than that recommended by a "qualified independent underwriter" meeting specified standards. Accordingly, Credit Suisse First Boston Corporation is assuming the 78 responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting the due diligence. The initial public offering price of the shares of common stock will be no higher than the price recommended by Credit Suisse First Boston Corporation. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. Our officers and directors and the holders of all of our common stock have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale at the initial public offering price up to 725,000 shares of the common stock for employees and other persons associated with us who express an interest in purchasing common stock in the offering. No shares have been reserved by the underwriters for purchase by our directors. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. Any reserved shares purchased by these persons will not be subject to the lock-up described in the previous paragraph but will be restricted to the extent required by the Conduct Rules of the National Association of Securities Dealers, Inc. from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this prospectus. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect. As of September 30, 2001, GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P., affiliates of Goldman, Sachs & Co., held an aggregate of 122,123 shares of Series A preferred stock and 121,000 shares of Series B junior preferred stock; an aggregate principal amount of $82.5 million of our senior notes; and an aggregate principal amount of $14.2 million of our senior subordinated notes, and warrants to purchase 814,575 shares of our common stock at an exercise price of $0.0007 per share. Melina Higgins, one of our directors, is the Chief Financial Officer of GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P. Some of the representatives or their affiliates have provided investment banking and advisory services for us from time to time for which they have received customary fees and reimbursements of expenses and may in the future provide additional services. In connection with our recapitalization, an affiliate of Goldman, Sachs & Co. acted as sole lead arranger for our $300.0 million credit facility and received customary fees in connection therewith. The affiliate currently acts as the syndication agent and as a lender thereunder. Goldman, Sachs & Co. 79 is also acting as the initial purchaser in our concurrent note offering. In addition, Credit Suisse First Boston Corporation and Jefferies and Company, Inc. provided advisory services in connection with our recapitalization and each received customary fees for their services. Prior to this offering, there has been no public trading market for the common stock. The initial public offering price for the common stock will be determined by negotiation between us and the representatives. The principal factors to be considered in determining the initial public offering price include: . the information included in this prospectus and otherwise available to the representatives; . the history and the prospects of the industry in which we compete; . the ability of our management; . our past and present operations; . our prospects for future earnings; . the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; . market conditions for initial public offerings; and . the general condition of the securities markets at the time of this offering. We cannot assure you that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to the offering or that an active trading market for our common stock will develop and continue after the offering. In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. 80 These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. Credit Suisse First Boston Corporation may effect an on-line distribution through its affiliate, CSFBdirect Inc., an on-line broker/dealer, as a selling group member. 81 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that: . the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws, . where required by law, that the purchaser is purchasing as principal and not as agent, and . the purchaser has reviewed the text above under "Resale Restrictions". Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. Relationship Between Us and Certain Underwriters We are currently in compliance with the terms of our senior notes and our senior subordinated notes. GS Mezzanine Partners II, L.P. and GS Mezzanine II Offshore, L.P. had no involvement in determining whether or not to distribute the shares of common stock in this offering or the terms of this offering. The only benefits that Goldman, Sachs & Co. will receive from this offering are described in this prospectus. 82 LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by our legal counsel, Akin, Gump, Strauss, Hauer & Feld, LLP, Los Angeles, California. Various legal matters in connection with this offering will be passed on for the underwriters by Skadden, Arps, Slate, Meagher & Flom, LLP, Los Angeles, California. EXPERTS The audited financial statements and schedules included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form S-1 with the Commission regarding this offering. The registration statement of which this prospectus is a part contains additional relevant information about us and our capital stock and you should refer to the registration statement and its exhibits to read that information. References in this prospectus to any of our contracts or other documents are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may read and copy the registration statement, the related exhibits and the other material we file with the Commission and the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. You can also request copies of those documents, upon payment of a duplicating fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The Commission also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file with the Commission. The site's address is www.sec.gov. You may also request a copy of these filing, at no cost, by writing or telephoning us as follows: 12401 West Olympic Boulevard, Los Angeles, California 90064-1022, Attention: Chief Financial Officer, or 310-571-6500. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act and, in accordance with those requirements, will file periodic reports, proxy statements and other information with the SEC. We intend to furnish our stockholders with annual reports containing financial statements audited by our independent accountants. 83 [LOGO] Veterinary Centers of America VCA ANTECH, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS -----------------
Page ---- Report of Independent Public Accountants....................................................... F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998..... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998......................................................................................... F-5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998..................................................................................... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998..... F-7 Notes to Consolidated Financial Statements..................................................... F-9 Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (unaudited)................................................................. F-32 Condensed Consolidated Statements of Operations for the nine months ended September 30, 2001 and 2000 (unaudited)....................................................... F-33 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (unaudited)....................................................... F-34 Notes to Condensed Consolidated Financial Statements--September 30, 2001 (unaudited)........... F-35
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of VCA Antech, Inc.: We have audited the accompanying consolidated balance sheets of VCA Antech, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted 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 VCA Antech, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 28, 2001 F-2 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2000 and 1999 (In thousands, except par value)
2000 1999 --------- -------- ASSETS Current Assets: Cash and cash equivalents...................................................... $ 10,519 $ 10,620 Marketable securities.......................................................... -- 5,313 Trade accounts receivable, less allowance for uncollectible accounts of $4,110 and $7,162 at December 31, 2000 and 1999, respectively................ 15,450 15,276 Inventory...................................................................... 5,773 5,455 Prepaid expense and other...................................................... 3,424 4,544 Deferred income taxes.......................................................... 4,655 4,213 Prepaid income taxes........................................................... 9,402 3,986 --------- -------- Total current assets....................................................... 49,223 49,407 Property and equipment, net....................................................... 86,972 70,336 Other Assets: Goodwill, net.................................................................. 310,185 291,286 Covenants not to compete, net.................................................. 19,549 4,450 Notes receivable, net.......................................................... 2,178 1,891 Investment in VPI.............................................................. -- 5,000 Deferred financing costs, net.................................................. 13,373 1,515 Other.......................................................................... 1,590 2,615 --------- -------- $ 483,070 $426,500 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current portion of long-term obligations....................................... $ 5,756 $ 21,901 Accounts payable............................................................... 8,393 8,715 Accrued payroll and related liabilities........................................ 8,335 7,258 Accrued recapitalization costs................................................. 4,014 -- Other accrued liabilities...................................................... 13,228 7,896 --------- -------- Total current liabilities.................................................. 39,726 45,770 Long-term obligations, less current portion....................................... 356,993 139,634 Deferred income taxes............................................................. 8,484 6,655 Other liabilities................................................................. 1,500 -- Minority interest................................................................. 3,610 3,212 Series A Redeemable Preferred Stock, at redemption value.......................... 77,875 -- Series B Redeemable Preferred Stock, at redemption value.......................... 76,747 -- Stockholders' Equity (Deficit): Common stock, par value $.01 as of December 31, 2000, 24,000 shares authorized as of December 31, 2000, 17,524 and 325,620 outstanding as of December 31, 2000 and 1999, respectively.................................................. 175 3,256 Additional paid-in capital..................................................... 18,498 210,492 Retained earnings (accumulated deficit)........................................ (100,020) 25,737 Accumulated comprehensive loss--unrealized loss on investment.................. -- (361) Notes receivable from stockholders............................................. (518) (654) Less: cost of common stock held in treasury.................................... -- (7,241) --------- -------- Total stockholders' equity (deficit)....................................... (81,865) 231,229 --------- -------- $ 483,070 $426,500 ========= ========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2000, 1999 and 1998 (In thousands, except per share amounts)
2000 1999 1998 -------- -------- -------- Revenue.................................................................... $354,687 $320,560 $281,039 Direct costs (excludes operating depreciation of $6,872, $6,853, and $4,698 for the years ended December 31, 2000, 1999 and 1998, respectively)...... 254,787 232,493 209,380 -------- -------- -------- 99,900 88,067 71,659 Selling, general and administrative........................................ 26,994 23,622 19,693 Depreciation and amortization.............................................. 18,878 16,463 13,132 Year 2000 remediation expense.............................................. -- 2,839 -- Reversal of restructuring charges.......................................... -- (1,873) -- Recapitalization costs..................................................... 34,823 -- -- -------- -------- -------- Operating income........................................................ 19,205 47,016 38,834 Interest income............................................................ 850 1,194 2,357 Interest expense........................................................... 20,742 10,643 11,189 Other (income) expense..................................................... 1,800 -- -- -------- -------- -------- Income (loss) before minority interest, provision for income taxes and extraordinary item.................................................... (2,487) 37,567 30,002 Minority interest in income of subsidiaries................................ 1,066 850 780 -------- -------- -------- Income (loss) before provision for income taxes and extraordinary item.................................................... (3,553) 36,717 29,222 Provision for income taxes................................................. 2,199 16,462 12,954 Income tax adjustment...................................................... -- (2,102) -- -------- -------- -------- Income (loss) before extraordinary item................................. (5,752) 22,357 16,268 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $1,845).................................... 2,659 -- -- -------- -------- -------- Net income (loss)....................................................... $ (8,411) $ 22,357 $ 16,268 ======== ======== ======== Increase in carrying amount of Redeemable Preferred Stock.................. 5,391 -- -- -------- -------- -------- Net income (loss) available to common stockholders...................... $(13,802) $ 22,357 $ 16,268 ======== ======== ======== Basic earnings (loss) per common share: Income (loss) before extraordinary item................................. $ (0.05) $ 0.07 $ 0.05 Extraordinary loss on early extinguishment of debt...................... (0.01) -- -- -------- -------- -------- Earnings (loss) per common share........................................ $ (0.06) $ 0.07 $ 0.05 ======== ======== ======== Diluted earnings (loss) per common share: Income (loss) before extraordinary item................................. $ (0.05) $ 0.07 $ 0.05 Extraordinary loss on early extinguishment of debt...................... (0.01) -- -- -------- -------- -------- Earnings (loss) per common share........................................ $ (0.06) $ 0.07 $ 0.05 ======== ======== ======== Shares used for computing basic earnings (loss) per share.................. 234,055 315,945 305,250 ======== ======== ======== Shares used for computing diluted earnings (loss) per share................ 234,055 329,775 329,100 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Years Ended December 31, 2000, 1999 And 1998 (In thousands)
Notes Common Stock Additional Treasury Shares Receivable Accumulated ----------------- Paid-In --------------- From Retained Comprehensive Shares Amount Capital Shares Amount Stockholders (Deficit) Loss -------- ------- --------- ------ ------- ----------- --------- ------------ Balances, December 31, 1997............. 304,800 $ 3,048 $ 193,717 (3,405) $(2,480) $(546) $ (12,888) Net income........................... -- -- -- -- -- -- 16,268 -- Unrealized loss on investments....... -- -- -- -- -- -- -- $(870) Unrealized loss recognized on investments......................... -- -- -- -- -- -- -- 402 Exercise of stock options............ 2,910 29 2,008 -- -- -- -- -- Interest on notes.................... -- -- -- -- -- (71) -- -- Business acquisitions................ 2,610 26 3,121 -- -- -- -- -- Conversion of convertible debt....... 180 2 83 -- -- -- -- -- Settlement of guaranteed purchase price contingently payable in cash or common stock..................... 315 3 (3) -- -- -- -- -- Restricted stock bonus............... 1,425 14 822 -- -- -- -- -- -------- ------- --------- ------ ------- ----- --------- ----- Balances, December 31, 1998............. 312,240 3,122 199,748 (3,405) (2,480) (617) 3,380 (468) Net income........................... -- -- -- -- -- -- 22,357 -- Unrealized loss on investments....... -- -- -- -- -- -- -- (218) Unrealized loss recognized on investments......................... -- -- -- -- -- -- -- 325 Exercise of stock options............ 750 8 527 -- -- -- -- -- Exercise of warrants................. 45 -- -- -- -- -- -- -- Interest on notes.................... -- -- -- -- -- (37) -- -- Business acquisitions................ 8,820 88 8,740 -- -- -- -- -- Conversion of convertible debt....... 150 2 72 -- -- -- -- -- Restricted stock bonus............... 3,615 36 1,405 -- -- -- -- -- Purchase of treasury shares.......... -- -- -- (5,895) (4,761) -- -- -- -------- ------- --------- ------ ------- ----- --------- ----- Balances, December 31, 1999............. 325,620 3,256 210,492 (9,300) (7,241) (654) 25,737 (361) Net loss............................. -- -- -- -- -- -- (8,411) -- Unrealized loss on investments....... -- -- -- -- -- -- -- (219) Unrealized loss recognized on investments......................... -- -- -- -- -- -- -- 580 Exercise of stock options............ 1,830 18 905 -- -- -- -- -- Restricted stock bonus............... 3,060 31 1,071 -- -- -- -- -- Interest on notes.................... -- -- -- -- -- (34) -- -- Purchase of treasury shares.......... -- -- -- (7,715) (3,323) -- -- -- Retirement of treasury shares........ (17,015) -- -- 17,015 10,564 -- -- -- Issuance of common stock............. 14,865 149 14,716 -- -- (518) -- -- Issuance of warrants................. -- -- 1,149 -- -- -- -- -- Write-off of notes as part of Recapitalization.................... -- -- -- -- -- 688 -- -- Increase in carrying amount of Redeemable Preferred Stock.......... -- -- -- -- -- -- (5,391) -- Repurchase and retirement of common stock........................ (310,836) (3,279) (209,835) -- -- -- (111,955) -- -------- ------- --------- ------ ------- ----- --------- ----- Balances, December 31, 2000............. 17,524 $ 175 $ 18,498 -- $ -- $(518) $(100,020) $ -- ======== ======= ========= ====== ======= ===== ========= =====
Total --------- Balances, December 31, 1997............. $ 180,851 Net income........................... 16,268 Unrealized loss on investments....... (870) Unrealized loss recognized on investments......................... 402 Exercise of stock options............ 2,037 Interest on notes.................... (71) Business acquisitions................ 3,147 Conversion of convertible debt....... 85 Settlement of guaranteed purchase price contingently payable in cash or common stock..................... -- Restricted stock bonus............... 836 --------- Balances, December 31, 1998............. 202,685 Net income........................... 22,357 Unrealized loss on investments....... (218) Unrealized loss recognized on investments......................... 325 Exercise of stock options............ 535 Exercise of warrants................. -- Interest on notes.................... (37) Business acquisitions................ 8,828 Conversion of convertible debt....... 74 Restricted stock bonus............... 1,441 Purchase of treasury shares.......... (4,761) --------- Balances, December 31, 1999............. 231,229 Net loss............................. (8,411) Unrealized loss on investments....... (219) Unrealized loss recognized on investments......................... 580 Exercise of stock options............ 923 Restricted stock bonus............... 1,102 Interest on notes.................... (34) Purchase of treasury shares.......... (3,323) Retirement of treasury shares........ 10,564 Issuance of common stock............. 14,347 Issuance of warrants................. 1,149 Write-off of notes as part of Recapitalization.................... 688 Increase in carrying amount of Redeemable Preferred Stock.......... (5,391) Repurchase and retirement of common stock........................ (325,069) --------- Balances, December 31, 2000............. $ (81,865) =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 ------- ------- ------- Net income (loss).................................. $(8,411) $22,357 $16,268 Other comprehensive income: Unrealized loss on investments.................. (219) (218) (870) Recognized loss on investments.................. 580 325 402 ------- ------- ------- Other comprehensive income (loss).................. 361 107 (468) ------- ------- ------- Net comprehensive income (loss).................... $(8,050) $22,464 $15,800 ======= ======= ======= Accumulated comprehensive loss at beginning of year $ (361) $ (468) $ -- Other comprehensive income (loss).................. 361 107 (468) ------- ------- ------- Accumulated comprehensive loss at end of year...... $ -- $ (361) $ (468) ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 --------- -------- -------- Cash flows from operating activities: Net income (loss)....................................................... $ (8,411) $ 22,357 $ 16,268 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................................ 18,878 16,463 13,132 Amortization of deferred financing costs and debt discount........... 836 241 431 Provision for uncollectible accounts................................. 3,105 2,515 2,898 Extraordinary loss on early extinguishment of debt................... 4,504 -- -- Recapitalization costs............................................... 34,823 -- -- Interest paid in kind on senior subordinated notes................... 4,306 -- -- Gain on sale of investment in VPI.................................... (3,200) -- -- Loss recognized on investment in Zoasis.............................. 5,000 -- -- Minority interest in income of subsidiaries.......................... 1,066 850 780 Distributions to minority interest partners.......................... (1,400) (926) (627) Increase in accounts receivable...................................... (3,362) (5,535) (3,749) Increase in inventory................................................ (167) (347) (242) Increase (decrease) in accounts payable and accrued liabilities...... 5,932 (1,383) (4,872) Decrease (increase) in prepaid income taxes.......................... (5,416) 1,054 594 Decrease (increase) in prepaid expense and other..................... 2,173 (414) (1,061) Increase in deferred income tax asset................................ (442) (102) (1,043) Increase in deferred income tax liability............................ 1,829 3,694 4,614 --------- -------- -------- Net cash provided by operating activities............................... 60,054 38,467 27,123 --------- -------- -------- Cash flows from investing activities: Business acquisitions, net of cash acquired............................. (18,183) (16,079) (17,108) Real estate acquired in connection with business acquisitions........... (1,800) (4,241) (4,270) Property and equipment additions, net................................... (22,555) (21,803) (11,678) Investments in marketable securities.................................... (129,992) (58,258) (44,902) Proceeds from sales or maturities of marketable securities.............. 135,666 86,410 62,447 Payment for covenants not to compete.................................... (15,630) -- -- Investment in VPI....................................................... -- -- (4,000) Net proceeds from sale of investment in VPI............................. 8,200 -- -- Investment in Zoasis.................................................... (5,000) -- -- Other................................................................... 1,615 295 37 --------- -------- -------- Net cash used in investing activities................................... (47,679) (13,676) (19,474) --------- -------- -------- Cash flows from financing activities: Repayment of long-term debt............................................. (172,854) (18,922) (20,591) Proceeds from the issuance of long-term debt............................ 356,670 -- -- Payment of deferred financing costs..................................... (13,958) -- -- Proceeds from issuance of common stock under stock option plans......... 923 535 2,037 Proceeds from issuance of preferred stock............................... 149,231 -- -- Proceeds from issuance of common stock.................................. 14,350 -- -- Proceeds from issuance of stock warrants................................ 1,149 -- -- Repurchase of common stock.............................................. (314,508) -- -- Purchase of treasury stock.............................................. (3,323) (4,761) -- Payments for recapitalization expense................................... (30,156) -- -- --------- -------- -------- Net cash used in financing activities................................... (12,476) (23,148) (18,554) --------- -------- -------- Increase (decrease) in cash and cash equivalents............................ (101) 1,643 (10,905) Cash and cash equivalents at beginning of year.............................. 10,620 8,977 19,882 --------- -------- -------- Cash and cash equivalents at end of year.................................... $ 10,519 $ 10,620 $ 8,977 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-7 VCA ANTECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) For the Years Ended December 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 -------- -------- -------- Supplemental disclosures of cash flow information: Interest paid.......................................... $ 15,237 $ 10,517 $ 11,301 Income taxes paid...................................... 4,337 9,603 10,944 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.......................... $ 29,616 $ 53,209 $ 30,740 Less consideration given: Cash paid and acquisition costs..................... (18,230) (19,497) (20,255) Cash paid in settlement of assumed liabilities...... (1,262) (517) (812) Common stock issued................................. -- (8,828) (3,100) -------- -------- -------- Liabilities assumed including notes payable issued..... $ 10,124 $ 24,367 $ 6,573 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-8 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 1. The Company Based in Los Angeles, California, VCA Antech, Inc. ("VCA"), a Delaware corporation, is an animal health care services company with positions in two core businesses, animal hospitals ("Animal Hospitals") and veterinary diagnostic laboratories ("Laboratories"). In 2000, the Company established a new legal structure, comprised of a holding company and an operating company. VCA is the holding company ("Holding Company"). Vicar Operating, Inc. ("Operating Company") is wholly-owned by the Holding Company and owns the capital stock of all of the Company's subsidiaries. Collectively, the Holding Company and the Operating Company are referred to as VCA or the Company. Prior to September 24, 2001, VCA was known as Veterinary Centers of America, Inc. Animal Hospitals offer a full range of general medical and surgical services for companion animals. Animal Hospitals treat diseases and injuries, provide pharmaceutical products and perform a variety of pet wellness programs, including routine vaccinations, health examinations, spaying, neutering and dental care. The Company operates a full-service, veterinary diagnostic laboratory network serving all 50 states. The laboratory network provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. The Company does not conduct experiments on animals and is not engaged in animal research. At December 31, 2000, the Company owned or operated 209 animal hospitals throughout 30 states, as follows: California 45 Delaware 4 New York (a) 24 Connecticut 3 Florida 18 New Mexico 3 Illinois 15 Colorado 2 Michigan 12 North Carolina (a) 2 Pennsylvania 10 Utah 2 Maryland 9 Alabama (a) 1 Texas (a) 9 Arizona 1 New Jersey (a) 8 Georgia 1 Indiana 7 Hawaii 1 Massachusetts 7 Louisiana (a) 1 Nevada 6 Missouri 1 Virginia 5 Nebraska (a) 1 Ohio (a) 5 South Carolina 1 Alaska 4 West Virginia (a) 1
-------- (a)states where the Company manages animal hospitals under long-term management agreements. F-9 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000, the Company operated 15 full-service laboratories. Our laboratory network includes primary hubs that are open 24 hours per day and offer a full testing menu, secondary laboratories, that service large metropolitan areas, are open 24 hours per day and offer a wide testing menu and nine STAT laboratories that service other locations with demand sufficient to warrant nearby laboratory facilities and are open during daytime hours.
Primary Hubs Secondary Hubs STAT laboratories ------------ -------------- ----------------- California 1 Arizona 1 California 1 New York 1 Georgia 1 Colorado 1 Illinois 1 Florida 1 Tennessee 1 Hawaii 1 Michigan 1 Oregon 1 Texas 2 Washington 1 - - - Totals 2 4 9 = = =
The Company was formed in 1986 and during the 1990s, established a position in the veterinary diagnostic laboratory and animal hospital markets through both internal growth and acquisitions. By 1997, the Company had built a laboratory network of 12 laboratories servicing animal hospitals in all 50 states and operated a total of 160 animal hospitals. On September 20, 2000, the Company completed a recapitalization transaction (the "Recapitalization") with certain investors who are affiliated with Leonard Green & Partners, L.P. The Company purchased 99% of its outstanding shares of common stock for $1.00 per share for a total consideration of $314.5 million, and such shares were subsequently retired. The Company then issued 14,350,005 new common shares to certain investors in exchange for an 80% controlling interest in the Company. An additional 517,995 shares of common stock were issued to certain members of management. In connection with the Recapitalization, the Company also authorized and issued preferred stock for which it received approximately $149.2 million and entered into various debt agreements through which it received approximately $356.7 million in cash. The Recapitalization did not result in a change in the historical cost basis of the Company's assets and liabilities because certain management shareholders retained their ownership of the Company common stock, which amounted to approximately 20% of the Company's outstanding common stock following the Recapitalization. The Company incurred $34.8 million of Recapitalization costs for the year ended December 31, 2000 which consisted of $24.1 million associated with the buy-out of stock options held by employees, $1.2 million paid to employees for services rendered in connection with the Recapitalization, $7.6 million in professional fees and $1.9 million of other expenses. Additionally, the Company paid $15.6 million out of these proceeds for covenants not to compete to the following executive officers: Robert L. Antin, Chief Executive Officer; Arthur J. Antin, Chief Operating Officer; Tomas W. Fuller, Chief Financial Officer; and Neil Tauber, Senior Vice President of Development. The payments made for the covenants not to compete are being amortized over a three-year period commencing September 20, 2000. 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. F-10 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company provides management services to certain veterinary medical groups in states with laws that prohibit business corporations from providing veterinary services through the direct employment of veterinarians. As of December 31, 2000, the Company operated in nine of these states. In these states, instead of owning a animal hospital, the Company provides management services to veterinary medical groups. The Company provides management services pursuant to long-term management agreements (the "Management Agreements") with the veterinary medical groups, ranging from 10 to 40 years with non-binding renewal options, where allowable. Pursuant to the Management Agreements, the veterinary medical groups 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 services: . availability of all facilities and equipment . day-to-day financial and administrative supervision and management . maintenance of patient records . recruitment of veterinary and hospitals staff . marketing . malpractice and general insurance The Company does not consolidate the operations of the veterinary medical groups since it has no control over the practice of veterinary medicine at these hospitals. As compensation for the Company's services, it receives management fees which are included in revenue and were $31.1 million, $30.2 million and $19.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. 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):
2000 1999 ------- ------- Cash.............. $ 3,443 $ 8,160 Money market funds 7,076 2,460 ------- ------- $10,519 $10,620 ======= =======
c. Marketable Securities During the year ending December 31, 2000, the Company realized a loss on the sale of an investment of $1.3 million; however, the Company recorded unrealized losses of $727,000 on this investment in years prior to 2000. d. 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. F-11 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Depreciation and amortization are provided for on the straight-line method over the following estimated useful lives: Buildings and improvements........ 5 to 30 years Leasehold improvements............ Lesser of lease term or 15 years Furniture and equipment........... 5 to 7 years Property held under capital leases 5 to 30 years
Property and equipment at December 31, consisted of (in thousands):
2000 1999 -------- -------- Land........................................... $ 19,788 $ 14,423 Building and improvements...................... 33,920 24,615 Leasehold improvements......................... 17,565 13,428 Furniture and equipment........................ 43,771 35,206 Equipment held under capital leases............ 1,533 1,552 Construction in progress....................... 1,293 4,479 -------- -------- Total fixed assets............................. 117,870 93,703 Less--Accumulated depreciation and amortization (30,898) (23,367) -------- -------- $ 86,972 $ 70,336 ======== ========
Accumulated depreciation on equipment held under capital leases amounted to $1.3 million and $1.2 million at December 31, 2000 and 1999, respectively. e. Goodwill 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. Accumulated amortization of goodwill was $35.0 million and $27.2 million at December 31, 2000 and 1999, respectively. f. Covenants Not to Compete Covenants not to compete are amortized on a straight-line basis over the term of the agreements, usually three to ten years. Accumulated amortization of covenants not to compete was $6.6 million and $4.7 million at December 31, 2000 and 1999, respectively. F-12 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) g. Notes Receivable Notes receivable are not market traded financial instruments. The amounts recorded approximate fair value and are shown net of valuation allowances of $63,000 and $270,000 as of December 31, 2000 and 1999, respectively. The notes bear interest at rates varying from 7% to 9% per annum. h. Deferred Revenue As part of a partnership with Heinz Pet Products ("HPP"), 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 revenue and amounted to $425,000 for the year ended December 31, 2000, and $5.1 million for each of the years ended December 31, 1999 and 1998, respectively. The agreement expired February 1, 2000. In October 2000, the Company entered into a two-year consulting agreement with HPP for which the Company was paid $5.0 million. Of the $5.0 million received, $4.0 million will be recognized as revenue ratably over the life of the agreement and $1.0 million will be used for certain marketing obligations under the agreement. As of December 31, 2000, $500,000 has been recognized as revenue and deferred revenue of $2.0 million and $1.5 million is recorded in other accrued liabilities and other liabilities, respectively. i. Deferred Financing Costs In connection with the issuance of long-term debt in 2000, the Company incurred $13.9 million of deferred financing costs. These costs are shown net of accumulated amortization of $586,000 in the Consolidated Balance Sheet at December 31, 2000. The deferred financing costs are amortized using the effective interest method over the life of the related debt. j. Investment in VPI and Zoasis During portions of 2000 and 1999, the Company had investments in Veterinary Pet Insurance, Inc. ("VPI") and Zoasis.com, Inc. ("Zoasis"), both of which were accounted for on the cost basis. See Footnote 4, Joint Ventures and Investments, for a description of these investments. k. 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 customer base. l. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expense during the reporting period. Actual results could differ from those estimates. F-13 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) m. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, which as amended is effective beginning in the fiscal year beginning after June 15, 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, (collectively referred to as "derivatives"). It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under the provisions of the Credit and Guaranty Agreement, dated September 20, 2000, the Company was required to enter into an arrangement to hedge interest rate exposure for a minimum notional amount of $62.0 million and a minimum term of two years. On November 13, 2000, the Company entered into a no fee interest rate collar agreement with Wells Fargo Bank effective November 15, 2000 and expiring November 15, 2002, (the "Collar Agreement"). The Collar Agreement is based on LIBOR, which resets monthly, and has a cap and floor notional amount of $62.5 million, with a cap and floor interest rate of 7.5% and 5.9%, respectively. The Collar Agreement is accounted for as a cash flow hedge which will require that the Company report the market value of the Collar Agreement in the balance sheet. Payments made or received as a result of a LIBOR outside of the cap or floor of the Collar Agreement will be accounted for as a component of net income. The Company adopted SFAS 133 effective January 1, 2001; however, had the Company adopted it in the year ending December 31, 2000, it would have reported a liability from interest rate hedging activities at the market rate of $525,000, $411,000 of which would have been recognized in comprehensive income and $114,000 which would have been recognized in other (income) expense. No payments were required under the Collar Agreement during the year ending December 31, 2000. With the exception of the Collar Agreement, management does not intend to enter into derivative contracts in the future and does not expect the implementation of SFAS 133 to have a material impact on its future earnings. n. Reclassifications Certain 1999 and 1998 balances have been reclassified to conform with the 2000 financial statement presentation. o. Revenue Recognition Revenue is recognized only after the following criteria are met: (i) there exists adequate evidence of the transactions; (ii) delivery of goods has occurred or services have been rendered; and (iii), the price is not contingent on future activity and collectibility is reasonably assured. p. Related Party Transactions As part of an often-used acquisition strategy, the Company hires the selling doctor upon purchase of their practice. The Company may lease facilities from the selling doctor; the related lease agreements are negotiated as part of the acquisition before the doctor is hired. These arrangements are not contingent upon the current or future employment of the doctors. F-14 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 2000, the Company invested $5.0 million for convertible preferred stock of Zoasis, an internet start-up business, majority-owned by Robert A. Antin, the Company's Chief Executive Officer and a director of the Company. In December 2000, the Company determined that the value of this investment was impaired and, as a result, recognized a loss of $5.0 million. (See Footnote 4, Joint Ventures and Investments, for a description of Zoasis and the reason for impairment). Zoasis continues to provide marketing reminder services to the Company. The Company incurred $81,000 during the year ended December 31, 2000 for these marketing reminder services. In September 2000, the Company sold its entire equity interest in Vet's Choice, which had zero cost basis, to Heinz Pet Products. The Company received $500,000 in the sale. At the time of the sale, one of the Company's directors, Mr. John A. Heil, served as president of an affiliate of Heinz Pet Products. In connection with the sale, Heinz Pet Products also paid the Company $1.0 million which was transferred to the Wisdom Group, L.P. and used to redeem the limited partnership interests in the Wisdom Group, L.P. Members of the Company's executive management had a 30.5% ownership interest in the Wisdom Group, L.P. as limited partners and a subsidiary of the Company owned a 1% ownership interest as the general partner. The Wisdom Group, L.P. was dissolved in November 2000 upon redemption of all the partnership interests. The nature of the business of the Wisdom Group, L.P. was to provide consulting services to Vet's Choice with respect to the development, marketing and sale of premium pet food products. On September 20, 2000, the Company entered into a ten-year management services agreement with Leonard Green & Partners, L.P. ("Leonard Green") for services relating to investment banking, general consulting and financial planning. The agreement calls for monthly payments of $207,000 and is subject to an increase of 1.6% of any additional capital invested by Green Equity Investors, III, L.P., a Delaware limited partnership, any of its affiliates, or any of its co-investors in the Company. In addition, Leonard Green received one-time fees of approximately $7.6 million in connection with the Company's recapitalization on September 20, 2000. q. 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 $5.6 million, $4.3 million and $3.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. 3. Acquisitions During 2000, the Company purchased 24 animal hospitals and one veterinary diagnostic laboratory, all of which were accounted for as purchases. Three of the acquired animal hospitals and the laboratory were merged into existing VCA facilities upon acquisition. Including acquisition costs, VCA paid an aggregate consideration of $29.6 million, consisting of $18.2 million in cash, $11.1 million in debt, and the assumption of liabilities totaling $315,000. The aggregated purchase price was allocated as follows: $2.7 million to tangible assets, $21.6 million to goodwill and $5.3 million to other intangibles. 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 $24.2 million, consisting of $10.4 million in cash, $12.4 million in debt, 70,712 shares of common stock of the Company with a value of $1.1 million, and the assumption of liabilities totaling $369,000. The aggregated purchase price was allocated as follows: $1.9 million to tangible assets, $18.6 million to goodwill and $3.8 million to other intangibles. F-15 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, on April 1, 1999, the Company completed the acquisition of AAH Management Corp. ("AAH") for a total consideration (including acquisition costs) of $29.0 million, consisting of 517,585 shares of VCA common stock, with a value at the date of acquisition of $7.8 million, $9.1 million in cash, $1.2 million in notes payable and the assumption of $10.9 million 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: $6.3 million to tangible assets, $21.9 million to goodwill, and $725,000 to other intangible assets. During 1998, the Company completed the acquisitions of 11 animal hospitals and one veterinary diagnostic laboratory. In connection with these acquisitions, which were accounted for as purchases, VCA paid an aggregate consideration including acquisition costs of $30.7 million, consisting of $20.2 million in cash, $6.5 million in debt, 171,564 shares of common stock of the Company with a value of $3.1 million, and the assumption of liabilities totaling $903,000. The $30.7 million aggregate purchase price was allocated $6.2 million to tangible assets, $23.4 million to goodwill and $1.2 million to other intangible assets. The pro forma results listed below are unaudited and reflect purchase price accounting adjustments assuming 2000 and 1999 acquisitions occurred at January 1, 1999. 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.
For the Years Ended December 31, (In thousands, except per share amounts) (Unaudited) --------------------------------------- 2000 1999 -------- -------- Revenue....................................... $369,958 $365,391 Net income (loss) available to common stockholders................................ $(12,587) $ 24,224 Diluted earnings per share.................... $ (0.05) $ (0.07) Shares used for computing diluted earnings per share....................................... 234,055 329,775
In connection with certain acquisitions, the Company assumed certain contractual arrangements whereby cash may be issued to former owners of acquired hospitals upon attainment of specified financial criteria over periods of three to five years ("Earn-Out Payments"), 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 2000 and 1999 consisted entirely of cash approximating $486,000 and $326,000, respectively. 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 Investments During fiscal year 2000, the Company invested $5.0 million for convertible preferred stock of Zoasis, an internet start-up business, majority-owned by Robert L. Antin, the Company's Chief Executive Officer and a director of the Company. Zoasis was to develop and provide services to the veterinary industry such as consumer e-commerce, e-commerce of veterinary supplies for hospitals, internet diagnostic laboratory results, on-line continuing education for veterinarians, hosted web sites for veterinarian clients, and a marketing reminder F-16 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) service. Due to the decline in the market value of many internet companies, Zoasis was not able to raise additional capital to continue its development. Zoasis scaled back its operations significantly. In December 2000, the Company determined that the value of this investment was impaired and, as a result, recognized a loss of $5.0 million on the write-down of its investment in Zoasis. In September 2000, the Company sold its 50.5% equity interest in Vet's Choice, which had a zero cost basis, to HPP. The Company received $500,000 in the sale. In connection with the sale, the Company also received $1.0 million, which was transferred to the Wisdom Group, L.P. in January 2001. In December 1997 and January 1998, the Company made a combined $5.0 million investment in VPI, the largest provider of pet health insurance in the United States. The Company sold its investment in VPI and received $8.2 million in cash in February 2000, resulting in a one-time gain of approximately $3.2 million. F-17 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Long-Term Obligations Long-term obligations consisted of the following at December 31 (in thousands):
2000 1999 --------- --------- Senior Term A Notes payable of Operating Company, maturing in 2006, secured by assets, variable interest rates (weighted average interest rate at 9.882% during the year ended December 31, 2000, and an interest rate of 9.938% at December 31, 2000)........................................... $ 50,000 $ -- Senior Term B Notes payable of Operating Company, maturing in 2008, secured by assets, variable interest rates (weighted average interest rate at 10.382% during the year ended December 31, 2000, and an interest rate of 10.438% at December 31, 2000)........................................... 200,000 -- Senior Subordinated Notes payable of Operating Company, maturing in Notes 2010, unsecured, fixed interest rate of 13.5%... 20,000 -- Holding Company Notes payable of Holding Company, maturing in Senior Notes 2010, unsecured, fixed interest rate of 15.5%... 104,306 -- Secured seller notes Notes payable and other obligations, various 1,328 69,213 maturities through 2014, secured by assets and stock of certain subsidiaries, various interest rates ranging from 5.3% to 12.0%................ 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%........ -- 3,212 Convertible debt Notes payable, convertible into VCA common stock at prices ranging from $0.47 to $1.00 per share, due through 2013, secured by stock of certain subsidiaries at interests rates ranging from 7.0% to 10.0%.............................. -- 1,803 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%....... 350 2,982 Debentures Convertible subordinated 5.25% debentures, due in 2006, convertible into approximately 36.8 million shares of VCA common stock at $2.29 per share....................................... -- 84,385 --------- --------- Total debt obligations............................ 375,984 161,595 Capital lease obligations......................... 110 187 Less--unamortized discount........................ (13,345) (247) --------- --------- 362,749 161,535 Less--current portion............................. (5,756) (21,901) --------- --------- $356,993 $139,634 ========= =========
F-18 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The annual aggregate scheduled maturities of debt obligations for the five years subsequent to December 31, 2000 are presented below (in thousands): 2001...... $ 5,756 2002...... 8,592 2003...... 8,960 2004...... 9,850 2005...... 17,486 Thereafter 325,340 -------- $375,984 ========
During the year ended December 31, 2000, the Company recorded an extraordinary loss of approximately $4.5 million, before effect of the income tax benefit, primarily as a result of the early redemption of $84.4 million of convertible subordinated 5.25% debentures. The Company entered into a Credit and Guaranty Agreement, dated September 20, 2000, with various lenders for $300.0 million of Senior Secured Credit Facilities (the "Credit Agreement"). The Credit Agreement includes a $50.0 million Revolving Credit Facility and the Senior Term A and B Notes. A first priority lien has been granted on certain of the Company's assets, including a pledge of all the capital stock of the Operating Company's subsidiaries, to secure the borrowings under the Credit Agreement. The Revolving Credit Facility allows the Company to borrow up to an aggregate principal amount of $50.0 million and expires in 2006. As of December 31, 2000, the Company has not utilized the Revolving Credit Facility. The Revolving Credit Facility and the Senior Term A Notes bear interest at an annual rate equal to: (1)the greater of Wells Fargo Bank's prime lending rate or the Federal funds effective rate plus 0.5% (the "Base Rate"), plus an applicable margin for unpaid principal amounts maintained as base rate loans; or (2)the average British Bankers Association Interest Settlement Rate for deposits ("LIBOR") plus an applicable margin for unpaid principal amounts maintained as eurodollar rate loans. The applicable margin is 3.25% for the first twelve months ending September 20, 2001. Thereafter, applicable margin varies based upon the Company's leverage ratio as defined in the Credit Agreement. The applicable margin varies from 3.25% for a leverage ratio of 3.75 to 1.0 to 2.00% for a leverage ratio of 2.25 to 1.0. The Senior Term B Notes bear interest at an annual rate equal to: (1)the Base Rate plus 2.75% for unpaid principal amounts maintained as base rate loans; or (2)LIBOR plus 3.75% for unpaid principal amounts maintained as eurodollar rate loans. Interest for the Senior Term A and B Notes is payable in cash at the earlier of the maturity of a eurodollar rate loan or on a quarterly basis. Maturities of Senior A Term Notes principal during each of the years 2001 through 2006 are $2.5 million, $6.3 million, $7.2 million, $8.7 million, $12.5 million and $12.8 million, respectively. The principal for the Senior B Term Notes matures at $2.5 million per year for the first six years and $92.5 million per year for 2007 and 2008. F-19 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Credit Agreement contains certain financial covenants pertaining to interest coverage, fixed charge coverage and leverage ratios which commence in 2001. In addition, the Credit Agreement has restrictions pertaining to capital expenditures, acquisitions and the payment of dividends on all classes of stock. On September 20, 2000, the Operating Company issued $20.0 million of 13.5% Senior Subordinated Notes, which are subordinated to the borrowings under the Credit Agreement. Interest on the Senior Subordinated Notes is payable in cash on a semi-annual basis. The effective interest rate for these notes is 16.2%. The $20.0 million aggregate principal amount of the Senior Subordinated Notes is due in full in September 2010. In addition, on September 20, 2000, the Holding Company issued $100.0 million of 15.5% Senior Notes (the "Holding Company Senior Notes"). The Holding Company Senior Notes are subordinated to the Operating Company's liabilities. Interest on the Holding Company Senior Notes is payable on a semi-annual basis. At the Company's sole discretion it may issue additional Holding Company Senior Notes in lieu of cash payments for all interest due through March 2005. Thereafter, interest is payable in cash on a semi-annual basis. The effective rate for these notes is 17.3%. A mandatory redemption of principal and accumulated interest paid in kind approximating $80.0 million is due September 2005. The remaining principal is due in full in September 2010. There were no significant differences between the carrying amount and fair values of the Company's long-term debt as of December 31, 2000. 6. Redeemable Preferred Stocks In 2000, the Company adopted an Amended and Restated Certificate of Incorporation, which authorized the issuance of up to 6,000,000 shares of preferred stock. In connection with the Recapitalization, the Company issued 2,998,408 shares of Series A Senior Redeemable Exchangeable Cumulative Preferred Stock ("Series A Preferred Stock"), par value $.01 per share, and 2,970,822 shares of Series B Junior Redeemable Cumulative Preferred Stock ("Series B Preferred Stock"), par value $.01 per share. In exchange for the issuance of the Series A Preferred Stock and Series B Preferred Stock, the Company received $75.0 million and $74.3 million, respectively. The Series A and Series B Preferred Stock earn dividends at the rate of 14% and 12% per annum of the liquidation preference, respectively. The liquidation preference and redemption value for both the Series A and Series B Preferred Stock is the sum of $25.00 per share plus accrued and unpaid dividends less any special dividend paid. Holders of preferred stock are entitled to receive dividends, whether or not declared by the Board of Directors, out of funds legally available. Dividends are payable in cash on a quarterly basis. If dividends are not paid when due, the amount payable is added to the liquidation preference and redemption value. For the year ended December 31, 2000, dividends earned but not paid were $2.9 million and $2.5 million for the Series A and Series B Preferred Stock, respectively. These dividends were recorded as an increase to preferred stock and a corresponding decrease to retained earnings. The Company has the option to redeem both series of preferred stock beginning September 2002. The prepayment premium at September 2002 is 109%, at September 2003 is 106%, and at September 2004 is 103%. Beginning September 2005 and thereafter, the Company has the option to redeem the preferred shares at 100% of the liquidation preference. The Company is required to redeem the preferred shares at 100% of liquidation preference in September 2012 from funds legally available. The Series A Preferred Stock is ranked senior to the Series B Preferred Stock and the Company's common stock. The Company has the option to exchange all the Series A Preferred Stock into 14% Senior Subordinated Debentures due 2012 (the "Exchange Debentures"). The Exchange Debentures are subordinated to the Holding Company Senior Notes. F-20 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Series B Preferred Stock is ranked senior to the Company's common stock. Neither series of preferred stock is convertible into common stock or securities convertible into common stock. Prior to the Recapitalization, there were no preferred shares of the Company issued or outstanding. 7. Common Stock In 2000, the Company's Board of Directors declared a fifteen-for-one stock split. The stock split has been retroactively reflected in the accompanying financial statements and footnotes. During 2000 and prior to the Recapitalization, the Company repurchased 7,715,000 shares of its common stock for $3.3 million. These shares, along with all other treasury shares held prior to 2000, were retired. On September 20, 2000, in connection with the Recapitalization, the Company repurchased and retired a majority of the outstanding common stock of the Company. Certain members of senior management that held 2,656,335 shares before the Recapitalization continued to hold those shares. In 2000, the Company adopted an Amended and Restated Certificate of Incorporation, which authorized the issuance of up to 24,000,000 common shares with a par value of $.01 per common share. The Company had approximately 17,524,000 and 325,620,000 common shares outstanding at December 31, 2000 and 1999, respectively. During 1999, the Company issued 8,820,000 shares of its common stock valued at $8.8 million, the fair market value at the date of commitment, as a portion of the consideration for certain acquisitions. During 1999, the Company repurchased 5,895,000 shares of its common stock for $4.8 million. 8. Warrants In connection with the Recapitalization, the Company issued warrants to purchase 1,149,990 shares of the Company's common stock to certain investors. The warrants allow the holders to purchase common shares at a price equal to $0.0007. The Company valued these warrants at their fair market value on the date of issuance at $1.1 million, which was recorded as part of stockholders' equity. 9. Notes Receivable from Stockholders Concurrent with the Recapitalization, the Company sold 518,000 common shares to certain non-executive employees of the Company. As consideration for the issuance of common stock, the Company received notes with an aggregate value approximating $518,000. Each note earns interest at the rate of 6.2% per annum, is compounded annually and is due and payable on September 16, 2007. The notes are collateralized by the Company's common stock which was purchased by the stockholders. 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 2,739,990 shares of the Company's common stock. These notes had an interest rate of 6.1% per annum and had a maturity date of January 22, 2001. The receivables are shown in the accompanying 1999 consolidated balance sheet as a reduction of stockholders' equity. In connection with the Recapitalization in September 2000, the Company forgave the indebtedness of these notes. The total principal and interest approximating $688,000 are included in Recapitalization costs. F-21 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Stock-Based Compensation Plans The Company has granted stock options to various employees. The Company accounts for these plans under APB Opinion 25. 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 (loss) and earnings (loss) per share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):
2000 1999 1998 -------- ------- ------- Net income (loss) available to common stockholders: As reported..................................... $(13,802) $22,357 $16,268 Pro forma....................................... (14,178) 19,214 12,040 Diluted earnings (loss) per share: As reported..................................... $ (0.06) $ 0.07 $ 0.05 Pro forma....................................... (0.06) 0.06 0.04
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:
2000 1999 1998 ----- ----- ----- Risk free interest rate..... 6.0% 5.8% 5.0% Dividend yield.............. 0.0% 0.0% 0.0% Expected volatility......... 0.0% 54.2% 64.5% Weighted fair value average. $0.78 $7.97 $9.25 Expected option life (years) 5 7 7
In connection with the Recapitalization, certain of the Company's employees elected to exchange their stock options for newly issued stock options. The number of stock options issued to each employee was equal to the intrinsic value of their old stock options divided by the strike price of the new stock options ($0.20). These stock options will be accounted for as variable awards, and related expense of $555,000 was recorded in the year ended December 31, 2000. As of December 31, 2000, 693,870 such new options are outstanding. These options are fully vested and expire in 2010. In September 2000, the Company issued 631,800 stock options under the 1996 Stock Incentive Plan. These options vest ratably over four years from the date of grant. The exercise price of these options is $1.00 (the fair market value at such date) and they expire in 2010. F-22 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The table below summarizes the transactions in the Company's stock option plans (in thousands, except per share amounts):
2000 1999 1998 ------- ------ ------ Options outstanding at beginning of year........ 57,300 57,315 53,760 Exchanged in connection with Recapitalization... 694 -- -- Granted......................................... 632 2,490 7,275 Exercised....................................... (1,815) (750) (2,910) Purchased....................................... (54,585) -- -- Canceled........................................ (900) (1,755) (810) ------- ------ ------ Options outstanding at end of year (Exercise prices ranging from $0.20 to $1.00 at December 31, 2000)......................... 1,326 57,300 57,315 ======= ====== ====== Exercisable at end of year...................... 694 30,465 25,110 ======= ====== ======
The following table summarizes information about certain options in the stock option plans outstanding as of December 31, 2000 in accordance with SFAS 123:
Options Outstanding Options Exercisable ------------------------------------------------------- -------------------------- Weighted Avg. Remaining Number Contractual Weighted Avg. Number Weighted Avg. Exercise Price Outstanding Life Exercise Price Exercisable Exercise Price -------------- ----------- ------------- -------------- ----------- -------------- $0.20 694 9.73 $ 0.20 694 $ .20 1.00 632 9.73 1.00 -- 1.00 ----- ---- 1,326 694 ===== ====
11. Commitments and Contingencies a. Leases 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, 2000, including renewal option periods, are as follows (in thousands): 2001......................... $ 11,161 2002......................... 10,825 2003......................... 10,746 2004......................... 10,828 2005......................... 10,626 Thereafter................... 112,065 -------- $166,251 ========
F-23 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense totaled $11.7 million, $10.4 million and $9.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. Rental income totaled $259,000, $310,000 and $203,000 for the years ended December 31, 2000, 1999 and 1998, respectively. b. Earn-out Payments In connection with certain acquisitions, the Company assumed certain contractual arrangements whereby additional cash may be paid to former owners of acquired hospitals upon attainment of specified financial criteria over periods of one to two years, as set forth in the respective agreements. The amount to be paid cannot be determined until the earn-out periods expire and the attainment of criteria is established. If the specified financial criteria is attained in the future, but not exceeded, the Company will be obligated to make cash payments of approximately $1.1 million over the next two years. c. Officers' Compensation Effective upon the closing of the Company's initial public offering, three members of the Company's executive management will amend and restate employment agreements with the Company. These members include the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The Senior Vice President will retain his existing employment agreement. These agreements aggregate to $1.4 million in salary per year. The agreements allow for upward adjustments to annual salary based on the Consumer Price Index for Los Angeles County. The agreements also call for a maximum of $1.1 million to be paid as annual bonuses based on annual performance goals to be set by the compensation committee of the board of directors, except for the Senior Vice President, whose annual bonus is based on EBITDA targets. Lastly, the agreements call for aggregate severance payments under different scenarios with the maximum amount approximating $8.5 million. d. Management Services On September 20, 2000, the Company entered into a ten-year management services agreement with Leonard Green & Partners, L.P. for services relating to investment banking, general consulting and financial planning. The agreement calls for monthly payments of $207,000 and is subject to an increase of 1.6% of any additional capital invested by Green Equity Investors III, L.P., a Delaware limited partnership, any of its affiliates, or any of its co-investors in the Company. In addition, Leonard Green received one-time fees of approximately $7.6 million in connection with the Company's recapitalization on September 20, 2000. e. State Laws The laws of many states 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 restriction 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 state. For example, the Company is currently a party to a lawsuit in the State of Ohio in which the State has alleged that the Company's management of a licensed veterinary medical group violates the Ohio statute prohibiting business corporations from providing or holding themselves out as providers of veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and issued an order enjoining the Company from operating in the State of Ohio in a manner that is in violation of the state statute. In response, the Company has restructured its operations in the State of Ohio in a manner that it F-24 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) believes conforms to the state law and the court's order. The Attorney General of the State of Ohio has informed the Company that it disagrees with the Company's position and that it does not believe that the Company is in compliance with the court's order. The Company is currently in discussions with the Attorney General's office in the State of Ohio in an attempt to resolve this matter. The Company may not be able to reach a settlement, in which case we would be required to discontinue our operations in the state. The Company's five animal hospitals in the State of Ohio have a book value of $6.0 million as of December 31, 2000. If the Company is required to discontinue its operations in the State of Ohio, it may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue and operating income of $2.2 million and $513,000, respectively, in 2000. f. Other Contingencies The Company has certain contingent liabilities resulting from litigation and claims incident to the ordinary course of its business. Management believes that the probable resolution of such contingencies will not affect the Company's financial position or results of operations. 12. Calculation of Per Share Amounts A reconciliation of the income and shares used in the computations of the basic and diluted earnings (loss) per share ("EPS") for each of the three years in the period ended December 31, 2000 follows (amounts shown in thousands, except per share amounts):
2000 1999 1998 -------- -------- -------- Income (loss) before extraordinary item.................................. $ (5,752) $ 22,357 $ 16,268 Increase in carrying amount of Redeemable Preferred Stock............. (5,391) -- -- -------- -------- -------- Income (loss) from continuing operations available to Common stockholders (Basic and Diluted).................................................... $(11,143) $ 22,357 $ 16,268 ======== ======== ======== Weighted average common shares outstanding: Basic................................................................. 234,055 315,945 305,250 Effect of dilutive common shares stock options.................... -- 13,830 23,850 -------- -------- -------- Diluted............................................................... 234,055 329,775 329,100 ======== ======== ======== Earnings per share (before extraordinary items) Basic................................................................. $ (0.05) $ 0.07 $ 0.05 Diluted............................................................... $ (0.05) $ 0.07 $ 0.05
On September 20, 2000, the Company paid $1.00 per share, for a total payment of $314.5 million, to repurchase 310,836,000 shares of its outstanding common stock in connection with the Recapitalization, of which approximately $3.7 million was attributable to costs incurred in connection with the repurchase of the Company's common stock. These per share and share amounts have been adjusted to reflect a 15-for-1 stock split which took place after the Recapitalization. Immediately after this repurchase, the Company issued 517,995 and 14,350,005 shares of common stock to its management and certain investors, respectively, for $1.00 per share. As consideration for these shares, the management shareholders signed promissory notes which become due in 2007 and accrue interest at the rate of 6.22% per year, compounded annually. At December 31, 2000, warrants to purchase an aggregate of 1,149,990 common shares and 1,325,675 stock options were outstanding but were not included in the computation of Diluted EPS because conversion would have an antidilutive effect on Diluted EPS. The $84.4 million of 5.25% convertible debentures which were convertible into 36,849,345 shares of common stock were outstanding at both December 31, 1999 and 1998, but were not included in the computation of Diluted EPS, because conversion would have an antidilutive effect on Diluted EPS. These convertible debentures were retired in 2000. F-25 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Income Taxes The provision for income taxes is comprised of the following for the three years ended December 31, (in thousands):
2000 1999 1998 ------ ------- ------- Federal: Current.. $ (889) $10,161 $ 8,064 Deferred. 1,219 515 2,080 ------ ------- ------- 330 10,676 10,144 ------ ------- ------- State: Current.. (142) 2,850 2,157 Deferred. 166 834 653 ------ ------- ------- 24 3,684 2,810 ------ ------- ------- $ 354 $14,360 $12,954 ====== ======= =======
The consolidated statement of operations for the year ended December 31, 2000 includes a provision for income taxes of $2.2 million and a benefit for income taxes of $1.8 million associated with the early extinguishment of debt; the net provision is approximately $354,000 as reflected in the table above. 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):
2000 1999 ------ ------- Current deferred tax assets (liabilities): Accounts receivable........................... $1,273 $ 2,782 State taxes................................... (903) (457) Other liabilities and reserves................ 3,696 2,347 Start-up costs................................ 66 66 Restructuring charges......................... -- 815 Other assets.................................. (294) (299) Inventory..................................... 817 817 Valuation allowance........................... -- (1,858) ------ ------- Total current deferred tax asset, net..... $4,655 $ 4,213 ====== =======
2000 1999 -------- ------- Non-current deferred tax (liabilities) assets: Net operating loss carryforwards...................... $ 6,460 $ 5,704 Write-down of assets.................................. 1,377 1,433 Start-up costs........................................ 302 300 Other assets.......................................... 3,537 445 Intangible assets..................................... (11,934) (9,204) Property and equipment................................ (1,720) (1,267) Unrealized loss on investments........................ 2,555 355 Valuation allowance................................... (9,061) (4,421) -------- ------- Total non-current deferred tax liability, net..... $ (8,484) $(6,655) ======== =======
F-26 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Under the Tax Reform Act of 1986, the utilization of NOL carryforwards to reduce taxable income will be restricted under certain circumstances. Events that 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, Pet Practice and AAH 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. At December 31, 2000, the Company has Federal net operating loss ("NOL") carryforwards of approximately $20.3 million, comprised principally of NOL carryforwards acquired in the Pets' Rx, Pet Practice and AAH mergers. Also included in this amount is the loss generated in the current year which can be utilized with no cumulative ownership change limitations in future years. These NOL carryforwards expire at various dates through 2015. 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 Regulation" ("Issue No. 99-15"). Issue No. 99-15 is the EITF's response to the Internal Revenue Services'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 $2.1 million. As a result of a loss of $5.0 million recognized by the Company on its investment in Zoasis, the valuation allowance is increased since it is more likely than not that the carrying amount of the asset will not be recognized due to the character of the loss. A reconciliation of the provision for income taxes to the amount computed at the Federal statutory rate for the three years ended December 31, is as follows:
2000 1999 1998 ---- ---- ---- Federal income tax at statutory rate............................... (35)% 35% 35% Effect of amortization of goodwill................................. 18 4 3 State taxes, net of federal benefit................................ (2) 7 6 Tax exempt income.................................................. (1) (1) (1) Change in valuation allowance associated with the Recapitalization, and the write-off of investments................................. 24 (6) -- Other.............................................................. -- -- 1 --- -- -- 4% 39% 44% === == ==
14. 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 employees 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 2000, 1999 and 1998, the Company provided a total matching contribution approximating $715,000, $353,000 and $942,000, respectively. F-27 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Lines of Business During the three years ending December 31, 2000, the Company had three reportable segments: Animal Hospital, Laboratory 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 Hospital segment provides veterinary services for companion animals and sells related retail products. The Laboratory segment provides testing services for veterinarians both associated with the Company and independent of the Company. Corporate provides selling, general and administrative support for the other segments and recognizes revenue associated with consulting agreements. 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 reviewing the operating performance of the segments, all intercompany 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 three segments (in thousands):
Intercompany Animal Sales Hospital Laboratory Corporate Eliminations Total -------- ---------- --------- ------------ -------- 2000 Revenue.......................... $240,624 $119,300 $ 925 $(6,162) $354,687 Operating income (loss).......... 30,818 34,355 (45,968) -- 19,205 Recapitalization costs........... -- -- 34,823 -- 34,823 Depreciation/amortization expense 12,167 4,472 2,239 -- 18,878 Identifiable assets.............. 312,473 109,453 61,144 -- 483,070 Capital expenditures............. 18,751 2,194 1,610 -- 22,555 1999 Revenue.......................... $217,988 $103,282 $ 5,100 $(5,810) $320,560 Operating income (loss).......... 26,765 28,039 (7,788) -- 47,016 Year 2000 remediation costs...... -- -- 2,839 -- 2,839 Reversal of restructuring charges -- -- 1,873 -- 1,873 Depreciation/amortization expense 10,472 4,234 1,757 -- 16,463 Identifiable assets.............. 280,742 105,224 40,534 -- 426,500 Capital expenditures............. 15,970 1,997 3,836 -- 21,803 1998 Revenue.......................... $191,888 $ 89,896 $ 5,100 $(5,845) $281,039 Operating income (loss).......... 23,487 20,141 (4,794) -- 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
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 Hospital and Laboratory segments. F-28 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is a reconciliation between total segment operating income after eliminations and consolidated income (loss) before provision for income taxes and extraordinary items as reported on the consolidated statements of operations (in thousands):
2000 1999 1998 -------- -------- -------- Total segment operating income after eliminations................ $ 19,205 $ 47,016 $ 38,834 Interest income.................................................. 850 1,194 2,357 Interest expense................................................. (20,742) (10,643) (11,189) Minority interest................................................ (1,066) (850) (780) Gain on sale of VPI.............................................. 3,200 -- -- Loss on investment in Zoasis..................................... (5,000) -- -- -------- -------- -------- Income (loss) before provision for income taxes and extraordinary items.......................................................... $ (3,553) $ 36,717 $ 29,222 ======== ======== ========
16. Restructuring and Asset Write-Down During 1996, the Company adopted and implemented a restructuring plan (the "1996 Plan") and recorded a restructuring charge of $5.7 million and an asset write-down charge of $9.5 million. The major components of the 1996 Plan included: . 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; . 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 . 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 $6.8 million and net operating loss of $350,000 for the year ended December 31, 1996. The restructuring of the Company's laboratory operations consisted primarily of: . plans to relocate the Company's facility in Indiana to Chicago; . the downsizing of its Arizona laboratory operations; . the standardization of laboratory and testing methods throughout all of the Company's laboratories, resulting in the write-down of equipment that will no longer be utilized; and . the shutdown of a laboratory facility in the Midwest. During 1999, pursuant to the 1996 Plan, the Company incurred the following: . Cash expenditures for $345,000 for lease and other contractual obligations. . Non-cash asset write-downs of $157,000, primarily pertaining to hospitals previously closed and the shutdown of certain computer systems. . The Company recognized a $321,000 favorable settlement related to a laboratory operations' contract that was terminated as part of the 1996 restructuring plan. . 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. F-29 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1998, the Company took the following actions pursuant to the 1996 Plan: . The Company closed one animal hospital. . The Company shutdown certain computer hardware and software, as part of our migration to common computer systems. . The Company decided that two hospitals would continue to be operated instead of closed as was originally outlined in the 1996 restructuring plan. The hospitals' local markets improved since the 1996 Plan was determined, causing the Company's management to revise its plan. . The Company terminated its attempt 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 were ultimately retained, were utilized to offset increases in the expected cost to extinguish lease commitments and contract obligations that were part of the 1996 Plan. As of December 31, 1999, all phases of the 1996 Plan were complete and no restructuring reserves remained 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 $2.1 million. The major components of the 1997 Plan consisted of the termination of leases, amounting to $1.2 million, 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 $5.4 million and net operating income of $176,000 for the year ended December 31, 1997. During the year ended December 31, 2000, the Company incurred $190,000 of expenditures for lease and other contractual obligations. During 1999, the actions taken pursuant to the 1997 Plan were as follows: . The Company sold one hospital resulting in cash expenditures of $2,000 and non-cash asset write-downs of $64,000. . The Company closed three hospitals resulting in cash expenditures of $4,000 and non-cash asset write-downs of $53,000. . The Company incurred cash expenditures of $71,000 for lease and other contractual obligations. . The Company recorded an additional $28,000 non-cash asset write-down pertaining to a hospital previously closed. . During the fourth quarter of 1999, the Company reached favorable settlements from the sale and/or closure of the hospitals noted in the first two bulleted points 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, we determined that five of the animal hospitals that were to be sold as a part of the 1997 Plan would be kept due to their improved performance. F-30 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000, $153,000 of the restructuring reserves from the 1997 Plan remain on our balance sheet, consisting primarily of lease and other contractual obligations. All significant phases of the 1997 Plan were complete as of December 31, 1999, although certain lease obligations will continue though 2005. The following tables summarize the activity in the Company's restructuring reserves (in thousands):
The 1996 Plan ------------- Cash Non-Cash Charges Charges Total ------- -------- ------ 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....................................... $ -- $ -- $ -- ====== ===== ====== The 1997 Plan ------------- Cash Non-Cash Charges Charges Total ------- -------- ------ 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 Cash expenditures for lease and other contractual obligations. (190) -- (190) ------ ----- ------ Balance, December 31, 2000....................................... $ 153 $ -- $ 153 ====== ===== ======
17. Subsequent Events From January 1, 2001 through March 28, 2001, the Company has acquired nine animal hospitals, of which two were merged upon acquisition into existing VCA facilities, for an aggregate consideration (including acquisition costs) of $11.9 million, consisting of $10.3 million in cash, $1.5 million in debt and the assumption of liabilities totaling $80,000. In addition, on January 30, 2001, the Company opened a diagnostics imaging center that performs CT scans and MRI's. The total cost of forming the center was $800,000, consisting of equipment and leasehold improvements. F-31 VCA ANTECH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS As of September 30, 2001 and December 31, 2000 (In thousands) (Unaudited) ASSETS
September 30, December 31, 2001 2000 ------------- ------------ Current assets: Cash and equivalents.................................................... $ 23,631 $ 10,519 Trade accounts receivable, less allowance for uncollectible accounts of $5,077 and $4,110 at September 30, 2001 and December 31, 2000, respectively.......................................................... 17,138 15,450 Inventory, prepaid expense and other.................................... 8,080 9,197 Deferred income taxes................................................... 5,837 4,655 Prepaid income taxes.................................................... 8,923 9,402 --------- --------- Total current assets................................................ 63,609 49,223 Property and equipment, net................................................ 89,060 86,972 Goodwill, net.............................................................. 316,308 310,185 Covenants not to compete, net.............................................. 15,512 19,549 Notes receivable, net...................................................... 2,983 2,178 Deferred financing costs, net.............................................. 11,839 13,373 Other...................................................................... 1,916 1,590 --------- --------- $ 501,227 $ 483,070 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations................................ $ 8,952 $ 5,756 Accounts payable........................................................ 7,885 8,393 Accrued payroll and related liabilities................................. 12,265 8,335 Other accrued liabilities............................................... 17,653 17,242 --------- --------- Total current liabilities........................................... 46,755 39,726 Long-term obligations, less current portion................................ 362,413 356,993 Deferred income taxes...................................................... 14,657 8,484 Minority interest.......................................................... 5,143 3,610 Other liabilities.......................................................... -- 1,500 Series A Redeemable Preferred Stock, at redemption value................... 86,342 77,875 Series B Redeemable Preferred Stock, at redemption value................... 83,863 76,747 Stockholders' equity (deficit): Common stock............................................................ 182 175 Additional paid-in capital.............................................. 19,567 18,498 Notes receivable from stockholders...................................... (518) (518) Accumulated deficit..................................................... (115,159) (100,020) Accumulated comprehensive loss.......................................... (2,018) -- --------- --------- Total stockholders' deficit......................................... (97,946) (81,865) --------- --------- $ 501,227 $ 483,070 ========= =========
The accompanying notes are an integral part of these condensed consolidated balance sheets. F-32 VCA ANTECH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 2001 and 2000 (Unaudited) (In thousands)
Nine Months Ended September 30, ------------------ 2001 2000 -------- -------- Revenue............................................................................... $305,365 $269,281 Direct costs (excludes operating depreciation of $6,182 and $4,998 for the nine months ended September 30, 2001 and 2000, respectively).................................... 212,042 191,269 -------- -------- 93,323 78,012 Selling, general and administrative................................................... 24,166 20,465 Depreciation and amortization......................................................... 19,121 13,200 Write-down and loss on sale of assets................................................. 8,745 -- Recapitalization costs................................................................ -- 34,823 Stock-based compensation.............................................................. 382 -- -------- -------- Operating income................................................................... 40,909 9,524 Net interest expense.................................................................. 32,387 8,433 Other (income) expense................................................................ 233 (3,200) -------- -------- Income before minority interest and provision for income taxes..................... 8,289 4,291 Minority interest in income of subsidiaries........................................... 1,104 808 -------- -------- Income before provision for income taxes and extraordinary item.................... 7,185 3,483 Provision for income taxes............................................................ 6,741 2,709 -------- -------- Income (loss) before extraordinary item............................................ 444 774 Extraordinary loss on early extinguishment of debt (net of income tax benefit of $1,845)........................................................................... -- 2,659 -------- -------- Net income (loss).................................................................. $ 444 $ (1,885) ======== ======== Increase in carrying amount of redeemable preferred stock............................. 15,583 539 -------- -------- Net income (loss) available to common stockholders.................................... $(15,139) $ (2,424) ======== ======== Basic earnings (loss) per common share: Income (loss) before extraordinary item............................................ $ (0.86) $ -- Extraordinary loss on early extinguishment of debt................................. -- (0.01) -------- -------- Earnings (loss) per common share................................................... $ (0.86) $ (0.01) ======== ======== Diluted earnings (loss) per common share: Income (loss) before extraordinary item............................................ $ (0.86) $ -- Extraordinary loss on early extinguishment of debt................................. -- (0.01) -------- -------- Earnings (loss) per common share................................................... $ (0.86) $ (0.01) ======== ======== Shares used for computing basic earnings per share................................. 17,643 306,718 ======== ======== Shares used for computing diluted earnings per share............................... 17,643 306,718 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-33 VCA ANTECH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2001 and 2000 (Unaudited) (In thousands)
2001 2000 -------- --------- Cash flows from operating activities: Net income (loss).......................................................... $ 444 $ (1,885) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................................... 19,121 13,200 Amortization of debt discount and deferred financing costs.............. 1,667 283 Extraordinary loss on early extinguishment of debt...................... -- 4,504 Recapitalization costs.................................................. -- 34,823 Interest paid in kind on senior notes................................... 12,259 -- Write-down and loss on sale of assets................................... 8,745 -- Gain on sale of investment in VPI....................................... -- (3,200) Minority interest in income of subsidiaries............................. 1,104 808 Distributions to minority interest partners............................. (1,083) (1,031) Stock-based compensation................................................ 382 -- Provision for uncollectible accounts.................................... 2,182 2,379 Increase in accounts receivable, net.................................... (3,736) (5,139) Decrease (increase) in inventory, prepaid expense and other assets...... 686 (16) Decrease (increase) in prepaid income taxes............................. 479 (3,103) Increase in accounts payable and accrued liabilities.................... 3,575 5,352 Decrease in deferred revenue............................................ (1,500) -- Change in deferred taxes, net........................................... 4,991 -- -------- --------- Net cash provided by operating activities............................ 49,316 46,975 -------- --------- Cash flows from investing activities: Property and equipment additions........................................ (10,604) (13,686) Business acquisitions, net of cash acquired............................. (20,615) (8,988) Proceeds from sales of marketable securities, net....................... -- 135,666 Investments in marketable securities, net............................... -- (129,992) Payment for covenants not to compete.................................... -- (15,630) Proceeds from sale of real estate....................................... 603 -- Net proceeds from sale of investment in VPI............................. -- 8,200 Investment in Zoasis ................................................... -- (5,000) Other................................................................... 285 317 -------- --------- Net cash used in investing activities................................ (30,331) (29,113) -------- --------- Cash flows from financing activities: Repayment of long-term obligations...................................... (3,735) (172,342) Net payments related to recapitalization................................ (2,138) (29,643) Proceeds from issuance of long-term debt................................ -- 356,670 Payment of deferred financing costs..................................... -- (13,958) Proceeds from issuance of common stock under stock option plans......... -- 923 Purchase of treasury stock.............................................. -- (3,323) Proceeds from issuance of preferred stock............................... -- 149,231 Proceeds from issuance of common stock.................................. -- 14,350 Proceeds form issuance of stock warrants................................ -- 1,149 Repurchase of common stock.............................................. -- (314,508) -------- --------- Net cash used in financing activities................................ (5,873) (11,451) -------- --------- Increase (decrease) in cash and equivalents.................................... 13,112 6,411 Cash and equivalents at beginning of period.................................... 10,519 10,620 -------- --------- Cash and equivalents at end of period.......................................... $ 23,631 $ 17,031 ======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-34 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) (1) General The accompanying unaudited condensed consolidated financial statements of VCA Antech, Inc. and subsidiaries (the "Company" or "VCA") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States 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 nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Company's 2000 consolidated financial statements and footnotes thereto included in the Company's S-1 Registration Statement filed on August 9, 2001 with the SEC. Prior to September 24, 2001, VCA was known as Veterinary Centers of America, Inc. (2) Acquisitions During the third quarter of 2001, the Company purchased five animal hospitals, one of which was merged into existing VCA facilities, for an aggregate consideration (including acquisition costs) of $7.4 million, consisting of $6.0 million in cash, $1.4 million in debt and the assumption of liabilities totaling $40,000. The $7.4 million aggregate purchase price was allocated as follows: $425,000 to tangible assets, $5.8 million to goodwill and $1.2 million to other intangible assets. During the second quarter of 2001, the Company purchased four animal hospitals, two of which were merged into existing VCA facilities, for an aggregate consideration (including acquisition costs) of $2.7 million, consisting of $2.4 million in cash, $320,000 in debt and the assumption of liabilities totaling $30,000. The $2.7 million aggregate purchase price was allocated as follows: $82,000 to tangible assets, $2.0 million to goodwill and $609,000 to other intangible assets. During the first quarter of 2001, the Company purchased nine animal hospitals, two of which were merged into existing VCA facilities for an aggregate consideration (including acquisition costs) of $11.9 million, consisting of $10.4 million in cash, $1.4 million in debt and the assumption of liabilities totaling $80,000. The $11.9 million aggregate purchase price was allocated as follows: $827,000 to tangible assets, $9.5 million to goodwill and $1.6 million to other intangible assets. (3) Write-down and loss on sale of assets The Company periodically evaluates whether events, circumstances or net losses at the entity level have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance may not be recoverable. As a result of such analysis, the Company recorded a write-down of goodwill at one animal hospital in the amount of approximately $800,000 during 2001. Also during 2001, five animal hospitals were closed because their operating performance was unsatisfactory. The book value of the related goodwill and certain other assets that were determined to be unrecoverable of approximately $6.0 million was written off during 2001. During the nine months ended September 30, 2001, the Company determined to sell three properties whose fair value was less than their respective book value. F-35 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 2001, the Company sold substantially all the assets of one animal hospital and a portion of real estate related to another animal hospital. Both sales were completed during the nine months ended September 30, 2001 for aggregate cash proceeds of $603,000. In connection with these asset sales, the Company recorded a pre-tax loss of $778,000. As a result of the items discussed above, a non-cash charge to operations in the amount of approximately $8.7 million was recorded in 2001. (4) Calculation of Per Share Amounts Below is a reconciliation of the income (loss) and shares used in the computations of the basic and diluted earnings (loss) per share before extraordinary items ("EPS") (amounts in thousands, except per share amounts):
Nine Months Ended September 30, ------------------ 2001 2000 -------- -------- Income (loss) before extraordinary item............................................. $ 444 $ 774 Increase in carrying amount of Redeemable Preferred Stock........................... (15,583) (539) -------- -------- Income (loss) from continuing operations available to common shareholders (basic and diluted).......................................................................... $(15,139) $ 235 ======== ======== Weighted average common shares outstanding: Basic............................................................................ 17,643 306,718 Effect of dilutive common shares: Stock options................................................................ -- 535 Warrants..................................................................... -- 1,149 -------- -------- Diluted.......................................................................... 17,643 308,402 ======== ======== Earnings (loss) per share (before extraordinary items): Basic............................................................................ $ (0.86) $ -- ======== ======== Diluted.......................................................................... $ (0.86) $ -- ======== ========
(5) Comprehensive Income (Loss) Below is a calculation of comprehensive income (loss) (in thousands):
Nine Months Ended September 30, ---------------- 2001 2000 ------- ------- Net income (loss)...................................... $ 444 $(1,885) Decrease in the intrinsic value of the collar agreement (2,018) -- Decrease in unrealized loss on investment.............. -- 361 ------- ------- Net comprehensive income (loss)........................ $(1,574) $(1,524) ======= =======
No income tax benefit related to the unrealized loss on investment was recognized due to the potential tax treatment of investment losses. See Footnote 8 "Derivatives", for additional information regarding the collar agreement. F-36 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (6) Lines of Business During the nine months ended September 30, 2001 and 2000, the Company had three reportable segments: Animal Hospital, Laboratory 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 Hospital segment provides veterinary services for companion animals and sells related retail products. The Laboratory segment provides testing services for veterinarians both associated with the Company and independent of the Company. Corporate provides selling, general and administrative support for the other segments and recognizes revenue associated with consulting agreements. 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 2000 Financial Statements included in the Company's S-1 filing. 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 intercompany 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):
Animal Intercompany Hospital Laboratory Corporate Eliminations Total -------- ---------- --------- ------------ -------- Nine Months Ended September 30, 2001 Revenue........................... $207,665 $101,855 $ 1,500 $(5,655) $305,365 Operating income (loss)........... 32,330 31,807 (14,101) -- 50,036 Depreciation/amortization expense. 10,829 3,457 4,835 -- 19,121 Capital expenditures.............. 7,093 1,548 1,963 -- 10,604 Nine Months Ended September 30, 2000 Revenue........................... $182,716 $ 90,831 $ 425 $(4,691) $269,281 Operating income (loss)........... 25,114 27,165 (7,932) -- 44,347 Depreciation/amortization expense. 9,173 3,330 697 -- 13,200 Capital expenditures.............. 11,144 1,208 1,334 -- 13,686 At September 30, 2001 Identifiable assets............... 323,764 110,480 66,983 -- 501,227 At December 31, 2000 Identifiable assets............... 312,473 109,453 61,144 -- 483,070
F-37 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Below is a reconciliation between total segment operating income after eliminations and consolidated income (loss) before provision for income taxes as reported on the condensed consolidated statements of operations (in thousands):
Nine Months Ended September 30, ---------------- 2001 2000 ------- ------- Total segment operating income after eliminations $50,036 $44,347 Write-down and loss on sale of assets......... 8,745 -- Stock-based compensation...................... 382 -- Recapitalization costs........................ -- 34,823 ------- ------- Total reported operating income.................. 40,909 9,524 Net interest expense.......................... 32,387 8,433 Other (income) expense........................ 233 (3,200) Minority interest............................. 1,104 808 ------- ------- Income (loss) before provision for income taxes.. $ 7,185 $ 3,483 ======= =======
(7) Other (Income) Expense The components of other (income) expense are as follows: . Loss on hedging instrument--For the nine months ended September 30, 2001, the Company incurred non-cash charges of $233,000 for changes in the time value of a collar agreement. See Footnote 8, "Derivatives", for additional information. . Gain on sale of VPI--The Company sold its investment in VPI and received $8.2 million in cash in February 2000, resulting in a one-time gain of approximately $3.2 million for the nine months ended September 30, 2000. (8) Derivatives Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, (collectively referred to as "derivatives"). All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value with offsets to other comprehensive income or earnings, depending on the type of derivative and/or the underlying cause for the change in fair value. On November 13, 2000, the Company entered into a no-fee interest rate collar agreement with Wells Fargo Bank effective November 15, 2000 and expiring November 15, 2002 (the "collar agreement"). The collar agreement is based on LIBOR, pays out monthly, resets monthly and has a cap and floor notional amount of $62.5 million, with a cap rate of 7.5% and floor rate of 5.9%. The actual cash paid by the Company as a result of LIBOR rates being below the floor of the collar agreement are recorded as a component of earnings. As of September 30, 2001, the Company has paid $600,000 because of LIBOR rates being below the floor of 5.9%. These payments were all made during the nine months ended September 30, 2001 and are included in interest expense. F-38 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's objective for entering into the collar agreement is to minimize the interest rate risks related to our variable rate debt. The collar agreement is considered a cash flow hedge. Because LIBOR rates at September 30, 2001 were below the floor rate in the collar agreement of 5.9% and are projected to remain below the floor rate through the term of the collar agreement, the fair value of the collar agreement is a net liability to the Company of $2.2 million at September 30, 2001. The net liability is recorded in the Company's balance sheet as part of other liabilities. The valuation of the collar agreement is the sum of the following: . Non-cash charges for the changes in the time value of the collar agreement were recorded as a component of other income and expense of $233,000 for the nine months ending September 30, 2001. The cumulative effect of changes in the value of the collar agreement prior to adoption of SFAS 133 was immaterial. . A non-cash charge for the changes in the intrinsic value of the collar agreement resulting in a cumulative net charge of $2.0 million to other comprehensive income as of September 30, 2001. (9) Stock-Based Compensation In connection with the Recapitalization, employee option holders were allowed to exchange their stock options for new stock options with the same intrinsic value. The stock option exchange offer resulted in variable accounting treatment for the new stock options. The Company engaged an appraisal firm to determine the fair value of its common stock as of June 30, 2001. The appraisal firm determined that the fair value of the Company's common stock was $1.55 per share, an increase from the $1.00 per share fair value at the time of the Recapitalization. The effect of the increase in the fair market value of the common stock on these stock options resulted in a charge of $382,000 in the nine months ended September 30, 2001. In August 2001, all of these options were exercised by the holders, which caused the variable accounting treatment to cease. (10) Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, Goodwill and Other Intangible Assets, which changes the way companies account for intangible assets and goodwill associated with business combinations. The principal changes of SFAS No. 142 are as follows: . All goodwill amortization will cease effective January 1, 2002. For the nine months ended September 30, 2001, the Company recorded $6.9 million of goodwill amortization. . All of the goodwill on the Company's balance sheet at June 30, 2001 will continue to be amortized through the remaining months of 2001, under their current amortization schedules. . All goodwill acquired in acquisitions after June 30, 2001 will not be subject to amortization in 2001 or in the future. . All goodwill will be reviewed annually, or as circumstances warrant, using the fair-value-based goodwill impairment tests discussed in SFAS No. 142. As of September 30, 2001, our goodwill balance was $316.3 million. Any impairment recognized associated with the adoption of SFAS No. 142 will be accounted for as a cumulative effect of change in accounting principal. All other intangible assets typically included in goodwill will be valued independently and amortized over their useful lives. For the Company these intangibles may include: . the value of names and addresses associated with customer lists, and . the value of established business names. F-39 VCA ANTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The impact of SFAS No. 142 on the Company's financial statements has not yet been determined. In July, 2001, the FASB issued SFAS No. 141, Business Combinations, which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. The Company does not expect the impact of SFAS No. 141 to have a material impact on its financials statements or its operations. In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30. SFAS No. 144 is intended to establish a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, and to resolve certain implementation issues related to SFAS No. 121. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company will adopt SFAS No. 144 in the first quarter of 2002. The Company has not yet determined what the impact of SFAS No. 144 will be on its financial statements. (11) Reclassifications Certain 2000 balances have been reclassified to conform to the 2001 financial statement presentation. (12) Commitments and Contingencies a. Officers' Compensation Effective upon the closing of the Company's initial public offering, three members of the Company's executive management will amend and restate employment agreements with the Company. These members include the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. The Senior Vice President will retain his existing employment agreement. These agreements aggregate to $1.4 million in salary per year. The agreements allow for upward adjustments to annual salary based on comparable compensation packages for executives at similarly-situated companies, except for the Senior Vice President, whose upward annual salary adjustment is based on the Consumer Price Index for Los Angeles County. The agreements also call for a maximum of $1.1 million to be paid as annual bonuses based on annual performance goals to be set by the compensation committee of the board of directors, except for the Senior Vice President, whose annual bonus is based on EBITDA targets. Lastly, the agreements call for aggregate severance payments under different scenarios with the maximum amount approximating $8.5 million. b. State Laws The laws of many states 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 restriction 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 state. For example, the Company is currently a party to a lawsuit in the State of Ohio in which the State has alleged that the Company's management of a licensed veterinary medical group violates the Ohio statute prohibiting business corporations from providing or holding themselves out as providers of veterinary medical care. On March 20, 2001, the trial court in the case entered summary judgment in favor of the State of Ohio and F-40 issued an order enjoining the Company from operating in the State of Ohio in a manner that is in violation of the state statute. In response, the Company has restructured its operations in the State of Ohio in a manner that it believes conforms to the state law and the court's order. The Attorney General of the State of Ohio has informed the Company that it disagrees with the Company's position and that it does not believe that the Company is in compliance with the court's order. The Company is currently in discussions with the Attorney General's office in the State of Ohio in an attempt to resolve this matter. The Company may not be able to reach a settlement, in which case we would be required to discontinue our operations in the State. The Company's five animal hospitals in the State of Ohio have a book value of $6.1 million as of September 30, 2001. If the Company is required to discontinue its operations in the State of Ohio, it may not be able to dispose of the hospital assets for their book value. The animal hospitals located in the State of Ohio generated revenue and operating income of $1.7 million and $376,000, respectively, for the nine months ended September 30, 2001. F-41 [LOGO] VCA ANTECH PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table itemizes the expenses incurred by the Registrant in connection with the issuance and distribution of the Securities being registered, other than underwriting discounts. All the amounts shown are estimates except the Securities and Exchange Commission registration fee and the NASD filing fee. Registration fee--Securities and Exchange Commission....... $ 60,375 Filing fee--National Association of Securities Dealers, Inc 24,650 Listing fee--The Nasdaq National Market.................... 95,000 Accounting fees and expenses............................... 250,000 Legal fees and expenses (other than blue sky).............. 450,000 Blue sky fees and expenses, including legal fees........... 10,000 Printing; stock certificates............................... 200,000 Transfer agent and registrar fees.......................... 15,000 Miscellaneous.............................................. 50,000 ---------- Total................................................... $1,155,025 ==========
Item 14. Indemnification of Directors and Officers. Subsection (a) of Section 145 of the General Corporation Law of the State of Delaware, the "DGCL," empowers a corporation to indemnify any person who by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent that a director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided by, or granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled; and empowers the corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation, or is or was serving at the request of II-1 the corporation as a director, officer, employee or against another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. As permitted by Delaware law, our amended and restated certificate of incorporation, which is filed as Exhibit 3.1, provides that no director of ours will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for the following: . for liability for any breach of duty of loyalty to us or to our stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . for unlawful payment of dividends or unlawful stock repurchases or redemptions under Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derived an improper personal benefit. Our amended and restated certificate of incorporation further provides that we must indemnify our directors and executive officers and may indemnify our other officers and employees and agents to the fullest extent permitted by Delaware law. We believe that indemnification under our amended and restated certificate of incorporation covers negligence and gross negligence on the part of indemnified parties. Our by-laws, which is filed as Exhibit 3.2, provides us with the authority to indemnify our directors, officers and agents to the full extent allowed by Delaware law. We intend to enter into indemnification agreements, the form of which is filed as Exhibit 10.13, with each of our directors and officers. These agreements, among other things, will require us to indemnify each director and officer for certain expenses including attorneys' fees, judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in our right, arising out of the person's services as our director or officer, any subsidiary of ours or any other company or enterprise to which the person provides services at our request. The underwriting agreement will provide for indemnification by our underwriters, our directors, our officers who sign the registration statement, and our controlling persons for some liabilities, including liabilities arising under the Securities Act. Item 15. Recent Sales of Unregistered Securities. In January 2000, we granted 793,860 shares of restricted stock bonus awards to Robert L. Antin, 504,045 shares to Arthur J. Antin, 335,190 shares to Neil Tauber, 317,550 shares to Tomas W. Fuller and 30,000 shares to Dawn Olsen for an aggregate of 1,980,645 shares of common stock. These stock bonus awards have all been exercised. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. In February 1999 and January 1998, we granted 1,212,660 shares of restricted stock bonus awards to Robert L. Antin, 752,940 shares to Arthur J. Antin, 330,675 shares to Neil Tauber, 394,620 shares to Tomas W. Fuller and 49,350 shares to Dawn Olsen for an aggregate of 2,740,245 shares of common stock. These stock bonus awards have all been exercised. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. As part of our recapitalization, on September 20, 2000 we made the following sales of unregistered securities: . Issued and sold 17,524,337 shares of our common stock at a per share purchase price of $1.00 for an aggregate purchase price of $17.5 million to the following: Robert L. Antin, 1,906,380 shares; Arthur J. Antin, 400,005 shares; Neil Tauber, 49,995 shares; Tomas W. Fuller, 200,010 shares; certain entities II-2 controlled by Leonard Green & Partners, 14,336,112 shares; and certain of our employees, some of whom are accredited and some of whom are unaccredited, 631,835 shares. These securities were issued in reliance on the exemption from registration provided by Regulation D, Rule 506, of the Securities Act. . Issued and sold 2,998,408 shares of 14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock at a per share purchase price of $25.00 for an aggregate purchase price of approximately $75.0 million to the following: Green Equity Investors III, L.P. and affiliated investment funds, 2,826,000 shares; GS Mezzanine Partners II, L.P. and affiliated investment funds, 122,123 shares; TCW Leveraged Income Trust, L.P. and affiliated investment funds, 35,918 shares; and The Northwestern Mutual Life Insurance Company, 14,367 shares. These securities were issued in reliance on the exemption from registration provided by Regulation D, Rule 506, of the Securities Act. . Issued and sold 2,970,822 shares of 12% Series B Junior Redeemable Cumulative Preferred Stock at a per share purchase price of $25.00 for an aggregate purchase price of approximately $74.3 million to the following: Green Equity Investors III, L.P. and affiliated investment funds, 2,800,000 shares; GS Mezzanine Partners II, L.P. and affiliated investment funds, 121,000 shares; TCW Leveraged Income Trust, L.P. and affiliated investment funds, 35,588 shares; and The Northwestern Mutual Life Insurance Company, 14,234 shares. These securities were issued in reliance on the exemption from registration provided by Regulation D, Rule 506, of the Securities Act. . Sold $100.0 million in Senior Notes due 2010 pursuant to an indenture of the same date with Chase Manhattan Bank and Trust Company, National Association, as trustee, to the following: GS Mezzanine Partners II, L.P. and affiliated investment funds, $70.8 million; TCW Leveraged Income Trust, L.P. and affiliated funds, $20.8 million; and The Northwestern Mutual Life Insurance Company, $8.3 million. In connection with the sale of the Senior Notes, VCA Antech issued warrants to purchase up to 1,149,990 shares of common stock to the following investors: GS Mezzanine Partners II, L.P. and affiliated investment funds, 814,575 warrants; TCW Leveraged Income Trust, L.P. and affiliated funds, 239,580 warrants; and The Northwestern Mutual Life Insurance Company, 95,835 warrants. The warrants allow the holders to purchase the common shares at a price of $0.0007 on or before the closing of an initial public offering of our common stock. These securities were issued in reliance on the exemption from registration provided by Regulation D, Rule 506, of the Securities Act. . Sold $20.0 million in Senior Subordinated Notes due 2010 pursuant to an indenture of the same date with Chase Manhattan Bank and Trust Company, National Association, as trustee, to the following: GS Mezzanine Partners II, L.P. and affiliated investment funds, $14.2 million; TCW Leveraged Income Trust, L.P. and affiliated funds, $4.2 million; and The Northwestern Mutual Life Insurance Company, $1.7 million. These securities were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. II-3 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits
Number Exhibit Description ------ ------------------- 1.1 Form of Underwriting Agreement.(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of Registrant.(2) 3.3 Form of Amended and Restated Bylaws of Registrant.(3) 4.1 Stockholders Agreement by and among Registrant, Green Equity Investors III, L.P., Co-Investment Funds and Stockholders.(4) 4.2 Amendment No. 1 to Stockholders Agreement by and among Registrant, Green Equity Investors III, L.P., GS Mezzanine Partners II. L.P. and Robert L. Antin. 4.3 Indenture Agreement, dated as of September 20, 2000, by and between Registrant and Chase Manhattan Bank and Trust Company, National Association.(4) 4.4 Indenture Agreement, dated as of September 20, 2000, by and among Vicar Operating, Inc., Chase Manhattan Bank and Trust Company, National Association, with Registrant and its subsidiaries as Guarantors.(4) 4.5 Credit and Guaranty Agreement, dated as of September 20, 2000, by and among Registrant, Vicar Operating, Inc., certain subsidiaries of Registrant as Guarantors, Goldman Sachs Credit Partners L.P. and Wells Fargo Bank, National Association as Administrative and Collateral Agent.(4) 5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, LLP, regarding validity of securities. 10.1 Form of Employment Agreement by and between Registrant and Robert L. Antin. 10.2 Form of Employment Agreement by and between Registrant and Arthur J. Antin. 10.3 Form of Employment Agreement by and between Registrant and Tomas W. Fuller. 10.4 Employment Agreement by and between Registrant and Neil Tauber. 10.5 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Robert L. Antin.(4) 10.6 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Arthur J. Antin.(4) 10.7 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Tomas W. Fuller.(4) 10.8 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Neil Tauber.(4) 10.9 Amended and Restated 1996 Stock Incentive Plan. 10.10 2001 Stock Incentive Plan. 10.11 Corporate Headquarters Lease, dated as of August 1, 1999, by and between Registrant and Werner Wolfen, Michael Duritz, Nancy Bruch, Dorothy A. Duritz, Harvey Rosenberg and Judy Rosenberg (Landlords).(4) 10.12 Management Services Agreement, dated as of September 20, 2000, by and among Registrant, Vicar Operating, Inc. and Leonard Green and Partners, L.P.(4) 10.13 Form of Indemnification Agreement.(4) 10.14 Amended and Restated Agreement and Plan of Merger, dated as of August 11, 2000, by and among Registrant, Vicar Operating, Inc. and Vicar Recap, Inc.(4) 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, LLP (Set forth in Exhibit 5.1). 24.1 Power of Attorney.(4)
-------- (1) To be filed by amendment. (2) Previously filed as Exhibit 3.1 (3) Previously filed as Exhibit 3.2 (4) Previously filed. (b) Financial Statement Schedules: . Report of Independent Public Accountants . Schedule II--Valuation and Qualifying Accounts II-4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of VCA Antech, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of VCA Antech, Inc. and subsidiaries included in this registration statement and have issued our report thereon dated March 28, 2001. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. 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 financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic 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 financial statements taken as a whole. /S/ ARTHUR ANDERSEN LLP _____________________________________ Arthur Andersen LLP Los Angeles, California March 28, 2001 II-5 SCHEDULE II VCA ANTECH, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2000, 1999 and 1998 (in thousands)
Balance at Charged to Balance beginning costs and at end of period expenses Write-offs Other(1) of period ---------- ---------- ---------- -------- --------- Year ended December 31, 2000 Allowance for uncollectible accounts(2) $7,432 $3,105 $(6,771) $407 $4,173 Year ended December 31, 1999 Allowance for uncollectible accounts(2) $6,532 $2,515 $(2,252) $637 $7,432 Year ended December 31, 1998 Allowance for uncollectible accounts(2) $5,128 $2,898 $(1,831) $337 $6,532
-------- (1)"Other" changes in the allowance for uncollectible accounts include allowances acquired with animal hospitals and laboratories acquisitions. (2)Balance includes allowance for trade accounts receivable and notes receivable. Item 17. Undertakings. (a) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer of controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on October 30, 2001. /s/ TOMAS W. FULLER By: _____________________________________ Tomas W. Fuller Its: Chief Financial Officer, Principal Accounting Officer, Vice President and Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- * October 30, 2001 ---------------------- Chairman of the Board, President and Robert L. Antin Chief Executive Officer ---------------------- Director, Chief Operating Officer, October 30, 2001 Arthur J. Antin Senior Vice President and Secretary ---------------------- Chief Financial Officer, Principal October 30, 2001 Tomas W. Fuller Accounting Officer, Vice President and Assistant Secretary * Director October 30, 2001 ---------------------- John M. Baumer * Director October 30, 2001 ---------------------- John G. Danhakl ---------------------- Director October 30, 2001 Melina Higgins * Director October 30, 2001 ---------------------- Peter J. Nolan *By: October 30, 2001 /s/ TOMAS W. FULLER ---------------------- Attorney-in-Fact
II-7 EXHIBIT INDEX
Number Exhibit Description ------ ------------------- 1.1 Form of Underwriting Agreement.(1) 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Form of Amended and Restated Certificate of Incorporation of Registrant.(2) 3.3 Form of Amended and Restated Bylaws of Registrant.(3) 4.1 Stockholders Agreement by and among Registrant, Green Equity Investors III, L.P., Co-Investment Funds and Stockholders.(4) 4.2 Amendment No. 1 to Stockholders Agreement by and among Registrant, Green Equity Investors III, L.P., GS Mezzanine Partners II. L.P. and Robert L. Antin. 4.3 Indenture Agreement, dated as of September 20, 2000, by and between Registrant and Chase Manhattan Bank and Trust Company, National Association.(4) 4.4 Indenture Agreement, dated as of September 20, 2000, by and among Vicar Operating, Inc., Chase Manhattan Bank and Trust Company, National Association, with Registrant and its subsidiaries as Guarantors.(4) 4.5 Credit and Guaranty Agreement, dated as of September 20, 2000, by and among Registrant, Vicar Operating, Inc., certain subsidiaries of Registrant as Guarantors, Goldman Sachs Credit Partners L.P. and Wells Fargo Bank, National Association as Administrative and Collateral Agent.(4) 5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld, LLP, regarding validity of securities. 10.1 Form of Employment Agreement by and between Registrant and Robert L. Antin. 10.2 Form of Employment Agreement by and between Registrant and Arthur J. Antin. 10.3 Form of Employment Agreement by and between Registrant and Tomas W. Fuller. 10.4 Employment Agreement by and between Registrant and Neil Tauber. 10.5 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Robert L. Antin.(4) 10.6 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Arthur J. Antin.(4) 10.7 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Tomas W. Fuller.(4) 10.8 Non-Compete Agreement, dated as of September 20, 2000, by and between Registrant and Neil Tauber.(4) 10.9 Amended and Restated 1996 Stock Incentive Plan. 10.10 2001 Stock Incentive Plan. 10.11 Corporate Headquarters Lease, dated as of August 1, 1999, by and between Registrant and Werner Wolfen, Michael Duritz, Nancy Bruch, Dorothy A. Duritz, Harvey Rosenberg and Judy Rosenberg (Landlords).(4) 10.12 Management Services Agreement, dated as of September 20, 2000, by and among Registrant, Vicar Operating, Inc. and Leonard Green and Partners, L.P.(4) 10.13 Form of Indemnification Agreement.(4) 10.14 Amended and Restated Agreement and Plan of Merger, dated as of August 11, 2000, by and among Registrant, Vicar Operating, Inc. and Vicar Recap, Inc.(4) 21.1 List of Subsidiaries of Registrant. 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, LLP (Set forth in Exhibit 5.1). 24.1 Power of Attorney.(4)
-------- (1) To be filed by amendment. (2) Previously filed as Exhibit 3.1. (3) Previously filed as Exhibit 3.2. (4) Previously filed. EX-3.1 3 dex31.txt CERTIFICATE OF MERGER EXHIBIT 3.1 CERTIFICATE OF MERGER OF VICAR RECAP, INC., ------------------ a Delaware corporation, with and into VETERINARY CENTERS OF AMERICA, INC., ------------------------------------ a Delaware corporation Pursuant to Section 251 of the Delaware General Corporation Law Veterinary Centers of America, Inc., a corporation organized and existing pursuant to the Delaware General Corporation Law (the "DGCL"), does hereby certify that: 1. The name and state and date of incorporation of each of the constituent corporations (the "Constituent Corporations") are as follows: Veterinary Centers of America, Inc. was incorporated on May 4, 1987 in the State of Delaware pursuant to the DGCL; and Vicar Recap, Inc was incorporated on March 29, 2000 in the State of Delaware pursuant to the DGCL. 2. An Amended and Restated Agreement and Plan of Merger has been approved, adopted, certified, executed, and acknowledged by each of the Constituent Corporations in accordance with the requirements of Section 251 of the DGCL. 3. Veterinary Centers of America, Inc. shall be the surviving corporation in the merger (the "Surviving Corporation"). Upon the effectiveness of the merger, the name of the Surviving Corporation shall continue to be "Veterinary Centers of America, Inc." 4. At the effective time of the merger, the certificate of incorporation of the Surviving Corporation shall be amended to read in its entirety as set forth on Exhibit A. 5. The executed Amended and Restated Agreement and Plan of Merger is on file at the principal place of business of the Surviving Corporation. The address of the principal place of business of the Surviving Corporation is: 12401 West Olympic Boulevard Los Angeles, California 90064 6. A copy of the Amended and Restated Agreement and Plan of Merger will be furnished by the Surviving Corporation, on request and without cost, to any stockholder of any of the Constituent Corporations. The undersigned declares under penalty of perjury that the matters set forth herein are true and correct of his own knowledge. IN WITNESS WHEREOF, the undersigned has caused this Certificate of Merger to be duly executed and delivered as of the 20th day of September, 2000. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Robert Antin ------------------------------- Robert Antin Chief Executive Officer EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF VETERINARY CENTERS OF AMERICA, INC. FIRST: The name of the Corporation is Veterinary Centers of ----- America, Inc. SECOND: The address of the Corporation's registered office in ------ the State of Delaware is 30 Old Rudnick Lane, in the City of Dover, County of Kent, Delaware 19901. The name of the Corporation's registered agent at such address is CorpAmerica, Inc. THIRD: The purpose of the Corporation is to engage in any ----- lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock that ------ the Corporation shall have authority to issue is Thirty Million (30,000,000), consisting of: (i) Ten Million (10,000,000) shares of Common Stock of the par value of one cent ($.01) each (hereinafter referred to as "Common Stock"); and (ii) Twenty Million (20,000,000) shares of Preferred Stock of the par value of one cent ($.01) each (hereinafter referred to as "Preferred Stock"). A. Common Stock ------------ 1. Except where otherwise provided by law, by this Amended and Restated Certificate of Incorporation, or by resolution of the Board of Directors pursuant to this Article 4, the holders of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive voting rights and powers. 2. Subject to all of the rights of the Preferred Stock, dividends may be paid on the Common Stock, as and when declared by the Board of Directors, out of any funds of the Corporation legally available for the payment of such dividends. B. Preferred Stock --------------- The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and all other rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. FIFTH: The Corporation is to have a perpetual existence. ----- SIXTH: The business and affairs of the Corporation shall be ----- managed by or under the direction of the Board of Directors, and the directors need not be elected by written ballot unless required by the Bylaws of the Corporation. SEVENTH: In furtherance and not in limitation of the powers ------- conferred by the laws of the State of Delaware, the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the Corporation. EIGHTH: (a) A director of the Corporation shall not be ------ personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended after the date of filing of this Amended and Restated Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing in respect of any act or omission occurring prior to the time of such repeal or modification. (b) The Corporation shall indemnify, to the fullest extent now or hereafter permitted by the General Corporation Law of the State of Delaware, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to be taken or omitted in such capacity, and may to the same extent indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with such action, suit or proceeding or any appeal therefrom. NINTH: The Corporation reserves the right to amend or repeal ----- any provision contained in this Amended and Restated Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware, and all of the rights conferred upon stockholders are granted subject to this reservation. 3 VETERINARY CENTERS OF AMERICA, INC. CERTIFICATE OF DESIGNATIONS OF THE POWERS, PREFERENCES AND RELATIVE, OPTIONAL AND OTHER SPECIAL RIGHTS OF 14% SERIES A SENIOR REDEEMABLE EXCHANGEABLE CUMULATIVE PREFERRED STOCK AND OF 12% SERIES B JUNIOR REDEEMABLE CUMULATIVE PREFERRED STOCK, AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF ----------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ----------------------------------------- Veterinary Centers of America, Inc. (the "Company"), a Delaware corporation, does hereby certify that the board of directors of the Company (the "Board of Directors"), by unanimous written consent, dated as of September 20, 2000, duly approved and adopted the following resolutions (the "Resolutions"): I. RESOLVED, that, pursuant to the authority vested in the Board of Directors by the Company's Amended and Restated Certificate of Incorporation, the Board of Directors does hereby create, authorize and provide for the issue of the 14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock (the "Senior Preferred Stock"), par value $0.01 per share, consisting of 4,000,000 authorized shares, to have the powers, designations and preferences, the relative, participating, optional and other special rights and the qualifications, limitations and restrictions thereof (in addition to those are set forth in the Company's Amended and Restated Certificate of Incorporation) as follows: 1. Definitions and Interpretation. ------------------------------ (a) Definitions. As used in this Certificate of Designation, the ----------- following terms shall have the following meanings, unless the context otherwise requires: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. "Amended and Restated Certificate of Incorporation" means the Company's Amended and Restated Certificate of Incorporation. "Bank Facility" means the one or more credit agreements (including, without limitation, the Credit Agreement, dated as of September 20, 2000, by and among Operating Company, as borrower, the Company, certain subsidiaries of the Operating Company, as guarantors, the financial institutions parties thereto, Goldman Sachs Credit Partners L.P., as sole lead arranger and sole syndication agent, and Wells Fargo Bank, N.A., as administrative agent and collateral agent) entered into by and among Operating Company, certain of its subsidiaries (if any) and certain financial institutions, which provide for in the aggregate one or more term loans and/or revolving credit and letter of credit facilities, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, as such credit agreement and/or related documents may be amended, restated, supplemented, renewed, replaced or otherwise modified from time to time whether or not with the same agent, trustee, representative lenders or holders, and, subject to the proviso to the next succeeding sentence irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Bank Facility" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any such credit agreement and all refundings, refinancings and replacements of any such credit agreement, including any agreement (i) extending the maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder; provided, however, that the borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms hereof. "Beneficial Owner" or "beneficial owner" for purposes of the definition of Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Preferred Stock Issue Date), whether or not applicable. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day that is not a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are not required to be open. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness that is not itself otherwise capital stock), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalent" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and -2- having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more related transactions, of all or substantially all of the properties and assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than an Excluded Person or Excluded Persons, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction or other event (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than an Excluded Person or Excluded Persons, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the voting stock of the Company, or (iv) the first day on which a majority of the members of the Board are not Continuing Directors. Notwithstanding the foregoing, under no circumstances shall transfers among Green Equity Investors III, L.P. and the Co-Investors and their respective Affiliates or distributions to limited partners of Green Equity Investors III, L.P. or to the members of the Co-Investors be deemed a Change of Control. "Co-Investors" means VCA Co-Investment Fund I, LLC, VCA Co-Investment Fund II, LLC, VCA Co-Investment Fund III, LLC, VCA Co-Investment Fund IV, LLC, VCA Co-Investment Fund V, LLC, VCA Co-Investment Fund VI, LLC, VCA Co-Investment Fund VII, LLC and VCA Co-Investment Fund VIII. "Company Purchase Agreement" means that certain Purchase Agreement, dated as of September 20, 2000, by and among the Company, GS Mezzanine Partners II, L.P and Permitted Investors relating to the Company Senior Notes. "Company Senior Notes" means the senior notes due 2010, any Exchange Notes (as defined in the Company Purchase Agreement) and any PIK Notes (as defined in the Company Senior Notes Indenture), including any such notes issued in exchange or replacement therefor, issued pursuant to the Company Senior Notes Indenture. "Company Senior Notes Indenture" means that certain Indenture, dated as of September 20, 2000, by and between the Company and Chase Manhattan Bank and Trust Company, National Association, as trustee, pursuant to which the Company Senior Notes are issued. -3- "Consolidated" means, with respect to the Company, the consolidated accounts of its Subsidiaries with those of the Company, all in accordance with GAAP; provided, that "consolidated" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company. "Consolidated EBITDA" means, with respect to any Person, for any period, the Consolidated Net Income of such Person and its Consolidated Subsidiaries for such period adjusted to add thereto (to the extent deducted from net revenues in determining Consolidated Net Income), without duplication, the sum of (i) an amount equal to any extraordinary or non-recurring loss plus any net loss realized in connection with the sale or other disposition of assets outside the ordinary course of business, the disposition of any securities by such Person or any of its Subsidiaries or the extinguishment of any Indebtedness by such Person or its Subsidiaries, (ii) consolidated income taxes, (iii) consolidated depreciation and amortization (including amortization of debt issuance costs in connection with any Indebtedness of such Person and its Subsidiaries), (iv) Consolidated Fixed Charges; (v) payments pursuant to the Management Services Agreement (or the corresponding provisions of any agreement amending, extending or replacing the Management Services Agreement); and (vi) all other non-cash charges. "Consolidated Fixed Charges" of any Person means, for any period, the aggregate amount (without duplication and determined in each case in accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled to be paid or accrued (including, in accordance with the following sentence, interest attributable to Capitalized Lease Obligations) of such Person and its Consolidated Subsidiaries during such period, excluding amortization of debt issuance costs incurred in connection with the Senior Notes or the Bank Facility but including (i) original issue discount and non-cash interest payments or accruals on any Indebtedness, (ii) the interest portion of all deferred payment obligations, and (iii) all commissions, discounts and other fees and charges owed with respect to bankers' acceptances and letters of credit financings and currency and Interest Swap and Hedging Obligations (and minus net amounts received under Hedging Obligations), in each case to the extent attributable to such period, and (b) the amount of cash dividends paid by such Person or any of its Consolidated Subsidiaries in respect of preferred stock (other than by Subsidiaries of such Person to such Person or such Person's wholly owned Subsidiaries). For purposes of this definition, (x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP and (y) to the extent such expense would result in a liability upon the consolidated balance sheet of such Person in accordance with GAAP, interest expense attributable to any Indebtedness represented by the guaranty by such Person or a Subsidiary of such Person of an obligation of another Person shall be deemed to be the interest expense attributable to the Indebtedness guaranteed. Notwithstanding the foregoing, Consolidated Fixed Charges shall not include costs, fees and expenses incurred in connection with the Merger, and any non-cash charge or expense associated with the write-off of deferred debt issuance costs associated with the Bank Facility or the Senior Notes. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such -4- period, on a consolidated basis, determined in accordance with GAAP; provided, however, that (a) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or one of its wholly owned Subsidiaries, (b) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree or order, or any non-U.S. statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (c) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (d) the cumulative effect of a change in accounting principles shall be excluded, and (e) the costs, fees and expenses incurred in connection with the transactions contemplated by the Merger Agreement shall be excluded, including (i) any charge incurred by any Person or its Subsidiaries arising out of the repurchase at $15 per share on the closing date of the Merger of restricted capital stock of such Person or its Subsidiaries held by certain employees of such Person or its Subsidiaries, (ii) any financing, legal, accounting, investment banking or other professional fees and expenses incurred in connection with the Merger, (iii) any other costs and expenses incurred by any Person and its Subsidiaries in connection with the Merger arising pursuant to certain noncompetition agreements executed with members of senior management of such Person, in connection with the termination of certain employment contracts of such Person and its Subsidiaries and in connection with stay bonuses provided to certain employees of such Person and its Subsidiaries, and (iv) premium payments payable to certain note holders of such Person. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors who (i) was a member of the Board of Directors immediately after consummation of the Merger or (ii) was nominated for election or elected to the Board of Directors with the approval, recommendation or endorsement of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election. "control" means (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise; provided, however, that, with respect to any ownership interest in the Company and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting power normally entitled to vote in the election of directors, managers or trustees, as applicable, shall for such purposes be deemed to constitute control. "Default Event" means any of the following events: (i) any time when the Company fails to make a mandatory redemption of the Senior Preferred Stock when required (whether or not any contractual or other restrictions apply to such redemption) pursuant to Section 5(b) hereof; or (ii) any time when the Company fails to make an offer to -5- repurchase all of the outstanding shares of Senior Preferred Stock following a Change of Control, if such offer to repurchase is required to be made pursuant to Section 8(a) hereof (whether or not any contractual or other restrictions apply to such redemption). "Disqualified Capital Stock" means (a) except as set forth in (b), with respect to any Person, any Equity Interest of such Person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time or both would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such Person or any of its Subsidiaries, in whole or in part, on or prior to September 20, 2012 and (b) with respect to any Subsidiary of such Person (including with respect to any Subsidiary of the Company), any Equity Interests other than any common equity with no preference, privileges, or redemption or repayment provisions and preferred equity owned by the Company or one of its Subsidiaries. "Dividend Payment Date" means January 1, April 1, July 1 and October 1 of each year. "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. "Equity Interest" of any Person means any shares, interests, participations or other equivalents (however designated) in such Person's equity, and shall in any event include any Capital Stock issued by, or partnership or membership interests in, such Person. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Exchange Date" means a date on which shares of Senior Preferred Stock are exchanged by the Company for Exchange Debentures. "Exchange Debentures" means the 14% Subordinated Debentures due 2012 of the Company to be issued at the option of the Company in exchange for the Senior Preferred Stock. "Exchange Indenture" means the Indenture pursuant to which the Exchange Debentures will be issued. "Excluded Persons" means (i) Green Equity Investors III, L.P., (ii) the Co-Investors, and (iii) their Related Parties. "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession in the United States as in effect on the Preferred Stock Issue Date. "Holder" means a Person in whose name a share of Senior Preferred Stock is registered. -6- "Indebtedness" of any Person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of any such Person, to the extent such liabilities and obligations would appear as a liability upon the consolidated balance sheet of such Person in accordance with GAAP, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except those incurred in the ordinary course of its business that would constitute ordinarily a trade payable to trade creditors; (b) all liabilities and obligations, contingent or otherwise, of such Person (i) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (ii) relating to any Capitalized Lease Obligation, or (iii) evidenced by a letter of credit or a reimbursement obligation of such Person with respect to any letter of credit; (c) all net obligations of such Person under Interest Swap and Hedging Obligations; (d) all liabilities and obligations of others of the kind described in the preceding clauses (a), (b) or (c) that such Person has guaranteed or that is otherwise its legal liability or that are secured by one or more Liens on any assets or property of such Person; provided, however, that if the liabilities or obligations that are secured by a Lien have not been assumed in full by such Person or are not such Person's legal liability in full, the amount of such Indebtedness for the purposes of this definition shall be limited to the lesser of the amount of such Indebtedness secured by such Lien or the fair market value of the assets or property securing such Lien; (e) any and all deferrals, renewals, extensions, refinancing and refundings (whether direct or indirect) of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a), (b), (c) or (d), or this clause (e), whether or not between or among the same parties; and (f) all Disqualified Capital Stock of such Person (measured at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends). For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock. "Indentures" means the Company Senior Notes Indenture and the Senior Subordinated Notes Indenture. "Initial Dividend Period" means the dividend period commencing on the Preferred Stock Issue Date and ending on the day before the first Dividend Payment Date to occur thereafter. "Interest Swap and Hedging Obligation" means any obligation of any Person pursuant to any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate exchange agreement, currency exchange agreement or any other agreement or arrangement designed to protect against fluctuations in interest rates or currency values, including, without limitation, any arrangement whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or floating rate of interest on the same notional amount. "Investment" by any Person in any other Person means (without duplication) (a) the acquisition (whether by purchase, merger, consolidation or otherwise) by such Person -7- (whether for cash, property, services, securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities, including any options or warrants, of such other Person or any agreement to make any such acquisition; (b) the making by such Person of any deposit with, or advance, loan or other extension of credit to, such other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person) or any commitment to make any such advance, loan or extension (but excluding accounts receivable, endorsements for collection or deposits arising in the ordinary course of business) other than guarantees of Indebtedness of the Company or any Subsidiary; (c) the making of any capital contribution by such Person to such other Person; and (d) the designation by the Board of Directors of the Company of any Person to be an Unrestricted Subsidiary. The Company shall be deemed to make an Investment in an amount equal to the fair market value of the net assets of any subsidiary (or, if neither the Company nor any of its Subsidiaries has theretofore made an Investment in such subsidiary, in an amount equal to the Investments being made), at the time that such subsidiary is designated an Unrestricted Subsidiary, and any property transferred to an Unrestricted Subsidiary from the Company or a Subsidiary of the Company shall be deemed an Investment valued at its fair market value at the time of such transfer. The amount of any such Investment shall be reduced by any liabilities or obligations of the Company or any of its Subsidiaries to be assumed or discharged in connection with such Investment by an entity other than the Company or any of its Subsidiaries. For purposes of clarification and greater certainty, the designation of a newly formed subsidiary as an Unrestricted Subsidiary shall not constitute an Investment. "Junior Preferred Stock" means the Company's 12% Series B Junior Redeemable Cumulative Preferred Stock, par value $0.01 per share, consisting of 4,000,000 authorized shares. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "Liquidation Preference" means, as of any date, the sum of (a) $25.00 per share of Senior Preferred Stock, plus (b) accrued and unpaid dividends added to the Liquidation Preference in accordance with Section 3(a), minus (c) the Base Amount of any special dividend paid pursuant to Section 3(f). "Management Services Agreement" means that certain Management Services Agreement, dated as of the September 20, 2000, by and between Leonard Green & Partners, L.P., Operating Company and the Company, providing for certain fees, expenses and reimbursements to be paid to Leonard Green & Partners, L.P., as such Management Services Agreement may be amended from time to time. "Merger" means the merger of Recap with and into the Company in accordance with the provisions of the Merger Agreement. -8- "Merger Agreement" means that certain Amended and Restated Agreement and Plan of Merger, dated as of August 11, 2000, between the Company, Operating Company and Recap, as the same may be further amended from time to time. "Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents received by the Company in the case of a sale of Qualified Capital Stock plus, in the case of an issuance of Qualified Capital Stock upon any exercise, exchange or conversion of securities (including options, warrants, rights and convertible or exchangeable debt) of the Company that were issued for cash on or after the Preferred Stock Issue Date, the amount of cash originally received by the Company upon the issuance of such securities (including options, warrants, rights and convertible or exchangeable debt) less the sum of all payments, fees, commissions and expenses (including, without limitation, the fees and expenses of legal counsel and investment banking fees and expenses) incurred in connection with such sale or issuance of Qualified Capital Stock. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with the (A) sale or other disposition of assets outside the ordinary course of business, or (B) disposition of any securities by such Person or any of its Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Subsidiaries, (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss), and (iii) any non-cash compensation expense of such Person attributable to the exercise of options to acquire Capital Stock of the Company by any officers, directors or employees of the Company or any of its Subsidiaries in each case prior to, or in connection with, the consummation of the Merger. "obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Operating Company" means Vicar Operating, Inc., a Delaware corporation. "Other Permitted Payments" means, without duplication, (i) compensation, indemnification and other benefits paid or made available (A) pursuant to the employment agreements between the Company and members of its senior management, (B) for or in connection with services actually rendered to the Company and comparable to those generally paid or made available by entities engaged in the same or similar businesses (including reimbursement or advancement of reasonable out-of-pocket expenses) and loans to officers, directors and employees, (x) in the ordinary course of business or (y) to purchase common stock of the Company in an amount not to exceed $10 million; (ii) payments pursuant to the Management Services Agreement (or the corresponding provisions of any agreement amending, extending or replacing the Management Services Agreement); (iii) the repurchase of common stock, stock options and stock equivalents of the Company held by current or former directors, officers, employees of or consultants and advisors to the Company or any of its Subsidiaries ("Management Stock Repurchases") in an amount of $5 million at the end of fiscal year 2000, and such amount shall be increased by $1 million a -9- year for each fiscal year thereafter, plus the amount of any net cash proceeds to the Company from: (A) sales of Capital Stock of the Company to directors, officers and employees of or consultants and advisors to the Company subsequent to the Preferred Stock Issue Date; and (B) proceeds from any key-person life insurance policies, in either case, to the extent utilized for Management Stock Repurchases; provided, that any amount received from such life insurance not so paid in any fiscal year may be paid in future fiscal years; (iv) Restricted Payments in an aggregate amount not to exceed $10 million; and (v) expenses and payments in connection with the Merger. "Permitted Investment" means (a) Investments in any of the Senior Notes; (b) Investments in Cash Equivalents; (c) Investments in intercompany notes; provided, that Indebtedness under any such notes of a Subsidiary shall be deemed to be a Restricted Investment if such Person ceases to be a Subsidiary; (d) Investments in the form of promissory notes of members of the Company's management not to exceed $5 million in principal amount at any time outstanding solely in consideration of the purchase by such persons of Qualified Capital Stock of the Company; (e) Investments by the Company or any Subsidiary in any Person that is or immediately after such Investment becomes a Subsidiary, or immediately after such Investment merges or consolidates into the Company or any Subsidiary; provided, that such Person is engaged in all material respects in a Related Business; (f) Investments in the Company by any Subsidiary; provided, that in the case of Indebtedness constituting any such Investment, such Indebtedness shall be unsecured and subordinated in all respects to the Company's obligations under the Senior Notes; (g) Investments in securities of trade creditors or customers received in settlement of obligations that arose in the ordinary course of business or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (h) Investments by the Company outstanding on the Preferred Stock Issue Date; (i) transactions or arrangements with officers or directors of the Company or any Subsidiary entered into in the ordinary course of business; (j) any other contract, agreement, arrangement or transaction between the Company or any of its Subsidiaries with any Affiliate; (k) other Investments in any Person (other than a Subsidiary of the Company) having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (k) that are at the time outstanding, not to exceed $10 million; (l) Investments in Subsidiaries of the Company formed or acquired after the Closing Date that (i) are incorporated outside the United States, (ii) are not guarantors under the Senior Subordinated Notes Indenture, and (iii) if they were guarantors, would give rise to an investment in United States property within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time, which Investments shall not exceed in the aggregate more than $10 million outstanding at any time (treating any such Investment that is not Indebtedness at the value thereof on the date it is made); and (m) Investments in Equity Interests of a Person engaged in a Related Business, other than a Person described in clause (e), through the issuance of common stock of the Company. "Permitted Investors" means any of the affiliated investment funds of GS Mezzanine Partners II, L.P., GS Mezzanine Partners II Offshore, L.P., TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P., TCW Leveraged Income Trust -10- IV, L.P., TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent Mezzanine Trust II and The Northwestern Mutual Life Insurance Company. "Person" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock Issue Date" means the date on which the Senior Preferred Stock is originally issued by the Company under this Certificate of Designation. "Qualified Capital Stock" means any Equity Interest that is not Disqualified Capital Stock. "Qualified Exchange" means any legal defeasance, redemption, retirement, repurchase or other acquisition of Capital Stock or Indebtedness of the Company issued on or after the Preferred Stock Issue Date with the Net Cash Proceeds received by the Company from the substantially concurrent sale of its Qualified Capital Stock or any exchange of Qualified Capital Stock of the Company for any Capital Stock or Indebtedness of the Company issued on or after the Issue Date. "Quarterly Dividend Period" means the quarterly period commencing on each January 1, April 1, July 1 and October 1 and ending on the day before the following Dividend Payment Date. "Recap" means Vicar Recap, Inc., a Delaware corporation. "Redemption Date," with respect to any shares of Senior Preferred Stock, means the date on which such shares of Senior Preferred Stock are redeemed by the Company. "Related Business" means the business conducted or proposed to be conducted by the Company as of the Preferred Stock Issue Date and any and all businesses that in the good faith judgment of the Board of Directors of the Company are reasonably related businesses, including reasonably related extensions thereof. "Related Party" means with respect to any Excluded Person, (A) any Affiliate, controlling stockholder, 80% or more owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Excluded Person or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons holding an 80% or more controlling interest of which consist of such Excluded Person and/or such other persons referred to in the immediately preceding clause (A). "Restricted Investment" means, in one or a series of related transactions, any Investment, other than investments in Cash Equivalents and other Permitted Investments; provided, however, that a merger of another Person with or into the Company or a -11- Subsidiary shall not be deemed to be a Restricted Investment so long as the surviving entity is the Company or a Subsidiary. "Restricted Payment" means, (a) the declaration or payment of any dividend or other distribution in respect of Junior Securities or Equity Interests of the Company or any of the Company's Subsidiaries, (b) any payment on account of the purchase, redemption or other acquisition or retirement for value of Junior Securities or Equity Interests of the Company or any of the Company's Subsidiaries, and (c) any Restricted Investment by such Person; provided, however, that the term "Restricted Payment" shall not include (i) any dividend, distribution or other payment on or with respect to Equity Interests of the Company to the extent payable solely in shares of Qualified Capital Stock of the Company; (ii) any dividend, distribution or other payment to the Company, or to any of its Subsidiaries, by the Company or any of its Subsidiaries; (iii) payments made in connection with the Merger; (iv) Permitted Investments; or (v) pro rata dividends and other distributions on Equity Interests of any Subsidiary by such Subsidiary. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Senior Notes" means the Company Senior Notes and the Senior Subordinated Notes. "Senior Preferred Stock" means the Company's 14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock, par value $0.01 per share, consisting of 4,000,000 authorized shares. "Senior Subordinated Notes" means the senior subordinated notes due 2010, including any such notes issued in exchange or replacement therefor, issued by Operating Company pursuant to the Senior Subordinated Notes Indenture. "Senior Subordinated Notes Indenture" means that certain Indenture, dated as of September 20, 2000, by and among Operating Company, the Subsidiaries of Operating Company parties thereto, and Chase Manhattan Bank and Trust Company, National Association, as trustee, pursuant to which the Senior Subordinated Notes are issued. "Senior Subordinated Notes Purchase Agreement" means that certain Purchase Agreement, dated as of September 20, 2000, by and among Operating Company and Permitted Investors relating to the Senior Subordinated Notes. "Stockholders Agreement" means that certain Stockholders Agreement, dated as of September 20, 2000, by and among the Company, Green Equity Investors III, L.P, Permitted Investors and the other signatories thereto, as the same may be amended from time to time. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50.0% of the total voting power of -12- the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Unrestricted Subsidiary" means any Subsidiary of the Company that does not own any Capital Stock of, or own or hold any Lien on any property of the Company or any other Subsidiary of the Company and that, at the time of determination, shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company); provided, that (i) such Subsidiary shall not engage, to any substantial extent, in any line or lines of business activity other than a Related Business and (ii) neither immediately prior thereto nor after giving pro forma effect to such designation would there exist a Default Event. The Board of Directors may designate any Unrestricted Subsidiary to be a Subsidiary, provided that no Default Event is existing or will occur as a consequence thereof. Each such designation shall be evidenced by delivering to the Holders a certified copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "wholly owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock, Equity Interests or other ownership interests of which (other than directors' qualifying shares and shares in non-U.S. companies required by local law to be owned by local residents) shall at the time be owned (i) by such Person, (ii) by one or more wholly owned Subsidiaries of such Person or (iii) by such Person and one or more wholly owned Subsidiaries of such Person. (b) Interpretation. For the purposes of this Certificate of Designation: (x) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires and (y) the word "including" and words of similar import shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified. 2. Rank. ---- The Senior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank senior to all classes of common stock of the Company, to the Junior Preferred Stock and to each other class of capital stock or series of preferred stock hereafter created by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Senior Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company (collectively referred to with the common stock and Junior Preferred Stock of the Company as "Junior Securities"). The Senior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank on parity with any class of capital stock or series of -13- preferred stock hereafter created that expressly provides that it ranks on a parity with the Senior Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company ("Parity Securities"); provided, however, that any such Parity Securities that were not approved by the Holders of Senior Preferred Stock in accordance with Section 6(b)(i) hereof shall be deemed to be Junior Securities and not Parity Securities. The Senior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank junior to each class of capital stock or series of preferred stock hereafter created that has been approved by the Holders of Senior Preferred Stock in accordance with Section 6(b)(i) hereof and that expressly provides that it ranks senior to the Senior Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up or dissolution of the Company ("Senior Securities"). 3. Dividends. --------- (a) Beginning on the Preferred Stock Issue Date, the Holders of the outstanding shares of Senior Preferred Stock shall be entitled to receive, whether or not declared by the Board of Directors, out of funds legally available therefor, distributions in the form of cash dividends on each share of Senior Preferred Stock, at a rate per annum equal to 14% of the Liquidation Preference (with such Liquidation Preference being determined as of the first day of such Dividend Period) payable quarterly. All dividends shall be cumulative, whether or not earned or declared, on a daily basis from the Preferred Stock Issue Date and shall be payable quarterly in arrears on each Dividend Payment Date, commencing on January 1, 2001; provided, that if any dividend payable on any Dividend Payment Date is not declared and paid in full in cash on such Dividend Payment Date, the amount payable as dividends on such Dividend Payment Date that is not paid in cash on such Dividend Payment Date shall be added to the Liquidation Preference on the relevant Dividend Payment Date and may no longer be declared or paid as dividends in cash except for special dividends paid pursuant to Section 3(f). The addition of such amount to the Liquidation Preference shall constitute full payment of such dividend. Dividends payable on shares of the Senior Preferred Stock for any period less than a year shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which such Dividends are payable. Each distribution in the form of a dividend shall be payable to the Holders of Senior Preferred Stock of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 45 days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends shall cease to accumulate in respect of shares of the Senior Preferred Stock on the Exchange Date or on the date of their earlier redemption unless the Company shall have failed to issue the appropriate aggregate principal amount of Exchange Debentures (as defined in Section 7(a)(i) hereof) in respect of the Senior Preferred Stock on the Exchange Date or shall have failed to pay the relevant redemption price on the date fixed for redemption. -14- (b) All dividends paid in cash with respect to shares of the Senior Preferred Stock pursuant to Section 3(a) shall be paid pro rata to the Holders thereof entitled thereto. (c) Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board of Directors to declare, or the Company to pay or set apart for payment, any dividends on shares of the Senior Preferred Stock at any time; provided, however, for the avoidance of doubt, this Section 3(c) shall not be construed or deemed to prevent any Holder of shares of Senior Preferred Stock from receiving any dividends to which such Holder is entitled pursuant to Section 5 or 8 hereof. (d) No dividends shall be declared by the Board of Directors or paid or funds set apart for payment of dividends by the Company on any Parity Securities for any period unless cumulative dividends shall have been or contemporaneously are declared and paid in full, or declared and (in the case of dividends payable in cash) a sum in cash set apart sufficient for such payment, on the Senior Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of such dividends on such Parity Securities. If any dividends are not paid in full, as aforesaid, upon the shares of the Senior Preferred Stock and any other Parity Securities, all dividends declared upon shares of the Senior Preferred Stock and any other Parity Securities shall be declared pro rata based on the relative liquidation preference of the Senior Preferred Stock and such Parity Securities. So long as any shares of the Senior Preferred Stock are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any of the Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Parity Securities, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase, redeem or retire any of the Parity Securities or any such warrants, rights, calls or options unless dividends determined in accordance herewith on the Senior Preferred Stock shall have been paid or contemporaneously are declared and paid in full. (e) (i) Holders of shares of the Senior Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (ii) So long as any shares of Senior Preferred Stock are outstanding, the Company shall not (1) declare, pay or set apart for payment any dividend on any of the Junior Securities or make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any of the Junior Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities (other than the repurchase, redemption or other acquisition or retirement for value of Junior Securities (and any warrants, rights, calls or options exercisable for or convertible into such Junior Securities) held by current or former directors, officers, employees of or consultants or advisors to the Company or any of its Subsidiaries, which repurchase, redemption or other acquisition or retirement shall have been -15- approved by the Board of Directors or shall have been made pursuant to certain call options provided in the Stockholders Agreement, provided, however, that such Junior Securities may only be repurchased, redeemed or otherwise acquired or retired either in exchange for Junior Securities or upon the cessation of service to the Company or its Subsidiaries (by termination, resignation, retirement, death or disability or otherwise) of such director, officer, employee, consultant or advisor), or (2) make any distribution in respect of Junior Securities, either directly or indirectly, and whether in cash, obligations or shares of the Company or other property (other than distributions or dividends in Junior Securities to the holders of Junior Securities), or (3) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any of the Junior Securities or any such warrants, rights, calls or options, unless in any such case cumulative dividends determined in accordance herewith have been paid in full in cash on the Senior Preferred Stock and all other redemption or repayment obligations in respect of the Senior Preferred Stock have been paid in full in cash. (f) At any time and from time to time when the Liquidation Preference per share of Senior Preferred Stock exceeds $25.00, the Company may declare and pay, to the holders of record of the Senior Preferred Stock on the record date chosen by the Company for such dividend, a special dividend equal to the positive difference between the Liquidation Preference per share of Senior Preferred Stock and $25.00 per share of Senior Preferred Stock (such difference, the "Base Amount"), plus accrued and unpaid dividends on the Base Amount to the date of payment. Upon payment of such a dividend, the Liquidation Preference shall be reduced to $25.00 per share of Senior Preferred Stock. 4. Liquidation Preference. ---------------------- (a) Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders of shares of Senior Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, the Liquidation Preference per share of Senior Preferred Stock in cash (plus an amount in cash equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up) before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, common stock of the Company. Except as provided in the preceding sentence, Holders of shares of Senior Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the Holders of outstanding shares of the Senior Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts that would be payable on such distribution if the amount to which the Holders of outstanding shares of Senior Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. -16- (b) For the purposes of this Section 4, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations or other entities shall be deemed to be a liquidation, dissolution or winding up of the affairs of the Company (unless such sale, conveyance, exchange or transfer is in connection with a liquidation, dissolution or winding up of the business of the Company). 5. Redemption. ---------- (a) Optional Redemption. ------------------- (i) The Company may (subject to the legal availability of funds therefor), at the option of the Company, redeem in cash at any time or from time to time on or after September 20, 2002, from any source of funds legally available therefor, in whole or in part, in the manner provided in Section 5(c) hereof, any or all of the shares of the Senior Preferred Stock, at a redemption price equal to the following percentages of the Liquidation Preference per share (plus an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the "Optional Redemption Price"), in each case beginning on September 20 of the year indicated: 2002 109% 2003 106% 2004 103% 2005 and thereafter 100% provided, that no optional redemption pursuant to this Section 5(a)(i) shall be authorized or made at any time when the Company is making or required to make within the next 30 days, or purchasing shares of Senior Preferred Stock under, a Change of Control Offer in accordance with the provisions of Section 8 hereof. (ii) In the event of a redemption pursuant to Section 5(a)(i) hereof of only a portion of the then outstanding shares of the Senior Preferred Stock, the Company shall effect such redemption as it determines, pro rata, according to the number of shares held by each Holder of Senior Preferred Stock. (b) Mandatory Redemption. On September 20, 2012, the Company shall -------------------- redeem in cash, subject to contractual and other restrictions with respect thereto, from any source of funds legally available therefor, in the manner provided in Section 5(c) hereof all but not less than all of the shares of the Senior Preferred Stock then outstanding at a redemption price equal to 100% of the Liquidation Preference per share (plus an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the "Mandatory Redemption Price"). -17- (c) Procedures for Redemption. ------------------------- (i) At least 15 days and not more than 60 days prior to the date fixed for any redemption of the Senior Preferred Stock, written notice (the "Redemption Notice") shall be given by first-class mail, postage prepaid, to each Holder of Senior Preferred Stock of record on the record date fixed for such redemption of the Senior Preferred Stock at such Holder's address as the same appears on the stock register of the Company; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Senior Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to Section 5(a) or 5(b) hereof; (2) the Optional Redemption Price or the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of the Senior Preferred Stock are to be redeemed and the total number of shares of the Senior Preferred Stock being redeemed; (4) the number of shares of Senior Preferred Stock held, as of the appropriate record date, by the Holder that the Company intends to redeem; (5) the date fixed for redemption; (6) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Senior Preferred Stock are to be surrendered for redemption, in the manner and at the price designated, his certificate or certificates representing the shares of Senior Preferred Stock to be redeemed; and (7) that dividends on the shares of the Senior Preferred Stock to be redeemed shall cease to accrue on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be. (ii) Each Holder of Senior Preferred Stock shall surrender the certificate or certificates representing such shares of Senior Preferred Stock to be redeemed to the Company, duly endorsed, in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) Unless the Company defaults in the payment in full of the applicable redemption price, dividends on the Senior Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and the Holders of such redemption shares shall cease to have any further rights with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. 6. Voting Rights. ------------- -18- (a) The Holders of shares of Senior Preferred Stock, except as otherwise required under Delaware law or as set forth in Section 6(b) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. (b) (i) So long as any shares of the Senior Preferred Stock are outstanding, the Company shall not authorize or issue any class or series of Parity Securities without the affirmative vote or consent of Holders of a majority of the outstanding shares of Senior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, except that without the approval of Holders of Senior Preferred Stock, the Company may authorize and issue shares of Parity Securities in exchange for, or the proceeds of which concurrently are used to redeem or repurchase, any or all shares of Senior Preferred Stock then outstanding; provided, however, that, in the case of Parity Securities issued in exchange for, or the proceeds of which are used to redeem or repurchase, less than all shares of Senior Preferred Stock then outstanding, (1) the aggregate liquidation preference of such Parity Securities shall not exceed the aggregate liquidation preference of, premium and accrued and unpaid dividends on, and expenses in connection with the refinancing of, the Senior Preferred Stock so exchanged, redeemed or repurchased, (2) such Parity Securities shall not be Disqualified Capital Stock and (3) the Company may pay dividends on such Parity Securities in the form of cash or such Parity Securities. (ii) So long as any shares of the Senior Preferred Stock are outstanding, the Company shall not authorize or issue any class or series of Senior Securities without the affirmative vote or consent of Holders of a majority of the outstanding shares of Senior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (iii) So long as any shares of the Senior Preferred Stock are outstanding, the Company shall not amend its Amended and Restated Certificate of Incorporation or this Certificate of Designation, so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Senior Preferred Stock or to authorize the issuance of any additional shares of Senior Preferred Stock without the affirmative vote or consent of Holders of a majority of the outstanding shares of Senior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (iv) The affirmative vote or consent of Holders of a majority of the outstanding shares of Senior Preferred Stock, voting or consenting, as the case may be, separately as one class, whether voting in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, may waive compliance with any provision of this Certificate of Designation. -19- (c) In any case in which the Holders of shares of the Senior Preferred Stock shall be entitled to vote pursuant to this Section 6 or pursuant to Delaware law, each Holder of shares of the Senior Preferred Stock shall be entitled to one vote for each share of Senior Preferred Stock held. 7. Optional Exchange. ----------------- (a) Conditions. (i) Subject to contractual and other restrictions with respect thereto, the Company may, at its option on any Dividend Payment Date (the "Exchange Date"), exchange all, but not less than all, of the then outstanding shares of Senior Preferred Stock into the Company's 14% Senior Subordinated Debentures due 2012 (the "Exchange Debentures"). The Exchange Debentures shall be subordinated to the Senior Notes to the same extent as the Senior Notes are subordinated to Senior Indebtedness (as defined in the Indentures), and shall contain no covenant or agreements that are more restrictive to the Company than those contained in the Indentures. To exchange Senior Preferred Stock into Exchange Debentures, the Company shall send a written notice of exchange (the "Exchange Notice") by first class mail to each Holder of Senior Preferred Stock, which notice shall state: (A) that the Company has elected to exchange the Senior Preferred Stock into Exchange Debentures pursuant to this Section 7; (B) the Exchange Date, which shall be the next succeeding Dividend Payment Date and shall not be less than 20 days following the date on which the Exchange Notice is mailed; (C) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Senior Preferred Stock are to be surrendered for exchange, in the manner designated in the Exchange Notice, such Holder's certificate or certificates representing the shares of Senior Preferred Stock to be exchanged (properly endorsed or assigned for transfer); (D) that dividends on the shares of Senior Preferred Stock to be exchanged shall cease to accrue, and the Holders of such shares shall cease to have any further rights with respect to such shares (other than the right to receive Exchange Debentures), on the Exchange Date whether or not certificates for shares of Senior Preferred Stock are surrendered for exchange on the Exchange Date unless the Company shall default in the delivery of Exchange Debentures; and (E) that interest on the Exchange Debentures shall accrue from and after the Exchange Date whether or not certificates for shares of Senior Preferred Stock are surrendered for exchange on the Exchange Date. On the Exchange Date, if the conditions set forth in clauses (I) through (IV) below are satisfied, the Company shall issue Exchange Debentures in exchange for the Senior Preferred Stock as provided in the next paragraph; provided, that on the Exchange Date: (I) there shall be legally available funds sufficient therefor (including, without limitation, legally available funds sufficient therefor under Sections 160 and 170 (or any successor provisions) of the Delaware General Corporation Law); (II) either (A) a registration statement relating to the Exchange Debentures shall have been declared effective under the Securities Act prior to such exchange and shall continue to be in effect on the Exchange Date or (B)(i) the Company shall have obtained a written opinion of counsel that an exemption from the registration requirements of the Securities Act is available for -20- such exchange and that, upon receipt of such Exchange Debentures pursuant to such exchange made in accordance with such exemption, the holders (assuming such holder is not an Affiliate of the Company) thereof will not be subject to any restrictions imposed by the Securities Act upon the resale thereof other than restrictions that such holders were subject to immediately prior to such exchange and (ii) such exemption is relied upon by the Company for such exchange; (III) the Exchange Indenture and the trustee thereunder (the "Trustee") shall have been qualified under the Trust Indenture Act of 1939, as amended, if such qualification is required; and (IV) immediately after giving effect to such exchange, no default or event of default would exist under the Exchange Indenture. In the event that the issuance of the Exchange Debentures is not permitted on the Exchange Date set forth in the Exchange Notice, or any of the conditions set forth in clauses (I) through (IV) of the preceding sentence are not satisfied on the Exchange Date set forth in the Exchange Notice, the Exchange Date shall be deemed to be the first business day thereafter, if any, upon which all of such conditions are satisfied. (ii) Upon any exchange pursuant to Section 7(a)(i), each Holder of outstanding shares of Senior Preferred Stock shall be entitled to receive Exchange Debentures in a principal amount equal to the sum of (x) the Liquidation Preference of such Holder's shares of Senior Preferred Stock and (y) the amount of accumulated and unpaid dividends thereon, if any, to the Exchange Date; provided, however, that the Company may pay cash in lieu of issuing an Exchange Note in a principal amount of less than $25.00. (b) Procedure for Exchange. ---------------------- (i) On or before the Exchange Date, each Holder of Senior Preferred Stock shall surrender the certificate or certificates representing such shares of Senior Preferred Stock, in the manner and at the place designated in the Exchange Notice. The Company shall cause the Exchange Debentures to be executed on the Exchange Date and, upon surrender in accordance with the Exchange Notice of the certificates for any shares of Senior Preferred Stock so exchanged (properly endorsed or assigned for transfer), such shares shall be exchanged by the Company into Exchange Debentures. The Company shall pay interest on the Exchange Debentures at the rate and on the dates specified therein from the Exchange Date. (ii) Subject to the conditions set forth in Section 7(a), if notice has been mailed as aforesaid, and if before the Exchange Date (A) the Exchange Indenture shall have been duly executed and delivered by the Company and the Trustee and (B) all Exchange Debentures necessary for such exchange shall have been duly executed by the Company and delivered to the Trustee with irrevocable instructions to authenticate the Exchange Debentures necessary for such exchange, then the rights of the Holders of shares of the Senior Preferred Stock as stockholders of the Company shall cease (except the right to receive Exchange Debentures), and the Person or Persons entitled to receive the Exchange Debentures issuable upon exchange shall be treated for all purposes as the registered Holder or Holders of such -21- Exchange Debentures as of the date of exchange without any further action of the Holders of Senior Preferred Stock. 8. Change of Control Offer. Subject to contractual and other restrictions ----------------------- with respect thereto, upon the occurrence of a Change of Control, the Company shall make an offer (a "Change of Control Offer") to each Holder of Senior Preferred Stock to repurchase any or all of such Holder's shares of Senior Preferred Stock at a purchase price in cash equal to 101.0% of the aggregate liquidation preference thereof plus accumulated and unpaid dividends thereon, if any, to the date of repurchase (the "Change of Control Payment"). (a) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder of Senior Preferred Stock stating: (i) that the Change of Control Offer is being made pursuant to this Section 8 and that all shares of Senior Preferred Stock tendered will be accepted for payment; (ii) the purchase price and the purchase date, which shall be no sooner than 30 nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any shares not tendered will continue to accumulate dividends; (iv) that, unless the Company defaults in the payment of the Change of Control Payment, all shares of Senior Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accumulate dividends after the Change of Control Payment Date; (v) that Holders electing to have any shares of Senior Preferred Stock repurchased pursuant to a Change of Control Offer will be required to surrender such shares to the Company or its paying agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw their election if the Company or the paying agent, as the case may be, receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Senior Preferred Stock delivered for repurchase, and a statement that such Holder is withdrawing his election to have such shares repurchased; and (vii) that Holders whose shares of Senior Preferred Stock are being repurchased only in part will be issued new shares of Senior Preferred Stock equal in Liquidation Preference to the unpurchased portion of the shares of Senior Preferred Stock surrendered. (b) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all shares of Senior Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer and (ii) deposit with the Company's paying agent an amount equal to the Change of Control Payment in respect of all shares of Senior Preferred Stock or portions thereof so tendered. The Company or its paying agent, as the case may be, shall promptly mail to each Holder of shares of Senior Preferred Stock so tendered the Change of Control Payment for such shares or portions thereof. The Company shall promptly issue a certificate representing shares of Senior Preferred Stock and mail to each Holder a new certificate representing shares of Senior Preferred Stock equal in Liquidation Preference to any unpurchased portion of such shares surrendered by such Holder, if -22- any. The Company shall notify the remaining holders of Senior Preferred Stock of the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (c) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of shares of Senior Preferred Stock in connection with a Change of Control. (d) The Company's obligations with respect to a Change of Control Offer shall be satisfied to the extent actually performed by a third party in accordance with the terms of this Section 8. 9. Conversion or Exchange. ---------------------- The Holders of shares of Senior Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. 10. Preemptive Rights. ----------------- No shares of Senior Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Company, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities or such warrants, rights or options may be designated, issued or granted. 11. Reissuance of Senior Preferred Stock. ------------------------------------ Shares of Senior Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company; provided, however, that such shares may not in any event be reissued as Senior Preferred Stock. 12. Business Day. ------------ If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day, and no interest shall accrue for the intervening period. 13. Certain Additional Provisions. ----------------------------- (a) Restricted Payments. ------------------- -23- The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly make any Restricted Payment, unless, at the time of such Restricted Payment: (1) no Default Event shall have occurred and be continuing or would occur as a consequence thereof; and (2) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Preferred Stock Issue Date, does not exceed the sum (the "Basket") of (a) (i) Consolidated EBITDA of the Company for the period (taken as one accounting period), commencing on the first day of the first fiscal quarter commencing on or prior to the Preferred Stock Issue Date, to and including the last day of the fiscal quarter ended immediately prior to the date of each such calculation (or, in the event Consolidated EBITDA for such period is a deficit, then minus such deficit) less (ii) 150% of Consolidated Fixed Charges for such period, plus (b) the aggregate Net Cash Proceeds received by the Company from the sale of the Company's Qualified Capital Stock (other than in each case (i) to a Subsidiary of the Company, (ii) to the extent applied in connection with a Qualified Exchange and (iii) to the extent applied to repurchase Capital Stock pursuant to clause (iii) of the definition of Other Permitted Payments after the Preferred Stock Issue Date). The foregoing provisions of this Section 13(a) shall not prohibit the following Restricted Payments: (A) a Qualified Exchange; (B) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Certificate of Designation; and (C) Other Permitted Payments. The full amount of any Restricted Payment made pursuant to clause (B) of the immediately preceding sentence (but not pursuant to clauses (A) or (C) of the immediately preceding sentence), however, will be deducted in the calculation of the aggregate amount of Restricted Payments available to be made pursuant to the Basket. The amount of any Restricted Payment, if other than in cash, shall be the fair market value thereof, as determined in the good faith reasonable judgment of the Board of Directors. (b) Reports. ------- So long as any shares of Senior Preferred Stock are outstanding, the Company shall furnish to each Holder of Senior Preferred Stock (at such Holder's address listed in the register of Holders maintained by the transfer agent and registrar of the Senior Preferred Stock): (i) beginning at the end of the Company's first fiscal year ending after the Preferred Stock Issue Date, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants, and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. 14. Transfer Restrictions. --------------------- The certificates evidencing shares of Senior Preferred Stock shall, until the second anniversary of the date of original issuance of such shares, unless otherwise -24- agreed by the Company and the holders of any such certificates, bear a legend substantially to the following effect: "The Senior Preferred Stock evidenced hereby was originally issued in a transaction exempt from registration under Section 5 of the United States Securities Act of 1933, as amended (the "Securities Act"), and the Senior Preferred Stock evidenced hereby may not be offered, sold or otherwise transferred in the absence of such registration or an applicable exemption therefrom. Each purchaser of the Senior Preferred Stock evidenced hereby is hereby notified that the seller may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A thereunder. The Holder of the Senior Preferred Stock evidenced hereby agrees for the benefit of the Company that (A) such Senior Preferred Stock may be offered, resold, pledged or otherwise transferred, only (a) inside the United States to a Person whom the seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, (b) outside the United States to a foreign Person in a transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S under the Securities Act, (c) in a transaction meeting the requirements of Rule 144 under the Securities Act, (d) to the Company, (e) pursuant to an effective registration statement or (f) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and (B) the holder will, and each subsequent holder is required to, notify any purchaser from it of the Senior Preferred Stock evidenced hereby of the resale restrictions set forth in (A) above." The shares of Senior Preferred Stock not otherwise registered pursuant to an effective registration statement under the Securities Act shall be subject to the restrictions on transfer set forth in the legend referred to above until the second anniversary of the date of original issuance of such shares of Senior Preferred Stock. II. RESOLVED, that, pursuant to the authority vested in the Board of Directors by the Company's Amended and Restated Certificate of Incorporation, the Board of Directors does hereby create, authorize and provide for the issue of the 12% Series B Junior Redeemable Cumulative Preferred Stock (the "Junior Preferred Stock"), par value $0.01 per share, consisting of 4,000,000 authorized shares, to have the powers, designations and preferences, the relative, participating, optional and other special rights and the qualifications, limitations and restrictions thereof (in addition to those are set forth in the Company's Amended and Restated Certificate of Incorporation) as follows: 1. Definitions and Interpretation. ------------------------------ (a) Definitions. As used in this Certificate of Designation, the ----------- following terms shall have the following meanings, unless the context otherwise requires: -25- "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. "Amended and Restated Certificate of Incorporation" means the Company's Amended and Restated Certificate of Incorporation. "Bank Facility" means the one or more credit agreements (including, without limitation, the Credit Agreement, dated as of September 20, 2000, by and among Operating Company, as borrower, the Company, certain subsidiaries of Operating Company, as guarantors, the financial institutions parties thereto, Goldman Sachs Credit Partners L.P., as sole lead arranger and sole syndication agent, and Wells Fargo Bank, N.A., as administrative agent and collateral agent) entered into by and among Operating Company, certain of its subsidiaries (if any) and certain financial institutions, which provide for in the aggregate one or more term loans and/or revolving credit and letter of credit facilities, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, as such credit agreement and/or related documents may be amended, restated, supplemented, renewed, replaced or otherwise modified from time to time whether or not with the same agent, trustee, representative lenders or holders, and, subject to the proviso to the next succeeding sentence irrespective of any changes in the terms and conditions thereof. Without limiting the generality of the foregoing, the term "Bank Facility" shall include any amendment, amendment and restatement, renewal, extension, restructuring, supplement or modification to any such credit agreement and all refundings, refinancings and replacements of any such credit agreement, including any agreement (i) extending the maturity of any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or deleting borrowers or guarantors thereunder; provided, however, that the borrowers and issuers include one or more of the Company and its Subsidiaries and their respective successors and assigns, (iii) increasing the amount of Indebtedness incurred thereunder or available to be borrowed thereunder, or (iv) otherwise altering the terms and conditions thereof in a manner not prohibited by the terms hereof. "Beneficial Owner" or "beneficial owner" for purposes of the definition of Change of Control and Affiliate has the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as in effect on the Preferred Stock Issue Date), whether or not applicable. "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day that is not a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are not required to be open. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness that is not itself otherwise capital stock), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. -26- "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Cash Equivalent" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any commercial bank organized under the laws of the United States or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or more related transactions, of all or substantially all of the properties and assets of the Company and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than an Excluded Person or Excluded Persons, (ii) the adoption of a plan relating to the liquidation or dissolution of the Company, (iii) the consummation of any transaction or other event (including, without limitation, any merger or consolidation) the result of which is that any "person" (as defined above), other than an Excluded Person or Excluded Persons, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the voting stock of the Company, or (iv) the first day on which a majority of the members of the Board are not Continuing Directors. Notwithstanding the foregoing, under no circumstances shall transfers among Green Equity Investors III, L.P. and the Co-Investors and their respective Affiliates or distributions to limited partners of Green Equity Investors III, L.P. or to the members of the Co-Investors be deemed a Change of Control. "Co-Investors" means VCA Co-Investment Fund I, LLC, VCA Co-Investment Fund II, LLC, VCA Co-Investment Fund III, LLC, VCA Co-Investment Fund -27- IV, LLC, VCA Co-Investment Fund V, LLC, VCA Co-Investment Fund VI, LLC, VCA Co-Investment Fund VII, LLC and VCA Co-Investment Fund VIII, LLC. "Company Purchase Agreement" means that certain Purchase Agreement, dated as of September 20, 2000, by and among the Company, GS Mezzanine Partners II, L.P and Permitted Investors relating to the Company Senior Notes. "Company Senior Notes" means the senior notes due 2010, any Exchange Notes (as defined in the Company Purchase Agreement) and any PIK Notes (as defined in the Company Senior Notes Indenture), including any such notes issued in exchange or replacement therefor, issued pursuant to the Company Senior Notes Indenture. "Company Senior Notes Indenture" means that certain Indenture, dated as of September 20, 2000, by and between the Company and Chase Manhattan Bank and Trust Company, National Association, as trustee, pursuant to which the Company Senior Notes are issued. "Consolidated" means, with respect to the Company, the consolidated accounts of its Subsidiaries with those of the Company, all in accordance with GAAP; provided, that "consolidated" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company. "Consolidated EBITDA" means, with respect to any Person, for any period, the Consolidated Net Income of such Person and its Consolidated Subsidiaries for such period adjusted to add thereto (to the extent deducted from net revenues in determining Consolidated Net Income), without duplication, the sum of (i) an amount equal to any extraordinary or non-recurring loss plus any net loss realized in connection with the sale or other disposition of assets outside the ordinary course of business, the disposition of any securities by such Person or any of its Subsidiaries or the extinguishment of any Indebtedness by such Person or its Subsidiaries, (ii) consolidated income taxes, (iii) consolidated depreciation and amortization (including amortization of debt issuance costs in connection with any Indebtedness of such Person and its Subsidiaries), (iv) Consolidated Fixed Charges; (v) payments pursuant to the Management Services Agreement (or the corresponding provisions of any agreement amending, extending or replacing the Management Services Agreement); and (vi) all other non-cash charges. "Consolidated Fixed Charges" of any Person means, for any period, the aggregate amount (without duplication and determined in each case in accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled to be paid or accrued (including, in accordance with the following sentence, interest attributable to Capitalized Lease Obligations) of such Person and its Consolidated Subsidiaries during such period, excluding amortization of debt issuance costs incurred in connection with the Senior Notes or the Bank Facility but including (i) original issue discount and non-cash interest payments or accruals on any Indebtedness, (ii) the interest portion of all deferred payment obligations, and (iii) all commissions, discounts and other fees and charges owed with respect to bankers' acceptances and letters of credit financings and currency and Interest Swap and Hedging Obligations (and minus net amounts received under Hedging Obligations), in each case to the extent attributable to such period, and (b) the amount of -28- cash dividends paid by such Person or any of its Consolidated Subsidiaries in respect of preferred stock (other than by Subsidiaries of such Person to such Person or such Person's wholly owned Subsidiaries). For purposes of this definition, (x) interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with GAAP and (y) to the extent such expense would result in a liability upon the consolidated balance sheet of such Person in accordance with GAAP, interest expense attributable to any Indebtedness represented by the guaranty by such Person or a Subsidiary of such Person of an obligation of another Person shall be deemed to be the interest expense attributable to the Indebtedness guaranteed. Notwithstanding the foregoing, Consolidated Fixed Charges shall not include costs, fees and expenses incurred in connection with the Merger, and any non-cash charge or expense associated with the write-off of deferred debt issuance costs associated with the Bank Facility or the Senior Notes. "Consolidated Net Income" means, with respect to any specified Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that (a) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the specified Person or one of its wholly owned Subsidiaries, (b) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree or order, or any non-U.S. statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (c) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, (d) the cumulative effect of a change in accounting principles shall be excluded, and (e) the costs, fees and expenses, including payments of management bonuses, incurred in connection with the transactions contemplated by the Merger Agreement shall be excluded, including (i) any charge incurred by any Person or its Subsidiaries arising out of the repurchase at $15 per share on the closing date of the Merger of restricted capital stock of such Person or its Subsidiaries held by certain employees of such Person or its Subsidiaries, (ii) any financing, legal, accounting, investment banking or other professional fees and expenses incurred in connection with the Merger, (iii) any other costs and expenses incurred by any Person and its Subsidiaries in connection with the Merger arising pursuant to certain noncompetition agreements executed with members of senior management of such Person, in connection with the termination of certain employment contracts of such Person and its Subsidiaries and in connection with stay bonuses provided to certain employees of such Person and its Subsidiaries, and (iv) premium payments payable to certain note holders of such Person. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors who (i) was a member of the Board of Directors immediately after consummation of the Merger or (ii) was nominated for election or elected to the Board of Directors with the approval, recommendation or endorsement of a majority of the -29- Continuing Directors who were members of the Board of Directors at the time of such nomination or election. "control" means (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise; provided, however, that, with respect to any ownership interest in the Company and its Subsidiaries, a Beneficial Owner of 10% or more of the total voting power normally entitled to vote in the election of directors, managers or trustees, as applicable, shall for such purposes be deemed to constitute control. "Default Event" means any of the following events: (i) any time when the Company fails to make a mandatory redemption of the Junior Preferred Stock when required (whether or not any contractual or other restrictions apply to such redemption) pursuant to Section 5(b) hereof; or (ii) any time when the Company fails to make an offer to repurchase all of the outstanding shares of Junior Preferred Stock following a Change of Control, if such offer to repurchase is required to be made pursuant to Section 7(a) hereof (whether or not any contractual or other restrictions apply to such redemption). "Disqualified Capital Stock" means (a) except as set forth in (b), with respect to any Person, any Equity Interest of such Person that, by its terms or by the terms of any security into which it is convertible, exercisable or exchangeable, is, or upon the happening of an event or the passage of time or both would be, required to be redeemed or repurchased (including at the option of the holder thereof) by such Person or any of its Subsidiaries, in whole or in part, on or prior to September 20, 2012 and (b) with respect to any Subsidiary of such Person (including with respect to any Subsidiary of the Company), any Equity Interests other than any common equity with no preference, privileges, or redemption or repayment provisions and preferred equity owned by the Company or one of its Subsidiaries. "Dividend Payment Date" means January 1, April 1, July 1 and October 1 of each year. "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. "Equity Interest" of any Person means any shares, interests, participations or other equivalents (however designated) in such Person's equity, and shall in any event include any Capital Stock issued by, or partnership or membership interests in, such Person. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Excluded Persons" means (i) Green Equity Investors III, L.P., (ii) the Co-Investors, and (iii) their Related Parties. -30- "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession in the United States as in effect on the Preferred Stock Issue Date. "Holder" means a Person in whose name a share of Junior Preferred Stock is registered. "Indebtedness" of any Person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of any such Person, to the extent such liabilities and obligations would appear as a liability upon the consolidated balance sheet of such Person in accordance with GAAP, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services, except those incurred in the ordinary course of its business that would constitute ordinarily a trade payable to trade creditors; (b) all liabilities and obligations, contingent or otherwise, of such Person (i) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (ii) relating to any Capitalized Lease Obligation, or (iii) evidenced by a letter of credit or a reimbursement obligation of such Person with respect to any letter of credit; (c) all net obligations of such Person under Interest Swap and Hedging Obligations; (d) all liabilities and obligations of others of the kind described in the preceding clauses (a), (b) or (c) that such Person has guaranteed or that is otherwise its legal liability or that are secured by one or more Liens on any assets or property of such Person; provided, however, that if the liabilities or obligations that are secured by a Lien have not been assumed in full by such Person or are not such Person's legal liability in full, the amount of such Indebtedness for the purposes of this definition shall be limited to the lesser of the amount of such Indebtedness secured by such Lien or the fair market value of the assets or property securing such Lien; (e) any and all deferrals, renewals, extensions, refinancing and refundings (whether direct or indirect) of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a), (b), (c) or (d), or this clause (e), whether or not between or among the same parties; and (f) all Disqualified Capital Stock of such Person (measured at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends). For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock. "Indentures" means the Company Senior Note Indenture and the Senior Subordinated Notes Indenture. "Initial Dividend Period" means the dividend period commencing on the Preferred Stock Issue Date and ending on the day before the first Dividend Payment Date to occur thereafter. "Interest Swap and Hedging Obligation" means any obligation of any Person pursuant to any interest rate swap agreement, interest rate cap agreement, interest rate collar -31- agreement, interest rate exchange agreement, currency exchange agreement or any other agreement or arrangement designed to protect against fluctuations in interest rates or currency values, including, without limitation, any arrangement whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a fixed or floating rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or floating rate of interest on the same notional amount. "Investment" by any Person in any other Person means (without duplication) (a) the acquisition (whether by purchase, merger, consolidation or otherwise) by such Person (whether for cash, property, services, securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities, including any options or warrants, of such other Person or any agreement to make any such acquisition; (b) the making by such Person of any deposit with, or advance, loan or other extension of credit to, such other Person (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person) or any commitment to make any such advance, loan or extension (but excluding accounts receivable, endorsements for collection or deposits arising in the ordinary course of business) other than guarantees of Indebtedness of the Company or any Subsidiary; (c) the making of any capital contribution by such Person to such other Person; and (d) the designation by the Board of Directors of the Company of any Person to be an Unrestricted Subsidiary. The Company shall be deemed to make an Investment in an amount equal to the fair market value of the net assets of any subsidiary (or, if neither the Company nor any of its Subsidiaries has theretofore made an Investment in such subsidiary, in an amount equal to the Investments being made), at the time that such subsidiary is designated an Unrestricted Subsidiary, and any property transferred to an Unrestricted Subsidiary from the Company or a Subsidiary of the Company shall be deemed an Investment valued at its fair market value at the time of such transfer. The amount of any such Investment shall be reduced by any liabilities or obligations of the Company or any of its Subsidiaries to be assumed or discharged in connection with such Investment by an entity other than the Company or any of its Subsidiaries. For purposes of clarification and greater certainty, the designation of a newly formed subsidiary as an Unrestricted Subsidiary shall not constitute an Investment. "Junior Preferred Stock" means the Company's 12% Series B Junior Redeemable Cumulative Preferred Stock, par value $0.01 per share, consisting of 4,000,000 authorized shares. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. "Liquidation Preference" means, as of any date, the sum of (a) $25.00 per share of Junior Preferred Stock, plus (b) accrued and unpaid dividends added to the Liquidation Preference in accordance with Section 3(a), minus (c) the Base Amount of any special dividend paid pursuant to Section 3(f). -32- "Management Services Agreement" means that certain Management Services Agreement, dated as of the September 20, 2000, by and between Leonard Green & Partners, L.P., Operating Company and the Company, providing for certain fees, expenses and reimbursements to be paid to Leonard Green & Partners, L.P., as such Management Services Agreement may be amended from time to time. "Merger" means the merger of Recap with and into the Company in accordance with the provisions of the Merger Agreement. "Merger Agreement" means that certain Amended and Restated Agreement and Plan of Merger, dated as of August 11, 2000, between the Company, Operating Company and Recap, as the same may be further amended from time to time. "Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents received by the Company in the case of a sale of Qualified Capital Stock plus, in the case of an issuance of Qualified Capital Stock upon any exercise, exchange or conversion of securities (including options, warrants, rights and convertible or exchangeable debt) of the Company that were issued for cash on or after the Preferred Stock Issue Date, the amount of cash originally received by the Company upon the issuance of such securities (including options, warrants, rights and convertible or exchangeable debt) less the sum of all payments, fees, commissions and expenses (including, without limitation, the fees and expenses of legal counsel and investment banking fees and expenses) incurred in connection with such sale or issuance of Qualified Capital Stock. "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with the (A) sale or other disposition of assets outside the ordinary course of business, or (B) disposition of any securities by such Person or any of its Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Subsidiaries, (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss), and (iii) any non-cash compensation expense of such Person attributable to the exercise of options to acquire Capital Stock of the Company by any officers, directors or employees of the Company or any of its Subsidiaries in each case prior to, or in connection with, the consummation of the Merger. "obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Operating Company" means Vicar Operating, Inc., a Delaware corporation. "Other Permitted Payments" means, without duplication, (i) compensation, indemnification and other benefits paid or made available (A) pursuant to the employment agreements between the Company and members of its senior management, (B) for or in connection with services actually rendered to the Company and comparable to those generally paid or made available by entities engaged in the same or similar businesses -33- (including reimbursement or advancement of reasonable out-of-pocket expenses) and loans to officers, directors and employees, (x) in the ordinary course of business or (y) to purchase common stock of the Company in an amount not to exceed $10 million; (ii) payments pursuant to the Management Services Agreement (or the corresponding provisions of any agreement amending, extending or replacing the Management Services Agreement); (iii) the repurchase of common stock, stock options and stock equivalents of the Company held by current or former directors, officers, employees of or consultants and advisors to the Company or any of its Subsidiaries ("Management Stock Repurchases") in an amount of $5 million at the end of fiscal year 2000, and such amount shall be increased by $1 million a year for each fiscal year thereafter, plus the amount of any net cash proceeds to the Company from: (A) sales of Capital Stock of the Company to directors, officers and employees of or consultants and advisors to the Company subsequent to the Preferred Stock Issue Date; and (B) proceeds from any key-person life insurance policies, in either case, to the extent utilized for Management Stock Repurchases; provided, that any amount received from such life insurance not so paid in any fiscal year may be paid in future fiscal years; (vi) Restricted Payments in an aggregate amount not to exceed $10 million; and (vii) expenses and payments in connection with the Merger. "Permitted Investment" means (a) Investments in any of the Senior Notes; (b) Investments in Cash Equivalents; (c) Investments in intercompany notes; provided, that Indebtedness under any such notes of a Subsidiary shall be deemed to be a Restricted Investment if such Person ceases to be a Subsidiary; (d) Investments in the form of promissory notes of members of the Company's management not to exceed $5 million in principal amount at any time outstanding solely in consideration of the purchase by such persons of Qualified Capital Stock of the Company; (e) Investments by the Company or any Subsidiary in any Person that is or immediately after such Investment becomes a Subsidiary, or immediately after such Investment merges or consolidates into the Company or any Subsidiary; provided, that such Person is engaged in all material respects in a Related Business; (f) Investments in the Company by any Subsidiary; provided, that in the case of Indebtedness constituting any such Investment, such Indebtedness shall be unsecured and subordinated in all respects to the Company's obligations under the Senior Notes; (g) Investments in securities of trade creditors or customers received in settlement of obligations that arose in the ordinary course of business or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; (h) Investments by the Company outstanding on the Preferred Stock Issue Date; (i) transactions or arrangements with officers or directors of the Company or any Subsidiary entered into in the ordinary course of business; (j) any other contract, agreement, arrangement or transaction between the Company or any of its Subsidiaries with any Affiliate; (k) other Investments in any Person (other than a Subsidiary of the Company) having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (k) that are at the time outstanding, not to exceed $10 million; (l) Investments in Subsidiaries of the Company formed or acquired after the Closing Date that (i) are incorporated outside the United States, (ii) are not guarantors under the Senior Subordinated Notes Indenture, and (iii) if they were guarantors, would give rise to an investment in United States property within the meaning of Section 956 of the Internal Revenue Code of 1986, as amended from time to time, which Investments shall not -34- exceed in the aggregate more than $10 million outstanding at any time (treating any such Investment that is not Indebtedness at the value thereof on the date it is made); and (m) Investments in Equity Interests of a Person engaged in a Related Business, other than a Person described in clause (e), through the issuance of common stock of the Company. "Permitted Investors" means any of the affiliated investment funds of GS Mezzanine Partners II, L.P., GS Mezzanine Partners II Offshore, L.P., TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P., TCW Leveraged Income Trust IV, L.P., TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent Mezzanine Trust II and The Northwestern Mutual Life Insurance Company. "Person" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock Issue Date" means the date on which the Junior Preferred Stock is originally issued by the Company under this Certificate of Designation. "Qualified Capital Stock" means any Equity Interest that is not Disqualified Capital Stock. "Qualified Exchange" means any legal defeasance, redemption, retirement, repurchase or other acquisition of Capital Stock or Indebtedness of the Company issued on or after the Preferred Stock Issue Date with the Net Cash Proceeds received by the Company from the substantially concurrent sale of its Qualified Capital Stock or any exchange of Qualified Capital Stock of the Company for any Capital Stock or Indebtedness of the Company issued on or after the Issue Date. "Quarterly Dividend Period" means the quarterly period commencing on each January 1, April 1, July 1 and October 1 and ending on the day before the following Dividend Payment Date. "Recap" means Vicar Recap, Inc., a Delaware corporation. "Redemption Date," with respect to any shares of Junior Preferred Stock, means the date on which such shares of Junior Preferred Stock are redeemed by the Company. "Related Business" means the business conducted or proposed to be conducted by the Company as of the Preferred Stock Issue Date and any and all businesses that in the good faith judgment of the Board of Directors of the Company are reasonably related businesses, including reasonably related extensions thereof. "Related Party" means with respect to any Excluded Person, (A) any Affiliate, controlling stockholder, 80% or more owned Subsidiary, or spouse or immediate family member (in the case of an individual) of such Excluded Person or (B) any trust, -35- corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons holding an 80% or more controlling interest of which consist of such Excluded Person and/or such other persons referred to in the immediately preceding clause (A). "Restricted Investment" means, in one or a series of related transactions, any Investment, other than investments in Cash Equivalents and other Permitted Investments; provided, however, that a merger of another Person with or into the Company or a Subsidiary shall not be deemed to be a Restricted Investment so long as the surviving entity is the Company or a Subsidiary. "Restricted Payment" means, (a) the declaration or payment of any dividend or other distribution in respect of Junior Securities or Equity Interests of the Company or any of the Company's Subsidiaries, (b) any payment on account of the purchase, redemption or other acquisition or retirement for value of Junior Securities or Equity Interests of the Company or any of the Company's Subsidiaries, and (c) any Restricted Investment by such Person; provided, however, that the term "Restricted Payment" shall not include (i) any dividend, distribution or other payment on or with respect to Equity Interests of the Company to the extent payable solely in shares of Qualified Capital Stock of the Company; (ii) any dividend, distribution or other payment to the Company, or to any of its Subsidiaries, by the Company or any of its Subsidiaries; (iii) payments made in connection with the Merger; (iv) Permitted Investments; or (v) pro rata dividends and other distributions on Equity Interests of any Subsidiary by such Subsidiary. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Senior Notes" means the Company Senior Notes and the Senior Subordinated Notes. "Senior Preferred Stock" means the Company's 14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock, par value $0.01 per share, consisting of 4,000,000 authorized shares. "Senior Subordinated Notes" means the senior subordinated notes due 2010, including any such notes issued in exchange or replacement therefor, issued by Operating Company pursuant to the Senior Subordinated Notes Indenture. "Senior Subordinated Notes Indenture" means that certain Indenture, dated as of September 20, 2000, by and among Operating Company, the Subsidiaries of Operating Company parties thereto, and Chase Manhattan Bank and Trust Company, National Association, as trustee, pursuant to which the Senior Subordinated Notes are issued. "Senior Subordinated Notes Purchase Agreement" means that certain Purchase Agreement, dated as of September 20, 2000, by and among Operating Company and Permitted Investors relating to the Senior Subordinated Notes. -36- "Stockholders Agreement" means that certain Stockholders Agreement, dated as of September 20, 2000, by and among the Company, Green Equity Investors III, L.P, Permitted Investors and the other signatories thereto, as the same may be amended from time to time. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50.0% of the total voting power of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Unrestricted Subsidiary" means any Subsidiary of the Company that does not own any Capital Stock of, or own or hold any Lien on any property of the Company or any other Subsidiary of the Company and that, at the time of determination, shall be an Unrestricted Subsidiary (as designated by the Board of Directors of the Company); provided, that (i) such Subsidiary shall not engage, to any substantial extent, in any line or lines of business activity other than a Related Business and (ii) neither immediately prior thereto nor after giving pro forma effect to such designation would there exist a Default Event. The Board of Directors may designate any Unrestricted Subsidiary to be a Subsidiary, provided that no Default Event is existing or will occur as a consequence thereof. Each such designation shall be evidenced by delivering to the Holders a certified copy of the resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions. "wholly owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock, Equity Interests or other ownership interests of which (other than directors' qualifying shares and shares in non-U.S. companies required by local law to be owned by local residents) shall at the time be owned (i) by such Person, (ii) by one or more wholly owned Subsidiaries of such Person or (iii) by such Person and one or more wholly owned Subsidiaries of such Person. (b) Interpretation. For the purposes of this Certificate of -------------- Designation: (x) words in the singular shall be deemed to include the plural and vice versa and words of one gender shall be deemed to include the other gender as the context requires and (y) the word "including" and words of similar import shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified. 2. Rank. ---- The Junior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank senior to all classes of common stock of the Company and to each other class of capital stock or series of preferred stock hereafter created by the Board of Directors -37- the terms of which do not expressly provide that it ranks senior to or on a parity with the Junior Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company (collectively referred to with the common stock of the Company as "Junior Securities"). The Junior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank on parity with any class of capital stock or series of preferred stock hereafter created that expressly provides that it ranks on a parity with the Junior Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company ("Parity Securities"); provided, however, that any such Parity Securities that were not approved by the Holders of Junior Preferred Stock in accordance with Section 6(b)(i) hereof shall be deemed to be Junior Securities and not Parity Securities. The Junior Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Company, rank junior to the Senior Preferred Stock and to each class of capital stock or series of preferred stock hereafter created that has been approved by the Holders of Junior Preferred Stock in accordance with Section 6(b)(ii) hereof and that expressly provides that it ranks senior to the Junior Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up or dissolution of the Company ("Senior Securities"). 3. Dividends. --------- (a) Beginning on the Preferred Stock Issue Date, the Holders of the outstanding shares of Junior Preferred Stock shall be entitled to receive, whether or not declared by the Board of Directors, out of funds legally available therefor, distributions in the form of cash dividends on each share of Junior Preferred Stock, at a rate per annum equal to 12% of the Liquidation Preference (with such Liquidation Preference being determined as of the first day of such Dividend Period) payable quarterly. All dividends shall be cumulative, whether or not earned or declared, on a daily basis from the Preferred Stock Issue Date and shall be payable quarterly in arrears on each Dividend Payment Date, commencing on January 1, 2001; provided, that if any dividend payable on any Dividend Payment Date is not declared and paid in full in cash on such Dividend Payment Date, the amount payable as dividends on such Dividend Payment Date that is not paid in cash on such Dividend Payment Date shall be added to the Liquidation Preference on the relevant Dividend Payment Date and may no longer be declared or paid as dividends in cash except for special dividends paid pursuant to Section 3(f). The addition of such amount to the Liquidation Preference shall constitute full payment of such dividend. Dividends payable on shares of the Junior Preferred Stock for any period less than a year shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which such Dividends are payable. Each distribution in the form of a dividend shall be payable to the Holders of Junior Preferred Stock of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 45 days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends shall cease to accumulate in respect of shares of the Junior Preferred Stock on the date of their -38- redemption unless the Company shall have failed to pay the relevant redemption price on the date fixed for redemption. (b) All dividends paid in cash with respect to shares of the Junior Preferred Stock pursuant to Section 3(a) shall be paid pro rata to the Holders thereof entitled thereto. (c) Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board of Directors to declare, or the Company to pay or set apart for payment, any dividends on shares of the Junior Preferred Stock at any time; provided, however, for the avoidance of doubt, this Section 3(c) shall not be construed or deemed to prevent any Holder of shares of Senior Preferred Stock from receiving any dividends to which such Holder is entitled pursuant to Section 5 or 7 hereof. (d) No dividends shall be declared by the Board of Directors or paid or funds set apart for payment of dividends by the Company on any Parity Securities for any period unless cumulative dividends shall have been or contemporaneously are declared and paid in full, or declared and (in the case of dividends payable in cash) a sum in cash set apart sufficient for such payment, on the Junior Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of such dividends on such Parity Securities. If any dividends are not paid in full, as aforesaid, upon the shares of the Junior Preferred Stock and any other Parity Securities, all dividends declared upon shares of the Junior Preferred Stock and any other Parity Securities shall be declared pro rata based on the relative liquidation preference of the Junior Preferred Stock and such Parity Securities. So long as any shares of the Junior Preferred Stock are outstanding, the Company shall not make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any of the Parity Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Parity Securities, and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase, redeem or retire any of the Parity Securities or any such warrants, rights, calls or options unless dividends determined in accordance herewith on the Junior Preferred Stock shall have been paid or contemporaneously are declared and paid in full. (e) (i) Holders of shares of the Junior Preferred Stock shall be entitled to receive the dividends provided for in Section 3(a) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (ii) So long as any shares of Junior Preferred Stock are outstanding, the Company shall not (1) declare, pay or set apart for payment any dividend on any of the Junior Securities or make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any of the Junior Securities or any warrants, rights, calls or options exercisable for or convertible into any of the Junior Securities (other than the repurchase, redemption or other acquisition or retirement for value of Junior Securities (and any warrants, rights, calls or options exercisable for or -39- convertible into such Junior Securities) held by current or former directors, officers, employees of or consultants or advisors to the Company or any of its Subsidiaries, which repurchase, redemption or other acquisition or retirement shall have been approved by the Board of Directors or shall have been made pursuant to certain call options provided in the Stockholders Agreement, provided, however, that such Junior Securities may only be repurchased, redeemed or otherwise acquired or retired either in exchange for Junior Securities or upon the cessation of service to the Company or its Subsidiaries (by termination, resignation, retirement, death or disability or otherwise) of such director, officer, employee, consultant or advisor), or (2) make any distribution in respect of Junior Securities, either directly or indirectly, and whether in cash, obligations or shares of the Company or other property (other than distributions or dividends in Junior Securities to the holders of Junior Securities), or (3) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any of the Junior Securities or any such warrants, rights, calls or options, unless in any such case cumulative dividends determined in accordance herewith have been paid in full in cash on the Junior Preferred Stock and all other redemption or repayment obligations in respect of the Junior Preferred Stock have been paid in full in cash. (f) At any time and from time to time when the Liquidation Preference per share of Junior Preferred Stock exceeds $25.00, the Company may declare and pay, to the holders of record of the Junior Preferred Stock on the record date chosen by the Company for such dividend, a special dividend equal to the positive difference between the Liquidation Preference per share of Junior Preferred Stock and $25.00 per share of Junior Preferred Stock (such difference, the "Base Amount"), plus accrued and unpaid dividends on the Base Amount to the date of payment. Upon payment of such a dividend, the Liquidation Preference shall be reduced to $25.00 per share of Junior Preferred Stock. 4. Liquidation Preference. ---------------------- (a) Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders of shares of Junior Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, the Liquidation Preference per share of Junior Preferred Stock in cash (plus an amount in cash equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up) before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, common stock of the Company. Except as provided in the preceding sentence, Holders of shares of Junior Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the Holders of outstanding shares of the Junior Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts that would be payable on such distribution if the amount to which -40- the Holders of outstanding shares of Junior Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (b) For the purposes of this Section 4, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations or other entities shall be deemed to be a liquidation, dissolution or winding up of the affairs of the Company (unless such sale, conveyance, exchange or transfer is in connection with a liquidation, dissolution or winding up of the business of the Company). 5. Redemption. ---------- (a) Optional Redemption. ------------------- (i) The Company may (subject to the legal availability of funds therefor), at the option of the Company, redeem in cash at any time or from time to time on or after September 20, 2002, from any source of funds legally available therefor, in whole or in part, in the manner provided in Section 5(c) hereof, any or all of the shares of the Junior Preferred Stock, at a redemption price equal to the following percentages of the liquidation preference per share (plus an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the "Optional Redemption Price"), in each case beginning on September 20 of the year indicated: 2002 109% 2003 106% 2004 103% 2005 and thereafter 100% provided, that no optional redemption pursuant to this Section 5(a)(i) shall be authorized or made at any time when the Company is making or required to make within the next 30 days, or purchasing shares of Junior Preferred Stock under, a Change of Control Offer in accordance with the provisions of Section 7 hereof. (ii) In the event of a redemption pursuant to Section 5(a)(i) hereof of only a portion of the then outstanding shares of the Junior Preferred Stock, the Company shall effect such redemption as it determines, pro rata, according to the number of shares held by each Holder of Junior Preferred Stock. (b) Mandatory Redemption. On September 20, 2012, the Company -------------------- shall redeem in cash, subject to contractual and other restrictions with respect thereto, from any source of funds legally available therefor, in the manner provided in Section 5(c) hereof all but not less than all of the shares of the Junior Preferred Stock then outstanding at a redemption price equal to 100% of the Liquidation Preference per share (plus an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the "Mandatory Redemption Price"). -41- (c) Procedures for Redemption. ------------------------- (i) At least 15 days and not more than 60 days prior to the date fixed for any redemption of the Junior Preferred Stock, written notice (the "Redemption Notice") shall be given by first-class mail, postage prepaid, to each Holder of Junior Preferred Stock of record on the record date fixed for such redemption of the Junior Preferred Stock at such Holder's address as the same appears on the stock register of the Company; provided, however, that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Junior Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to Section 5(a) or 5(b) hereof; (2) the Optional Redemption Price or the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of the Junior Preferred Stock are to be redeemed and the total number of shares of the Junior Preferred Stock being redeemed; (4) the number of shares of Junior Preferred Stock held, as of the appropriate record date, by the Holder that the Company intends to redeem; (5) the date fixed for redemption; (6) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Junior Preferred Stock are to be surrendered for redemption, in the manner and at the price designated, his certificate or certificates representing the shares of Junior Preferred Stock to be redeemed; and (7) that dividends on the shares of the Junior Preferred Stock to be redeemed shall cease to accrue on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be. (ii) Each Holder of Junior Preferred Stock shall surrender the certificate or certificates representing such shares of Junior Preferred Stock to be redeemed to the Company, duly endorsed, in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) Unless the Company defaults in the payment in full of the applicable redemption price, dividends on the Junior Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and the Holders of such redemption shares shall cease to have any further rights with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. 6. Voting Rights. ------------- -42- (a) The Holders of shares of Junior Preferred Stock, except as otherwise required under Delaware law or as set forth in Section 6(b) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. (b) (i) So long as any shares of the Junior Preferred Stock are outstanding, the Company shall not authorize or issue any class or series of Parity Securities without the affirmative vote or consent of Holders of a majority of the outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, except that without the approval of Holders of Junior Preferred Stock, the Company may authorize and issue shares of Parity Securities in exchange for, or the proceeds of which concurrently are used to redeem or repurchase, any or all shares of Junior Preferred Stock then outstanding; provided, however, that, in the case of Parity Securities issued in exchange for, or the proceeds of which are used to redeem or repurchase, less than all shares of Junior Preferred Stock then outstanding, (1) the aggregate liquidation preference of such Parity Securities shall not exceed the aggregate liquidation preference of, premium and accrued and unpaid dividends on, and expenses in connection with the refinancing of, the Junior Preferred Stock so exchanged, redeemed or repurchased, (2) such Parity Securities shall not be Disqualified Capital Stock and (3) the Company may pay dividends on such Parity Securities in the form of cash or such Parity Securities. (ii) So long as any shares of the Junior Preferred Stock are outstanding, the Company shall not authorize or issue any class or series of Senior Securities without the affirmative vote or consent of Holders of a majority of the outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (iii) So long as any shares of the Junior Preferred Stock are outstanding, the Company shall not amend its Amended and Restated Certificate of Incorporation or this Certificate of Designation, so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Junior Preferred Stock or to authorize the issuance of any additional shares of Junior Preferred Stock without the affirmative vote or consent of Holders of a majority of the outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (iv) The affirmative vote or consent of Holders of a majority of the outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, separately as one class, whether voting in person or by proxy, either in writing or by resolution adopted at an annual or special meeting, may waive compliance with any provision of this Certificate of Designation. -43- (c) In any case in which the Holders of shares of the Junior Preferred Stock shall be entitled to vote pursuant to this Section 6 or pursuant to Delaware law, each Holder of shares of the Junior Preferred Stock shall be entitled to one vote for each share of Junior Preferred Stock held. 7. Change of Control Offer. Subject to contractual and other ----------------------- restrictions with respect thereto, upon the occurrence of a Change of Control, the Company shall make an offer (a "Change of Control Offer") to each Holder of Junior Preferred Stock to repurchase any or all of such Holder's shares of Junior Preferred Stock at a purchase price in cash equal to 101.0% of the aggregate liquidation preference thereof plus accumulated and unpaid dividends thereon, if any, to the date of repurchase (the "Change of Control Payment"). (a) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder of Junior Preferred Stock stating: (i) that the Change of Control Offer is being made pursuant to this Section 7 and that all shares of Junior Preferred Stock tendered will be accepted for payment; (ii) the purchase price and the purchase date, which shall be no sooner than 30 nor later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"); (iii) that any shares not tendered will continue to accumulate dividends; (iv) that, unless the Company defaults in the payment of the Change of Control Payment, all shares of Junior Preferred Stock accepted for payment pursuant to the Change of Control Offer shall cease to accumulate dividends after the Change of Control Payment Date; (v) that Holders electing to have any shares of Junior Preferred Stock repurchased pursuant to a Change of Control Offer will be required to surrender such shares to the Company or its paying agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Change of Control Payment Date; (vi) that Holders will be entitled to withdraw their election if the Company or the paying agent, as the case may be, receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of shares of Junior Preferred Stock delivered for repurchase, and a statement that such Holder is withdrawing his election to have such shares repurchased; and (vii) that Holders whose shares of Junior Preferred Stock are being repurchased only in part will be issued new shares of Junior Preferred Stock equal in Liquidation Preference to the unpurchased portion of the shares of Junior Preferred Stock surrendered. (b) On the Change of Control Payment Date, the Company shall, to the extent lawful, (i) accept for payment all shares of Junior Preferred Stock or portions thereof properly tendered pursuant to the Change of Control Offer and (ii) deposit with the Company's paying agent an amount equal to the Change of Control Payment in respect of all shares of Junior Preferred Stock or portions thereof so tendered. The Company or its paying agent, as the case may be, shall promptly mail to each Holder of shares of Junior Preferred Stock so tendered the Change of Control Payment for such shares or portions thereof. The Company shall promptly issue a certificate representing shares of Junior Preferred Stock and mail to each Holder a new -44- certificate representing shares of Junior Preferred Stock equal in Liquidation Preference to any unpurchased portion of such shares surrendered by such Holder, if any. The Company shall notify the remaining holders of Junior Preferred Stock of the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. (c) The Company shall comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of shares of Junior Preferred Stock in connection with a Change of Control. (d) The Company's obligations with respect to a Change of Control Offer shall be satisfied to the extent actually performed by a third party in accordance with the terms of this Section 7. 8. Conversion or Exchange. ---------------------- The Holders of shares of Junior Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. 9. Preemptive Rights. ----------------- No shares of Junior Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Company, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities or such warrants, rights or options may be designated, issued or granted. 10. Reissuance of Junior Preferred Stock. ------------------------------------ Shares of Junior Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company; provided, however, that such shares may not in any event be reissued as Junior Preferred Stock. 11. Business Day. ------------ If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day, and no interest shall accrue for the intervening period. 12. Certain Additional Provisions. ----------------------------- -45- (a) Restricted Payments. ------------------- The Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly make any Restricted Payment, unless, at the time of such Restricted Payment: (1) no Default Event shall have occurred and be continuing or would occur as a consequence thereof; and (2) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Subsidiaries after the Preferred Stock Issue Date, does not exceed the sum (the "Basket") of (a) (i) Consolidated EBITDA of the Company for the period (taken as one accounting period), commencing on the first day of the first fiscal quarter commencing on or prior to the Preferred Stock Issue Date, to and including the last day of the fiscal quarter ended immediately prior to the date of each such calculation (or, in the event Consolidated EBITDA for such period is a deficit, then minus such deficit) less (ii) 150% of Consolidated Fixed Charges for such period, plus (b) the aggregate Net Cash Proceeds received by the Company from the sale of the Company's Qualified Capital Stock (other than in each case (i) to a Subsidiary of the Company, (ii) to the extent applied in connection with a Qualified Exchange and (iii) to the extent applied to repurchase Capital Stock pursuant to clause (iii) of the definition of Other Permitted Payments after the Preferred Stock Issue Date). The foregoing provisions of this Section 12(a) shall not prohibit the following Restricted Payments: (A) a Qualified Exchange; (B) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of this Certificate of Designation; and (C) Other Permitted Payments. The full amount of any Restricted Payment made pursuant to clause (B) of the immediately preceding sentence (but not pursuant to clauses (A) or (C) of the immediately preceding sentence), however, will be deducted in the calculation of the aggregate amount of Restricted Payments available to be made pursuant to the Basket. The amount of any Restricted Payment, if other than in cash, shall be the fair market value thereof, as determined in the good faith reasonable judgment of the Board of Directors. (b) Reports. ------- So long as any shares of Junior Preferred Stock are outstanding, the Company shall furnish to each Holder of Junior Preferred Stock (at such Holder's address listed in the register of Holders maintained by the transfer agent and registrar of the Junior Preferred Stock): (i) beginning at the end of the Company's first fiscal year ending after the Preferred Stock Issue Date, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants, and (ii) all current reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports. 13. Transfer Restrictions. --------------------- -46- The certificates evidencing shares of Junior Preferred Stock shall, until the second anniversary of the date of original issuance of such shares, unless otherwise agreed by the Company and the holders of any such certificates, bear a legend substantially to the following effect: "The Junior Preferred Stock evidenced hereby was originally issued in a transaction exempt from registration under Section 5 of the United States Securities Act of 1933, as amended (the "Securities Act"), and the Junior Preferred Stock evidenced hereby may not be offered, sold or otherwise transferred in the absence of such registration or an applicable exemption therefrom. Each purchaser of the Junior Preferred Stock evidenced hereby is hereby notified that the seller may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A thereunder. The Holder of the Junior Preferred Stock evidenced hereby agrees for the benefit of the Company that (A) such Junior Preferred Stock may be offered, resold, pledged or otherwise transferred, only (a) inside the United States to a Person whom the seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, (b) outside the United States to a foreign Person in a transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S under the Securities Act, (c) in a transaction meeting the requirements of Rule 144 under the Securities Act, (d) to the Company, (e) pursuant to an effective registration statement or (f) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel if the Company so requests), and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction and (B) the holder will, and each subsequent holder is required to, notify any purchaser from it of the Junior Preferred Stock evidenced hereby of the resale restrictions set forth in (A) above." The shares of Junior Preferred Stock not otherwise registered pursuant to an effective registration statement under the Securities Act shall be subject to the restrictions on transfer set forth in the legend referred to above until the second anniversary of the date of original issuance of such shares of Junior Preferred Stock. -47- IN WITNESS WHEREOF, the Company has caused this Certificate to be executed by its President this 20th day of September, 2000. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Robert L. Antin -------------------------------- Name: Robert L. Antin Title: President -48- CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF VETERINARY CENTERS OF AMERICA, INC. ----------------------------------- a Delaware corporation The undersigned corporation, organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. Article FOURTH of the Amended and Restated Certificate of Incorporation ------ of this corporation is amended to read in its entirety as follows: "FOURTH: The total number of all classes of stock that the Corporation ------ shall have authority to issue is Thirty Million (30,000,000), consisting of: (i) Twenty-Four Million (24,000,000) shares of Common Stock of the par value of one cent ($.01) each (hereinafter referred to as "Common Stock"); and (ii) Six Million (6,000,000) shares of Preferred Stock of the par value of one cent ($.01) each (hereinafter referred to as "Preferred Stock"). Upon the filing and effectiveness of this Certificate of Amendment of Amended and Restated Certificate of Incorporation, each currently issued and outstanding share of Common Stock of this Corporation shall be subdivided and split up into fifteen (15) shares of Common Stock, $.01 par value." 2. The foregoing amendment to the Amended and Restated Certificate of Incorporation of this corporation has been duly approved by this corporation's Board of Directors in accordance with Sections 242 and 141(f) of the Delaware General Corporation Law and by the required vote of stockholders in accordance with Sections 242 and 228 of the Delaware General Corporation Law. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment of Amended and Restated Certificate of Incorporation this 20 day of November, 2000. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Robert L. Antin ----------------------------------- Name: Robert L. Antin --------------------------------- Its: Chief Executive Officer ---------------------------------- - 2 - AMENDMENT NO. 1 TO VETERINARY CENTERS OF AMERICA, INC. CERTIFICATE OF DESIGNATIONS OF THE POWERS, PREFERENCES AND RELATIVE, OPTIONAL AND OTHER SPECIAL RIGHTS OF 14% SERIES A SENIOR REDEEMABLE EXCHANGEABLE CUMULATIVE PREFERRED STOCK AND OF 12% SERIES B JUNIOR REDEEMABLE CUMULATIVE PREFERRED STOCK, AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF ----------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ----------------------------------------- Veterinary Centers of America, Inc. (the "Company"), a Delaware corporation, does hereby certify that the board of directors of the Company (the "Board of Directors"), by unanimous written consent, dated as of December 19, 2000, duly approved and adopted the following resolutions: RESOLVED, that, pursuant to the authority vested in the Board of Directors by the Company's Amended and Restated Certificate of Incorporation, the Board of Directors does hereby authorize and direct that the number of authorized shares of the 14% Series A Senior Redeemable Exchangeable Cumulative Preferred Stock(the "Senior Preferred Stock"), par value $0.01 per share, of the Company be decreased from 4,000,000 shares to 3,000,000 shares; and RESOLVED FURTHER, that, pursuant to the authority vested in the Board of Directors by the Company's Amended and Restated Certificate of Incorporation, the Board of Directors does hereby authorize and direct that the number of authorized shares of the 12% Series B Junior Redeemable Cumulative Preferred Stock (the "Junior Preferred Stock"), par value $0.01 per share, of the Company be decreased from 4,000,000 shares to 3,000,000 shares; and RESOLVED FURTHER, that the powers, preferences and relative, optional and other special rights of, and the qualifications, limitations and restrictions of, the Senior Preferred Stock and of the Junior Preferred Stock shall otherwise remain in full force and effect as set forth in the Certificate of Designations of the Senior Preferred Stock and the Junior Preferred Stock of the Company filed with the Office of the Secretary of State of the State of Delaware on September 20, 2000. IN WITNESS WHEREOF, the Company has caused this Certificate to be executed by its President this 26 day of December, 2000. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Robert L. Antin --------------------------------- Name: Robert L. Antin Title: President -2- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF VETERINARY CENTERS OF AMERICA, INC. A Delaware Corporation VETERINARY CENTERS OF AMERICA, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Corporation held on August 6, 2001, the Board of Directors duly adopted a resolution setting forth a proposed amendment of the Amended and Restated Certificate of Incorporation of the Corporation ("Certificate"), declaring said amendment to be advisable and calling for consideration thereof by the stockholders of the corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate be, and it hereby is, amended by changing Article I thereof so that said Article shall be and read as follows: "FIRST: The name of this Corporation is VCA Antech, Inc." ----- SECOND: That thereafter, in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. (i) the majority stockholder of the Corporation duly approved the amendment by written consent, dated September 21, 2001, and (ii) written notice of the adoption of the amendment was promptly given to every stockholder entitled to such notice. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. [Signature Page Immediately Follows] IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Tomas W. Fuller, its authorized officer, this 21st day of September, 2001. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Tomas W. Fuller ------------------------------------------ Tomas W. Fuller, Chief Financial Officer EX-4.2 4 dex42.txt AMENDMENT NO. 1 STOCKHOLDERS AGREEMENT Exhibit 4.2 AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT THIS AMENDMENT NO. 1 (this "Amendment") TO STOCKHOLDERS AGREEMENT entered into as of September 20, 2000 (the "Stockholders Agreement") is dated as of ____________ __, 2001, by and among VCA Antech, Inc, a Delaware corporation (the "Company"), Green Equity Investors III, L.P., a Delaware limited partnership (the "Purchaser"), VCA Co-Investment Fund I, LLC, a Delaware limited liability company ("VCA I"), VCA Co-Investment Fund II, LLC, a Delaware limited liability company ("VCA II"), VCA Co-Investment Fund III, LLC, a Delaware limited liability company ("VCA III"), VCA Co-Investment Fund IV, LLC, a Delaware limited liability company ("VCA IV"), VCA Co-Investment Fund V, LLC, a Delaware limited liability company ("VCA V"), VCA Co-Investment Fund VI, LLC., a Delaware limited liability company ("VCA VI"), VCA Co-Investment Fund VII, LLC., a Delaware limited liability company ("VCA VII") and VCA Co-Investment Fund VIII, LLC., a Delaware limited liability company ("VCA VIII" and, together with VCA I, VCA II, VCA III, VCA IV, VCA V, VCA VI and VCA VII, the "VCA Co-Investment Funds"), GS Mezzanine Partners II, L.P., a Delaware limited partnership ("GS Mezzanine"), GS Mezzanine Partners II Offshore, L.P., an exempted limited partnership organized under the laws of the Cayman Islands ("GS Mezzanine Offshore," and, together with GS Mezzanine, the "GS Purchasers"), TCW Leveraged Income Trust, L.P., a Delaware limited partnership ("TCW I"), TCW Leveraged Income Trust II, L.P., a Delaware limited partnership ("TCW II"), TCW Leveraged Income Trust IV, L.P., a Delaware limited partnership ("TCW III"), TCW/Crescent Mezzanine Partners II, L.P., a Delaware limited partnership ("TCW IV"), TCW/Crescent Mezzanine Trust II, a closed-end Delaware statutory business trust ("TCW V" and, together with TCW I, TCW II, TCW III and TCW IV, the "TCW Purchasers"), The Northwestern Mutual Life Insurance Company, a Wisconsin corporation ("Northwestern" and, together with the GS Purchasers and the TCW Purchasers, the "Mezzanine Purchasers"), and each of the management or employee stockholders named on the signature pages to the Stockholders Agreement (collectively, the "Management Stockholders" and, individually, a "Management Stockholder"). Each of the parties to the Stockholders Agreement, as amended by this Amendment (other than the Company) and any other Person who in accordance with the terms of the Stockholders Agreement shall become a party to, or agree to be bound by the terms of, the Stockholders Agreement, as amended by this Amendment, after the date hereof is sometimes hereinafter referred to, individually, as a "Stockholder" and, collectively, as "Stockholders." The Purchaser and the VCA Co-Investment Funds are sometimes herein referred to, individually, as an "Investor" and, collectively, as "Investors." Capitalized terms used and not defined herein shall have those meanings ascribed to them in the Stockholders Agreement. R E C I T A L WHEREAS, On September 20, 2000, the Company completed a recapitalization transaction (the "Recapitalization") pursuant to the terms and conditions of that certain Amended and Restated Agreement and Plan of Merger dated as of August 11, 2000 (the "Merger Agreement"). WHEREAS, as a condition precedent to the closing under the Merger Agreement, the Company and the Stockholders executed and delivered the Stockholders Agreement; WHEREAS, Article 6 of the Stockholders Agreement provides that specified provisions of the Stockholders Agreement, including the provisions of Section 2.8 of the Stockholders Agreement, terminate on the date of a Public Offering Event; and WHEREAS, the Company and each of the Stockholders desire, for their mutual benefit and protection, to enter into this Amendment to modify the terms of each Call Option set forth in Section 2.8 of the Stockholders Agreement and to modify the termination provisions of Article 6 as applicable to Section 2.8 of the Stockholders Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Upon the occurrence of a Public Offering Event: 1.1 Antin Call Option. Call Option rights shall expire on ----------------- one-half of the Antin Callable Shares. Call Option rights shall expire on the remaining Antin Callable Shares in equal monthly installments over the six month period commencing on the date of the Public Offering Event, as though the Public Offering Event occurred on October 1, 2001. The term "Antin Vesting Period" in the Stockholders Agreement is revised to reflect the provisions of this Section 1.1. 1.2 Executive Employee Call Option. Call Option rights shall ------------------------------ expire on one-half of each Executive Employee's Executive Callable Shares. Call Option rights shall expire on one-half of the remaining Executive Callable Shares of each Executive Employee six months following the date of the Public Offering Event, and on the other one-half of the remaining Executive Callable Shares of each Executive Employee, one year following the date of the Public Offering Event, in each case as though the Public Offering Event occurred on October 1, 2001. The term "Executive Vesting Period" in the Stockholders Agreement is revised to reflect the provisions of this Section 1.2. 1.3 Management Employee Call Option. Call Option rights shall ------------------------------- expire on one-half of each Management Employee's Management Callable Shares. Call Option rights shall expire on the remaining Management Callable Shares of each Management Employee in equal monthly installments over the twelve month period commencing seven months following the date of the Public Offering Event, as though the Public Offering Event occurred on October 1, 2001. The term "Management Vesting Period" in the Stockholders Agreement is revised to reflect the provisions of this Section 1.3. 2 1.4 Article 6 of the Stockholders Agreement is amended and restated to read in its entirety as follows: Subject to the next succeeding sentence, this Agreement shall terminate ten (10) years from the date of this Agreement with respect to all rights and obligations pertaining to Common Shares and this Agreement shall terminate twelve (12) years from the date of this Agreement with respect to all rights and obligations pertaining to Preferred Shares. If any rights and obligations provided in Article 1, Article 3, Section 2.3, Section 2.4, Section 2.5, Section 2.6, Section 2.7, Section 2.8.4 or Section 2.9 of this Agreement have not terminated earlier in accordance with the preceding sentence, such rights and obligations shall terminate on the date of a Public Offering Event. 2. Except as amended by this Amendment, the Stockholders Agreement will continue unmodified and in full force and effect. 3. This Amendment may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. [Signature Page Immediately Follows] 3 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first set forth above. VCA ANTECH, INC. By:____________________________________________ Name: Title: GREEN EQUITY INVESTORS III, L.P. By: GEI Capital III, LLC, its general partner By:____________________________________________ Name: John Danhakl Title: Manager GS MEZZANINE PARTNERS II, L.P. By: GS MEZZANINE ADVISORS II, L.L.C., its general partner By:____________________________________________ Name: Title: _______________________________________________ Robert L. Antin 4 EX-5.1 5 dex51.txt OPINION OF AKIN, GUMP, STRAUSS, HAUER & FELD, LLP EXHIBIT 5.1 [LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.] October 30, 2001 Tomas W. Fuller VCA Antech, Inc. 12401 West Olympic Boulevard Los Angeles, CA 90064-1022 Re: VCA Antech, Inc., Registration Statement on Form S-1 Registration No. 333- 37128 Ladies and Gentlemen: We have acted as counsel to VCA Antech, Inc., a Delaware corporation (the "Company"), in connection with the registration, pursuant to a registration statement on Form S-1, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), of the offering and sale by the Company of up to 16,100,000 shares (the "Company Shares") of the Company's common stock, par value $0.001 per share ("Common Stock") sold pursuant to the terms of an underwriting agreement to be executed by the Company and Credit Suisse First Boston and Goldman, Sachs & Co. (the "Underwriters"). We have examined originals or certified copies of such corporate records of the Company and other certificates and documents of officials of the Company, public officials and others as we have deemed appropriate for purposes of this letter. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all copies submitted to us as conformed and certified or reproduced copies. Based upon the foregoing and subject to the assumptions, exceptions, qualifications and limitations set forth hereinafter, we are of the opinion that Akin, Gump, Strauss, Hauer & Feld, L.L.P. October 28, 2001 Page 2 when issued, sold and delivered as described in the Registration Statement, the Company Shares will be duly authorized and validly issued and are fully paid and non-assessable. The opinions and other matters in this letter are qualified in their entirety and subject to the following: A. We express no opinion as to the laws of any jurisdiction other than any published constitutions, treaties, laws, rules or regulations or judicial or administrative decisions ("Laws") of the Laws of (i) the State of California; and (ii) the General Corporation Law of the State of Delaware. B. This law firm is a registered limited liability partnership organized under the laws of the State of Texas. C. This opinion is limited to the matters stated herein, and no opinion is implied or may be inferred beyond the matters expressly stated. We assume herein no obligation, and hereby disclaim any obligation, to make any inquiry after the date hereof or to advise you or any future changes in the foregoing or of any fact or circumstances that may hereafter come to our attention. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Prospectus forming a part of the Registration Statement under the caption "Legal Matters". In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act and the rules and regulations thereunder. We also consent to your filing copies of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Akin, Gump, Strauss, Hauer & Feld ------------------------------------------ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. EX-10.1 6 dex101.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Amended Agreement") is made and entered into as of the __ day of October, 2001, by and between VCA Antech, Inc., a Delaware corporation (the "Company") and Robert L. Antin, an individual ("Officer"). R E C I T A L S A. Officer is currently employed as Chairman of the Board, Chief Executive Officer and President of the Company pursuant to an Employment Agreement (the "Employment Agreement") between the Company and Officer dated as of September 20, 2000. B. The Company and Officer desire to amend and restate the Employment Agreement regarding the terms and conditions of Officer's employment by the Company. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, the Company and Officer agree as follows: 1. EMPLOYMENT. ---------- Company hereby employs Officer, and Officer hereby accepts such employment, as Chairman of the Board, Chief Executive Officer and President of the Company, on the terms and subject to the conditions set forth herein. 2. CAPACITY AND DUTIES. ------------------- 2.1 Officer shall serve the Company as its Chairman of the Board, Chief Executive Officer and President and shall report directly to the Board of Directors of the Company (the "Board of Directors"). 2.2 Subject to the direction and control of the Board of Directors, Officer shall have the full authority and responsibility to operate and manage, on a day to day basis, the business and affairs of the Company, and shall perform such other duties and responsibilities as are prescribed by the Bylaws of the Company and which are customarily vested in the office of chief executive officer of a corporation. 2.3 Officer shall devote his business time, energy and efforts faithfully and diligently to promote the Company's interests. 2.4 The terms of this Section 2 shall not prevent Officer from investing or otherwise managing his assets in such form or manner as he chooses and spending such time, whether or not during business hours, as he deems necessary to manage his investments, so long as he is able to fulfill his duties pursuant to Section 2 above. 1 2.5 Except for routine travel incident to the business of the Company, Officer shall perform his duties and obligations under this Amended Agreement principally from an office provided by the Company in Los Angeles, California or the surrounding area. 3. TERM. ---- This Amended Agreement shall be effective as of the date hereof (the "Effective Date") and shall govern Officer's employment from and after such date. As of any given date, (the "Date of Determination"), Officer's employment shall terminate on the fifth anniversary of the Date of Determination, unless sooner terminated in accordance with the provisions of this Amended Agreement or extended by an amendment executed by the Company and the Officer (the "Term"). Accordingly, there shall always for all purposes be a minimum of at least five years remaining on the Term under this Amended Agreement. 4. COMPENSATION. ------------ 4.1 Base Salary. ----------- 4.1.1 As compensation for services rendered under this Amended Agreement, the Company shall pay to Officer a base salary (the "Base Salary") computed in accordance with Section 4.1.2 below during the Term, payable in accordance with the normal payroll procedures of the Company. 4.1.2 During the Term, Officer's Base Salary shall be $513,000 and shall be adjusted as provided in this Section. Commencing on January 1, 2002 and on each anniversary thereafter, or from time to time at the sole discretion of the Compensation Committee of the Board of Directors (the "Compensation Committee"), Officer's Base Salary shall be reviewed by the Compensation Committee and may be increased, but may never be decreased, in the sole discretion of the Compensation Committee. In determining whether to increase Officer's Base Salary the Compensation Committee may engage a reputable compensation consulting firm to determine comparable compensation packages provided to executives in similarly situated companies. 4.1.3 The Company may deduct from the Base Salary amounts sufficient to cover applicable federal, state and/or local income tax withholdings and any other amounts which the Company is required to withhold by applicable law. 4.2 Cash Bonus Plan. The Compensation Committee shall adopt a cash bonus --------------- plan designed to provide Officer an opportunity to earn annual cash bonuses during each calendar year during his employment which, when added to Officer's Base Salary, shall provide Officer a level of compensation comparable to compensation generally prevailing for other chief executive officers of publicly traded companies which are comparable to the Company. The factors to be used to select which companies are comparable to that of the Company shall include, but not be limited to, industry group, revenues, operating income, growth rate, number of employees and location. The annual performance goals to be met (the "Annual Performance Goal") in order to earn portions or all of the bonus provided under the plan shall be determined through consultation between the Officer and the Compensation Committee. If requested by the Compensation Committee or Officer, the Company shall retain a reputable, nationally 2 recognized compensation consultant to assist the Compensation Committee in identifying comparable companies and to make recommendations regarding the structure and amount of the cash bonus plan. The amount of the cash bonus for any particular calendar year shall be determined as follows: (i) if Officer substantially achieves the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus of at least 50% of the Officer's Base Salary for such calendar year; and (ii) if Officer exceeds the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus between 50% and 100% of the Officer's Base Salary for such calendar year. If this Amended Agreement is terminated in the middle of a calendar year, Officer shall receive a cash bonus for services rendered through the Termination Date (as defined below) equal to the cash bonus he would have received for the entire calendar year, pro rated through the Termination Date. All cash bonuses hereunder shall be paid to Officer within five business days following the date the audited consolidated financial statements for the Company for the applicable calendar year become available. 4.3 Stock Options. All options granted to Officer after the Effective ------------- Date, whether pursuant to a Company Stock Option Plan or otherwise, shall vest in 24 equal monthly installments commencing on the first day of each month following the month in which such options are granted. All options to purchase the Company's Common Stock currently outstanding or which may be granted to Officer whether pursuant to a Company Stock Option Plan or otherwise and notwithstanding the provisions of any other agreement to the contrary, may be exercised by Officer or by Officer's family by delivery of a promissory note in the amount of the total exercise price of the option (the "Exercise Price"). The promissory note shall bear interest at the then current thirty year U.S. treasury bond rate, shall be nonrecourse except to the security referred to in the following clause, shall be secured by the Common Stock of the Company so purchased, and shall be payable in full (principal and interest) on the fourth anniversary of the date of the purchase of the shares. Notwithstanding the foregoing, Officer shall apply all proceeds from the sale of the shares so purchased by delivery of a promissory note to the repayment of principal and interest outstanding under the note until all principal and interest is paid in full. The Company shall maintain an effective registration statement covering the shares underlying the options granted to Officer whether pursuant to a Company Stock Option Plan or otherwise. 4.4 Benefits. -------- 4.4.1 Vacation. Officer shall be entitled to five weeks paid -------- vacation for each calendar year during Officer's employment; provided, however, that vacation shall only be taken at such times as not to interfere with the necessary performance of Officer's duties and obligations under this Amended Agreement. 4.4.2 Automobile. The Company shall provide Officer with the use of ---------- a luxury automobile that is selected by Officer and approved by the Compensation Committee, the cost (the "Automobile Cost") of which during the first year of the Term shall not be less than the cost that the Company currently provides for Officer's use of an automobile. Commencing January 1, 2002 and continuing annually thereafter, the Automobile Cost may, at Officer's sole discretion, be increased 5% per annum. On the earlier of significant damage or destruction or attaining two years of age, the Company shall replace such automobile with a new automobile selected by Officer and approved by the Compensation Committee. The Company shall pay all 3 costs of insurance, repair, maintenance and operation of such automobile. At the end of the two year period referred to herein (or termination of employment, if earlier), Officer may, but is not obligated to, purchase the automobile for the book value of the automobile on the Company's financial records. 4.4.3 Club Memberships. The Company shall reimburse Officer for the ---------------- initiation and monthly dues for Officer's membership in two health clubs and one country club selected by Officer, provided the aggregate of such dues shall not exceed $1,500 per month during the first year of the Term. Commencing January 1, 2002, and continuing annually thereafter, such monthly dues may, at Officer's sole discretion, increase 5% per annum. 4.4.4 Other Benefits; Insurance. During the term of Officer's ------------------------- employment under this Amended Agreement, if and to the extent eligible, Officer shall be entitled to participate in all operative Officer benefit and welfare plans of the Company then in effect ("Company Officer Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, however, that nothing contained in this Section 4.4.4 shall, in any manner whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the Term) except that the Company will at all times during the Term and any severance period referred to in Section 8 or 9 hereof maintain medical insurance (including Exec-U-Care Medical Reimbursement Insurance or a substantially similar policy) covering Officer and his dependents with benefits at least as favorable as those provided by the Company to its executives as of the date of termination. In addition to, and not in lieu of, any Company Officer Benefit Plan available to Officer during the Term of Officer's employment hereunder, the Company shall provide Officer supplemental retirement benefits pursuant to a "Supplemental Executive Retirement Program," the terms of which shall be mutually agreed to by Officer and the Company. 4.4.5 Entertainment. The Company shall reimburse Officer for the ------------- cost of entertainment provided by Officer to the Company's customers, vendors, employees and strategic partners, provided the aggregate of such annual cost does not exceed $200,000 per annum during the first year of the Term. Commencing January 1, 2002 and continuing annually thereafter, the cost of entertainment may, at Officer's sole discretion, be increased 5% per annum. 4.4.6 Reimbursement. Officer shall be entitled to reimbursement from ------------- the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Amended Agreement. The Company shall provide Officer reimbursement for the cost of an apartment in the Borough of Manhattan, provided the aggregate of such cost does not exceed $2,000 per month during the first year of the Term. Commencing January 1, 2002, and continuing annually thereafter, such monthly cost of an apartment in the Borough of Manhattan may, at Officer's sole discretion, increase 5% per annum. Additionally, Officer shall be entitled to reimbursement for reasonable attorneys fees incurred in connection with the receipt of advice from attorneys, accountants or financial planners regarding the exercise of stock options to purchase common stock of the Company and other compensation related issues not to exceed $12,000 per calendar year. Reimbursement shall 4 be paid upon prompt presentation of expense statements or vouchers and such other supporting information as the Company may from time to time require. 5. INDEMNIFICATION. --------------- The Company and Officer are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and conditions therein set forth, to indemnify Officer against certain claims arising by reason of the fact that he is or was an officer or director of the Company. 6. TRADE SECRETS. ------------- Officer will not at any time during the Term and for the three year period thereafter, in any fashion, form, or manner, unless specifically consented to in writing by the Company, either directly or indirectly use or divulge, disclose or communicate to any person, firm or corporation, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company, except in the ordinary course of the Company's business. All equipment, notebooks, documents, memoranda, report, files, samples, books, correspondence, lists, other written and graphic records, and the like, affecting or relating to the business of the Company, which Officer shall prepare, use, construct, observe, possess or control, shall be and remain the Company's sole property. Officer's obligation under the preceding sentence shall continue in effect after the end of Officer's employment with the Company and the obligations shall be binding on Officer's assigns, heirs, executors, administrators, and other legal representatives. 7. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. ---------------------------------------------- Upon termination of this Amended Agreement for any reason, Officer, or his estate in the event of his death, shall turn over to the Company all correspondence, property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or any of its subsidiaries or affiliates or comprising or relating to the Trade Secrets. 8. TERMINATION OF EMPLOYMENT. ------------------------- 8.1 Termination in Case of Death. ---------------------------- 8.1.1 Officer's employment hereunder shall terminate immediately upon the death of Officer. 8.1.2 Upon termination of Officer's employment pursuant to this Section 8.1, the Company shall pay to Officer's estate, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase 5 the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide for the benefit of Officer's family the medical benefits referred to in Section 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). 8.2 Termination in Case of Disability. --------------------------------- 8.2.1 If Officer suffers a physical or mental disability which results in Officer being unable to perform his duties hereunder for a 26 consecutive week period, then the Board of Directors shall select a qualified physician to examine Officer and review his physical and mental capacity. If such physician determines in good faith that such physical or mental disability renders Officer incapable of performing his duties hereunder for a period of at least 26 consecutive weeks following the date of such physician's written opinion, then Officer's employment shall terminate effective 26 weeks following the date of such physician's written opinion. 8.2.2 Upon termination of Officer's employment pursuant to this Section 8.2, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.2); provided, however, such amount shall be reduced by the amount of any payments to be paid to Officer under any long-term disability insurance policy maintained by the Company for the benefit of Officer pursuant to Section 4.4.4. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits referred to in Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.2). 8.3 Termination by Officer for Cause. -------------------------------- 8.3.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by Officer to the Company upon the occurrence of any of the following events: 6 8.3.1.1 The willful breach of any of the material obligations of the Company to Officer under this Amended Agreement following written notice delivered to the Company and a reasonable cure period not to exceed 30 days. 8.3.1.2 The Company's chief executive offices are moved to a location outside of Los Angeles County, California; or 8.3.1.3 Officer fails to be reelected to, or is removed from, the Board of Directors of the Company. 8.3.2 Upon termination of Officer's employment pursuant to this Section 8.3, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3), plus an amount equal to five times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3). 8.4 Termination by Officer Without Cause. ------------------------------------ 8.4.1 This Amended Agreement shall terminate immediately upon delivery to the Company of written notice of termination by Officer without cause. 8.4.2 Upon termination of this Amended Agreement pursuant to this Section 8.4, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date. 8.5 Termination by the Company Without Cause. ---------------------------------------- 7 8.5.1 The employment of Officer shall terminate immediately upon delivery to Officer of written notice of termination by the Company, which shall be deemed to be "without cause" unless termination is expressly stated to be pursuant to Sections 8.1 or 8.2. 8.5.2 Upon termination of this Officer's employment pursuant to this Section 8.5, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5), plus an amount equal to five times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5). 8.6 Termination by the Company For Cause. ------------------------------------ 8.6.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by the Company to the Officer of termination for "cause" by reason of Officer's conviction (including any plea of guilty or no contest) of (x) any felony involving the embezzlement, theft or misappropriation of monies or other property, of the Company or otherwise, or (y) any crime of moral turpitude. 8.6.2 Upon termination of this Amended Agreement pursuant to this Section 8.6, the Company shall pay to Officer, on the Termination Date, all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by the Officer to the Company through the Termination Date in a lump sum payment. The Company shall have no further obligation to the Officer pursuant to this Amended Agreement. 8.7 Termination Date. For purposes of this Section 8, the term, ---------------- "Termination Date" shall mean that date on which Officer's employment is terminated pursuant to this Section 8. 9. SEVERANCE PAYMENTS UPON CHANGE IN CONTROL. ----------------------------------------- 8 9.1 Severance Payment. Upon the occurrence of a Change in Control (as ----------------- defined in Section 9.5 below) of the Company, the employment of Officer hereunder shall terminate and the Company, in lieu of any payment otherwise due under Section 8 hereof, shall pay to Officer in cash, on the fifth day following the date on which the Change of Control occurs (which for the purposes of this Section 9 shall be the Termination Date), the following: 9.1.1 All accrued and unpaid salary and other compensation payable to Officer by the Company for services rendered by Officer to the Company through the Termination Date; 9.1.2 All accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date; and 9.1.3 Severance pay in an amount equal to (x) the Base Salary Officer would have earned during the remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), plus an amount equal to five times (y) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement, or (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. 9.2 Continuation of Benefits. The Company shall continue for the ------------------------ remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), to provide Officer with all benefits that would have been payable to him pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof if Officer had been employed by the Company during such period. 9.3 Vesting of Options. In addition to the foregoing, and ------------------ notwithstanding the provisions of any other agreement to the contrary, upon the occurrence of a Change in Control, all options to purchase Common Stock of the Company which have been granted to Officer by the Company shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option. 9.4 Provision of Services Following Change in Control. At the request of ------------------------------------------------- the Company, Officer shall continue to serve hereunder for a period of up to 180 days following the Termination Date. If the Company requests Officer to perform such services, Officer shall be compensated from and after the Termination Date for the period that Officer actually remains employed by the Company at his then current Base Salary. Any such amounts payable to Officer shall be in addition to and not in lieu of the amounts payable to Officer under Section 9.1 above. Upon the later to occur of an occurrence of a Change of Control or the termination of any period during which Officer continues to provide services as aforesaid, Officer's employment hereunder shall terminate. 9 9.5 Change in Control. For purposes of this Section 9, "Change in ----------------- Control" of the Company shall be deemed to have occurred if (a) there shall be consummated (x) any consolidation or merger of the Company into or with another Person as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease or other transfer (in one transaction or a series of related transactions) of all or a significant portion of the assets of the Company (for purposes of this definition, the sale of the stock or assets of two or more of the Company's existing subsidiaries shall be deemed to be a sale of a significant portion of the Company's assets), or (b) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (c) any Person who is not now the owner of 10% or more of the Company's outstanding equity securities shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's outstanding equity securities, or (d) during any period of two consecutive years, 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 Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors in the beginning of the period. The parties believe that the payments pursuant to Sections 8 and 9 hereof do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if any benefit under these sections constitutes an "Excess Parachute Payment" the Company shall pay to Officer an additional amount ("Tax Payment") such that (x) the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to (y) the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. Such Tax Payment shall be paid to Officer concurrently with the severance payment referred to in Section 9.1 above. 10. NO MITIGATION. ------------- The payments required to be paid to Officer by Company pursuant to Sections 8 and 9 shall not be reduced by or mitigated by amounts which Officer earns or is capable of earning during any period following his Termination Date. 11. INJUNCTIVE RELIEF. ----------------- Officer hereby recognizes, acknowledges and agrees that in the event of any breach by Officer of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a 10 result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Officer therefore agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Officer of any of the covenants, agreements, duties or obligations hereunder, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of Officer hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 11. shall be deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against Officer at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Officer of any of his covenants, agreements, duties or obligations hereunder. 12. MISCELLANEOUS. ------------- 12.1 Entire Agreement. This Amended Agreement contains the entire ---------------- understanding of the parties hereto relating to the subject matter hereof and cannot be changed or terminated except in writing signed by both Officer and the Company. 12.2 Limited Liabilities. All liabilities incurred by Officer in his ------------------- capacity as an officer hereunder shall be incurred for the account of the Company, and Officer shall not be personally liable therefor. Officer shall not be liable to the Company, or any of its respective subsidiaries, affiliates, employees, officers, directors, agents, representatives, successors, assigns, stockholders, and their respective subsidiaries and affiliates, the Company shall, and hereby agrees to, indemnify, defend and hold Officer harmless from and against any and all damages and/or loss or liability (including, without limitation, all costs of defense thereof), for any acts or omissions in the performance of service under and within the scope of this Amended Agreement on the part of Officer. 12.3 Notices. All notices, requests and other communications ------- (collectively, "Notices") given pursuant to this Amended Agreement shall be in writing, and shall be delivered by facsimile transmission with a copy delivered by personal service or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below: If to the Company: VCA Antech, Inc. 12401 West Olympic Boulevard Los Angeles, CA 90064-1022 Attention: Board of Directors Facsimile No.: (310) 571-6701 If to Officer: Robert L. Antin _____________________________ _____________________________ 11 Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 12.3. 12.4 Governing Law. This Amended Agreement has been made and entered ------------- into in the state of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. 12.5 Counterparts. This Amended Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.6 Severable Provisions. The provisions of this Amended Agreement -------------------- are severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 12.7 Successors and Assigns. This Amended Agreement and all ---------------------- obligations and benefits of Officer and the Company hereunder shall bind and inure to the benefit of Officer and the Company, their respective affiliates, and their respective successors and assigns. 12.8 Amendments and Waivers. No amendment or waiver of any term or ---------------------- provision of this Amended Agreement shall be effective unless made in writing. Any written amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Amended Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. 12.9 Title and Headings. The titles and headings contained in this ------------------ Amended Agreement are included for convenience only and form no part of the agreement between the parties. 12.10 Survival. Notwithstanding anything to the contrary contained -------- herein, the provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive the termination of this Amended Agreement. IN WITNESS WHEREOF, this Amended Agreement has been executed as of the date first set forth above. "THE COMPANY" VCA ANTECH, INC. By:__________________________________ Its:_________________________________ ACCEPTED AND AGREED TO: 12 --------------------- Robert L. Antin 13 EX-10.2 7 dex102.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Amended Agreement") is made and entered into as of the __ day of October, 2001, by and between VCA Antech, Inc., a Delaware corporation (the "Company") and Arthur J. Antin, an individual ("Officer"). R E C I T A L S A. Officer is currently employed as Chief Operating Officer, Senior Vice President and Secretary of the Company pursuant to an Employment Agreement (the "Employment Agreement") between the Company and Officer dated as of September 20, 2000. B. The Company and Officer desire to amend and restate the Employment Agreement regarding the terms and conditions of Officer's employment by the Company. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, the Company and Officer agree as follows: 1. EMPLOYMENT. ---------- Company hereby employs Officer, and Officer hereby accepts such employment, as Chief Operating Officer, Senior Vice President and Secretary of the Company, on the terms and subject to the conditions set forth herein. 2. CAPACITY AND DUTIES. -------------------- 2.1 Officer shall serve the Company as its Chief Operating Officer, Senior Vice President and Secretary and shall report directly to the Chief Executive Officer of the Company. 2.2 Subject to the direction and control of the Chief Executive Officer, Officer shall have the full authority and responsibility to operate and manage, on a day to day basis, the business and affairs of the Company, and shall perform such other duties and responsibilities as are prescribed by the Bylaws of the Company and which are customarily vested in the office of chief operating officer of a corporation. 2.3 Officer shall devote his business time, energy and efforts faithfully and diligently to promote the Company's interests. 2.4 The terms of this Section 2 shall not prevent Officer from investing or otherwise managing his assets in such form or manner as he chooses and spending such time, whether or not during business hours, as he deems necessary to manage his investments, so long as he is able to fulfill his duties pursuant to Section 2 above. 1 2.5 Except for routine travel incident to the business of the Company, Officer shall perform his duties and obligations under this Amended Agreement principally from an office provided by the Company in Los Angeles, California or the surrounding area. 3. TERM. ---- This Amended Agreement shall be effective as of the date hereof (the "Effective Date") and shall govern Officer's employment from and after such date. As of any given date, (the "Date of Determination"), Officer's employment shall terminate on the third anniversary of the Date of Determination, unless sooner terminated in accordance with the provisions of this Amended Agreement or extended by an amendment executed by the Company and the Officer (the "Term"). Accordingly, there shall always for all purposes be a minimum of at least three years remaining on the Term under this Amended Agreement. 4. COMPENSATION. ------------ 4.1 Base Salary. ----------- 4.1.1 As compensation for services rendered under this Amended Agreement, the Company shall pay to Officer a base salary (the "Base Salary") computed in accordance with Section 4.1.2 below during the Term, payable in accordance with the normal payroll procedures of the Company. 4.1.2 During the Term, Officer's Base Salary shall be $410,400 and shall be adjusted as provided in this Section. Commencing on January 1, 2002 and on each anniversary thereafter, or from time to time at the sole discretion of the Compensation Committee of the Board of Directors (the "Compensation Committee"), Officer's Base Salary shall be reviewed by the Compensation Committee and may be increased, but may never be decreased, in the sole discretion of the Compensation Committee. In determining whether to increase Officer's Base Salary the Compensation Committee may engage a reputable compensation consulting firm to determine comparable compensation packages provided to executives in similarly situated companies. 4.1.3 The Company may deduct from the Base Salary amounts sufficient to cover applicable federal, state and/or local income tax withholdings and any other amounts which the Company is required to withhold by applicable law. 4.2 Cash Bonus Plan. The Compensation Committee shall --------------- adopt a cash bonus plan designed to provide Officer an opportunity to earn annual cash bonuses during each calendar year during his employment which, when added to Officer's Base Salary, shall provide Officer a level of compensation comparable to compensation generally prevailing for other senior officers of publicly traded companies which are comparable to the Company. The factors to be used to select which companies are comparable to that of the Company shall include, but not be limited to, industry group, revenues, operating income, growth rate, number of employees and location. The annual performance goals to be met (the "Annual Performance Goal") in order to earn portions or all of the bonus provided under the plan shall be determined through consultation between the Officer and the Compensation Committee. If requested by the Compensation Committee or Officer, the Company shall retain a reputable, nationally 2 recognized compensation consultant to assist the Compensation Committee in identifying comparable companies and to make recommendations regarding the structure and amount of the cash bonus plan. The amount of the cash bonus for any particular calendar year shall be determined as follows: (i) if Officer substantially achieves the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus of at least 45% of the Officer's Base Salary for such calendar year; and (ii) if Officer exceeds the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus between 45% and 90% of the Officer's Base Salary for such calendar year. If this Amended Agreement is terminated in the middle of a calendar year, Officer shall receive a cash bonus for services rendered through the Termination Date (as defined below) equal to the cash bonus he would have received for the entire calendar year, pro rated through the Termination Date. All cash bonuses hereunder shall be paid to Officer within five business days following the date the audited consolidated financial statements for the Company for the applicable calendar year become available. 4.3 Stock Options. All options granted to Officer after the ------------- Effective Date, whether pursuant to a Company Stock Option Plan or otherwise, shall vest in 24 equal monthly installments commencing on the first day of each month following the month in which such options are granted. All options to purchase the Company's Common Stock currently outstanding or which may be granted to Officer whether pursuant to a Company Stock Option Plan or otherwise and notwithstanding the provisions of any other agreement to the contrary, may be exercised by Officer or by Officer's family by delivery of a promissory note in the amount of the total exercise price of the option (the "Exercise Price"). The promissory note shall bear interest at the then current thirty year U.S. treasury bond rate, shall be nonrecourse except to the security referred to in the following clause, shall be secured by the Common Stock of the Company so purchased, and shall be payable in full (principal and interest) on the fourth anniversary of the date of the purchase of the shares. Notwithstanding the foregoing, Officer shall apply all proceeds from the sale of the shares so purchased by delivery of a promissory note to the repayment of principal and interest outstanding under the note until all principal and interest is paid in full. The Company shall maintain an effective registration statement covering the shares underlying the options granted to Officer whether pursuant to a Company Stock Option Plan or otherwise. 4.4 Benefits. -------- 4.4.1 Vacation. Officer shall be entitled to five weeks -------- paid vacation for each calendar year during Officer's employment; provided, however, that vacation shall only be taken at such times as not to interfere with the necessary performance of Officer's duties and obligations under this Amended Agreement. 4.4.2 Automobile. The Company shall provide Officer with ---------- the use of a luxury automobile that is selected by Officer and approved by the Compensation Committee, the cost (the "Automobile Cost") of which during the first year of the Term shall not be less than the cost that the Company currently provides for Officer's use of an automobile. Commencing January 1, 2002 and continuing annually thereafter, the Automobile Cost may, at Officer's sole discretion, be increased 5% per annum. On the earlier of significant damage or destruction or attaining two years of age, the Company shall replace such automobile with a new automobile selected by Officer and approved by the Compensation Committee. The Company shall pay all 3 costs of insurance, repair, maintenance and operation of such automobile. At the end of the two year period referred to herein (or termination of employment, if earlier), Officer may, but is not obligated to, purchase the automobile for the book value of the automobile on the Company's financial records. 4.4.3 Club Memberships. The Company shall reimburse ---------------- Officer for the initiation and monthly dues for Officer's membership in two health clubs selected by Officer, provided the aggregate of such dues shall not exceed $1,000 per month during the first year of the Term. Commencing January 1, 2002, and continuing annually thereafter, such monthly dues may, at Officer's sole discretion, increase 5% per annum. 4.4.4 Other Benefits; Insurance. During the term of ------------------------- Officer's employment under this Amended Agreement, if and to the extent eligible, Officer shall be entitled to participate in all operative Officer benefit and welfare plans of the Company then in effect ("Company Officer Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, however, that nothing contained in this Section 4.4.4 shall, in any manner whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the Term) except that the Company will at all times during the Term and any severance period referred to in Section 8 or 9 hereof maintain medical insurance (including Exec-U-Care Medical Reimbursement Insurance or a substantially similar policy) covering Officer and his dependents with benefits at least as favorable as those provided by the Company to its executives as of the date of termination. 4.4.5 Reimbursement. Officer shall be entitled to ------------- reimbursement from the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Amended Agreement. Reimbursement shall be paid upon prompt presentation of expense statements or vouchers and such other supporting information as the Company may from time to time require. 5. INDEMNIFICATION. --------------- The Company and Officer are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and conditions therein set forth, to indemnify Officer against certain claims arising by reason of the fact that he is or was an officer or director of the Company. 6. TRADE SECRETS. ------------- Officer will not at any time during the Term and for the three year period thereafter, in any fashion, form, or manner, unless specifically consented to in writing by the Company, either directly or indirectly use or divulge, disclose or communicate to any person, firm or corporation, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company, except in the ordinary course of the Company's business. All equipment, notebooks, documents, memoranda, report, files, samples, books, correspondence, lists, other written and graphic records, and the like, affecting or relating to the 4 business of the Company, which Officer shall prepare, use, construct, observe, possess or control, shall be and remain the Company's sole property. Officer's obligation under the preceding sentence shall continue in effect after the end of Officer's employment with the Company and the obligations shall be binding on Officer's assigns, heirs, executors, administrators, and other legal representatives. 7. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. ---------------------------------------------- Upon termination of this Amended Agreement for any reason, Officer, or his estate in the event of his death, shall turn over to the Company all correspondence, property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or any of its subsidiaries or affiliates or comprising or relating to the Trade Secrets. 8. TERMINATION OF EMPLOYMENT. ------------------------- 8.1 Termination in Case of Death. ---------------------------- 8.1.1 Officer's employment hereunder shall terminate immediately upon the death of Officer. 8.1.2 Upon termination of Officer's employment pursuant to this Section 8.1, the Company shall pay to Officer's estate, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide for the benefit of Officer's family the medical benefits referred to in Section 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). 8.2 Termination in Case of Disability. --------------------------------- 8.2.1 If Officer suffers a physical or mental disability which results in Officer being unable to perform his duties hereunder for a 26 consecutive week period, then the Board of Directors shall select a qualified physician to examine Officer and review his physical and mental capacity. If such physician determines in good faith that such physical or mental disability renders Officer incapable of performing his duties hereunder for a period of at least 26 consecutive weeks following the date of such physician's written opinion, then Officer's employment shall terminate effective 26 weeks following the date of such physician's written opinion. 5 8.2.2 Upon termination of Officer's employment pursuant to this Section 8.2, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.2); provided however, such amount shall be reduced by the amount of any payments to be paid to Officer under any long-term disability insurance policy maintained by the Company for the benefit of Officer pursuant to Section 4.4.4. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits referred to in Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.2). 8.3 Termination by Officer for Cause. -------------------------------- 8.3.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by Officer to the Company upon the occurrence of any of the following events: 8.3.1.1 The willful breach of any of the material obligations of the Company to Officer under Amended Agreement following written notice delivered to the Company and a reasonable cure period not to exceed 30 days. 8.3.1.2 The Company's chief executive offices are moved to a location outside of Los Angeles County, California; or 8.3.1.3 Officer fails to be reelected to, or is removed from, the Board of Directors of the Company. 8.3.2 Upon termination of Officer's employment pursuant to this Section 8.3, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3), plus an amount equal to three times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this 6 Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3). 8.4 Termination by Officer Without Cause. ------------------------------------ 8.4.1 This Amended Agreement shall terminate immediately upon delivery to the Company of written notice of termination by Officer without cause. 8.4.2 Upon termination of this Amended Agreement pursuant to this Section 8.4, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date. 8.5 Termination by the Company Without Cause. ---------------------------------------- 8.5.1 The employment of Officer shall terminate immediately upon delivery to Officer of written notice of termination by the Company, which shall be deemed to be "without cause" unless termination is expressly stated to be pursuant to Sections 8.1 or 8.2. 8.5.2 Upon termination of this Officer's employment pursuant to this Section 8.5, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5), plus an amount equal to three times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (i) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer 7 pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5). 8.6 Termination by the Company For Cause. ------------------------------------ 8.6.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by the Company to the Officer of termination for "cause" by reason of Officer's conviction (including any plea of guilty or no contest) of (x) any felony involving the embezzlement, theft or misappropriation of monies or other property, of the Company or otherwise, or (y) any crime of moral turpitude. 8.6.2 Upon termination of this Amended Agreement pursuant to this Section 8.6, the Company shall pay to Officer, on the Termination Date, all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by the Officer to the Company through the Termination Date in a lump sum payment. The Company shall have no further obligation to the Officer pursuant to this Amended Agreement. 8.7 Termination Date. For purposes of this Section 8, the term, ---------------- "Termination Date" shall mean that date on which Officer's employment is terminated pursuant to this Section 8. 9. SEVERANCE PAYMENTS UPON CHANGE IN CONTROL. ----------------------------------------- 9.1 Severance Payment. Upon the occurrence of a Change in Control (as ----------------- defined in Section 9.5 below) of the Company, the employment of Officer hereunder shall terminate and the Company, in lieu of any payment otherwise due under Section 8 hereof, shall pay to Officer in cash, on the fifth day following the date on which the Change of Control occurs (which for the purposes of this Section 9 shall be the Termination Date), the following: 9.1.1 All accrued and unpaid salary and other compensation payable to Officer by the Company for services rendered by Officer to the Company through the Termination Date; 9.1.2 All accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date; and 9.1.3 Severance pay in an amount equal to (x) the Base Salary Officer would have earned during the remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), plus an amount equal to three times (y) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement, or (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. 8 9.2 Continuation of Benefits. The Company shall continue for the ------------------------ remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), to provide Officer with all benefits that would have been payable to him pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof if Officer had been employed by the Company during such period. 9.3 Vesting of Options. In addition to the foregoing, and ------------------ notwithstanding the provisions of any other agreement to the contrary, upon the occurrence of a Change in Control, all options to purchase Common Stock of the Company which have been granted to Officer by the Company shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option. 9.4 Provision of Services Following Change in Control. At the ------------------------------------------------- request of the Company, Officer shall continue to serve hereunder for a period of up to 180 days following the Termination Date. If the Company requests Officer to perform such services, Officer shall be compensated from and after the Termination Date for the period that Officer actually remains employed by the Company at his then current Base Salary. Any such amounts payable to Officer shall be in addition to and not in lieu of the amounts payable to Officer under Section 9.1 above. Upon the later to occur of an occurrence of a Change of Control or the termination of any period during which Officer continues to provide services as aforesaid, Officer's employment hereunder shall terminate. 9.5 Change in Control. For purposes of this Section 9, "Change in ----------------- Control" of the Company shall be deemed to have occurred if (a) there shall be consummated (x) any consolidation or merger of the Company into or with another Person as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease or other transfer (in one transaction or a series of related transactions) of all or a significant portion of the assets of the Company (for purposes of this definition, the sale of the stock or assets of two or more of the Company's existing subsidiaries shall be deemed to be a sale of a significant portion of the Company's assets), or (b) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (c) any Person who is not now the owner of 10% or more of the Company's outstanding equity securities shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's outstanding equity securities, or (d) during any period of two consecutive years, 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 Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors in the beginning of the period. 9 The parties believe that the payments pursuant to Sections 8 and 9 hereof do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if any benefit under these sections constitutes an "Excess Parachute Payment" the Company shall pay to Officer an additional amount (the "Tax Payment") such that (x) the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to (y) the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. Such Tax Payment shall be paid to Officer concurrently with the severance payment referred to in Section 9.1 above. 10. NO MITIGATION. ------------- The payments required to be paid to Officer by Company pursuant to Sections 8 and 9 shall not be reduced by or mitigated by amounts which Officer earns or is capable of earning during any period following his Termination Date. 11. INJUNCTIVE RELIEF. ----------------- Officer hereby recognizes, acknowledges and agrees that in the event of any breach by Officer of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Officer therefore agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Officer of any of the covenants, agreements, duties or obligations hereunder, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of Officer hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 11. shall be deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against Officer at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Officer of any of his covenants, agreements, duties or obligations hereunder. 12. MISCELLANEOUS. ------------- 12.1 Entire Agreement. This Amended Agreement contains the entire ---------------- understanding of the parties hereto relating to the subject matter hereof and cannot be changed or terminated except in writing signed by both Officer and the Company. 12.2 Limited Liabilities. All liabilities incurred by Officer in his ------------------- capacity as an officer hereunder shall be incurred for the account of the Company, and Officer shall not be 10 personally liable therefor. Officer shall not be liable to the Company, or any of its respective subsidiaries, affiliates, employees, officers, directors, agents, representatives, successors, assigns, stockholders, and their respective subsidiaries and affiliates, the Company shall, and hereby agrees to, indemnify, defend and hold Officer harmless from and against any and all damages and/or loss or liability (including, without limitation, all costs of defense thereof), for any acts or omissions in the performance of service under and within the scope of this Amended Agreement on the part of Officer. 12.3 Notices. All notices, requests and other communications ------- (collectively, "Notices") given pursuant to this Amended Agreement shall be in writing, and shall be delivered by facsimile transmission with a copy delivered by personal service or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below: If to the Company: VCA Antech, Inc. 12401 West Olympic Boulevard Los Angeles, CA 90064-1022 Attention: Board of Directors Facsimile No.: (310) 571-6710 If to Officer: Arthur J. Antin ------------------------------------ ------------------------------------ Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 12.3. 12.4 Governing Law. This Amended Agreement has been made and entered ------------- into in the state of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. 12.5 Counterparts. This Amended Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.6 Severable Provisions. The provisions of this Amended Agreement -------------------- are severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 12.7 Successors and Assigns. This Amended Agreement and all ---------------------- obligations and benefits of Officer and the Company hereunder shall bind and inure to the benefit of Officer and the Company, their respective affiliates, and their respective successors and assigns. 12.8 Amendments and Waivers. No amendment or waiver of any term or ---------------------- provision of this Amended Agreement shall be effective unless made in writing. Any written 11 amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Amended Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. 12.9 Title and Headings. The titles and headings contained in this ------------------ Amended Agreement are included for convenience only and form no part of the agreement between the parties. 12.10 Survival. Notwithstanding anything to the contrary contained -------- herein, the provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive the termination of this Amended Agreement. IN WITNESS WHEREOF, this Amended Agreement has been executed as of the date first set forth above. "THE COMPANY" VCA ANTECH, INC. By: ------------------------------------------- Its: ------------------------------------------ ACCEPTED AND AGREED TO: ---------------------------- Arthur J. Antin 12 EX-10.3 8 dex103.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Amended Agreement") is made and entered into as of the __ day of October, 2001, by and between VCA Antech, Inc., a Delaware corporation (the "Company") and Tomas W. Fuller, an individual ("Officer"). R E C I T A L S A. Officer is currently employed as Chief Financial Officer, Vice President and Assistant Secretary of the Company pursuant to an Employment Agreement (the "Employment Agreement") between the Company and Officer dated as of September 20, 2000. B. The Company and Officer desire to amend and restate the Employment Agreement regarding the terms and conditions of Officer's employment by the Company. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, the Company and Officer agree as follows: 1. EMPLOYMENT. ---------- Company hereby employs Officer, and Officer hereby accepts such employment, as Chief Financial, Vice President and Assistant Secretary of the Company, on the terms and subject to the conditions set forth herein. 2. CAPACITY AND DUTIES. ------------------- 2.1 Officer shall serve the Company as its Chief Financial Officer, Vice President and Assistant Secretary and shall report directly to the Chief Executive Officer of the Company (the "Board of Directors"). 2.2 Subject to the direction and control of the Chief Executive Officer, Officer shall have the full authority and responsibility to operate and manage, on a day to day basis, the business and affairs of the Company, and shall perform such other duties and responsibilities as are prescribed by the Bylaws of the Company and which are customarily vested in the office of chief financial officer of a corporation. 2.3 Officer shall devote his business time, energy and efforts faithfully and diligently to promote the Company's interests. 2.4 The terms of this Section 2 shall not prevent Officer from investing or otherwise managing his assets in such form or manner as he chooses and spending such time, whether or not during business hours, as he deems necessary to manage his investments, so long as he is able to fulfill his duties pursuant to Section 2 above. 1 2.5 Except for routine travel incident to the business of the Company, Officer shall perform his duties and obligations under this Amended Agreement principally from an office provided by the Company in Los Angeles, California or the surrounding area. 3. TERM. ---- This Amended Agreement shall be effective as of the date hereof (the "Effective Date") and shall govern Officer's employment from and after such date. As of any given date, (the "Date of Determination"), Officer's employment shall terminate on the second anniversary of the Date of Determination, unless sooner terminated in accordance with the provisions of this Amended Agreement or extended by an amendment executed by the Company and the Officer (the "Term"). Accordingly, there shall always for all purposes be a minimum of at least two years remaining on the Term under this Amended Agreement. 4. COMPENSATION. ------------ 4.1 Base Salary. ----------- 4.1.1 As compensation for services rendered under this Amended Agreement, the Company shall pay to Officer a base salary (the "Base Salary") computed in accordance with Section 4.1.2 below during the Term, payable in accordance with the normal payroll procedures of the Company. 4.1.2 During the Term, Officer's Base Salary shall be $205,200 and shall be adjusted as provided in this Section. Commencing on January 1, 2002 and on each anniversary thereafter, or from time to time at the sole discretion of the Compensation Committee of the Board of Directors (the "Compensation Committee"), Officer's Base Salary shall be reviewed by the Compensation Committee and may be increased, but may never be decreased, in the sole discretion of the Compensation Committee. In determining whether to increase Officer's Base Salary the Compensation Committee may engage a reputable compensation consulting firm to determine comparable compensation packages provided to executives in similarly situated companies. 4.1.3 The Company may deduct from the Base Salary amounts sufficient to cover applicable federal, state and/or local income tax withholdings and any other amounts which the Company is required to withhold by applicable law. 4.2 Cash Bonus Plan. The Compensation Committee shall --------------- adopt a cash bonus plan designed to provide Officer an opportunity to earn annual cash bonuses during each calendar year during his employment which, when added to Officer's Base Salary, shall provide Officer a level of compensation comparable to compensation generally prevailing for other senior officers of publicly traded companies which are comparable to the Company. The factors to be used to select which companies are comparable to that of the Company shall include, but not be limited to, industry group, revenues, operating income, growth rate, number of employees and location. The annual performance goals to be met (the "Annual Performance Goal") in order to earn portions or all of the bonus provided under the plan shall be determined through consultation between the Officer and the Compensation Committee. If requested by the Compensation Committee or Officer, the Company shall retain a reputable, nationally 2 recognized compensation consultant to assist the Compensation Committee in identifying comparable companies and to make recommendations regarding the structure and amount of the cash bonus plan. The amount of the cash bonus for any particular calendar year shall be determined as follows: (i) if Officer substantially achieves the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus of at least 35% of the Officer's Base Salary for such calendar year; and (ii) if Officer exceeds the Annual Performance Goal for such calendar year, Officer shall receive a cash bonus between 35% and 70% of the Officer's Base Salary for such calendar year. If this Amended Agreement is terminated in the middle of a calendar year, Officer shall receive a cash bonus for services rendered through the Termination Date (as defined below) equal to the cash bonus he would have received for the entire calendar year, pro rated through the Termination Date. All cash bonuses hereunder shall be paid to Officer within five business days following the date the audited consolidated financial statements for the Company for the applicable calendar year become available. 4.3 Stock Options. All options granted to Officer after the ------------- Effective Date, whether pursuant to a Company Stock Option Plan or otherwise, shall vest in 24 equal monthly installments commencing on the first day of each month following the month in which such options are granted. All options to purchase the Company's Common Stock currently outstanding or which may be granted to Officer whether pursuant to a Company Stock Option Plan or otherwise and notwithstanding the provisions of any other agreement to the contrary, may be exercised by Officer or by Officer's family by delivery of a promissory note in the amount of the total exercise price of the option (the "Exercise Price"). The promissory note shall bear interest at the then current thirty year U.S. treasury bond rate, shall be nonrecourse except to the security referred to in the following clause, shall be secured by the Common Stock of the Company so purchased, and shall be payable in full (principal and interest) on the fourth anniversary of the date of the purchase of the shares. Notwithstanding the foregoing, Officer shall apply all proceeds from the sale of the shares so purchased by delivery of a promissory note to the repayment of principal and interest outstanding under the note until all principal and interest is paid in full. The Company shall maintain an effective registration statement covering the shares underlying the options granted to Officer whether pursuant to a Company Stock Option Plan or otherwise. 4.4 Benefits. -------- 4.4.1 Vacation. Officer shall be entitled to four weeks -------- paid vacation for each calendar year during Officer's employment; provided, however, that vacation shall only be taken at such times as not to interfere with the necessary performance of Officer's duties and obligations under this Amended Agreement. 4.4.2 Automobile. The Company shall provide Officer ---------- with the use of a luxury automobile that is selected by Officer and approved by the Compensation Committee, the cost (the "Automobile Cost") of which during the first year of the Term shall not be less than the cost that the Company currently provides for Officer's use of an automobile. Commencing January 1, 2002 and continuing annually thereafter, the Automobile Cost may, at Officer's sole discretion, be increased 5% per annum. On the earlier of significant damage or destruction or attaining two years of age, the Company shall replace such automobile with a new automobile selected by Officer and approved by the Compensation Committee. The Company shall pay all 3 costs of insurance, repair, maintenance and operation of such automobile. At the end of the two year period referred to herein (or termination of employment, if earlier), Officer may, but is not obligated to, purchase the automobile for the book value of the automobile on the Company's financial records. 4.4.3 Other Benefits; Insurance. During the term of Officer's ------------------------- employment under this Amended Agreement, if and to the extent eligible, Officer shall be entitled to participate in all operative Officer benefit and welfare plans of the Company then in effect ("Company Officer Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, however, that nothing contained in this Section 4.4.4 shall, in any manner whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the Term) except that the Company will at all times during the Term and any severance period referred to in Section 8 or 9 hereof maintain medical insurance (including Exec-U-Care Medical Reimbursement Insurance or a substantially similar policy) covering Officer and his dependents with benefits at least as favorable as those provided by the Company to its executives as of the date of termination. 4.4.4 Reimbursement. Officer shall be entitled to reimbursement ------------- from the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Amended Agreement. 5. INDEMNIFICATION. --------------- The Company and Officer are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and conditions therein set forth, to indemnify Officer against certain claims arising by reason of the fact that he is or was an officer or director of the Company. 6. TRADE SECRETS. ------------- Officer will not at any time during the Term and for the three year period thereafter, in any fashion, form, or manner, unless specifically consented to in writing by the Company, either directly or indirectly use or divulge, disclose or communicate to any person, firm or corporation, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company, except in the ordinary course of the Company's business. All equipment, notebooks, documents, memoranda, report, files, samples, books, correspondence, lists, other written and graphic records, and the like, affecting or relating to the business of the Company, which Officer shall prepare, use, construct, observe, possess or control, shall be and remain the Company's sole property. Officer's obligation under the preceding sentence shall continue in effect after the end of Officer's employment with the Company and the obligations shall be binding on Officer's assigns, heirs, executors, administrators, and other legal representatives. 7. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. ---------------------------------------------- 4 Upon termination of this Amended Agreement for any reason, Officer, or his estate in the event of his death, shall turn over to the Company all correspondence, property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or any of its subsidiaries or affiliates or comprising or relating to the Trade Secrets. 8. TERMINATION OF EMPLOYMENT. ------------------------- 8.1 Termination in Case of Death. ---------------------------- 8.1.1 Officer's employment hereunder shall terminate immediately upon the death of Officer. 8.1.2 Upon termination of Officer's employment pursuant to this Section 8.1, the Company shall pay to Officer's estate, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide for the benefit of Officer's family the medical benefits referred to in Section 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.1). 8.2 Termination in Case of Disability. --------------------------------- 8.2.1 If Officer suffers a physical or mental disability which results in Officer being unable to perform his duties hereunder for a 26 consecutive week period, then the Board of Directors shall select a qualified physician to examine Officer and review his physical and mental capacity. If such physician determines in good faith that such physical or mental disability renders Officer incapable of performing his duties hereunder for a period of at least 26 consecutive weeks following the date of such physician's written opinion, then Officer's employment shall terminate effective 26 weeks following the date of such physician's written opinion. 8.2.2 Upon termination of Officer's employment pursuant to this Section 8.2, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the 5 Amended Agreement pursuant to this Section 8.2); provided however, such amount shall be reduced by the amount of any payments to be paid to Officer under any long-term disability insurance policy maintained by the Company for the benefit of Officer pursuant to Section 4.4.4. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits referred to in Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.2). 8.3 Termination by Officer for Cause. -------------------------------- 8.3.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by Officer to the Company upon the occurrence of any of the following events: 8.3.1.1 The willful breach of any of the material obligations of the Company to Officer under this Amended Agreement following written notice delivered to the Company and a reasonable cure period not to exceed 30 days. 8.3.1.2 The Company's chief executive offices are moved to a location outside of Los Angeles County, California; or 8.3.1.3 Officer fails to be reelected to, or is removed from, the Board of Directors of the Company. 8.3.2 Upon termination of Officer's employment pursuant to this Section 8.3, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3), plus an amount equal to two times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company 6 shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.3). 8.4 Termination by Officer Without Cause. ------------------------------------ 8.4.1 This Amended Agreement shall terminate immediately upon delivery to the Company of written notice of termination by Officer without cause. 8.4.2 Upon termination of this Amended Agreement pursuant to this Section 8.4, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date. 8.5 Termination by the Company Without Cause. ---------------------------------------- 8.5.1 The employment of Officer shall terminate immediately upon delivery to Officer of written notice of termination by the Company, which shall be deemed to be "without cause" unless termination is expressly stated to be pursuant to Sections 8.1 or 8.2. 8.5.2 Upon termination of this Officer's employment pursuant to this Section 8.5, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5), plus an amount equal to two times (i) in the event no previous bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement; and (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the Termination Date shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof for the remaining scheduled Term of the Amended Agreement (computed without regard to the termination of the Amended Agreement pursuant to this Section 8.5). 8.6 Termination by the Company For Cause. ------------------------------------ 7 8.6.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by the Company to the Officer of termination for "cause" by reason of Officer's conviction (including any plea of guilty or no contest) of (x) any felony involving the embezzlement, theft or misappropriation of monies or other property, of the Company or otherwise, or (y) any crime of moral turpitude. 8.6.2 Upon termination of this Amended Agreement pursuant to this Section 8.6, the Company shall pay to Officer, on the Termination Date, all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by the Officer to the Company through the Termination Date in a lump sum payment. The Company shall have no further obligation to the Officer pursuant to this Amended Agreement. 8.7 Termination Date. For purposes of this Section 8, the term, ---------------- "Termination Date" shall mean that date on which Officer's employment is terminated pursuant to this Section 8. 9. SEVERANCE PAYMENTS UPON CHANGE IN CONTROL. ----------------------------------------- 9.1 Severance Payment. Upon the occurrence of a Change in Control (as ----------------- defined in Section 9.5 below) of the Company, the employment of Officer hereunder shall terminate and the Company, in lieu of any payment otherwise due under Section 8 hereof, shall pay to Officer in cash, on the fifth day following the date on which the Change of Control occurs (which for the purposes of this Section 9 shall be the Termination Date), the following: 9.1.1 All accrued and unpaid salary and other compensation payable to Officer by the Company for services rendered by Officer to the Company through the Termination Date; 9.1.2 All accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date; and 9.1.3 Severance pay in an amount equal to (x) the Base Salary Officer would have earned during the remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), plus an amount equal to two times (y) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Amended Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, the greater of (a) the last annual bonus paid or payable to Officer pursuant to this Amended Agreement, or (b) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Amended Agreement. 9.2 Continuation of Benefits. The Company shall continue for the ------------------------ remaining scheduled Term of the Amended Agreement (computed without regard to the Change in Control described in this Section 9), to provide Officer with all benefits that would have been payable to him pursuant to Sections 4.4.2, 4.4.3 and 4.4.4 hereof if Officer had been employed by the Company during such period. 8 9.3 Vesting of Options. In addition to the foregoing, and ------------------ notwithstanding the provisions of any other agreement to the contrary, upon the occurrence of a Change in Control, all options to purchase Common Stock of the Company which have been granted to Officer by the Company shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option. 9.4 Provision of Services Following Change in Control. At the request ------------------------------------------------- of the Company, Officer shall continue to serve hereunder for a period of up to 180 days following the Termination Date. If the Company requests Officer to perform such services, Officer shall be compensated from and after the Termination Date for the period that Officer actually remains employed by the Company at his then current Base Salary. Any such amounts payable to Officer shall be in addition to and not in lieu of the amounts payable to Officer under Section 9.1 above. Upon the later to occur of an occurrence of a Change of Control or the termination of any period during which Officer continues to provide services as aforesaid, Officer's employment hereunder shall terminate. 9.5 Change in Control. For purposes of this Section 9, "Change in ----------------- Control" of the Company shall be deemed to have occurred if (a) there shall be consummated (x) any consolidation or merger of the Company into or with another Person as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (y) any sale, lease or other transfer (in one transaction or a series of related transactions) of all or a significant portion of the assets of the Company (for purposes of this definition, the sale of the stock or assets of two or more of the Company's existing subsidiaries shall be deemed to be a sale of a significant portion of the Company's assets), or (b) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (c) any Person who is not now the owner of 10% or more of the Company's outstanding equity securities shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's outstanding equity securities, or (d) during any period of two consecutive years, 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 Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors in the beginning of the period. The parties believe that the payments pursuant to Sections 8 and 9 hereof do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if any benefit under these sections constitutes an "Excess Parachute Payment" the Company shall pay to Officer an additional amount ("Tax Payment") such that (x) the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to 9 (y) the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. Such Tax Payment shall be paid to Officer concurrently with the severance payment referred to in Section 9.1 above. 10. NO MITIGATION. ------------- The payments required to be paid to Officer by Company pursuant to Sections 8 and 9 shall not be reduced by or mitigated by amounts which Officer earns or is capable of earning during any period following his Termination Date. 11. INJUNCTIVE RELIEF. ----------------- Officer hereby recognizes, acknowledges and agrees that in the event of any breach by Officer of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Officer therefore agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Officer of any of the covenants, agreements, duties or obligations hereunder, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of Officer hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 11. shall be deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against Officer at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Officer of any of his covenants, agreements, duties or obligations hereunder. 12. MISCELLANEOUS. ------------- 12.1 Entire Agreement. This Amended Agreement contains the entire ---------------- understanding of the parties hereto relating to the subject matter hereof and cannot be changed or terminated except in writing signed by both Officer and the Company. 12.2 Limited Liabilities. All liabilities incurred by Officer in his ------------------- capacity as an officer hereunder shall be incurred for the account of the Company, and Officer shall not be personally liable therefor. Officer shall not be liable to the Company, or any of its respective subsidiaries, affiliates, employees, officers, directors, agents, representatives, successors, assigns, stockholders, and their respective subsidiaries and affiliates, the Company shall, and hereby agrees to, indemnify, defend and hold Officer harmless from and against any and all damages and/or loss or liability (including, without limitation, all costs of defense thereof), for any acts or omissions in the performance of service under and within the scope of this Amended Agreement on the part of Officer. 10 12.3 Notices. All notices, requests and other communications ------- (collectively, "Notices") given pursuant to this Amended Agreement shall be in writing, and shall be delivered by facsimile transmission with a copy delivered by personal service or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below: If to the Company: VCA Antech, Inc. 12401 West Olympic Boulevard Los Angeles, CA 90064-1022 Attention: Board of Directors Facsimile No.: (310) 571-6701 If to Officer: Tomas W. Fuller ______________________________________ ______________________________________ Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 12.3. 12.4 Governing Law. This Amended Agreement has been made and entered ------------- into in the state of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. 12.5 Counterparts. This Amended Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.6 Severable Provisions. The provisions of this Amended Agreement -------------------- are severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 12.7 Successors and Assigns. This Amended Agreement and all ---------------------- obligations and benefits of Officer and the Company hereunder shall bind and inure to the benefit of Officer and the Company, their respective affiliates, and their respective successors and assigns. 12.8 Amendments and Waivers. No amendment or waiver of any term or ---------------------- provision of this Amended Agreement shall be effective unless made in writing. Any written amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Amended Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. 12.9 Title and Headings. The titles and headings contained in this ------------------ Amended Agreement are included for convenience only and form no part of the agreement between the parties. 11 12.10 Survival. Notwithstanding anything to the contrary contained -------- herein, the provisions of Sections 6, 7, 8, 9, 10 and 11 shall survive the termination of this Amended Agreement. IN WITNESS WHEREOF, this Amended Agreement has been executed as of the date first set forth above. "THE COMPANY" VCA ANTECH, INC. By: ------------------------------------------ Its: ----------------------------------------- ACCEPTED AND AGREED TO: Tomas W. Fuller 12 EX-10.4 9 dex104.txt EMPLOYMENT AGREEMENT EXHIBIT 10.4 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of the 20th day of September 2000, by and between Veterinary Centers of America, Inc., a Delaware corporation (the "Company") and Neil Tauber, an individual ("Officer"). R E C I T A L S Pursuant to that certain Agreement and Plan of Merger by and between the Company, Vicar Operating, Inc., a Delaware corporation and Vicar Recap, Inc., a Delaware corporation dated March 30, 2000, the Company as the surviving corporation in the merger has determined to employ Officer as its Senior Vice President. The parties desire that this Agreement supersede any and all prior employment agreements Officer may have with the Company and that such prior agreements be cancelled. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the terms, covenants and conditions contained herein, the Company and Officer agree as follows: 1. Employment. Company hereby employs Officer, and Officer hereby accepts such employment, as Senior Vice President of the Company, on the terms and subject to the conditions set forth herein. 2. Capacity and Duties. 2.1 Officer shall serve the Company as its Senior Vice President and shall report directly to the Chief Executive Officer of the Company. 2.2 Subject to the direction and control of the Chief Executive Officer, Officer shall perform such duties and responsibilities as are currently prescribed by the Bylaws of the Company and which are customarily vested in the office of senior vice president of a corporation. 2.3 Officer shall devote his business time, energy and efforts faithfully and diligently to promote the Company's interests. 2.4 The terms of this Section 2 shall not preclude Officer from serving and performing his duties as an officer and/or director of yopet.com, inc., or any of its subsidiaries, or engaging in appropriate professional, educational, civic, charitable or religious activities or from devoting a reasonable amount of time to private investments, provided that such activities do not interfere or conflict with Officer's duties to the Company. 2.5 Except for routine travel incident to the business of the Company, Officer shall perform his duties and obligations under this Agreement principally from an office provided by the Company in Los Angeles, California or the surrounding area. 1 3. Term. This Agreement shall be effective as of the date hereof (the "Effective Date") and shall govern Officer's employment from and after such date. Officer's employment shall terminate on the third anniversary of the Effective Date unless sooner terminated by either party hereto upon 60 days advance written notice or otherwise in accordance with the provisions of this Agreement or extended by an amendment executed by the Company and the Officer (the "Term"). 4. Compensation. 4.1 Base Salary. ----------- 4.1.1 As compensation for services rendered under this Agreement, the Company shall pay to Officer a base salary (the "Base Salary") computed in accordance with Section 4.1.3 below during the Term of this Agreement, payable in accordance with the normal payroll procedures of the Company. 4.1.2 In addition to the Base Salary, the Company shall pay to Officer additional compensation during each year in the Term of this Agreement in an amount equal to $48,000, payable in accordance with the normal payroll procedures of the Company. 4.1.3 During the term of this Agreement, Officer's Base Salary shall be $200,000 and shall be adjusted as provided in this Section. Commencing on January 1 2001 and on each anniversary thereafter (each, an "Adjustment Date"), or from time to time at the sole discretion of the Board of Directors, Officer's Base Salary shall be reviewed by the Board of Directors and may be increased, but may never be decreased, in the sole discretion of the Board of Directors; provided, however, on each Adjustment Date, Officer's Base Salary shall be increased by at least an amount which equates to the percentage increase in the consumer price index for the greater Los Angeles metropolitan area from January 1, 2000 to the Adjustment Date. 4.1.4 The Company may deduct from the Base Salary amounts sufficient to cover applicable federal, state and/or local income tax withholdings and any other amounts which the Company is required to withhold by applicable law. 4.2 Cash Bonus Plan. The Board of Directors shall adopt a cash bonus --------------- plan designed to provide Officer an opportunity to earn annual cash bonuses during each calendar year during his employment (commencing with calendar year 2000) of up to 70% of Officer's Base Salary, pro rated, based on (i) the Company's Adjusted EBITDA and (ii) acquisition goals established by the Chief Executive Officer and the Board of Directors that will be based primarily on the satisfaction of the acquisition plans of the Company, the successful integration and operation of the acquisitions and the overall performance of the Company as it relates to the business plan of the Company. Approximately 40% any bonus will reflect EBITDA goals and 60% of any bonus will reflect acquisition goals. The amount of the cash bonus related to EBITDA goals for any particular calendar year shall be determined as follows: (i) if the Company's Adjusted EBITDA for such calendar year is 95% or below the Target for such calendar year, Officer shall not receive a cash bonus for such calendar year (ii) if the Company's Adjusted EBITDA for such calendar year is between 95% and 100% of the Target for such calendar year, 2 Officer shall receive a cash bonus pro rated between 0% and 15% of the Officer's Base Salary for such calendar year; (iii) if the Company's Adjusted EBITDA for such calendar year is equal to 100% of the Target for such calendar year, Officer shall receive a cash bonus equal to 15% of the Officer's Base Salary for such calendar year; (iv) if the Company's Adjusted EBITDA is between 100% and 105% of the Target for such calendar year Officer shall receive a cash bonus prorated between 15% and 30% of the Officer's Base Salary for such calendar year, and (v) if the Company's Adjusted EBITDA for such calendar year is equal to 105% of the Target for such calendar year, Officer shall receive a cash bonus equal to 30% of the Officer's Base Salary for such calendar year. Officer's cash bonus for 2000 shall be based on the Base Salary provided for in this Agreement, as if Officer received such Base Salary for the entire calendar year. Officer shall receive the full cash bonus for calendar year 2000 notwithstanding that this Agreement was entered into during the calendar year. If this Agreement is terminated in the middle of a calendar year, Officer shall receive a cash bonus for services rendered through the Termination Date (as defined below) equal to the cash bonus he would have received for the entire calendar year, pro rated through the Termination Date. All cash bonuses hereunder shall be paid to Officer within five business days following the date the audited consolidated financial statements for the Company for the applicable calendar year become available. For purposes of this Agreement, Adjusted EBITDA shall mean consolidated earnings for the Company before interest, taxes, depreciation and amortization and any amount of expense arising under that certain Management Services Agreement dated as of the date hereof by and between the Company, Vicar Operating, Inc., a Delaware corporation and Leonard Green & Partners, L.P. for a calendar year, as reflected on the Company's audited consolidated financial statements for such calendar year. For purposes of this Agreement, the term, "Target," shall mean the planned targeted Adjusted EBITDA for the Company for each calendar year as set forth on Exhibit A attached hereto, which Exhibit shall be amended from time to time to reflect (x) transactions after the date hereof outside of the ordinary course of business, such as (i) material acquisitions that require consent of the lenders party to the Credit and Guaranty Agreement, dated as of the date hereof, by and among the Company, the lenders party thereto from time to time, and the other signatories thereto or (ii) dispositions of assets and changes in accounting policy, and (y) extensions of the Term of this Agreement beyond the third anniversary of the Effective Date. In any such case, the parties shall negotiate in good faith amendments to the Exhibit that are equitable in the circumstances. Any bonus for achievement of acquisition goals will be determined by the Board of Directors taking into consideration the recommendations of the Chief Executive Officer. 4.3 Stock Options. If options are granted to Officer pursuant to ------------- the Company's stock incentive programs, the options shall vest in 24 equal monthly installments on the first day of each month commencing on the date of grant. All options to purchase the Company's Common Stock granted to Officer whether pursuant to a Company Stock Option Plan or otherwise and notwithstanding the provisions of any other agreement to the contrary, may be exercised by Officer or by Officer's family by delivery of a promissory note in the amount of the total exercise price of the option (the "Exercise Price"). The promissory note shall bear interest at the then current thirty year U.S. treasury bond rate, shall be nonrecourse except to the security referred to in the following clause, shall be secured by the Common Stock of the Company so purchased, and shall be payable in full (principal and interest) on the fourth anniversary of the date of the purchase of the shares. Notwithstanding the foregoing, Officer shall apply all proceeds from the sale of the shares so purchased by delivery of a promissory note to the repayment of principal and interest outstanding under the note until all principal and interest is paid in full. Following such time as the Company's Common Stock is registered under the Securities Exchange Act of 1934, as amended, the Company shall maintain an effective registration statement covering the shares underlying the options granted to Officer whether pursuant to a Company Stock Option Plan or otherwise. 3 4.4 Benefits. --------- 4.4.1 Vacation. Officer shall be entitled to four weeks paid -------- vacation for each calendar year during Officer's employment; provided, however, -------- ------- that vacation shall only be taken at such times as not to interfere with the necessary performance of Officer's duties and obligations under this Agreement. 4.4.2 Automobile. The Company shall provide Officer with the use ---------- of a luxury automobile that is selected by Officer and approved by the Board of Directors, the cost (the "Automobile Cost") of which during the first year of the Term shall not be less than the cost that the Company currently provides for Officer's use of a Mercedes Benz 1999 Model. The Company shall pay all costs of insurance, repair, maintenance and operation of such automobile. At the end of a three year period (or termination of employment, if earlier), Officer may, but is not obligated to, purchase the automobile for the book value of the automobile on the Company's financial records. 4.4.3 Other Benefits; Insurance. During the term of Officer's ------------------------- employment under this Agreement, if and to the extent eligible, Officer shall be entitled to participate in all operative Officer benefit and welfare plans of the Company then in effect ("Company Officer Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans, all on the same basis generally applicable to the executives of the Company; provided, however, that nothing contained in this Section 4.4.3 shall, -------- ------- in any manner whatsoever, directly or indirectly, require or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Officer Benefit Plan at any time (whether during or after the term hereof) except that the Company will at all times during the term hereof and any severance period referred to in Section 8 or 9 hereof maintain medical insurance (including Exec-U-Care Medical Reimbursement Insurance or a substantially similar policy) covering Officer and his dependents with benefits at least as favorable as those provided by the Company to its executives as of the date of termination. 4.4.4 Reimbursement. Officer shall be entitled to reimbursement ------------- from the Company for the reasonable costs and expenses incurred in connection with the performance of the duties and obligations provided for in this Agreement. 5. Indemnification. The Company and Officer are parties to an Indemnification Agreement, pursuant to which, inter alia, the Company has agreed, on the terms and ----- ---- conditions therein set forth, to indemnify Officer against certain claims arising by reason of the fact that he is or was an officer or director of the Company. 6. Trade Secrets. Officer will not at any time during the Term hereof and for the three year period thereafter, in any fashion, form, or manner, unless specifically consented to in writing by the Company, either directly or indirectly use or divulge, disclose or communicate to any person, firm or corporation, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company, except in the ordinary course of the Company's business. All equipment, notebooks, documents, memoranda, report, files, samples, books, correspondence, lists, other written and graphic records, and the like, affecting or relating to the business of the 4 Company, which Officer shall prepare, use, construct, observe, possess or control, shall be and remain the Company's sole property. Officer's obligation under the preceding sentence shall continue in effect after the end of Officer's employment with the Company and the obligations shall be binding on Officer's assigns, heirs, executors, administrators, and other legal representatives. 7. Return of Corporate Property and Trade Secrets. Upon termination of this Agreement for any reason, Officer, or his estate in the event of his death, shall turn over to the Company all correspondence, property, writings or documents then in his possession or custody belonging to or relating to the affairs of the Company or any of its subsidiaries or affiliates or comprising or relating to the Trade Secrets. 8. Termination of Employment. 8.1 Termination in Case of Death. ---------------------------- 8.1.1 Officer's employment hereunder shall terminate immediately upon the death of Officer. 8.1.2 Upon termination of this Officer's employment pursuant to this Section 8.1, the Company shall pay to Officer's estate, on the Termination Date (as hereinafter defined), a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the twelve months following the Termination Date; provided, however, such amounts shall be reduced by the amount of any payments paid to Officer's estate or heirs under any life insurance policy maintained by the Company for the benefit of Officer pursuant to the provisions of Section 4.4 hereof. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the date of termination shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide for the benefit of Officer's family the medical benefits referred to in Section 4.4.3 hereof for the twelve months following the Termination Date. 8.2 Termination in Case of Disability. --------------------------------- 8.2.1 If Officer suffers a physical or mental disability which results in Officer being unable to perform his duties hereunder for a 26 consecutive week period, then the Board of Directors shall select a qualified physician to examine Officer and review his physical and mental capacity. If such physician determines in good faith that such physical or mental disability renders Officer incapable of performing his duties hereunder for a period of at least 26 consecutive weeks following the date of such physician's written opinion, then Officer's employment shall terminate effective 26 weeks following the date of such physician's written opinion. 8.2.2 Upon termination of Officer's employment pursuant to this Section 8.2, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and 5 all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the twelve months following the Termination Date; provided, however, such -------- ------- amount shall be reduced by the amount of any payments to be paid to Officer under any long-term disability insurance policy maintained by the Company for the benefit of Officer pursuant to Section 4.4.3. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer and which would have vested during the 24 months following the date of termination shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits referred to in Section 4.4.3 hereof for the twelve months following the Termination Date. 8.3 Termination By Officer for Cause. -------------------------------- 8.3.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by Officer to the Company upon the occurrence of any of the following events: 8.3.1.1 The willful breach of any of the material obligations of the Company to Officer under this Agreement following written notice delivered to the Company and a reasonable cure period not to exceed 30 days; or 8.3.1.2 The Company's chief executive offices are moved to a location outside of a ten mile radius of its current location; 8.3.2 Upon termination of Officer's employment pursuant to this Section 8.3, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the amount Officer would have earned as Base Salary during the twelve months following the Termination Date and (z) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Agreement, 20% of Officer's Base Salary for each annual period (or portion thereof) during the twelve months following the Termination Date, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, an amount equal to the greater of (x) the last annual bonus paid or payable to Officer, and (y) the average annual bonus based on all bonuses paid or payable to Officer pursuant to this Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Section 4.4.3 hereof for the twelve months following the Termination Date. 8.4 Termination by Officer Without Cause. ------------------------------------ 8.4.1 This Agreement shall terminate immediately upon delivery to the Company of written notice of termination by Officer without cause. 6 8.4.2 Upon termination of this Agreement pursuant to this Section 8.4, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date. 8.5 Termination By the Company Without Cause. ---------------------------------------- 8.5.1 The employment of Officer shall terminate immediately upon delivery to Officer of written notice of termination by the Company, which shall be deemed to be "without cause" unless termination is expressly stated to be pursuant to Sections 8.1, 8.2 or 8.6. 8.5.1.1 Upon termination of Officer's employment pursuant to this Section 8.5, the Company shall pay to Officer, on the Termination Date, a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) if (a) on the Termination Date, Officer has been continuously employed by the Company for at least nine months but less than fifteen months, the Company shall pay to Officer the amount Officer would have earned as Base Salary during the six months following the Termination Date; or (b) on the Termination Date, Officer has been continuously employed by the Company for at least fifteen months from the Effective Date, the Company shall pay to Officer the amount Officer would have earned as Base Salary during the twelve months following the Termination Date; and (i) in the event no previous annual bonus has been paid or is payable pursuant to this Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, an amount equal to the greater of (x) the last annual bonus paid or payable to Officer, and (y) the average annual bonus based on all bonuses paid or payable to Officer pursuant to this Agreement. In addition to the foregoing, and notwithstanding the provisions of any other agreement to the contrary, (x) all options to purchase the Common Stock of the Company which have been granted to Officer shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option, and (y) the Company shall continue to provide to Officer all other benefits that would otherwise be payable to Officer pursuant to Section 4.4.3 hereof for the same number of months following the Termination Date for which Base Salary is payable hereunder. 8.6 Termination by the Company for Cause. ------------------------------------ 8.6.1 The employment of Officer hereunder shall terminate immediately upon written notice delivered by the Company to the Officer of termination for "cause" by reason of: 8.6.1.1 Officer's conviction (including any plea of guilty or no contest) of (x) any felony or misdemeanor involving the embezzlement, theft or misappropriation of monies or other property of the Company or (y) any felony involving the embezzlement, theft or misappropriation of monies or other property or crime of moral turpitude; 8.6.1.2 The willful and continued neglect by Officer of his duties under this Agreement, but only if such neglect continues for 30 days following receipt by the Officer of written notice from the Company specifying such breach and demanding that Officer cease such activities; 7 8.6.1.3 The willful breach of any of the material obligations of the Officer to the Company under this Agreement following written notice delivered to the Officer and a reasonable cure period not to exceed 30 days; 8.6.2 Upon termination of this Agreement pursuant to this Section 8.6, the Company shall pay to Officer, on the Termination Date, all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by the Officer to the Company through the Termination Date in a lump sum payment. The Company shall have no further obligation to the Officer pursuant to this Agreement. 8.7 Termination Date. For purposes of Sections 8 or 9 hereof, the ---------------- term, "Termination Date", shall mean that date on which Officer's employment is terminated pursuant to Section 8 or 9, as applicable. 9. Severance Payments Upon Change in Control. 9.1 Severance Payment. Upon the occurrence of a Change in ----------------- Control (as defined in Section 9.5 below) of the Company, the employment of Officer hereunder shall terminate and the Company shall pay to Officer, on the fifth day following the date on which the Change of Control occurs (which for the purposes of this Section 9 shall be the Termination Date), a lump sum payment of an amount equal to (x) all accrued and unpaid salary and other compensation payable to Officer by the Company and all accrued and unused vacation and sick pay payable to Officer by the Company with respect to services rendered by Officer to the Company through the Termination Date, and (y) the Base Salary Officer would have earned during the twelve months following the Termination Date; and (z) (i) in the event no previous annual bonus has been paid or is payable pursuant to this Agreement, 20% of Officer's Base Salary, or (ii) in the event at least one annual bonus has been paid or is payable to Officer, an amount equal to the greater of (x) the last annual bonus paid or payable to Officer, and (y) the average annual bonus based on all annual bonuses paid or payable to Officer pursuant to this Agreement. 9.2 Continuation of Benefits. The Company shall continue for the that ------------------------ period of time which is the greater of twelve months following the Termination Date and the remaining scheduled Term of the Agreement to provide Officer with all benefits that would have been payable to him pursuant to Section 4.4.3 hereof if Officer had been employed by the Company during such period. 9.3 Vesting of Options. In addition to the foregoing, and ------------------ notwithstanding the provisions of any other agreement to the contrary, upon the occurrence of a Change in Control, all options to purchase Common Stock of the Company which have been granted to Officer by the Company shall become immediately exercisable on the Termination Date and, notwithstanding any other agreement to the contrary, shall remain exercisable for the full term of each such option. 9.4 Provision of Services Following Change in Control. At the ------------------------------------------------- request of the Company, Officer shall continue to serve hereunder for a period of up to 180 days following the Termination Date. If the Company requests Officer to perform such services, Officer shall be compensated from and after the Termination Date for the period that Officer actually remains employed by the Company at his then current Base Salary. Any such amounts payable to Officer shall be in addition to and not in lieu of the amounts payable to Officer under Section 9.1 above. Upon the later to 8 occur of an occurrence of a Change of Control or the termination of any period during which Officer continues to provide services as aforesaid, Officer's employment hereunder shall terminate. 9.5 Change in Control. For purposes of this Section 9, "Change in ----------------- Control" of the Company shall be deemed to have occurred if (a) there shall be consummated (x) any consolidation or merger of the Company into or with another Person (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")), if Green Equity Investors III, L.P. ("GEI III") or any co-investor, or affiliate, related party or entity controlled by Leonard Green & Partners, L.P. (LGP") (collectively, the "GEI Group") owns less than 50% of the voting control of the surviving corporation immediately after the merger, or (y) any sale, lease or other transfer (in one transaction or a series of related transactions) of all of the assets of the Company or either of its laboratory or hospital operating divisions; provided however, no payment pursuant to Section 9.1 shall be payable -------- ------- if Officer agrees to the transactions set forth in this Subsection 9.5(y), or (b) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company, or (c) any Person shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) prior to the time (if any) that the Company issues any equity securities pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of a greater number of voting securities of the Company than the GEI Group), or (d) after such time (if any) that the Company issues any equity securities pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, any Person (other than the GEI Group) shall become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of 30% or more of the voting securities of the Company. The parties believe that the payments pursuant to Sections 8 and 9 hereof do not constitute "Excess Parachute Payments" under Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). Notwithstanding such belief, if any benefit under these sections constitutes an "Excess Parachute Payment," the Company shall pay to Officer an additional amount ("Tax Payment") such that (x) the excess of all Excess Parachute Payments (including payments under this sentence) over the sum of excise tax thereon under Section 4999 of the Code and income tax thereon under Subtitle A of the Code and under applicable state law is equal to (y) the excess of all Excess Parachute Payments (excluding payments under this sentence) over income tax thereon under Subtitle A of the Code and under applicable state law. Such Tax Payment shall be paid to Officer concurrently with the severance payment referred to in Section 9.1 above. 10. No Mitigation. The payments required to be paid to Officer by Company pursuant to Sections 8 and 9 shall not be reduced by or mitigated by amounts which Officer earns or is capable of earning during any period following his Termination Date. 11. Injunctive Relief. Officer hereby recognizes, acknowledges and agrees that in the event of any breach by Officer of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated in damages in any action at law. Officer therefore agrees that, in addition to any other remedy the Company 9 may have at law, in equity, by statute or otherwise, in the event of any breach by Officer of any of the covenants, agreements, duties or obligations hereunder, the Company or its subsidiaries shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company or its subsidiaries or any of the covenants, agreements, duties or obligations of Officer hereunder, or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or its subsidiaries thereof resulting therefrom; provided, however, that nothing contained in this Section 11 shall be -------- ------- deemed or construed in any manner whatsoever as a waiver by the Company or its subsidiaries of any of the rights which any of them may have against Officer at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Officer of any of his covenants, agreements, duties or obligations hereunder. 12. Miscellaneous. 12.1 Entire Agreement. This Agreement contains the entire ----------------- understanding of the parties hereto relating to the subject matter hereof and cannot be changed or terminated except in writing signed by both Officer and the Company. 12.2 Limited Liabilities. All liabilities incurred by Officer in his ------------------- capacity as an officer hereunder shall be incurred for the account of the Company, and Officer shall not be personally liable therefor. Officer shall not be liable to the Company, or any of its respective subsidiaries, affiliates, employees, officers, directors, agents, representatives, successors, assigns, stockholders, and their respective subsidiaries and affiliates, the Company shall, and hereby agrees to, indemnify, defend and hold Officer harmless from and against any and all damages and/or loss or liability (including, without limitation, all costs of defense thereof), for any acts or omissions in the performance of service under and within the scope of this Agreement on the part of Officer. 12.3 Notices. All notices, requests and other communications ------- (collectively, "Notices") given pursuant to this Agreement shall be in writing, and shall be delivered by facsimile transmission with a copy delivered by personal service or by United States first class, registered or certified mail (return receipt requested), postage prepaid, addressed to the party at the address set forth below: If the Company: 12401 West Olympic Blvd. Los Angeles, California 90064 Attention: Board of Directors Facsimile No.: (310) 584-6701 If to Officer: Neil Tauber 12401 West Olympic Blvd. Los Angeles, California 90064 Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by registered or certified mail shall be ---- deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 12. 3. 10 12.4 Governing Law. This Agreement has been made and entered into in ------------- the state of California and shall be construed in accordance with the laws of the State of California without regard to the conflict of laws principles thereof. 12.5 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.6 Severable Provisions. The provisions of this Agreement are -------------------- severable, and if any one or more provisions are determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 12.7 Successors and Assigns. This Agreement and all obligations and ---------------------- benefits of Officer and the Company hereunder shall bind and inure to the benefit of Officer and the Company, their respective affiliates, and their respective successors and assigns. 12.8 Amendments and Waivers. No amendment or waiver of any term or ---------------------- provision of this Agreement shall be effective unless made in writing. Any written amendment or waiver shall be effective only in the instance given and then only with respect to the specific term or provision (or portion thereof) of this Agreement to which it expressly relates, and shall not be deemed or construed to constitute a waiver of any other term or provision (or portion thereof) waived in any other instance. 12.9 Title and Headings. The titles and headings contained in this ------------------ Agreement are included for convenience only and form no part of the agreement between the parties. 12.10 Survival. Notwithstanding anything to the contrary contained -------- herein, the provisions of Sections 6, 7, 8, 9, and 11 shall survive the termination of this Agreement. 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first set forth above. VCA Antech, Inc. ---------------------------------------- By /s/ Robert L. Antin -------------------------------------- Its: Chief Executive Officer ------------------------------------ ACCEPTED AND AGREED TO: /s/ Neil Tauber -------------------------------- Neil Tauber -------------------------------- 12 EX-10.9 10 dex109.txt AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN EXHIBIT 10.9 VETERINARY CENTERS OF AMERICA, INC. AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN ARTICLE 1 GENERAL PURPOSE OF PLAN The name of this plan is the Veterinary Centers of America, Inc. Amended and Restated 1996 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Veterinary Centers of America, Inc., a Delaware corporation (the "Company"), and any Parent or any Subsidiary to obtain and retain the services of the types of employees, consultants, officers and Directors who will contribute to the Company's long range success and to provide incentives which are linked directly to increases in share value which will inure to the benefit of all shareholders of the Company. ARTICLE 2 DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. "Committee" means a committee of the Board designated by the Board to administer the Plan and composed of not less than the minimum number of persons from time to time required both by the Rule and Section 162(m) of the Code, each of whom is a Non-Employee Director and an Outside Director. "Company" means Veterinary Centers of America, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). "Date of Grant" means the date on which the Committee adopts a resolution expressly granting Stock Options to a Participant, or if a different date is set forth in such resolution as the Date of Grant, then such date as is set forth in such resolution. "Director" means a member of the Board. "Disability" means permanent and total disability as defined by the Committee. "Election" shall have the meaning set forth in Section 10.3(d)(i) of the Plan. "Eligible Person" means an employee, officer, consultant or, subject to the limitations set forth in Article 5 of the Plan, Director of the Company, any Parent or any Subsidiary. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Price" shall have the meaning set forth in Section 6.2(c) of the Plan. 1 "Fair Market Value" per share at any date shall mean (i) if the Stock is listed on an exchange or exchanges, or admitted for trading in a market system which provides last sale data under Rule 11Aa3-1 of the General Rules and Regulations of the SEC under the Exchange Act (a "Market System"), the last reported sales price per share on the last business day prior to such date on the principal exchange on which it is traded, or in a Market System, as applicable, or if no sale was made on such day on such principal exchange or in such a Market System, as applicable, the last reported sales price per share on the most recent day prior to such date on which a sale was reported on such exchange or such Market System, as applicable; or (ii) if the Stock is not then traded on an exchange or in a Market System, the average of the closing bid and asked prices per share for the Stock in the over-the-counter market as quoted on NASDAQ on the day prior to such date; or (iii) if the Stock is not listed on an exchange or quoted on NASDAQ, an amount determined in good faith by the Committee. "Liquidating Event" shall have the meaning set forth in Section 8.1(b) of the Plan. "Liquidity Event" means any Reorganization Event which the Committee determines, in its sole and absolute discretion, to treat as such an event. "Incentive Stock Option" means a Stock Option intended to qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) under the Exchange Act, or any successor definition adopted by the SEC. "Non-Statutory Stock Option" means a Stock Option intended to not qualify as an Incentive Stock Option. "Optionee" means a Participant who is granted a Stock Option pursuant to the Plan. "Outside Director" means a Director who is not (a) a current employee of the Company (or any related entity), (b) a former employee of the Company (or any related entity) who is receiving compensation for prior services (other than benefits under a tax-qualified retirement plan), (c) a former officer of the Company (or any related entity), or (d) a consultant or person otherwise receiving compensation or other remuneration, either directly or indirectly, in any capacity other than as a Director. "Parent" means any present or future corporation which would be a "parent corporation" as that term is defined in Section 424 of the Code. "Participant" means any Eligible Person selected by the Committee, pursuant to the Committee's authority set forth in Article 3 of the Plan, to receive grants of Stock Options. "Plan" means this Veterinary Centers of America, Inc. Amended and Restated 1996 Stock Incentive Plan, as the same may be amended or supplemented from time to time. "Reorganization Event" shall have the meaning set forth in Section 8.1(c) of the Plan. "Retirement" means retirement from active employment with the Company or any Parent or Subsidiary as defined by the Committee. "Rule" means Rule 16b-3 and any future rules promulgated in substitution therefor under the Exchange Act. 2 "SEC" means the Securities and Exchange Commission. "Section 16(b) Person" means a person subject to Section 16(b) of the Exchange Act. "Stock" means the Common Stock, par value $.01 per share, of the Company. "Stock Option" means an option to purchase shares of Stock granted pursuant to Article 6 of the Plan. "Stock Option Agreement" shall have the meaning set forth in Section 6.2 of the Plan. "Subsidiary" means any present or future corporation which would be a "subsidiary corporation" as that term is defined in Section 424 of the Code. "Tax Date" shall have the meaning set forth in Section 10.3(d)(iii) of the Plan. "Ten Percent Shareholder" means a person who on the Date of Grant owns, either directly or through attribution as provided in Section 424(d) of the Code, Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary. "Withholding Right" shall have the meaning set forth in Section 10.3(c) of the Plan. ARTICLE 3 ADMINISTRATION SECTION 3.1 Administrator. The Plan shall be administered by the Board or the Committee (the group that administers the plan is referred to as the "Administrator"). SECTION 3.2 Powers in General. The Administrator shall have the power and authority to grant Stock Options to Eligible Persons, pursuant to the terms of the Plan. SECTION 3.3 Specific Powers. In particular, the Administrator shall have the authority: (i) to construe and interpret the Plan and apply its provisions; (ii) to promulgate, amend and rescind rules and regulations relating to the administration of the Plan; (iii) to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (iv) to determine when Stock Options are to be granted under the Plan; (v) from time to time to select, subject to the limitations set forth in this Plan, those Eligible Persons to whom Stock Options shall be granted; (vi) to determine the number of shares of Stock to be made subject to each Stock Option; (vii) to prescribe the terms and conditions of each Stock Option, including, without limitation, the Exercise Price and medium of payment and vesting provisions, to determine whether the Stock Option is to be an Incentive Stock Option or a Non- Statutory Stock Option and to specify the provisions of the Stock Option Agreement relating to such Stock Option; (viii) to amend any outstanding Stock Options for the purpose of modifying the time or manner of vesting, the Exercise Price, thereunder or otherwise, subject to applicable legal restrictions and to the consent of the other party to such agreement; (ix) to determine when a consultant's relationship with the Company is sufficient to constitute the equivalent of employment with the Company for purposes of the Plan; (x) to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of his or her employment for purposes of the Plan; and (xi) to make any and all other determinations which it determines to be necessary or advisable for administration of the Plan. 3 SECTION 3.4 Decisions Final. All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants. SECTION 3.5 The Committee. The Board may, in its sole and absolute discretion, from time to time delegate any or all of its duties and authority with respect to the Plan to the Committee whose members are to be appointed by and to serve at the pleasure of the Board. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase or decrease (to not less than the minimum number of persons from time to time required by both the Rule and Section 162(m) of the Code) the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of the majority of its members or, in the case of a committee comprised of only two members, the unanimous consent of its members, whether present or not, or by the written consent of the majority of its members or, in the case of a committee comprised of only two members, the unanimous written consent of its members, and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable. ARTICLE 4 STOCK SUBJECT TO PLAN SECTION 4.1 Stock Subject to the Plan. Subject to adjustment as provided in Article 8, the total number of shares of Stock reserved and available for issuance under the Plan as of August 5, 2001 was 37,500,000 shares of Stock. Effective as of August 6, 2001, no additional Stock Options may be granted under this Plan and the number of shares of Stock reserved and available for issuance under the Plan shall be limited to the number of shares of Stock underlying any Stock Options issued and outstanding under the Plan as of August 6, 2001. SECTION 4.2 Unexercised Stock Options; Reacquired Shares. Prior to August 6, 2001, to the extent that any Stock Options expired or were otherwise terminated without being exercised, the shares of Stock underlying such Stock Options (and shares related thereto) were available for issuances in connection with future Stock Options under the Plan. If and to the extent that the Company received shares of Stock in payment of all or a portion of the purchase price for any Stock, or in payment of any tax liabilities, the receipt of such shares did not increase the number of shares available for issuance under the Plan. Effective as of August 6, 2001, no additional Stock Options may be granted under this Plan and outstanding Stock Options that expire or terminate will no longer be available for issuance under the Plan. 4 ARTICLE 5 ELIGIBILITY Directors who are designated as Eligible Persons by the Board of Directors, officers, employees and consultants of the Company, any Parent or any Subsidiary, shall be eligible to be granted Stock Options hereunder, subject to limitations set forth in this Plan; provided, however, that only employees (including officers and Directors who are employees) shall be eligible to be granted Incentive Stock Options hereunder. ARTICLE 6 STOCK OPTIONS SECTION 6.1 General. Each Stock Option granted under the Plan shall be in such form and under such terms and conditions as the Committee may from time to time approve; provided, that such terms and conditions are not inconsistent with the Plan. The provisions of Stock Option Agreements entered into under the Plan need not be identical with respect to each Optionee. Stock Options granted under the Plan may be either Incentive Stock Options or Non-Statutory Stock Options. SECTION 6.2 Terms and Conditions of Stock Options. Each Stock Option granted pursuant to the Plan shall be evidenced by a written option agreement between the Company and the Optionee (the "Stock Option Agreement"), which shall comply with and be subject to the following terms and conditions. (a) Number of Shares. Each Stock Option Agreement shall state the number of shares of Stock to which the Stock Option relates. (b) Type of Option. Each Stock Option Agreement shall identify the portion (if any) of the Stock Option which constitutes an Incentive Stock Option. (c) Exercise Price. Each Stock Option Agreement shall state the price at which shares subject to the Stock Option may be purchased (the "Exercise Price"), which, with respect to Incentive Stock Options, shall not be less than 100% of the Fair Market Value of the shares of Stock on the Date of Grant; provided, however, that in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the Exercise Price shall not be less than 110% of such Fair Market Value. (d) Value of Shares. The Fair Market Value of the shares of Stock (determined as of the Date of Grant) with respect to which Incentive Stock Options are first exercisable by an Optionee under this Plan and all other incentive option plans of the Company and any Parent or Subsidiary in any calendar year shall not, for such year, in the aggregate, exceed $100,000; provided, however, that if the aggregate Fair Market Value of such shares exceeds $100,000, then the incremental portion in excess of $100,000 shall be treated as Non-Statutory Stock Options (and not as Incentive Stock Options); provided, further, that this Section 6.2(d) shall not affect the right of the Administrator to accelerate or otherwise alter the time of vesting of any Stock Options granted as Incentive Stock Options, even if, as a result thereof, some of such Stock Options cease being Incentive Stock Options. (e) Medium and Time of Payment. The Exercise Price shall be paid in full, at the time of exercise, (i) in cash or cash equivalents, (ii) with the approval of the Administrator, in 5 shares of Stock which have been held by the Optionee for a period of at least six calendar months preceding the date of surrender and which have a Fair Market Value equal to the Exercise Price, (iii) in a combination of cash, cash equivalents and Stock, or (iv) in any other form of legal consideration acceptable to the Administrator, and may be effected in whole or in part (x) with monies received from the Company at the time of exercise as a compensatory, cash payment or (y) with monies borrowed from the Company in accordance with Section 10.5. (f) Term and Exercise of Stock Options. Stock Options shall vest or become exercisable over the exercise period at the times the Administrator may determine, as reflected in the related Stock Option Agreements; provided, however, that the Optionees shall have the right to exercise the Stock Options at the rate of at least 20% per year over five years from the Date of Grant of such Stock Options. The exercise period of any Stock Option shall be determined by the Administrator, but shall not exceed ten years from the Date of Grant of the Stock Option. In the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the exercise period shall be determined by the Administrator, but shall not exceed five years from the Date of Grant of the Stock Option. A Stock Option may be exercised, as to any or all full shares of Stock as to which the Stock Option has become exercisable, by giving written notice of such exercise to the Company. ARTICLE 7 MANDATORY GRANTS TO OUTSIDE DIRECTORS RESERVED ARTICLE 8 ADJUSTMENTS SECTION 8.1 Effect of Certain Changes. (a) Stock Dividends, Splits, etc. If there is any change in the number of outstanding shares of Stock through the declaration of Stock dividends or through a recapitalization resulting in Stock splits, or combinations or exchanges of the outstanding shares, (i) the number of shares of Stock available for Stock Options, (ii) the number of shares covered by outstanding Stock Options, (iii) the number of shares set forth under Section 10.1(a) and (iv) the Exercise Price of any Stock Option, in effect prior to such change, shall be proportionately adjusted by the Administrator to reflect any increase or decrease in the number of issued shares of Stock; provided, however, that any fractional shares resulting from the adjustment shall be eliminated. (b) Liquidating Event. In the event of the proposed dissolution or liquidation of the Company, or in the event of any corporate separation or division, including, but not limited to, a split-up, split-off or spin-off (each, a "Liquidating Event"), the Administrator may provide that the holder of any Stock Options then exercisable shall have the right to exercise such Stock Options (at the price provided in the agreement evidencing the Stock Options) subsequent to the Liquidating Event, and for the balance of its term, solely for the kind and amount of shares of Stock and other securities, property, cash or any combination thereof receivable upon such Liquidating Event by a holder of the number of shares of Stock for or with respect to which such Stock Options might have been exercised immediately prior to such Liquidating Event; or the Administrator may provide, in the alternative, that each Stock Option granted under the Plan shall 6 terminate as of a date to be fixed by the Board; provided, however, that not less than 30 days written notice of the date so fixed shall be given to each Stock Option holder and if such notice is given, each Stock Option holder shall have the right, during the period of 30 days preceding such termination, to exercise his or her Stock Options as to all or any part of the shares of Stock covered thereby, without regard to any installment or vesting provisions in his or her Stock Options agreement, on the condition, however, that the Liquidating Event actually occurs; and if the Liquidating Event actually occurs, such exercise shall be deemed effective (and, if applicable, the Stock Option holder shall be deemed a shareholder with respect to the Stock Options exercised) immediately preceding the occurrence of the Liquidating Event (or the date of record for shareholders entitled to share in such Liquidating Event, if a record date is set). (c) Merger or Consolidation. In the case of any capital reorganization, any reclassification of the Stock (other than a change in par value or recapitalization described in Section 8.1(a) of the Plan), or the consolidation of the Company with, or a sale of substantially all of the assets of the Company to (which sale is followed by a liquidation or dissolution of the Company), or merger of the Company with another person (a "Reorganization Event"), the Administrator may provide in the Stock Option Agreement, or if not provided in the Stock Option Agreement, may determine, in its sole and absolute discretion, to accelerate the vesting of outstanding Stock Options (a "Liquidity Event") in which case the Company shall deliver to the Stock Option holders at least 15 days prior to such Reorganization Event (or at least 15 days prior to the date of record for shareholders entitled to share in the securities or property distributed in the Reorganization Event, if a record date is set) a notice which shall (i) indicate whether the Reorganization Event shall be considered a Liquidity Event and (ii) advise the Stock Option holder of his or her rights pursuant to the agreement evidencing such Stock Options. If the Reorganization Event is determined to be a Liquidity Event, (i) the Surviving Corporation may, but shall not be obligated to, tender stock options or stock appreciation rights to the Stock Option holder with respect to the Surviving Corporation, and such new options and rights shall contain terms and provisions that substantially preserve the rights and benefits of the applicable Stock Options then outstanding under the Plan, or (ii) in the event that no stock options or stock appreciation rights have been tendered by the Surviving Corporation pursuant to the terms of item (i) immediately above, the Stock Option holder shall have the right, exercisable during a 10 day period ending on the fifth day prior to the Reorganization Event (or ending on the fifth day prior to the date of record for shareholders entitled to share in the securities or properly distributed in the Reorganization Event, if a record date is set), to exercise his or her rights as to all or any part of the shares of Stock covered thereby, without regard to any installment or vesting provisions in his or her Stock Options agreement, on the condition, however, that the Reorganization Event is actually effected; and if the Reorganization Event is actually effected, such exercise shall be deemed effective (and, if applicable, the Stock Option holder shall be deemed a shareholder with respect to the Stock Options exercised) immediately preceding the effective time of the Reorganization Event (or on the date of record for shareholders entitled to share in the securities or property distributed in the Reorganization Event, if a record date is set). If the Reorganization Event is not determined to be a Liquidity Event, the Stock Option holder shall thereafter be entitled upon exercise of the Stock Options to purchase the kind and number of shares of stock or other securities or property of the Surviving Corporation receivable upon such event by a holder of the number of shares of the Stock which the Stock Options would have entitled the Stock Option holder to purchase from the Company if the Reorganization Event had not occurred, and in any such case, appropriate adjustment shall be made in the application of the provisions set forth in this Plan with respect to the Stock Option holder's rights and interests thereafter, to the end that the provisions set forth in the agreement applicable to such Stock Options (including the specified changes and other adjustments to the Exercise Price) shall 7 thereafter be applicable in relation to any shares or other property thereafter purchasable upon exercise of the Stock Options. (d) Par Value Changes. In the event of a change in the Stock of the Company as presently constituted which is limited to a change of all of its authorized shares with par value, into the same number of shares without par value, or any subsequent change in the par value, the shares resulting from any such change shall be "Stock" within the meaning of the Plan. SECTION 8.2 Decision of Committee Final. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive; provided, however, that each Incentive Stock Option granted pursuant to the Plan shall not be adjusted without the prior consent of the holder thereof in a manner that causes such Stock Option to fail to continue to qualify as an Incentive Stock Option. SECTION 8.3 No Other Rights. Except as expressly provided in this Article 8, no Stock Option holder shall have any rights by reason of any subdivision or consolidation of shares of Stock or the payment of any dividend or any other increase or decrease in the number of shares of Stock of any class or by reason of any Liquidating Event, merger, or consolidation of assets or stock of another corporation, or any other issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class; and except as provided in this Article 8, none of the foregoing events shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock subject to Stock Options. The grant of Stock Options pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. SECTION 8.4 No Rights as Shareholder. Except as specifically provided in this Article 8, a Stock Option holder or a transferee of Stock Options shall have no rights as a shareholder with respect to any shares covered by the Stock Options until the date of the issuance of a Stock certificate to him or her for such shares, and no adjustment shall be made for dividends (ordinary, or extraordinary, whether in cash, securities or other property) or distributions of other rights for which the record date is prior to the date such Stock certificate is issued, except as provided in Section 8.1. ARTICLE 9 AMENDMENT AND TERMINATION The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of a Participant under any Stock Options therefore granted without such Participant's consent, or which without the approval of the shareholders would: (a) except as provided in Article 8, materially increase the total number of shares of Stock reserved for the purposes of the Plan; (b) materially increase the benefits accruing to Participants or Eligible Persons under the Plan; or 8 (c) materially modify the requirements for eligibility under the Plan. The Administrator may amend the terms of any award theretofore granted, prospectively or retroactively, but, subject to Article 3, no such amendment shall impair the rights of any holder without his or her consent. ARTICLE 10 GENERAL PROVISIONS SECTION 10.1 General Restrictions. (a) Limitation on Granting of Stock Options. Subject to adjustment as provided in Article 8, prior to August 6, 2001, the maximum number of shares with respect to which Stock Options may be granted under the Plan to any Participant in any one calendar year was 7,500,000 shares. Effective as of August 6, 2001, the maximum number of shares with respect to which Stock Options may be granted under the Plan to any Participant in any one calendar year is zero (0) shares. (b) No View to Distribute. The Administrator may require each person acquiring shares of Stock pursuant to the Plan to represent to and agree with the Company in writing that such person is acquiring the shares without a view towards distribution thereof. The certificates for such shares may include any legend which the Administrator deems appropriate to reflect any restrictions on transfer. (c) Legends. All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations and other requirements of the SEC, any stock exchange upon which the Stock is then listed and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. SECTION 10.2 Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. SECTION 10.3 Disqualifying Dispositions, Withholding Taxes. (a) Disqualifying Disposition. The Stock Option Agreements shall require Optionees who make a "disposition" (as defined in the Code) of all or any of the Stock acquired through the exercise of Stock Options within two years from the date of grant of the Stock Option, or within one year after the issuance of Stock relating thereto, to immediately advise the Company in writing as to the occurrence of the sale and the price realized upon the sale of such Stock; and each Optionee shall agree that he or she shall maintain all such Stock in his or her name so long as he or she maintains beneficial ownership of such Stock. (b) Withholding Required. Each Participant shall, no later than the date as of which the value derived from Stock Options first becomes includable in the gross income of the Participant for income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to the Stock Options or their exercise. The obligations of the 9 Company under the Plan shall be conditioned upon such payment or arrangements and the Participant shall, to the extent permitted by law, have the right to request that the Company deduct any such taxes from any payment of any kind otherwise due to the Participant. (c) Withholding Right. The Administrator may, in its discretion, grant to a Stock Option holder the right (a "Withholding Right") to elect to make such payment by irrevocably requiring the Company to withhold from shares issuable upon exercise of the Stock Options that number of full shares of Stock having a Fair Market Value on the Tax Date (as defined below) equal to the amount (or portion of the amount) required to be withheld. The Withholding Right may be granted with respect to all or any portion of the Stock Options. However, the Fair Market Value of the number of shares of Stock subject to the Withholding Right shall not exceed an amount equal to the applicable minimum required tax withholding rates. (d) Exercise of Withholding Right. To exercise a Withholding Right, the Stock Option holder must follow the election procedures set forth below, together with such additional procedures and conditions as may be set forth in the related Stock Option Agreement or otherwise adopted by the Committee. (i) The Stock Option holder must deliver to the Company his or her written notice of election (the "Election") to have the Withholding Right apply to all (or a designated portion) of his or her Stock Options prior to the date of exercise of the Right to which it relates. (ii) Unless disapproved by the Administrator as provided in Subsection (iii) below, the Election once made will be irrevocable. (iii) No Election is valid unless the Administrator consents to the Election; the Administrator has the right and power, in its sole discretion, with or without cause or reason therefor, to consent to the Election, to refuse to consent to the Election, or to disapprove the Election; and if the Administrator has not consented to the Election on or prior to the date that the amount of tax to be withheld is, under applicable federal income tax laws, fixed and determined by the Company (the "Tax Date"), the Election will be deemed approved. (iv) If the Stock Option holder on the date of delivery of the Election to the Company is a Section 16(b) Person, the following additional provisions will apply: (A) the Election cannot be made during the six calendar month period commencing with the date of the grant of the Withholding Right (even if the Stock Options to which such Withholding Right relates have been granted prior to such date); provided, that this Subsection (A) is not applicable to any Stock Option holder at any time subsequent to the death, Disability or Retirement of the Stock Option holder; (B) the Election (and the exercise of the related Stock Option) can only be made during the Window Period; and (C) notwithstanding any other provision of this Section 10.3, no Section 16(b) Person shall have the right to make any Election unless the Company has been subject to the reporting requirements of Section 13(a) of the Exchange Act for at least a year prior to the transaction and has filed all reports and statements required to be filed pursuant to that Section for that year. (e) Effect. If the Administrator consents to an Election of a Withholding Right: 10 (i) upon the exercise of the Stock Options (or any portion thereof) to which the Withholding Right relates, the Company will withhold from the shares otherwise issuable that number of full shares of Stock having an actual Fair Market Value equal to the amount (or portion of the amount, as applicable) required to be withheld under applicable federal, state and/or local income tax laws as a result of the exercise; and (ii) if the Stock Option holder is then a Section 16(b) Person who has made an Election, the related Stock Options may not be exercised, nor may any shares of Stock issued pursuant thereto be sold, exchanged or otherwise transferred, unless such exercise, or such transaction, complies with an exemption from Section 16(b) provided under Rule 16b-3. (f) Cash Reimbursements. The Company may, but shall not be required to, make cash bonus payments to Non-Statutory Stock Option holders to reimburse such Non-Statutory Stock Option holders for all or part of federal and state taxes payable with respect to the exercise of Non-Statutory Stock Options. SECTION 10.4 Indemnification. In addition to such other rights of indemnification as they may have as Directors or Outside Directors, and to the extent allowed by applicable law, the Administrator shall be indemnified by the Company against the reasonable expenses, including attorney's fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which they or any one of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Stock Option granted under the Plan, and against all amounts paid by them in settlement thereof (provided that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Administrator did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, and in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful; provided, however, that within 60 days after institution of any such action, suit or proceeding, such Administrator shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding. SECTION 10.5 Loans. The Company may make loans to Optionees (other than Directors who are not also employees or officers of the Company or any Parent or any Subsidiary) as the Administrator, in its discretion, may determine in connection with the exercise of outstanding Stock Options granted under the Plan. Such loans shall (i) be evidenced by promissory notes entered into by the holders in favor of the Company; (ii) be subject to the terms and conditions set forth in this Section 10.5 and such other terms and conditions, not inconsistent with the Plan, as the Administrator shall determine; and (iii) bear interest, if any, at such rate as the Administrator shall determine. In no event may the principal amount of any such loan exceed the Exercise Price less the par value, if any, of the shares of Stock covered by the Stock Option, or portion thereof, exercised by the Optionee. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal and applicable interest and the conditions upon which the loan will become payable in the event of the holder's termination of employment shall be determined by the Administrator; provided, however, that the term of the loan, including extensions, shall not exceed 10 years. Unless the Administrator determines otherwise, when a loan shall have been made, shares of Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan and such pledge shall be evidenced by a security agreement, the terms of which shall be determined by the Committee, in its discretion; provided, 11 however, that each loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. SECTION 10.6 Non-Transferability of Stock Options. Except as provided herein, Stock Options granted under the Plan may not be assigned, sold or transferred, in whole or in part, other than by will or by operation of the laws of descent and distribution. Notwithstanding the forgoing, the Administrator, in its sole discretion may permit the transfer of a Non-Statutory Stock Option as follows: (i) by gift to a member of the Participant's immediate family or (ii) by transfer by instrument to a trust in which Permitted Transferees have more than 50% of the beneficial interest or that provides that the Stock Option is to be passed to beneficiaries who are Permitted Transferees upon death of the trustor (either or both (i) or (ii) referred to as a "Permitted Transferee"). For purposes of this Section, "immediate family" shall mean the Optionee's spouse (including a former spouse subject to terms of a domestic relations order); child, stepchild, grandchild, child-in-law; parent, stepparent, grandparent, parent-in-law; sibling and sibling-in-law, and shall include adoptive relationships. A transfer permitted under this Section may be made only upon written notice to and approval thereof by the Administrator. A Permitted Transferee may not further assign, sell or transfer the transferred Stock Option, in whole or in part, other than by will or by operation of the laws of descent and distribution. A Permitted Transferee shall agree in writing to be bound by the provisions of this Plan. SECTION 10.7 Regulatory Matters. Each Stock Option Agreement shall provide that no shares shall be purchased or sold thereunder unless and until (i) any then applicable requirements of state or federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel; and (ii) if required to do so by the Company, the Optionee shall have executed and delivered to the Company a letter of investment intent in such form and containing such provisions as the Administrator may require. (A) Recapitalizations. Each Stock Option Agreement and Stock Purchase Agreement shall contain provisions required to reflect the provisions of Article 8. SECTION 10.8 Delivery. Upon exercise of Stock Options granted under this Plan, the Company shall issue Stock or pay any amounts due within a reasonable period of time thereafter. Subject to any statutory obligations the Company may otherwise have, for purposes of this Plan, 30 days shall be considered a reasonable period of time. SECTION 10.9 Rule 16b-3. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Administrator fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Administrator. SECTION 10.10 Other Provisions. The Stock Option Agreements authorized under the Plan may contain such other provisions not inconsistent with this Plan, including, without limitation, restrictions upon the exercise of the Stock Options, as the Administrator may deem advisable. ARTICLE 11 EFFECTIVE DATE OF PLAN The Plan was originally adopted by the Board on November 7, 1995 and approved by the 12 Company's shareholders on July 19, 1996. This Amended and Restated Plan shall become effective on August 6, 2001, the date the amendments to the Plan were adopted by the Board. ARTICLE 12 TERM OF PLAN No Stock Options shall be granted pursuant to the Plan on or after August 6, 2001, but Stock Options previously granted may extend beyond that date. ARTICLE 13 INFORMATION TO STOCK OPTION HOLDERS The Company will cause a report to be sent to each Stock Option holder not later than 120 days after the end of each fiscal year. Such report shall consist of the financial statements of the Company for such fiscal year and shall include such other information as is provided by the Company to its shareholders. 13 EX-10.10 11 dex1010.txt 2001 STOCK INCENTIVE PLAN Exhibit 10.10 VETERINARY CENTERS OF AMERICA, Inc. 2001 STOCK INCENTIVE PLAN SECTION 1: GENERAL PURPOSE OF PLAN The name of this plan is the Veterinary Centers of America, Inc. 2001 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Veterinary Centers of America, Inc., a Delaware corporation (the "Company"), and any Parent or any Subsidiary to obtain and retain the services of the types of Employees, Consultants, and Directors who will contribute to the Company's long range success and to provide incentives which are linked directly to increases in share value which will inure to the benefit of all stockholders of the Company. SECTION 2: DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: "Administrator" shall have the meaning as set forth in Section 3, hereof. "Board" means the Board of Directors of the Company. "Cause" means (i) failure by an Eligible Person to substantially perform his or her duties and obligations to the Company (other than any such failure resulting from his or her incapacity due to physical or mental illness); (ii) engaging in misconduct or a fiduciary breach which is or potentially is materially injurious to the Company or its stockholders; (iii) commission of a felony; (iv) the commission of a crime against the Company which is or potentially is materially injurious to the Company; or (v) as otherwise provided in the Stock Option Agreement or Stock Purchase Agreement. For purposes of this Plan, the existence of Cause shall be determined by the Administrator in its sole discretion. "Change in Control" shall mean: (1) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power (which voting power shall be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote, but not assuming the exercise of any warrant or right to subscribe to or purchase those shares) of the continuing or Surviving Entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned, directly or indirectly, by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; provided, however, that in making -------- ------- the determination of ownership by the stockholders of the Company, immediately after the reorganization, equity securities which persons own immediately before the reorganization as stockholders of another party to the transaction shall be disregarded; or (2) The sale, transfer or other disposition of all or substantially all of the Company's assets. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1 "Committee" means a committee of the Board designated by the Board to administer the Plan. "Company" means Veterinary Centers of America, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). "Consultant" means a consultant or advisor who is a natural person and who provides bona fide services to the Company, a Parent or a Subsidiary; provided such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities. "Date of Grant" means the date on which the Administrator adopts a resolution expressly granting a Right to a Participant or, if a different date is set forth in such resolution as the Date of Grant, then such date as is set forth in such resolution. "Director" means a member of the Board. "Disability" means that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment; provided, however, for purposes of determining the term of an ISO under Section 6.6 hereof, the term Disability has the same meaning ascribed to it in Code Section 22(e)(3). The determination of whether an individual has a Disability shall be determined under procedures established by the Plan Administrator. "Eligible Person" means an Employee, Consultant or Director of the Company, any Parent or any Subsidiary. "Employee" shall mean any individual who is a common-law employee (including officers) of the Company, a Parent or a Subsidiary. "Exercise Price" shall have the meaning set forth in Section 6.3 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the fair market value of a Share, determined as follows: (i) if the Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market, the Fair Market Value of a share of Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in the Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) if the Stock is quoted on the Nasdaq System (but not on the Nasdaq National Market) or any similar system whereby the stock is regularly quoted by a recognized securities dealer but closing sale prices are not reported, the Fair Market Value of a share of Stock shall be the mean between the bid and asked prices for the Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; or (iii) in the absence of an established market for the Stock, the Fair Market Value shall be determined in good faith by the Administrator and such determination shall be conclusive and binding on all persons. 2 "ISO" means a Stock Option intended to qualify as an "incentive stock option" as that term is defined in Section 422(b) of the Code. "Non-Employee Director" means a member of the Board who is not an Employee of the Company, a Parent or Subsidiary, who satisfies the requirements of such term as defined in Rule 16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission. "Non-Qualified Stock Option" means a Stock Option not described in Section 422(b) of the Code. "Offeree" means a Participant who is granted a Purchase Right pursuant to the Plan. "Optionee" means a Participant who is granted a Stock Option pursuant to the Plan. "Outside Director" means a member of the Board who is not an Employee of the Company, a Parent or Subsidiary, who satisfies the requirements of such term as defined in Treasury Regulations (26 Code of Federal Regulation Section 1.162-27(e)(3)). "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. "Participant" means any Eligible Person selected by the Administrator, pursuant to the Administrator's authority in Section 3, to receive grants of Rights. "Plan" means this Veterinary Centers of America, Inc. 2001 Stock Incentive Plan, as the same may be amended or supplemented from time to time. "Purchase Price" shall have the meaning set forth in Section 7.3. "Purchase Right" means the right to purchase Stock granted pursuant to Section 7. "Rights" means Stock Options and Purchase Rights. "Service" shall mean service as an Employee, Director or Consultant. "Stock" means Common Stock of the Company. "Stock Option" or "Option" means an option to purchase shares of Stock granted pursuant to Section 6. "Stock Option Agreement" shall have the meaning set forth in Section 6.1. "Stock Purchase Agreement" shall have the meaning set forth in Section 7.1. 3 "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. "Surviving Entity" means the Company if immediately following any merger, consolidation or similar transaction, the holders of outstanding voting securities of the Company immediately prior to the merger or consolidation own equity securities possessing more than 50% of the voting power of the corporation existing following the merger, consolidation or similar transaction. In all other cases, the other entity to the transaction and not the Company shall be the Surviving Entity. In making the determination of ownership by the stockholders of a entity immediately after the merger, consolidation or similar transaction, equity securities which the stockholders owned immediately before the merger, consolidation or similar transaction as stockholders of another party to the transaction shall be disregarded. Further, outstanding voting securities of an entity shall be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote. "Ten Percent Stockholder" means a person who on the Date of Grant owns, either directly or through attribution as provided in Section 424 of the Code, Stock constituting more than 10% of the total combined voting power of all classes of stock of his or her employer corporation or of any Parent or Subsidiary. SECTION 3: ADMINISTRATION 3.1 Administrator. The Plan shall be administered by the Board or the Committee (the group that administers the Plan is referred to as the "Administrator"). 3.2 Powers in General. The Administrator shall have the power and authority to grant to Eligible Persons, pursuant to the terms of the Plan, (i) Stock Options, (ii) Purchase Rights or (iii) any combination of the foregoing. 3.3 Specific Powers. In particular, the Administrator shall have the authority: (i) to construe and interpret the Plan and apply its provisions; (ii) to promulgate, amend and rescind rules and regulations relating to the administration of the Plan; (iii) to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (iv) to determine when Rights are to be granted under the Plan; (v) from time to time to select, subject to the limitations set forth in this Plan, those Eligible Persons to whom Rights shall be granted; (vi) to determine the number of shares of Stock to be made subject to each Right; (vii) to determine whether each Stock Option is to be an ISO or a Non-Qualified Stock Option; (viii) to prescribe the terms and conditions of each Stock Option and Purchase Right, including, without limitation, the Purchase Price and medium of payment, vesting provisions and repurchase provisions, and to specify the provisions of the Stock Option Agreement or Stock Purchase Agreement relating to such grant or sale; (ix) to amend any outstanding Rights for the purpose of modifying the time or manner of vesting, the Purchase Price or Exercise Price, as the case may be, subject to applicable legal restrictions and to the consent of the other party to such agreement; (x) to determine the duration 4 and purpose of leaves of absences which may be granted to a Participant without constituting termination of their employment for purposes of the Plan; (xi) to make decisions with respect to outstanding Stock Options that may become necessary upon a change in corporate control or an event that triggers anti-dilution adjustments; and (xii) to make any and all other determinations which it determines to be necessary or advisable for administration of the Plan. 3.4 Decisions Final. All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants. 3.5 The Committee. The Board may, in its sole and absolute discretion, from time to time delegate any or all of its duties and authority with respect to the Plan to a Committee comprised of at least two members who are both Non-Employee Directors and Outside Directors. The members of the Committee shall be appointed by the Board and shall serve at the pleasure of the Board. From time to time, the Board may increase or decrease the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of the majority of its members or, in the case of a committee comprised of only two members, the unanimous consent of its members, whether present or not, or by the unanimous written consent of the majority of its members and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable. During any period of time during which the Company's Stock is registered pursuant to Section 12 of the Exchange Act, the Board shall delegate all of its duties and authority with respect to the Plan to a Committee composed of not less than the minimum number of persons from time to time required by Rule 16b-3 of the Securities and Exchange Act of 1934 and Section 162(m) of the Code, each member of which shall be a Non-Employee Director and an Outside Director. 3.6 Indemnification. In addition to such other rights of indemnification as they may have as Directors or members of the Committee, and to the extent allowed by applicable law, the Administrator and each of the Administrator's consultants shall be indemnified by the Company against the reasonable expenses, including attorney's fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which the Administrator or any of its consultants may be party by reason of any action taken or failure to act under or in connection with the Plan or any option granted under the Plan, and against all amounts paid by the Administrator or any of its consultants in settlement thereof (provided that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by the Administrator or any of its consultants in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Administrator or any of its consultants did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, and in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful; provided, however, that within 60 days -------- ------- after institution of any such action, suit or proceeding, such Administrator or any of its consultants shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding. SECTION 4: STOCK SUBJECT TO THE PLAN 4.1 Stock Subject to the Plan. Subject to adjustment as provided in Section 9, 2,000,000 shares of Common Stock shall be reserved and available for issuance under the Plan. 5 Stock reserved hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. 4.2 Basic Limitation. The maximum number of shares with respect to which Options, awards or sales of Stock may be granted under the Plan to any Participant in any one calendar year shall be 500,000 shares. The number of shares that are subject to Rights under the Plan shall not exceed the number of shares that then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available a sufficient number of shares to satisfy the requirements of the Plan. 4.3 Additional shares. In the event that any outstanding Option or other right for any reason expires or is canceled or otherwise terminated, the shares allocable to the unexercised portion of such Option or other right shall again be available for the purposes of the Plan. In the event that shares issued under the Plan are reacquired by the Company pursuant to the terms of any forfeiture provision or right of repurchase, such shares shall again be available for the purposes of the Plan. SECTION 5: ELIGIBILITY Eligible Persons who are selected by the Administrator shall be eligible to be granted Rights hereunder subject to limitations set forth in this Plan; provided, however, that only Employees shall be eligible to be granted -------- ------- ISOs hereunder. SECTION 6: TERMS AND CONDITIONS OF OPTIONS. 6.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Administrator deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. 6.2 Number of shares. Each Stock Option Agreement shall specify the number of shares of Stock that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 9, hereof. The Stock Option Agreement shall also specify whether the Option is an ISO or a Non-Qualified Stock Option. 6.3 Exercise Price. 6.3.1 In General. Each Stock Option Agreement shall state the price ---------- at which shares subject to the Stock Option may be purchased (the "Exercise Price"). Notwithstanding the foregoing, the Exercise Price of ISOs shall not be less than 100% of the Fair Market Value of the Stock as of the Date of Grant and the Exercise Price of ISOs granted to Ten Percent Stockholders shall not be less than 110% of the Fair Market Value of the Stock as of the Date of Grant. 6.3.2 Payment. The Exercise Price shall be payable in a form ------- described in Section 8 hereof. 6 6.4 Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Board may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise or with the disposition of shares acquired by exercising an Option. 6.5 Exercisability. Each Stock Option Agreement shall specify the date when all or any installment of the Option becomes exercisable. The exercise provisions of any Stock Option Agreement shall be determined by the Administrator, in its sole discretion. 6.6 Term. The Stock Option Agreement shall specify the term of the Option. No Option shall be exercised after the expiration of ten years after the date the Option is granted. In the case of an ISO granted to a Ten Percent Shareholder, the ISO shall not be exercised after the expiration of five years after the date the ISO is granted. Unless otherwise provided in the Stock Option Agreement, no Option may be exercised (i) three months after the date the Optionee's Service with the Company, its Parent or its Subsidiaries terminates if such termination is for any reason other than death, Disability or Cause, (ii) one year after the date the Optionee's Service with the Company and its subsidiaries terminates if such termination is a result of death or Disability, and (iii) if the Optionee's Service with the Company and its Subsidiaries terminates for Cause, all outstanding Options granted to such Optionee shall expire as of the commencement of business on the date of such termination. The Administrator may, in its sole discretion, waive the accelerated expiration provided for in (i) or (ii). Outstanding Options that are not exercisable at the time of termination of employment for any reason shall expire at the close of business on the date of such termination. 6.7 Leaves of Absence. For purposes of Section 6.6 above, to the extent required by applicable law, Service shall be deemed to continue while the Optionee is on a bona fide leave of absence. To the extent applicable law does not require such a leave to be deemed to continue while the Optionee is on a bona fide leave of absence, such leave shall be deemed to continue if, and only if, expressly provided in writing by the Administrator or a duly authorized officer of the Company, Parent or Subsidiary for whom Optionee provides his or her services. 6.8 Modification, Extension and Assumption of Options. Within the limitations of the Plan, the Administrator may modify, extend or assume outstanding Options (whether granted by the Company or another issuer) or may accept the cancellation of outstanding Options (whether granted by the Company or another issuer) in return for the grant of new Options for the same or a different number of shares and at the same or a different Exercise Price. Without limiting the foregoing, the Administrator may amend a previously granted Option to fully accelerate the exercise schedule of such Option and provide that upon the exercise of such Option, the Optionee shall receive shares of Stock that are subject to forfeiture at the same rate as the exercise provisions set forth in Optionee's Stock Option Agreement. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair the Optionee's rights or increase the Optionee's obligations under such Option. However, a termination of the Option in which the Optionee receives a cash payment equal to the difference between the Fair Market Value and the Exercise Price for all shares subject to exercise under any outstanding Option shall not be deemed to impair any rights of the Optionee or increase the Optionee's obligations under such Option. 7 SECTION 7: TERMS AND CONDITIONS OF AWARDS OR SALES 7.1 Stock Purchase Agreement. Each award or sale of shares under the Plan (other than upon exercise of an Option) shall be evidenced by a Stock Purchase Agreement between the Purchaser and the Company. Such award or sale shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Board deems appropriate for inclusion in a Stock Purchase Agreement. The provisions of the various Stock Purchase Agreements entered into under the Plan need not be identical. 7.2 Duration of Offers. Unless otherwise provided in the Stock Purchase Agreement, any right to acquire shares under the Plan (other than an Option) shall automatically expire if not exercised by the Purchaser within 15 days after the grant of such right was communicated to the Purchaser by the Company. 7.3 Purchase Price. 7.3.1 In General. Each Stock Purchase Agreement shall state the ---------- price at which the Stock subject to such Stock Purchase Agreement may be purchased (the "Purchase Price"), which shall be determined in the sole discretion of the Administrator. 7.3.2 Payment of Purchase Price. The Purchase Price shall be ------------------------- payable in a form described in Section 8. 7.4 Withholding Taxes. As a condition to the purchase of shares, the Purchaser shall make such arrangements as the Board may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such purchase. SECTION 8: PAYMENT; RESTRICTIONS 8.1 General Rule. The entire Purchase Price or Exercise Price of shares issued under the Plan shall be payable in full by, as applicable, cash or check for an amount equal to the aggregate Purchase Price or Exercise Price for the number of shares being purchased, or in the discretion of the Administrator, upon such terms as the Administrator shall approve, (i) in the case of an Option, by a copy of instructions to a broker directing such broker to sell the Stock for which such Option is exercised, and to remit to the Company the aggregate Exercise Price of such Options (a "cashless exercise"), (ii) in the case of an Option or a sale of Stock, by paying all or a portion of the Exercise Price or Purchase Price for the number of shares being purchased by tendering Stock owned by the Optionee, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the aggregate Purchase Price of the Stock with respect to which such Option or portion thereof is thereby exercised or Stock acquired (a "stock-for-stock exercise") or (iii) by a stock-for-stock exercise by means of attestation whereby the Optionee identifies for delivery specific shares of Stock already owned by Optionee and receives a number of shares of Stock equal to the difference between the Option shares thereby exercised and the identified attestation shares of Stock (an "attestation exercise"). 8.2 Withholding Payment. The Purchase Price or Exercise Price shall include payment of the amount of all federal, state, local or other income, excise or employment taxes subject to 8 withholding (if any) by the Company or any parent or subsidiary corporation as a result of the exercise of a Stock Option. The Optionee may pay all or a portion of the tax withholding by cash or check payable to the Company, or, at the discretion of the Administrator, upon such terms as the Administrator shall approve, by (i) cashless exercise or attestation exercise; (ii) stock-for-stock exercise; (iii) in the case of an Option, by paying all or a portion of the tax withholding for the number of shares being purchased by withholding shares from any transfer or payment to the Optionee ("Stock withholding"); or (iv) a combination of one or more of the foregoing payment methods. Any shares issued pursuant to the exercise of an Option and transferred by the Optionee to the Company for the purpose of satisfying any withholding obligation shall not again be available for purposes of the Plan. The Fair Market Value of the number of shares subject to Stock withholding shall not exceed an amount equal to the applicable minimum required tax withholding rates. 8.3 Services Rendered. At the discretion of the Administrator, shares may be awarded under the Plan in consideration of services rendered to the Company, a Parent or a Subsidiary prior to the award. 8.4 Promissory Note. To the extent that a Stock Option Agreement or Stock Purchase Agreement so provides, in the discretion of the Administrator, upon such terms as the Administrator shall approve, all or a portion of the Exercise Price or Purchase Price (as the case may be) of shares issued under the Plan may be paid with a full-recourse promissory note. However, in the event there is a stated par value of the shares and applicable law requires, the par value of the shares, if newly issued, shall be paid in cash or cash equivalents. The shares shall be pledged as security for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory note shall not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the foregoing, the Administrator (at its sole discretion) shall specify the term, interest rate, amortization requirements (if any) and other provisions of such note. Unless the Administrator determines otherwise, shares of Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan and such pledge shall be evidenced by a pledge agreement, the terms of which shall be determined by the Administrator, in its discretion; provided, however, that each loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. 8.5 Exercise/Pledge. To the extent that a Stock Option Agreement or Stock Purchase Agreement so allows, in the discretion of the Administrator, upon such terms as the Administrator shall approve, payment may be made all or in part by the delivery (on a form prescribed by the Administrator) of an irrevocable direction to pledge shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 8.6 Written Notice. The purchaser shall deliver a written notice to the Administrator requesting that the Company direct the transfer agent to issue to the purchaser (or to his designee) a certificate for the number of shares of Common Stock being exercised or purchased or, in the case of a cashless exercise or share withholding exercise, for any shares that were not sold in the cashless exercise or withheld. 9 8.7 Repurchase Rights. Following a termination of the Participant's service, the Company may repurchase Participant's Stock acquired under Stock Purchase Agreement to the extent provided in such Stock Purchase Agreement. 8.8 No Transferability. Except as provided herein, a Participant may not assign, sell or transfer Rights, in whole or in part, other than by will or by operation of the laws of descent and distribution. 8.8.1 Permitted Transfer of Non-Qualified Option. The Administrator, in ------------------------------------------ its sole discretion may permit the transfer of a Non-Qualified Option (but not an ISO or Stock Purchase Right) as follows: (i) by gift to a member of the Participant's immediate family or (ii) by transfer by instrument to a trust providing that the Option is to be passed to beneficiaries upon death of the trustor (either or both (i) or (ii) referred to as a "Permitted Transferee"). For purposes of this Section 8.8.1, "immediate family" shall mean the Optionee's spouse (including a former spouse subject to terms of a domestic relations order); child, stepchild, grandchild, child-in-law; parent, stepparent, grandparent, parent-in-law; sibling and sibling-in-law, and shall include adoptive relationships. 8.8.2 Conditions of Permitted Transfer. A transfer permitted under this -------------------------------- Section 8.8 hereof may be made only upon written notice to and approval thereof by Administrator. A Permitted Transferee may not further assign, sell or transfer the transferred Option, in whole or in part, other than by will or by operation of the laws of descent and distribution. A Permitted Transferee shall agree in writing to be bound by the provisions of this Plan. SECTION 9: ADJUSTMENTS; MARKET STAND-OFF 9.1 Effect of Certain Changes. 9.1.1 Stock Dividends, Splits, Etc. If there is any change in the ---------------------------- number of outstanding shares of Stock by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification, then (i) the number of shares of Stock available for Rights, (ii) the number of shares of Stock covered by outstanding Rights and (iii) the Exercise Price or Purchase Price of any Stock Option or Purchase Right, in effect prior to such change, shall be proportionately adjusted by the Administrator to reflect any increase or decrease in the number of issued shares of Stock; provided, however, -------- ------- that any fractional shares resulting from the adjustment shall be eliminated. 9.1.2 Liquidation, Dissolution, Merger or Consolidation. In the event ------------------------------------------------- of a dissolution or liquidation of the Company, or any corporate separation or division, including, but not limited to, a split-up, a split-off or a spin-off, or a sale of substantially all of the assets of the Company; a merger or consolidation in which the Company is not the Surviving Entity; or a reverse merger in which the Company is the Surviving Entity, but the shares of Company stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, the Company, to the extent permitted by applicable law, but otherwise in its sole discretion may provide for: (i) the continuation of outstanding Rights by the Company (if the Company is the Surviving Entity); (ii) the assumption of the Plan and such outstanding Rights by the Surviving Entity or its parent; (iii) the substitution by 10 the Surviving Entity or its parent of Rights with substantially the same terms for such outstanding Rights; or (iv) the cancellation of such outstanding Rights without payment of any consideration, provided that if such Rights would be canceled in accordance with the foregoing, the Participant shall have the right, exercisable during the later of the ten-day period ending on the fifth day prior to such merger or consolidation or ten days after the Administrator provides the Rights holder a notice of cancellation, to exercise such Rights in whole or in part without regard to any installment exercise provisions in the Rights agreement. 9.1.3 Par Value Changes. In the event of a change in the Stock of the ----------------- Company as presently constituted which is limited to a change of all of its authorized shares with par value, into the same number of shares without par value, or a change in the par value, the shares resulting from any such change shall be "Stock" within the meaning of the Plan. 9.2 Decision of Administrator Final. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive; provided, however, that each ISO granted pursuant to the Plan shall not be adjusted in a manner that causes such Stock Option to fail to continue to qualify as an ISO without the prior consent of the Optionee thereof. 9.3 No Other Rights. Except as hereinbefore expressly provided in this Section 9, no Participant shall have any rights by reason of any subdivision or consolidation of shares of Company stock or the payment of any dividend or any other increase or decrease in the number of shares of Company stock of any class or by reason of any of the events described in Section 9.1, above, or any other issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class; and, except as provided in this Section 9, none of the foregoing events shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock subject to Rights. The grant of a Right pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. 9.4 Market Stand-Off. Each Stock Option Agreement and Stock Purchase Agreement shall provide that, in connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, including the Company's initial public offering, the Participant shall agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the repurchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any Stock without the prior written consent of the Company or its underwriters, for such period of time from and after the effective date of such registration statement as may be requested by the Company or such underwriters (the "Market Stand-Off"). SECTIO 10: AMENDMENT AND TERMINATION The Board may amend, suspend or terminate the Plan at any time and for any reason. At the time of such amendment, the Board shall determine, upon advice from counsel, whether such amendment will be contingent on stockholder approval. 11 SECTION 11: GENERAL PROVISIONS 11.1 General Restrictions. 11.1.1 Legends. All certificates for shares of Stock delivered under ------- the Plan shall be subject to such stop transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities laws, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 11.1.2 No Rights as Stockholder. Except as specifically provided in ------------------------ this Plan, a Participant or a transferee of a Right shall have no rights as a stockholder with respect to any shares covered by the Rights until the date of the issuance of a Stock certificate to him or her for such shares, and no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions of other rights for which the record date is prior to the date such Stock certificate is issued, except as provided in Section 9.1, hereof. 11.2 Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 11.3 Disqualifying Dispositions. Any Participant who shall make a "disposition" (as defined in Section 424 of the Code) of all or any portion of an ISO within two years from the date of grant of such ISO or within one year after the issuance of the shares of Stock acquired upon exercise of such ISO shall be required to immediately advise the Company in writing as to the occurrence of the sale and the price realized upon the sale of such shares of Stock. 11.4 Regulatory Matters. Each Stock Option Agreement and Stock Purchase Agreement shall provide that no shares shall be purchased or sold thereunder unless and until (i) any then applicable requirements of state or federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel and (ii) if required to do so by the Company, the Optionee or Offeree shall have executed and delivered to the Company a letter of investment intent in such form and containing such provisions as the Board or Committee may require. 11.5 Recapitalizations. Each Stock Option Agreement and Stock Purchase Agreement shall contain provisions required to reflect the provisions of Section 9. 11.6 Delivery. Upon exercise of a Right granted under this Plan, the Company shall issue Stock or pay any amounts due within a reasonable period of time thereafter. Subject to any statutory obligations the Company may otherwise have, for purposes of this Plan, thirty days shall be considered a reasonable period of time. 11.7 Other Provisions. The Stock Option Agreements and Stock Purchase Agreements authorized under the Plan may contain such other provisions not inconsistent with this Plan, 12 including, without limitation, restrictions upon the exercise of the Rights, as the Administrator may deem advisable. SECTION 12: EFFECTIVE DATE OF PLAN The effective date of this Plan is August 6, 2001. The adoption of the Plan is subject to approval by the Company's stockholders, which approval must be obtained within 12 months from the date the Plan is adopted by the Board. In the event that the stockholders fail to approve the Plan within 12 months after its adoption by the Board, any grants of Options or sales or awards of shares that have already occurred shall be rescinded, and no additional grants, sales or awards shall be made thereafter under the Plan. SECTION 13: TERM OF PLAN The Plan shall terminate automatically on August 6, 2011, but no later than prior to the 10th anniversary of the effective date. No Right shall be granted pursuant to the Plan after such date, but Rights theretofore granted may extend beyond that date. The Plan may be terminated on any earlier date pursuant to Section 10 hereof. SECTION 14: EXECUTION To record the adoption of the Plan by the Board, the Company has caused its authorized officer to execute the same as of August 6, 2001. 13 EX-21.1 12 dex211.txt VCA ANTECH, INCORPORATED SUBSIDIARIES EXHIBIT 21.1 VCA Antech, Incorporated Subsidiaries Jurisdiction of --------------- Name of Subsidiary Organization / ------------------ ------------- Formation --------- AAH Merger Corporation Delaware Academy Animal, Inc. Maryland All Pet Complex Utah Anderson Animal Hospital, Inc. Colorado Animal Center, Inc. California Animal Clinic of Santa Cruz, Inc. California Animal Emergency Clinic, P.C. Illinois Animal Hospital of St. Petersburg, LLC California Asher Veterinary Medical Clinic California Beaumont Veterinary Associates, P.C. Texas BerLa, Inc. California Black Mountain Animal Hospital, L.P. California Cacoosing Animal Hospital, Ltd. Pennsylvania Cacoosing Pet Care & Nutrition Center, Inc. Pennsylvania Castle Shannon Pet Store, Inc. California Clarmar Animal Hospital, Inc. California Detwiler Veterinary Clinic, Inc. Pennsylvania Diagnostic Veterinary Service, Inc. California Eagle Park Animal Clinic, Inc. Indiana Eagle River Veterinary Hospital, Inc. Alaska Edgebrook, Inc. New Jersey Florida Veterinary Laboratories, Inc. Florida Fox Chapel Animal Hospital, Inc. Pennsylvania Freehold, Inc. New Jersey Glen Animal Hospital, Inc. New York Golden Merger Corporation Delaware H.B. Animal Clinics, Inc. California Highlands Animal Hospital, Inc. Virginia Howell Branch Animal Hospital, P.A. Florida Kirkwood Animal Hospital-Lea M.E. Tammi, V.M.D., P.A. Delaware 1 Jurisdiction of --------------- Name of Subsidiary Organization / ------------------ ------------- Formation --------- Kirkwood Animal Hospital Boarding and Grooming, Inc. Delaware Lake Jackson Veterinary Clinic, Inc. Texas Lakeside Animal Partnership California Lakewood Animal Hospital, Inc. California Lammers Veterinary Hospital, Inc. California Lewelling Veterinary Clinic, Inc. California M.S. Animal Hospitals, Inc. California Main Street Small Animal Hospital, Inc. California Miller Animal Hospital California Newark Animal Hospital, Inc. Delaware North Rockville Veterinary Hospital, Inc. Maryland Northern Animal Hospital, Inc. Arizona Northside Animal Hospital, P.C. Connecticut Noyes Animal Hospital, Inc. Illinois Oak Hill Animal Hospital, Inc. Massachusetts Old Town Veterinary Hospital, Inc. Virginia Pet Practice (Massachusetts), Inc. Delaware Pets' Rx Nevada, Inc. Nevada Pets' Rx, Inc. Delaware PPI of Pennsylvania, Inc. Delaware Princeton Animal Hospital, Inc. California Professional Veterinary Services, Inc. Indiana Riviera Animal Hospital, Inc. Florida Robertson Blvd. Animal Hospital, Inc. California Rossmoor - El Dorado Animal Hospital, Inc. California Rossmoor Center Animal Clinic, Inc. California San Vicente Animal Clinic California Silver Spur Animal Hospital, Inc. California South County Veterinary Clinic, Inc. California Southeast Area Veterinary Medical Center, P.C. Colorado Spanish River Animal Hospital, Inc. Florida Spring Mountain Animal Hospital, LLC Nevada Tampa Animal Medical Center, Inc. Florida The Pet Practice (Massachusetts), Inc. Massachusetts 2 Jurisdiction of --------------- Name of Subsidiary Organization / ------------------ ------------- Formation --------- The Pet Practice (Florida), Inc. Delaware The Pet Practice (Illinois), Inc. Delaware The Pet Practice of Michigan, Inc. Delaware VCA - Asher, Inc. California VCA - Rossmoor, Inc. California VCA Alabama, Inc. Alabama VCA Albany Animal Hospital, Inc. California VCA Albany Animal Hospital California VCA Albuquerque, Inc. California VCA All Pets Animal Complex, Inc. California VCA Alpine Animal Hospital, Inc. California VCA Ana Brook Animal Hospital California VCA Anderson of California Animal Hospital, Inc. California VCA Animal Hospital West, Inc. California VCA Animal Hospitals, Inc. California VCA APAC Animal Hospital, Inc. California VCA Associates Animal Hospital, L.P. California VCA Bay Area Animal Hospital, Inc. California VCA Cacoosing Animal Hospital, Inc. California VCA Castle Shannon Veterinary Hospital, Inc. California VCA Centers-Texas, Inc. Texas VCA Cenvet, Inc. California VCA Clarmar Animal Hospital, Inc. California VCA Clinical Veterinary Labs, Inc. California VCA Clinipath Labs, Inc. California VCA Closter, Inc. New Jersey VCA Coast Animal Hospital LLC California VCA Companion Animal Hospital, L.P. California VCA Detwiler Animal Hospital, Inc. California VCA Dover Animal Hospital, Inc. Delaware VCA Eagle River Animal Hospital, Inc. California VCA East Anchorage Animal Hospital, Inc. California VCA Golden Cove Animal Hospital, Inc. California VCA Greater Savannah Animal Hospital, Inc. California 3 Jurisdiction of --------------- Name of Subsidiary Organization / ------------------ ------------- Formation --------- VCA Greater Savannah Animal Hospital, L.P. California VCA Heritage Animal Hospital, LP California VCA Howell Branch Animal Hospital, Inc. California VCA Information Systems, Inc. California VCA Kaneohe Animal Hospital, Inc. California VCA Kenwood Animal Hospital L.P. California VCA Lakeside Animal Hospital, Inc. California VCA Lamb and Stewart Animal Hospital, Inc. California VCA Lammers Animal Hospital, Inc. California VCA Lewis Animal Hospital, Inc. California VCA MacArthur Animal Hospital L.P. California VCA Marina Animal Hospital, Inc. California VCA Miller Animal Hospital, Inc. California VCA Mission, Inc. California VCA New London Vet. Hospital L.P. California VCA Northboro Animal Hospital, Inc. California VCA Northwest Veterinary Diagnostics, Inc. California VCA of Colorado-Anderson, Inc. California VCA of New York, Inc. Delaware VCA of San Jose, Inc. California VCA of Teresita, Inc. California VCA Oneida Animal Hospital L.P. California VCA Professional Animal Laboratory, Inc. California VCA Real Property Acquisition Corporation California VCA Referral Associates Animal Hospital, Inc. California VCA Rohrig Animal Hospital, Inc. California VCA Rohrig Animal Hospital California VCA Rome Animal Hospital L.P. California VCA Santa Anita Animal Hospital L.P. California VCA Silver Spur Animal Hospital, Inc. California VCA South County Animal Hospital, LLC California VCA South Shore Animal Hospital, Inc. California VCA Spanish River Animal Hospital, L.P. Delaware VCA Specialty Pet Products, Inc. California 4 Jurisdiction of --------------- Name of Subsidiary Organization / ------------------ ------------- Formation --------- VCA Squire Animal Hospital, Inc. California VCA St. Petersburg Animal Hospital, Inc. California VCA Texas Management, Inc. California VCA Toms River Veterinery Hospital, L.P. New Jersey VCA Toms River Veterinery Hospital, P.A. New Jersey VCA Triangle Tower Animal Hospital, L.P. California VCA Twin Rivers Animal Hospital LLC Delaware VCA Villa Animal Hospital, L.P. California VCA Wyoming Animal Hospital, Inc. California Veterinary Centers of America, Inc. Delaware Veterinary Centers of America- Texas, L.P. Texas Veterinary Hospitals, Inc. California Vicar Operating, Inc. Delaware W.E. Zuschlag, D.V.M., Worth Animal Hospital, Chartered Illinois West Los Angeles Veterinary Medical Group, Inc. California Westwood Dog & Cat Hospital California William C. Fouts, D.V.M., Ltd. Nevada Wingate, Inc. Colorado Wisdom Group, L.P. California 5 EX-23.1 13 dex231.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our reports dated March 28, 2001 included herein and to all references to our Firm included in this registration statement. /s/ Arthur Andersen LLP --------------------------- ARTHUR ANDERSEN LLP Los Angeles, California October 30, 2001