-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZk+mDkNKAcBMNYeX6SBuTbnaoYDqoZCFUGLT8F7noKVJTNEMvutNOI/QtxdtIrk JICVR+QCj5ivutEquk8mBg== 0000898430-96-002099.txt : 19960520 0000898430-96-002099.hdr.sgml : 19960520 ACCESSION NUMBER: 0000898430-96-002099 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960227 ITEM INFORMATION: Other events FILED AS OF DATE: 19960517 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VETERINARY CENTERS OF AMERICA 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19935 FILM NUMBER: 96568946 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BLVD STE 1000 CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3103929599 MAIL ADDRESS: STREET 1: 3420 OCEAN PARK BLVD STE 1000 CITY: SANTA MC STATE: CA ZIP: 90405 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) February 27, 1996 ----------------- VETERINARY CENTERS OF AMERICA, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 1-10787 95-4097995 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (I.R.S. employer of incorporation) file number) identification number) 3420 OCEAN PARK BOULEVARD, SUITE 1000, SANTA MONICA, CALIFORNIA 90405 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (310) 392-9599 -------------------------- ITEM 5: OTHER EVENTS ------------ Attached hereto are the historical financial statements of Pets' Rx, Inc. for the years ended December 31, 1995, 1994, and 1993, the unaudited pro forma financial statements of Veterinary Centers of America, Inc. ("VCA") and the unaudited pro forma financial statements of VCA and Pets' Rx, Inc. in connection with the transactions contemplated by that certain Agreement and Plan of Reorganization dated February 27, 1996 among VCA, PRI Merger Company, Pets' Rx, Inc. and certain stockholders of Pets' Rx. Inc. named therein. Report of Independent Public Accountants To the Board of Directors and Stockholders of Pets' Rx, Inc.: We have audited the accompanying consolidated balance sheet of Pets' Rx, Inc. (a Delaware corporation) and subsidiary as of December 31, 1995, and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity (deficit), and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards which 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 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 audit provides 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 Pets' Rx, Inc. and subsidiary as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP San Jose, California March 20, 1996 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Stockholders of Pets' Rx, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of redeemable preferred stock and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Pets' Rx, Inc at December 31, 1994 and the results of its operations and its cash flows for the years ended December 31, 1994 and 1993 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Jose, California September 12, 1995 PETS' RX, INC. -------------- CONSOLIDATED BALANCE SHEETS --------------------------- AS OF DECEMBER 31, 1995 AND 1994 -------------------------------- (In thousands, except share and per share data) ASSETS ------
1995 1994 ------- ------- CURRENT ASSETS: Cash and cash equivalents $ 752 $ 2,254 Other current assets (Note 2) 671 571 ------- ------- Total current assets 1,423 2,825 PROPERTY AND EQUIPMENT, net (Note 2) 4,054 4,138 INTANGIBLE ASSETS, net (Note 2) 9,490 9,909 NOTE RECEIVABLE (Note 3) 100 293 OTHER ASSETS 265 118 ------- ------- $15,332 $17,283 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ---------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 1,080 $ 854 Current portion of long-term obligations (Note 4) 1,412 702 Accrued expenses and other current liabilities (Note 2) 1,358 1,188 ------- ------- Total current liabilities 3,850 2,744 ------- ------- LONG-TERM OBLIGATIONS, net of current portion (Note 4) 9,426 10,986 ------- ------- MINORITY INTEREST (Note 3) 251 - ------- ------- COMMITMENTS AND CONTINGENCIES (Note 3 and 9) REDEEMABLE CONVERTIBLE PREFERRED STOCK: 2,000,000 shares designated; 915,464 shares issued and outstanding in 1995 and 1994 (Note 5) 2,947 2,947 ------- ------- STOCKHOLDERS' EQUITY (DEFICIT) (Notes 6 and 7): Preferred stock, $0.01 par value; 5,000,000 shares authorized Convertible preferred stock, 100,000 shares designated Series A; 38,000 and 35,000 shares issued and outstanding in 1995 and 1994 3,395 3,095 Convertible preferred stock (Series A) 5,000 shares subscribed - 150 Common stock, $0.01 par value; 20,000,000 shares authorized; 6,265,685 and 6,069,261 shares issued and outstanding in 1995 and 1994 63 61 Additional paid-in capital 3,547 3,470 Accumulated deficit (8,147) (6,170) ------- ------- Total stockholders' equity (deficit) (1,142) 606 ------- ------- $15,332 $17,283 ======= =======
PETS' RX, INC. -------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ---------------------------------------------------- (In thousands)
1995 1994 1993 ------- ------- ------- REVENUES $15,622 $ 9,638 $ 5,785 ------- ------- ------- COSTS OF SERVICES: Cost of revenues 3,045 2,055 1,214 Salaries and wages of clinic operations 6,136 4,162 2,429 Other operating expenses of clinics 4,055 2,562 1,594 ------- ------- ------- 13,236 8,779 5,237 ------- ------- ------- Gross profit 2,386 859 548 GENERAL AND ADMINISTRATIVE 2,203 1,777 1,054 DEPRECIATION AND AMORTIZATION 1,200 919 562 WRITE-OFF OF GOODWILL - - 123 ------- ------- ------- Operating loss (1,017) (1,837) (1,191) INTEREST EXPENSE (1,009) (1,006) (352) INTEREST INCOME 99 38 21 ------- ------- ------- Loss before minority interest in income of subsidiary (1,927) (2,805) (1,522) MINORITY INTEREST IN INCOME OF SUBSIDIARY 50 - - ------- ------- ------- Net loss $(1,977) $(2,805) $(1,522) ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. PETS' RX, INC. -------------- CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------ (DEFICIT) --------- FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ---------------------------------------------------- (In thousands, except share data)
Stockholders' Equity (Deficit) ------------------------------------------ Redeemable Series A Preferred Stock Preferred Stock Common Stock --------------- ---------------- --------------------- Shares Amount Shares Amount Shares Amount ------- ------ ------ -------- --------- ------ BALANCE AT DECEMBER 31, 1992 792,170 $2,515 - $ - 1,792,500 $18 Issuance of common stock warrants - - - - - - Issuance of redeemable preferred stock warrants - - - - - - Redeemable preferred stock dividend 59,424 208 - - - - Subscription of Series C preferred stock - - - - - - Net loss - - - - - - ------- ------ ------ ------ --------- --- BALANCE AT DECEMBER 31, 1993 851,594 2,723 - - 1,792,500 18 Redeemable preferred stock dividend 63,870 224 - - - - Issuance of common stock for surrender of Series C - - - - 537,500 5 preferred stock subscription Issuance of Series A convertible preferred - - 35,000 3,262 - - stock, net of issuance cost of $238 Issuance of common stock to directors in conjunction with sale of Series A preferred stock Subscription of Series A convertible preferred stock - - - - - - Issuance of common stock for exercise and surrender - - - - 645,000 6 of warrants Issuance of common stock for payment of note interest - - - - 357,903 4 Issuance of common stock for note conversion - - - - 2,441,358 25 Issuance of common stock for acquisition - - - - 25,000 - Issuance of common stock warrants - - - - - - Net loss - - - - - - ------- ------ ------ ------ --------- --- BALANCE AT DECEMBER 31, 1994 915,464 2,947 35,000 3,095 6,069,261 61 Issuance of Series A convertible preferred stock - - 3,000 300 - - Issuance of common stock for bridge note conversion - - - - 142,960 2 Issuance of common stock for exercise and surrender of warrants - - - - 53,464 - Net loss - - - - - - ------- ------ ------ ------ --------- --- BALANCE AT DECEMBER 31, 1995 915,464 $2,947 38,000 $3,395 6,265,685 $63 ======= ====== ====== ====== ========= ===
The accompanying notes are an integral part of these consolidated financial statements.
Stockholders' Equity (Deficit) --------------------------------------------------------------------- Additional Paid-in Stock Accumulated Capital Subscribed Deficit Total ---------- ----------- ----------- -------- BALANCE AT DECEMBER 31, 1992 $1,386 $ - $(1,411) $ (7) Issuance of common stock warrants 101 - - 101 Issuance of redeemable preferred stock warrants 121 - - 121 Redeemable preferred stock dividend - - (208) (208) Subscription of Series C preferred stock - 200 - 200 Net loss - - (1,522) (1,522) ----- ------- ------- ------- BALANCE AT DECEMBER 31, 1993 1,608 200 (3,141) (1,315) Redeemable preferred stock dividend - - (224) (224) Issuance of common stock for surrender of Series C preferred stock subscription 195 (200) - - Issuance of Series A convertible preferred stock, net of issuance cost of $238 - - - 3,262 Issuance of common stock to directors in conjunction with sale of Series A preferred stock 164 - - - Subscription of Series A convertible preferred stock - 150 - 150 Issuance of common stock for exercise and surrender of warrants 49 - - 55 Issuance of common stock for payment of note interest 219 - - 223 Issuance of common stock for note conversion 1,207 - - 1,232 Issuance of common stock for acquisition 15 - - 15 Issuance of common stock warrants 13 - - 13 Net loss - - (2,805) (2,805) ----- ------- ------- ------- BALANCE AT DECEMBER 31, 1994 3,470 150 (6,170) 606 Issuance of Series A convertible preferred stock - (150) - 150 Issuance of common stock for bridge note conversion 77 - - 79 Issuance of common stock for exercise and surrender of warrants - - - - Net loss - - (1,977) (1,977) ----- ------- ------- ------- BALANCE AT DECEMBER 31, 1995 3,547 $ - $(8,147) $(1,142) ===== ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. PETS' RX, INC. -------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ---------------------------------------------------- (In thousands)
1995 1994 1993 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,977) $(2,805) $(1,522) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 1,200 919 562 Gain on sale of land and building (19) - - Write-off of goodwill - - 123 Minority interest in income of subsidiary in excess of distributions 7 - - Changes in assets and liabilities, net of effect of acquired clinics- Other current assets (88) 116 (136) Other assets 19 (51) (36) Accounts payable 607 476 115 Accrued expenses and other current liabilities 32 954 219 ------- ------- ------- Net cash used in operating activities (219) (391) (675) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (916) (114) (160) Purchases of veterinary clinics (40) (862) (1,140) Sale of marketable securities - - 140 Proceeds from sale of land and building 600 - - Payments received (advances made) under note receivable 193 (98) 2 ------- ------- ------- Net cash used in investing activities (163) (1,074) (1,158) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term obligations - 294 1,426 Proceeds from issuance of redeemable preferred stock warrants and common stock warrants - 13 222 Net proceeds from issuance of convertible preferred stock, preferred stock subscribed, and common stock 150 3,467 200 Principal payments under long-term obligations (1,270) (603) (356) ------- ------- ------- Net cash provided by (used in) financing activities (1,120) 3,171 1,492 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (1,502) 1,706 (341) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,254 548 889 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 752 $ 2,254 $ 548 ======= ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the year $ 972 $ 982 $ 324 Non-cash financing activities- Payment of accrued interest on notes by issuance of common stock $ - $ 223 $ - Conversion of notes payable to common stock $ 79 $ 1,232 $ - Capital leases $ 78 $ - $ - Conversion of accounts payable to note payable $ 381 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. PETS' RX, INC. -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ DECEMBER 31, 1995 ----------------- 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: --------------------------------------------------- The Company - ----------- Pets' Rx, Inc. (the "Company") was incorporated in Delaware on May 28, 1991. The Company is engaged in the acquisition and operation of veterinary clinics. As of December 31, 1995, the Company operates 16 clinics in the San Jose and Sacramento, California, and Las Vegas, Nevada, markets. The Company has substantial operating and debt service obligations as a result of the significant acquisition activity (see Note 3). The Company will require additional capital in 1996 if the merger discussed in Note 11 is not consummated. Use of Estimates in the Preparation of Financial Statements - ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Principles of Consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant intercompany transactions and balances have been eliminated. Minority interest on the accompanying balance sheet represents the initial contribution of assets to the subsidiary by the minority member increased by the member's share of income less distributions made. Revenue Recognition - ------------------- Revenues are recognized upon performance of veterinary services or sale of related veterinary products. Cash Equivalents - ---------------- All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Inventories - ----------- Inventories consist of veterinary supplies, pharmaceuticals, and retail veterinary products and are stated at the lower of cost, determined using the first-in, first-out basis, or market. -2- Property and Equipment - ---------------------- Property and equipment are stated at cost. Property and equipment, other than leasehold improvements, are depreciated using the straight-line method over the estimated useful lives of the assets, generally thirty-seven years for buildings and three to seven years for equipment. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. Intangible Assets - ----------------- Acquired animal records are valued based on their expected future contribution and are amortized using the straight-line method over the estimated lives of the records, generally seven years. Payments due under covenants not to compete are capitalized and amortized over the life of the covenants, generally five years, using the straight-line method. The excess of the Company's investment in veterinary clinics over the fair value of the net assets acquired (goodwill) is amortized using the straight-line method over its estimated useful life of 40 years. Intangible assets relating to discontinued clinics are charged to expense upon approval of the decision to close the clinic. Income Taxes - ------------ Income taxes are determined using an asset and liability approach that recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. New Accounting Standards - ------------------------ In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which will be effective for the Company's 1996 fiscal year. SFAS No. 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting rules under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" but with additional financial statement disclosure. The Company plans to continue to account for stock-based compensation arrangements under APB Opinion No. 25 and, therefore, does not anticipate SFAS No. 123 will have a material impact on its financial position, results of operations or cash flows. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This pronouncement requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is to be recognized when the sum of undiscounted cash flows is less than the carrying amount of the asset. Measurement of the loss for assets that the entity expects to hold and use is to be based on the fair value of the asset. Although this pronouncement did not have a material impact on the Company's financial condition or results of operations at adoption in 1996, its provisions will be applicable to any future assessments of its long-lived assets. Goodwill not associated with long-lived assets will continue to be assessed under APB Opinion No. 17. -3- Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform to their 1995 classifications. 2. BALANCE SHEET COMPONENTS (in thousands): ---------------------------------------
December 31, ----------------- 1995 1994 ------- ------- Other current assets: Accounts receivable, net $ 205 $ 210 Inventories 429 346 Prepaid expenses 37 15 ------- ------- $ 671 $ 571 ======= ======= Property and equipment: Buildings $ 2,002 $ 2,487 Clinic equipment 1,534 1,381 Leasehold improvements 682 254 Computer and office equipment 627 290 ------- ------- 4,845 4,412 Less- Accumulated depreciation and amortization (939) (537) ------- ------- 3,906 3,875 Land 148 263 ------- ------- $ 4,054 $ 4,138 ======= ======= Intangible Assets: Covenants not to compete and animal records $ 3,314 $ 3,351 Goodwill 8,359 7,960 ------- ------- 11,673 11,311 Less- Accumulated amortization (2,183) (1,402) ------- ------- $ 9,490 $ 9,909 ======= ======= Accrued Expenses and Other Current Liabilities: Payroll $ 246 $ 207 Professional services 252 139 Vacation 183 145 Settlement 200 350 Other 477 347 ------- ------- $ 1,358 $ 1,188 ======= =======
-4- 3. ACQUISITIONS: ------------ Since its inception, the Company has completed the acquisition of 19 veterinary clinics (of which three have been merged into other clinics). All of the acquisitions were accounted for using the purchase method of accounting; accordingly, the costs of these acquisitions have been allocated to assets acquired based on their fair value at date of acquisition. The results of the acquired clinics are included in the Company's results commencing from the date of acquisition. During 1993, the Company completed the acquisition of four veterinary clinics for total consideration of $6,733,000 consisting of $1,140,000 in cash, $5,350,000 in secured promissory notes payable, $200,000 payable under covenants not to compete, and the assumption of $43,000 in trade and payroll liabilities. During 1994, the Company completed the acquisition of six veterinary clinics for total consideration of $4,031,000 consisting of $862,000 in cash, $2,529,000 in secured promissory notes payable, $325,000 payable under convenants not to compete, 25,000 shares of newly issued common stock of the Company valued at $15,000 and the assumption of $300,000 of notes payable. In conjunction with one of the 1994 acquisitions, the Company advanced cash of $100,000 to the seller in exchange for an unsecured note receivable. Under the terms of the note, the Company will receive quarterly installments of interest at a rate of 7.5% per annum, with the entire principal balance and all accrued and unpaid interest due on November 1, 2004. The Company is contingently obligated for additional purchase price consideration related to one of its 1994 acquisitions. The amount to be paid equals 50 percent of the amount by which the revenues for the twelve-month period ending September 1997 exceed a base revenue amount. This additional consideration will be recorded as additional purchase price when and if earned. During 1995, the Company completed the acquisition of two veterinary clinics. In April 1995, the Company acquired a veterinary hospital for a total consideration of $218,000 consisting of $40,000 in cash, $25,000 in secured promissory note payable, $15,000 payable under covenants not to compete, $31,000 payable under an assumed lease obligation, and $32,000 in other assumed liabilities. The agreement also requires an additional payment based on revenues derived from pre-acquisition clients during the eighteen month period after the acquisition. As such, the Company recorded additional purchase price and a liability of $75,000 for the amounts expected to be paid in 1996. The purchase price will be adjusted in 1996 to reflect the actual payment. During 1995, a limited liability company (LLC) was formed by combining a veterinary clinic owned by the Company (Spring Mountain Clinic) with the practice of another veterinary clinic owned by an unrelated party. Certain assets were contributed by each party to form the new entity, which is not liable for any contracts or for any indebtedness relating to the predecessor clinics. The Company has an 80% interest in the LLC. The Company has certain obligations under an operating lease for the real property of the facility used by the other member prior to the consolidation of the operations of the LLC into the Spring Mountain clinic. Upon the occurrence of certain events, including an initial public offering or merger with a public company (see Note 11), the minority owner's interest may be converted into shares of the public entity. -5- The pro forma results listed below are unaudited and reflect purchase price accounting adjustments assuming the 1994 and 1995 acquisitions occurred at January 1, 1994. 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 operations.
1995 1994 ---------- -------- Revenues $15,863 $13,426 Net loss (1,962) (3,004)
4. LONG-TERM OBLIGATIONS: ---------------------- Long-term obligations consisted of the following (in thousands, except share data):
December 31, --------------------------- 1995 1994 ---------- --------- Promissory notes, secured by clinics, bearing interest at interest rates between 7% and 10% payable monthly, principal is generally due in monthly installments through July 2014 $ 7,517 $ 8,285 Promissory note, interest at prime plus 3% (11.75% at December 31, 1995), principal and interest payable in monthly installments through 133 154 July 2000 Convertible promissory note payable to a shareholder, officer and director, secured by a clinic, interest at 9% per annum payable semi-annually, principal due July 1996, convertible into 75,000 shares of common stock 250 250 Convertible promissory notes, secured by clinics, interest at 7% per annum payable monthly, principal due through December 2003, convertible into 88,625 shares of common stock 649 649 Convertible promissory note payable to an employee, secured by a clinic, interest at 8.5% per annum, interest and principal payable in monthly installments from January 1994 through December 1998, convertible into 100,000 shares of common stock 671 686 Convertible promissory notes payable primarily to directors and stockholders, secured by common stock and key man life insurance, interest at 12% per annum payable annually, principal due December 1998, convertible into shares of common stock at a conversion rate of $0.6233 183 272 Convertible promissory notes payable primarily to stockholders, interest at 12%, repaid at maturity on January 1, 1996 307 307
-6-
December 31, -------------------- 1995 1994 -------- -------- Obligations under covenants not to compete, payable in installments through 2003 782 1,005 Installment obligations bearing interest at 8% to 10.25%, due through 2005 295 - Installment obligations, variable interest rates, periodic installments due through 1996 - 131 Capital lease obligations (see Note 9) 69 - ------- ------- Total obligations 10,856 11,739 Less- Unamortized portion of discount on notes payable (18) (51) Less- Current portion (1,412) (702) ------- ------- Total long-term obligations $ 9,426 $10,986 ======= =======
Future principal payments, excluding capital lease obligations (see Note 9), are as follows (in thousands):
Year Ending December 31, ------------ 1996 $ 1,398 1997 1,650 1998 1,555 1999 476 2000 429 Thereafter 5,279 ------- $10,787 =======
In 1995, the Company restructured a $50,000 payment under a covenant not to compete to extend the payment date to 1997. In consideration of the extension, the Company committed to issue 2,500 shares of the Company's common stock and granted an option to convert the $50,000 into the Company's common stock at $2.50 per share. No shares have been issued under this agreement as of December 31, 1995. Convertible Promissory Notes Issued with Stock Warrants - ------------------------------------------------------- Under the terms of a financing agreement the Company entered into during 1993, the Company issued convertible promissory notes with a face value of $1,348,000, warrants to purchase 404,250 shares of common stock at an exercise price of $0.50 per share and warrants to purchase 404,250 shares of Series B Convertible Preferred Stock at an exercise price of $0.50 per share. The common warrants may be exercised at any time until their expiration in December 1998. The preferred warrants allowed for exercise until December 1998 or upon repayment or conversion of the promissory notes. The estimated fair value of the warrants has been recorded as discount on notes payable and is being amortized over the term of the notes. In 1994 and 1995, 645,000 and 53,464 shares of common stock were issued -7- upon exercise and surrender of warrants, respectively. All shares were issued at a reduced exercise price under the terms of the agreement for the issuance of Series A Preferred Stock. In December 1993, the Company received $500,000 in cash for a $500,000 convertible promissory note and a subscription for 500,000 shares of Series C Preferred stock valued at $0.40 per share. These proceeds have been allocated among the note payable and the stock subscription, with the difference between the face value and the proceeds being recorded as discount on notes payable and amortized over the term of the note. The face value of the note was $500,000 and bears interest at 12%. During 1994, notes payable with a face value of $1,575,000 were converted into 2,441,358 shares of common stock including shares for interest thereon. The Company also issued convertible promissory notes with a face value of $307,000 together with warrants to purchase 127,813 shares of common stock at an exercise price of $2.40 per share. The common warrants expire in December 1998. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK: -------------------------------------- The Company's articles of incorporation authorize the issuance of up to 5,000,000 shares of Preferred Stock, 2,000,000 of which have been designated redeemable convertible preferred stock. The Redeemable Preferred Stock has certain rights, preferences and restrictions. Each share of Redeemable Preferred Stock is convertible into one and one-half shares of common stock, subject to adjustment for dilution, at the option of the holder. The Redeemable Preferred Stock automatically converts to common stock upon the sale of common stock by the Company pursuant to an effective registration statement under the Securities Act of 1933 at a price per share of at least $5.25. The Company's articles of incorporation cannot be amended to alter in an adverse manner the designations, preferences or other rights of the Redeemable Preferred Stock without the consent of the holders of a majority of the outstanding shares of Redeemable Preferred Stock, voting together as a class. Similar consent is required for a change to the Company's articles of incorporation that establishes, authorizes or enlarges a series of any class of capital stock ranking senior to the Redeemable Preferred Stock. The Redeemable Preferred Stock shareholders have no additional voting rights. At its option, the Company may redeem the then outstanding shares of Redeemable Preferred Stock at any time after October 15, 1994 at a redemption price of $3.50 per share plus all declared but unpaid dividends. On October 15, 2001, any shares of Redeemable Preferred Stock remaining outstanding must be redeemed at a redemption price of $3.50 per share plus all declared but unpaid dividends. In the event of liquidation, the holders of the Redeemable Preferred Stock are entitled to receive, prior to and in preference to any distribution to the holders of common stock, the amount of $3.50 plus any accrued but unpaid dividends. After such distribution, holders of the Redeemable Preferred Stock are entitled to no further participation in the remaining assets of the Company. The holders of Preferred stock are entitled to receive, when and as declared by the Board of Directors, cash dividends per share in the amounts determined by the Board of Directors. -8- The Redeemable Preferred Stock is on parity with all other preferred stock. 6. CONVERTIBLE PREFERRED STOCK --------------------------- Series A Preferred Stock - ------------------------ In October 1994, the Company entered into an agreement whereby the Company sold 35,000 shares of Series A Preferred Stock to an investor at a price of $100 per share (par value $0.01 per share). Also pursuant to the agreement, approximately $1,575,000 of the Company's 12% Convertible Promissory Notes was converted into Common Stock. The agreement also limits the number of preferred stock purchase warrants which may be issued. The agreement also required a reduction in the number of directors. In conjunction with this reduction, the Company issued certain directors 270,000 shares of common stock for no consideration (see Note 7). The fair value of these shares has been recorded as issuance costs of the Series A Preferred Stock. Concurrent with the closing, a director and shareholder agreed to purchase 5,000 shares of the Series A Preferred Stock for an aggregate consideration of $500,000. Through December 31, 1995, the Company had received payments totaling $300,000 pursuant to which 3,000 shares were issued. The remaining $200,000 was received in 1996, at which time the remaining subscribed shares were issued. The Series A Preferred Stock has certain rights, preferences and restrictions. The Series A Preferred Stock is on a parity with all other "Convertible Preferred Stock" and "Series B Convertible Preferred Stock," when issued. The Series A is senior to Common Stock. Holders of the Series A Preferred Stock are entitled to receive, when and if declared by the Board of Directors, cumulative dividends at the annual rate of 7.5% times the stated value ($100 per share); provided, however, that dividends must also have been declared on the "Convertible Preferred Stock" and the "Series B Convertible Preferred Stock." In the event of any voluntary or involuntary liquidation or dissolution, the holders of Series A Preferred Stock are entitled to an amount equal to $125 per share, plus accrued and unpaid dividends. Series A shareholders may convert such shares into shares of Common Stock at a rate equal to the stated value plus accrued and unpaid dividends, divided by the conversion price. The initial conversion price is $2.50 per share. Shares of Series A will be converted into shares of Common Stock at the conversion rate should the Company file a registration statement for a common share offering with aggregate gross proceeds of at least $7,500,000. Series A holders and the Common Stock class will vote together as a class on transactions and each share of Series A is entitled to the number of votes per share equal to the number of shares of Common Stock issuable upon conversion of the Series A. However, as long as at least 10,000 shares of Series A are issued and outstanding, the Board of Directors shall not exceed five members and the holders of Series A are entitled (voting as a class) to elect in person or by proxy one director. If less than 10,000 shares are issued and outstanding, the term of the director elected by the Series A shall end and the remaining directors shall fill the vacancy. In addition, there are voting rights to prevent the establishment of new capital stock classes and enlargement of existing classes. -9- Series B Preferred Stock Warrants - --------------------------------- During 1994 and 1995, outstanding warrants for Series B Preferred Stock were surrendered to the Company for the direct issuance of shares of common stock into which the Series B Preferred Stock were convertible. As of December 31, 1995, warrants to purchase 55,018 shares of Series B Preferred Stock at an exercise price of $0.50 were outstanding. 7. COMMON STOCK: ------------ During 1994, the Company issued 25,000 shares of common stock as part of the consideration for acquisition of a clinic and 357,903 shares of common stock for repayment of promissory note interest. During 1993 and 1994 the Company issued certain equity securities to investors. In early 1996 the Company determined that such issuances were technically invalid due to the lack of filing legal documents in some states on a timely basis. Effective 1994, the Company's board of directors has resolved to issue 537,500 shares of common stock in exchange for the surrender of one class of such equity securities and to issue 322,500 shares of common stock in exchange for the surrender of the other class of such equity securities. Such shares of common stock represent the number of shares into which the invalidly issued securities were originally converted in 1994. Common Stock Warrants - --------------------- In addition to the common stock warrants discussed in Note 4, the Company, as of December 31, 1995, has warrants outstanding to purchase 108,544 common shares at exercise prices ranging from $0.50 to $2.66 per share. These warrants are exercisable at the option of the holder and expire on December 31, 1998. A nominal value was assigned to the warrants. Common Stock Options - -------------------- In July 1991, the Company granted an officer and director options to purchase 162,000 shares of the Company's common stock at a price of $0.50 per share. The options, which are currently exercisable, expire in July 2001. In 1992 and 1993, the Board of Directors authorized the grant of options to officers of the Company to purchase 197,500 shares of common stock at a price of $2.33 per share. The options, which are currently exercisable, expire in December 2002. In January 1992, the Board of Directors adopted a resolution which provides for the grant of common stock options to directors who are not employees of the Company (the "Outside Directors"). Under the resolution, each of the Outside Directors received options to purchase 54,000 shares of Common Stock at an exercise price per share of $1.67. Such options vest ratably over a four year period. In 1994, certain directors were required to resign, pursuant to the Stock Purchase Agreement for the issuance of Series A Preferred Stock. In consideration for the reconstitution of the Board of Directors, the Outside Directors' options became fully vested and the exercise price was reduced to zero. The fair value of the options were recorded as an issuance cost of the Series A Preferred Stock. -10- In 1994, the Board of Directors granted options to purchase 141,500 shares of Common Stock at a price of $2.75 per share to employees. These options, which are currently exercisable, expire in 2004 . A summary of the stock option activity follows:
Number Price of Shares Per Share ---------- --------- Balance at December 31, 1992 421,500 $0.50 - $2.33 Granted 208,000 $2.33 Exercised - - Canceled - - -------- Balance at December 31 ,1993 629,500 $0.50 - $2.33 Granted 141,500 $2.75 Exercised (270,000) - Canceled - - -------- Balance at December 31, 1994 501,000 $0.50 - $2.75 Granted 2,500 $2.75 Exercised - - Canceled - - -------- Balance at December 31, 1995 503,500 $0.50 - $2.75 ======== Exercisable at December 31, 1995 503,500 $0.50 - $2.75 ========
8. INCOME TAXES: ------------ No provision for income taxes has been recorded as the Company has incurred losses since its inception. At December 31, 1995, the Company has federal and state net operating loss ("NOL") carryforwards of approximately $6.5 million and $3.2 million, respectively. These NOL carryforwards expire at various dates through 2010 and 2000, respectively. Deferred tax assets of approximately $2.6 million and $1.9 million, resulting primarily from NOL carryforwards, were fully offset by a valuation allowances as of December 31, 1995 and 1994 due to the uncertainty of realization. Under the Tax Reform Act of 1986, the utilization of NOL carryforwards to reduce taxable income will be restricted in certain circumstances. Events which cause such a limitation include, but are not limited to, a cumulative ownership change of more than 50% over a three year period. Management believes that the issuance of Convertible Preferred Stock during 1994 caused such a change in ownership and, accordingly, utilization of NOL carryforwards may be limited in future years. -11- 9. COMMITMENTS AND CONTINGENCIES: ----------------------------- The Company leases clinic and office facilities under noncancelable operating lease agreements. The leases require the Company to pay property taxes, maintenance and certain insurance expenses. Total rent expense under the operating leases was $944,000, $584,000 and $436,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Minimum future lease payments under non-cancelable operating and capital leases are as follows (in thousands):
Year Ending Operating Capital December 31, Leases Leases ------------ --------- -------- 1996 $ 859 $ 24 1997 817 24 1998 824 24 1999 762 21 2000 753 4 Thereafter 6,430 - ------- --- $10,445 97 ======= --- Less- Amounts representing interest (28) ---- Present value of net minimum lease payments $ 69 ====
The cost of equipment under capital lease included in the balance sheet as property and equipment as of December 31, 1995 was approximately $78,000. Accumulated amortization of the leased equipment as of December 31, 1995 was approximately $13,000. In February 1996, the Company settled a wrongful termination claim in which it was the defendant. The settlement amount of approximately $200,000 approximated the accrued amount as of December 31, 1995 related to this matter. Various claims arising in the course of business, seeking monetary damages, are pending. The amount of liability, if any, from such claims cannot be determined with certainty; however, in the opinion of management, the ultimate outcome of such claims will not have a material adverse effect on the Company's financial position, results of operations or cash flows. -12- 10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: ----------------------------------------------------- The following disclosure of the estimated fair value of the Company's debt is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required to develop the estimates of fair value, thus the estimates provided therein are not necessarily indicative of the amounts that could be realized in a current market exchange.
December 31, 1995 ----------------- Carrying Fair Amount Value -------- ------- Fixed-rate long-term debt $10,723 $10,427 Variable rate long-term debt 133 139 ------- ------ $10,856 $10,566 ======= ======
The estimated fair value of the Company's fixed-rate long-term debt is based on prime plus an estimated spread at December 31, 1995 for similar securities with similar remaining maturities. 11. SUBSEQUENT EVENTS: ----------------- In February, 1996 the Company entered into a merger agreement with Veterinary Centers of America, Inc. (VCA). Under terms of the agreement, which is intended to qualify for pooling-of-interests accounting, stockholders and rights holders, as defined, are to receive shares with a market value on March 20, 1996 of approximately $25 million. UNAUDITED PRO FORMA FINANCIAL DATA VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL DATA. The following unaudited pro forma financial data and explanatory notes give effect to all acquisitions (33 animal hospitals and seven veterinary diagnostic laboratories) completed by Veterinary Centers of America, Inc. ("VCA") during 1995 and 1996 (through April 11, 1996) (the "VCA Acquired Companies"). The unaudited pro forma financial data do not reflect the pro forma effect of the application of approximately $11.0 million of the net proceeds of VCA's offering of approximately $84.3 million principal amount of convertible subordinated debentures due 2006 effected on April 12, 1996 to repay certain indebtedness incurred in connection with the acquisition of the VCA Acquired Companies. VCA does not believe that the pro forma effect of such use is material. The unaudited pro forma financial data have been prepared utilizing the historical consolidated financial statements of VCA and the historical financial statements of the VCA Acquired Companies. The acquisitions of the VCA Acquired Companies have been accounted for under purchase accounting. The unaudited pro forma financial data are based on the estimates and assumptions set forth in the notes thereto. The unaudited pro forma condensed consolidated statement of operations for VCA represents the historical results of operations of VCA for the year ended December 31, 1995 adjusted to reflect the acquisitions of the VCA Acquired Companies as if they had occurred at the beginning of the period. The unaudited pro forma condensed consolidated balance sheet represents the balance sheet of VCA at December 31, 1995 adjusted to reflect the acquisitions of the VCA Acquired Companies which occurred after December 31, 1995 (the "1996 VCA Acquired Companies") as if such acquisitions had occurred on December 31, 1995. Unaudited pro forma financial data are provided for illustrative purposes only and are not necessarily indicative of the results of operations or financial position that would have occurred if the acquisitions of the VCA Acquired Companies and 1996 VCA Acquired Companies had been consummated at January 1, 1995 and December 31, 1995, respectively, nor are they necessarily indicative of future operating results or financial position. VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share data)
VCA VCA ACQUIRED PRO FORMA PRO FORMA VCA COMPANIES (1) ADJUSTMENTS COMBINED ------------ --------------- -------------- ------------- Revenues Animal hospital............................. $ 51,437 $ 26,627 $ 78,064 Laboratory.................................. 37,606 16,066 $ 125 (2) 53,797 Pet food.................................... 4,756 4,756 Intercompany sales.......................... (1,727) (125)(3) (1,852) ------------ --------------- -------------- ------------- 92,072 42,693 134,765 ------------ --------------- -------------- ------------- Direct costs Animal hospital............................. 42,056 23,874 (937)(4) 64,993 Laboratory.................................. 23,977 8,842 (589)(5) 32,230 Pet food.................................... 3,205 3,205 Intercompany sales.......................... (1,727) (125)(3) (1,852) ------------ --------------- -------------- ------------- 67,511 32,716 (1,651) 98,576 ------------ --------------- -------------- ------------- Gross profit Animal hospital............................. 9,381 2,753 937 13,071 Laboratory.................................. 13,629 7,224 714 21,567 Pet food.................................... 1,551 1,551 ------------ --------------- -------------- ------------- 24,561 9,977 1,651 36,189 Selling, general and administrative............ 10,833 5,186 (876)(6) 15,143 Depreciation and amortization.................. 3,291 879 839 (7) 5,009 Royalty fees................................... 118 (118)(8) Restructuring charge........................... 1,086 (1,086)(9) ------------ --------------- -------------- ------------- Operating income............................... 9,351 3,794 2,892 16,037 Interest expense, net.......................... 1,639 268 1,444 (10) 3,351 ------------ --------------- -------------- ------------- Income before minority interest and provision for income taxes............................. 7,712 3,526 1,448 12,686 Minority interest in income of subsidiaries................................. 2,910 7 346 (11) 3,263 ------------ --------------- -------------- ------------- Income before provision for income taxes........................................ 4,802 3,519 1,102 9,423 Provision for income taxes..................... 2,238 102 2,071 (12) 4,411 ------------ --------------- -------------- ------------- Net income..................................... $ 2,564 $ 3,417 $ (969) $ 5,012 ============ =============== ============== ============= Primary earnings per share..................... $ 0.24 $ 0.44 ============ ============= Weighted average common shares used for computing primary earnings per share........................................ 10,703 594 (13) 11,297 ============ ============== ============= Fully diluted earnings per share............... $ 0.23 $ 0.42 ============ ============= Weighted average common shares used for computing fully diluted earnings per share.................................... 11,238 594 11,832 ============ ============== =============
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 (In thousands)
1996 VCA VCA ACQUIRED PRO FORMA PRO FORMA VCA COMPANIES (14) ADJUSTMENTS COMBINED ------------ ---------------- ----------- ----------- ASSETS Current assets: Cash and equivalents $ 46,799 $ 350 $ (10,500)(15) $ 36,649 Accounts receivable, net 6,303 1,163 66 (16) 7,532 Other current assets 5,187 464 (228)(17) 5,423 ------------ ---------------- ----------- ----------- 58,289 1,977 (10,662) 49,604 Property and equipment, net 13,641 2,282 (422)(18) 15,501 Other assets: Notes receivable 878 878 Goodwill 61,159 12 19,408 (19) 80,579 Covenants 4,885 999 (20) 5,884 Other 2,613 62 (62)(21) 2,613 ------------ ---------------- ----------- ----------- $ 141,465 $ 4,333 $ 9,261 $ 155,059 ============ ================ =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 6,009 $ 279 $ 1,731 (22) $ 8,019 Accounts payable 4,850 156 (156)(23) 4,850 Other accrued liabilities 5,554 483 1,943 (22) 7,980 ------------ ---------------- ----------- ----------- 16,413 918 3,518 20,849 Long-term obligations, less current portion 27,352 1,071 4,219 (24) 32,642 Deferred income taxes 1,301 1,301 Minority interest 4,605 4,605 Stockholders' equity 91,794 2,344 1,524 (25)(26) 95,662 ------------ ---------------- ----------- ----------- $ 141,465 $ 4,333 $ 9,261 $ 155,059 ============ ================ =========== ===========
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Reflects the historical statement of operations data of the VCA Acquired Companies for the period from January 1, 1995 to the earlier of the respective dates of acquisition of such companies or December 31, 1995. Each of the acquisitions has been accounted for as a purchase. Accordingly, the results of operations of each such VCA Acquired Company is included in the results of operations of VCA from the date of acquisition. The following are the VCA Acquired Companies: Cenvet, Inc. ("Cenvet"), January 1995; Animal Reference Lab, January 1995; BerLa, Inc. (d/b/a Animal and Avian Clinic of Golden Cove), January 1995; Silver Spur Animal Hospital, Inc., January 1995; Stephen A. LaDue D.V.M., P.A. (d/b/a Tampa Animal Medical Center), January 1995; Lewis Veterinary Hospital, Inc., February 1995; Animal Hospital of Sinking Spring, March 1995; Vet Research, Inc., March 1995; Lewelling Veterinary Hospital, Inc., April 1995; Northwest Veterinary Diagnostics, Inc., May 1995; South County Veterinary Clinic, Inc., May 1995; Alpine Veterinary Clinic, Inc., May 1995; Eagle River Veterinary Hospital, Inc., June 1995; Clinipath Diagnostics, Inc., July 1995; Florida Veterinary Laboratories, Inc. (composed of four hospitals), July 1995; Miller Animal Hospital, Inc., July 1995; Marina Veterinary Clinic, July 1995; South Shore Veterinary Associates, Inc., July 1995 (includes four animal hospitals); Pet Complex, P.A. (d/b/a All Pets Animal Complex-Sandy), July 1995; Brett T. Neville, D.V.M., Inc., P.C. (d/b/a All Pets Animal Complex-Taylorsville), July 1995; Castle Shannon Veterinary Hospital, Inc., August 1995; Fox Chapel Animal Hospital, Inc., September 1995 (includes two animal hospitals); East Anchorage Veterinary Hospital, Inc., September 1995; Greater Savannah Hospital for Animals, Inc., September 1995; Kaneohe Pet Health Center, November 1995; Elkton Veterinary Center, Inc. (composed of two hospitals), November 1995; Conawago Veterinary Practice, January 1996; Animal Hospital of St. Petersburg, Inc., January 1996; Kaneohe Veterinary Clinic, January 1996; Veterinary Referral Associates, Inc., February 1996; Lammers Veterinary Hospital, Inc., February 1996; Southwest Veterinary Diagnostics Inc., March 1996; Clarmar Animal Hospital, Inc., March 1996; Rotherwood Animal Clinic, Inc., March 1996 and Northboro Veterinary Clinic, Inc., April 1996. (2) Represents the revenue for laboratory services previously rendered by laboratories not owned by VCA. Such services are to be rendered by laboratories owned by VCA following the respective dates of acquisition. (3) Represents the elimination of intercompany revenue and the corresponding expense. (4) Represents principally an adjustment of $328,000 related to rental expense for the difference between such historical amounts and that to be paid following the acquisitions as a result of modifications to lease terms or the purchase of the hospital land and buildings previously leased, and an adjustment of $506,000 related to compensation for services provided by owner/veterinarians and other key employees for the difference between such historical amounts and employment terms existing following the acquisition. (5) Adjustments to direct costs consist primarily of (i) reductions of $605,000 to historical amounts to eliminate a charge incurred in connection with the consolidation of two acquired veterinary laboratories and an adjustment reflecting the net effect of the closure of two satellite laboratories that were consolidated into one central location following acquisition, and (ii) increases reflecting the incremental costs associated with the laboratory revenue which was previously rendered by laboratories not owned by VCA. Such services are to be rendered by laboratories owned by VCA following the respective dates of acquisition. (6) Adjustments to selling, general and administrative expenses consist primarily of adjustments to certain VCA Acquired Companies' historical amounts relating to (i) compensation for services provided by owner/veterinarians and other key employees for the difference between such historical amounts and employment terms existing following the acquisition, and (ii) administrative services eliminated following certain acquisitions. (7) Reflects additional depreciation of assets acquired and amortization of goodwill and other intangibles resulting from the acquisition of the VCA Acquired Companies. Goodwill acquired in 1995 and 1996 amounted to $52,683,000. Other intangibles acquired in 1995 and 1996 amounted to $6,141,000. Goodwill is amortized over forty years. Other intangibles consist primarily of covenants not to compete and are amortized over the term of the agreement (principally 5 to 10 years). (8) Reflects the elimination of royalty fee expense under an agreement that was not assumed by VCA. (9) Reflects the elimination of restructuring costs of $1,086,000 related to the consolidation of two acquired veterinary laboratories. (10) Reflects the additional interest expense that would have been incurred on the indebtedness of $26,793,000 issued by VCA in connection with the acquisitions of the VCA Acquired Companies. Annual interest rates on such indebtedness range from approximately 5.0 percent to 9.0 percent. (11) Represents the minority interest in certain of the VCA Acquired Companies net of an adjustment of $219,000, to eliminate a minority interest in another VCA Acquired Company acquired in 1995. (12) Represents an adjustment to provide income taxes at the effective rate. (13) To reflect the issuance of approximately 1,318,200 shares of VCA Common Stock in connection with the acquisition of the VCA Acquired Companies. (14) Reflects the combined financial position of the 1996 VCA Acquired Companies at December 31, 1995. See Note 1. (15) Represents cash consideration paid in connection with the acquisition of the 1996 VCA Acquired Companies. (16) Reflects an adjustment to net realizable value of accounts receivable acquired from certain companies. (17) Reflects an adjustment to reflect other current assets, principally inventory, at fair market value. (18) Reflects an adjustment to fair market value of property and equipment, net, acquired. (19) Reflects the excess of cost over the fair value of the net tangible assets acquired in connection with the acquisition of the 1996 VCA Acquired Companies. (20) Represents the value of consideration given in connection with non-compete agreements obtained in connection with the acquisition of the 1996 VCA Acquired Companies. (21) Reflects the exclusion of certain assets not acquired in connection with certain acquisitions. (22) Represents the indebtedness incurred or assumed in connection with the acquisition of certain of the 1996 VCA Acquired Companies, net of indebtedness of the acquired entities which was not assumed. (23) Reflects the elimination of certain current liabilities not assumed in connection with the acquisition of certain of the 1996 VCA Acquired Companies. (24) Reflects long-term indebtedness incurred in connection with the acquisition of certain 1996 VCA Acquired Companies at annual interest rates ranging from 5.0 percent to 8.0 percent. (25) Reflects the elimination of the stockholders' equity of the 1996 VCA Acquired Companies. (26) Represents the issuance of 242,925 shares of VCA Common Stock with a value of $3,868,000 in connection with the acquisition of the 1996 VCA Acquired Companies. VETERINARY CENTERS OF AMERICA, INC. AND PETS' RX INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data and explanatory notes give effect to VCA's acquisition of the VCA Acquired Companies and to the consummation of the merger with Pets' Rx. The unaudited pro forma financial data have been prepared utilizing VCA's unaudited pro forma financial data and the historical financial statements of Pets' Rx. The unaudited pro forma financial data are based on estimates and assumptions set forth in the notes to the unaudited pro forma financial data. The unaudited pro forma condensed combined statement of operations represents the unaudited pro forma results of operations of VCA for the year ended December 31, 1995 adjusted to reflect the merger with Pets' Rx as if it had occurred at the beginning of the period. The unaudited pro forma condensed combined balance sheet represents the unaudited pro forma balance sheet of VCA adjusted to reflect the merger with Pets' Rx as if it had occurred on December 31, 1995. Unaudited pro forma financial data are provided for illustrative purposes only and are not necessarily indicative of the results of operations or financial position that would have occurred if the merger with Pets' Rx had been consummated at January 1, 1995, nor are they necessarily indicative of future operating results or financial position. VCA AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share data)
VCA AND VCA PETS' RX PRO PRO FORMA POOLING FORMA COMBINED(1) PETS' RX ADJUSTMENTS COMBINED ------------- ------------ -------------- -------------- Revenues Animal hospital............................. $ 78,064 $ 15,622 $ 93,686 Laboratory.................................. 53,797 53,797 Pet food.................................... 4,756 4,756 Intercompany sales.......................... (1,852) (1,852) ------------- ------------ -------------- -------------- 134,765 15,622 150,387 Direct costs Animal hospital............................. 64,993 13,236 $ 78,229 Laboratory.................................. 32,230 32,230 Pet food.................................... 3,205 3,205 Intercompany sales.......................... (1,852) (1,852) ------------- ------------ -------------- -------------- 98,576 13,236 111,812 Gross profit Animal hospital............................. 13,071 2,386 15,457 Laboratory.................................. 21,567 21,567 Pet food.................................... 1,551 1,551 ------------- ------------ -------------- -------------- 36,189 2,386 38,575 Selling, general and administrative............ 15,143 2,203 17,346 Depreciation and amortization.................. 5,009 1,200 $ (347)(2) 5,862 Writedown or assets............................ 2,148 (3) 2,148 ------------- ------------ -------------- -------------- Operating income............................... 16,037 (1,017) (1,801) 13,219 Interest expense, net.......................... 3,351 910 4,261 ------------- ------------ -------------- -------------- Income (loss) before minority interest and provision for income taxes................ 12,686 (1,927) (1,801) 8,958 Minority interest in income of subsidiaries.................................. 3,263 50 3,313 ------------- ------------ -------------- -------------- Income (loss) before income taxes and cumulative impact of accounting change........................................ 9,423 (1,977) (1,801) 5,645 Provision for income taxes..................... 4,411 (1,360)(4) 3,051 ------------- ------------ -------------- -------------- Net income (loss).............................. $ 5,012 $ (1,977) $ (441) $ 2,594 ============= ============ ============== ============== Primary earnings per share..................... $ 0.44 $ 0.21 ============= ============== Weighted average common shares used for computing earnings per share.............. 11,297 850 (5) 12,147 ============= ============== ============== Fully diluted earnings per share............... $ 0.42 $ 0.20 ============== Weighted average common shares used for computing fully diluted earnings per share..................................... 11,832 850 (5) 12,682 ============= ============== ==============
VCA AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT DECEMBER 31, 1995 (IN THOUSANDS)
VCA AND VCA PETS' RX PRO FORMA POOLING PRO FORMA COMBINED(1) PETS' RX ADJUSTMENTS COMBINED ------------- ---------- ------------- ----------- ASSETS Current assets: Cash and equivalents $ 36,649 $ 752 $ 37,401 Accounts receivable, net 7,532 205 7,737 Other current assets 5,423 466 5,889 ------------- ---------- ------------- ----------- 49,604 1,423 51,027 Property and equipment, net 15,501 4,054 19,555 Deferred income taxes $ 1,360 (6) 1,360 Other assets: Notes receivable 878 100 978 Goodwill 80,579 6,176 (3,773)(3) 82,982 Covenants 5,884 3,314 (185)(3) 9,013 Other 2,613 265 2,878 ------------- ---------- ------------- ----------- $ 155,059 $ 15,332 $ (2,598) $ 167,793 ============= ========== ============= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,019 $ 1,412 $ 9,431 Accounts payable 4,850 1,080 5,930 Other accrued liabilities 7,980 1,358 9,338 ------------- ---------- ------------- ----------- 20,849 3,850 24,699 Long-term obligations, less current portion 32,642 9,426 42,068 Deferred income taxes 1,301 1,301 Minority interest 4,605 251 4,856 Redeemable convertible preferred stock 2,947 $ (2,947)(7) Stockholders' equity 95,662 (1,142) 349 (3)(5) 94,869 ------------- ---------- ------------- ----------- $ 155,059 $ 15,332 $ (2,598) $ 167,793 ============= ========== ============= ===========
VCA AND PETS' RX NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) Represents the pro forma results of operations of VCA assuming that the acquisitions of the Acquired Companies occurred on January 1, 1995. (2) Represents the reduction of amortization expense due to the conforming reclassification of medical records to goodwill and the reduced goodwill amortization due to the 1993 conforming write down of assets. (3) To reflect the write down of assets related to conforming the Pets' Rx method for evaluation the impairment of long lived assets to VCA's method. VCA uses an estimate of the related facility's undiscounted net income over the remaining life of the goodwill and other intangibles in measuring whether the goodwill is recoverable. (4) Represents an adjustment to provide taxes at the effective rate. (5) Reflects the issuance of 850,000 shares of VCA Common Stock for all of the outstanding securities of Pets' Rx. (6) To reflect the deferred tax benefit related to the writedowns of assets. See Note (3). (7) Represents the exchange of the redeemable convertible preferred stock as part of the merger. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. VETERINARY CENTERS OF AMERICA, INC. (REGISTRANT) Dated: May 15, 1996 By: /s/ Tomas W. Fuller -------------------------------- Tomas W. Fuller Chief Financial Officer EXHIBIT INDEX
Exhibit Page Number - ------- ----------- 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Price Waterhouse LLP
EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCNTS DATED 5/10/96 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 8-K, into the Company's previously filed Registration Statement (File Nos. 33-42504, 33-44622, 33-56846, 33-56848, 33-57768, 33-57770, 33-57772, 33-67588, 33-80212, 333-97682 and 333-00376). /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP San Jose, California May 10, 1996 EX-23.2 3 CONSENT OF INDPDNT ACCNTS DATED 5/13/96 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 of Veterinary Centers of America, Inc. (No.'s 33-80212, 33-42504, 33-91678, 33-92582, 33- 97682, 33-00324, 33-00376) and the Preliminary Proxy Statement of Veterinary Centers of America, Inc., filed during April 1996, of our report dated September 12, 1995 relating to the financial statements of Pets' Rx, Inc., which appears on page 6 of the Current Report on Form 8-K of Veterinary Centers of America, Inc. dated May 14, 1996. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Jose, California May 13, 1996 -----END PRIVACY-ENHANCED MESSAGE-----