-----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, IeoJNOFrGrbcljnCKhd+z+DN1KbNDcNoVcFJFb3VYpqUIX8emJS3hytlU17xnX5j HjCPjd7F3xp2eUoKQu9mIw== 0000944209-96-000087.txt : 19960625 0000944209-96-000087.hdr.sgml : 19960625 ACCESSION NUMBER: 0000944209-96-000087 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960624 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-06667 FILM NUMBER: 96584520 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 S-4 1 FORM S-4 As filed with the Securities and Exchange Commission on June 24, 1996 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _______________ VETERINARY CENTERS OF AMERICA, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 0742 95-4097995 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Organization) Classification Code No.) Identification No.)
3420 OCEAN PARK BOULEVARD, SANTA MONICA, CALIFORNIA 90405 (310) 392-9599 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ROBERT L. ANTIN 3420 OCEAN PARK BOULEVARD SANTA MONICA, CALIFORNIA (310) 392-9599 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) _______________ COPIES TO: C.N. Franklin Reddick III, Esq. Andrew J. Beck, Esq. Julie M. Kaufer, Esq. Haythe & Curley Troop Meisinger Steuber & Pasich, LLP 237 Park Avenue 10940 Wilshire Boulevard New York, New York 10017 Los Angeles, California 90024 (212) 880-6000 (310) 824-7000 _____________ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement is declared effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. CALCULATION OF REGISTRATION FEE
=============================================================================================================================== Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of Registration Securities to be Registered Registered(1) Unit(2) Price(2) Fee(3) - ------------------------------------------------------------------------------------------------------------------------------- Common Stock 3,411,434 $9.25 $31,555,764 $28,292.51 - -------------------------------------------------------------------------------------------------------------------------------
(1) Based upon the maximum number of shares expected to be issued in connection with the transaction described herein. (2) Estimated solely for the purposes of determining the registration fee in accordance with Rule 457(f)(1). The proposed maximum offering price is based on the average of the high and low prices of Pet Practice Common Stock on June 18, 1996 on the Nasdaq National Market. The proposed maximum aggregate offering price is based on the product of $9.25 (the proposed maximum aggregate offering price per unit) and 3,411,434 (the maximum number of shares expected to be issued in connection with the transaction described herein). (3) Pursuant to Rule 457(b), includes the fee of $16,392.31 previously paid in connection with the filing with the Commission of the preliminary proxy materials relating to the transactions described herein on April 30, 1996. 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. CROSS REFERENCE SHEET
ITEM NO. FORM S-4 ITEM NUMBER HEADING IN PROSPECTUS 1. Forepart of Registration Statement and Outside Front Cover Outside Front Cover Page Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page; Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Summary of Joint Proxy Statement/ Information Prospectus; Risk Factors; The Merger; Comparative Per Share Data; Market Price Information; Selected Historical and Unaudited Pro Forma Financial Data; Unaudited Pro Forma Financial Data 4. Terms of the Transaction Summary of Joint Proxy Statement/Prospectus; The Merger; The Merger Agreement; Comparison of Stockholders' Rights 5. Pro Forma Financial Information Summary of Joint Proxy Statement/Prospectus; Unaudited Pro Forma Financial Data 6. Material Contracts With the Company Being Acquired Summary of Joint Proxy Statement/Prospectus; The Merger 7. Additional Information Required for Reoffering by Persons * and Parties Deemed to be Underwriters 8. Interests of Named Experts and Counsel Legal Opinion; Experts 9. Disclosure of Commission Position on Indemnification For * Securities Act Liabilities 10. Information With Respect to S-3 Registrants * 11. Incorporation of Certain Information by Reference * 12. Information with Respect to S-2 or S-3 Registrants * 13. Incorporation of Certain Information by Reference * 14. Information With Respect to Registrants Other than S-3 or S- Summary of Joint Proxy 2 Registrants Statement/Prospectus; The Merger; Selected Historical and Unaudited Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations of VCA; Business of VCA 15. Information With Respect to S-3 Companies * 16. Information With Respect to S-2 or S-3 Companies *
ITEM NO. FORM S-4 ITEM NUMBER HEADING IN PROSPECTUS 17. Information With Respect to Other Than S-2 or S-3 Summary of Joint Proxy Companies Statement/Prospectus; The Merger; Selected Historical and Unaudited Pro Forma Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations of Pet Practice; Business of Pet Practice 18. Information if Proxies, Consents or Authorizations Are to be The Meetings of Stockholders; The Merger Solicited 19. Information If Proxies, Consents of Authorizations Are Not * to be Solicited, or in an Exchange Offer - -----------------------------
* None or not applicable. [VCA LOGO] June __, 1996 Dear Stockholder: As most of you are aware, Veterinary Centers of America, Inc. ("VCA") has entered into an Agreement and Plan of Reorganization with The Pet Practice, Inc. At our Annual Meeting on July 19, 1996, you will be asked to consider and approve the Merger and related items. The attached Joint Proxy Statement/Prospectus presents the details of this proposed strategic combination. VCA's Board of Directors has unanimously approved the Merger and recommends that you vote FOR all proposals presented. Our Board believes that VCA through this Merger will be better able to compete effectively in the companion animal care market. The addition of a large portfolio of strong, quality animal hospitals, the complementary geographic locations of these hospitals, the increased market capitalization, the opportunities for economies of scale and operating efficiencies as well as the potential expansion of VCA's veterinary diagnostic laboratory and pet food businesses should all result from the combination of VCA and The Pet Practice, Inc. For further information regarding the potential benefits of the Merger, I urge that you read carefully the section "The Merger -- VCA's Reasons for the Merger; Recommendations of the VCA Board" in the attached document. Even if you plan to attend the Annual Meeting in person, please complete, sign and promptly return the enclosed proxy in the enclosed postage-prepaid envelope. Sincerely, Robert L. Antin Chief Executive Officer THE PET PRACTICE, INC. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 June __, 1996 To our stockholders: Your Board of Directors has approved an Agreement and Plan of Reorganization, dated as of March 21, 1996, whereby The Pet Practice, Inc. ("The Pet Practice") would become a wholly owned subsidiary of Veterinary Centers of America, Inc, ("VCA"). In the merger, each outstanding share of The Pet Practice common stock will be converted into the right to receive a fractional number of shares of VCA common stock. Consummation of the merger is subject to, among other things, the approval of the stockholders of The Pet Practice voting at a Special Meeting of the Stockholders on July 19, 1996. Information concerning the Special Meeting, the merger transaction, and other matters concerning The Pet Practice and VCA is set forth in the accompanying proxy material. Because of the importance of the merger to The Pet Practice and its stockholders, we urge you to read this material carefully. Your Board of Directors and management have studied the proposed merger and have recommended that it be approved by the stockholders of The Pet Practice. Your Board of Directors and management believe that, by combining the complementary strengths of The Pet Practice and VCA, the merger will enhance the business prospects of both companies and that stockholders will benefit from the opportunity for continued equity participation in the combined enterprise. Your Board of Directors unanimously recommends that you vote FOR the merger. Since your vote is important at the Special Meeting of the Stockholders of The Pet Practice, we ask that you promptly complete, sign, date, and return the enclosed proxy in the enclosed envelope. We join with your Board of Directors in urging you to vote FOR the approval and adoption of the Agreement and Plan of Reorganization. Sincerely, STEPHEN F. NAGY PETER J. COHEN Chairman of the Board President and Chief Executive Officer YOUR VOTE IS IMPORTANT To ensure that your interests will be represented at the Meeting, whether or not you plan to attend, please complete, date, sign, and mail your proxy promptly in the enclosed postage-paid envelope. Stockholders who attend the Meeting in person may revoke their proxies and vote in person if they desire. VETERINARY CENTERS OF AMERICA, INC. ___________ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS ___________ To Be Held July 19, 1996 TO THE STOCKHOLDERS OF VETERINARY CENTERS OF AMERICA, INC.: Notice is hereby given that the 1996 Annual Meeting of Stockholders (the "VCA Annual Meeting") of Veterinary Centers of America, Inc. ("VCA") will be held at VCA's offices at 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405, on July 19, 1996, at 10:00 a.m., Los Angeles time, for the following purposes: 1. To approve the issuance of shares of Common Stock, par value $.001 per share, of VCA (the "VCA Common Stock"), pursuant to the Agreement and Plan of Reorganization, dated as of March 21, 1996, by and among VCA, Golden Merger Corporation, a Delaware corporation and a wholly owned subsidiary of VCA ("Merger Corp."), and The Pet Practice, Inc., a Delaware corporation ("Pet Practice"), pursuant to which, among other things, (i) Pet Practice will be merged with and into Merger Corp., which will be the surviving corporation, and Pet Practice will become a wholly owned subsidiary of VCA (the "Merger") and (ii) each outstanding share of Common Stock, par value $.01 per share, of Pet Practice will be converted into the right to receive a fraction of a share of VCA Common Stock determined by reference to an Exchange Ratio; 2. To elect two Class II Directors to the Board of Directors of VCA, each to hold office for three years and until their respective successors are elected; 3. To amend VCA's Certificate of Incorporation to increase the number of authorized shares of VCA Common Stock and VCA Preferred Stock; 4. To adopt the VCA 1996 Stock Incentive Plan; 5. To adopt the VCA 1996 Employee Stock Purchase Plan; and 6. To transact such other business as may properly come before the meeting and any adjournment(s) thereof. Only holders of record of the VCA Common Stock at the close of business on May 20, 1996 are entitled to notice of and to vote at the VCA Annual Meeting and adjournments or postponements thereof. All stockholders are cordially invited to attend the meeting in person. However, to ensure your representation at the meeting, you are urged to mark, sign and return the enclosed Proxy as promptly as possible in the postage- prepaid envelope enclosed for that purpose. Any stockholder attending the meeting may vote in person, even though he or she has returned a Proxy. By Order of the Board of Directors Arthur J. Antin Secretary 3420 Ocean Park Boulevard Santa Monica, CA 90405 June __, 1996 IN ORDER TO ENSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE REQUESTED TO COMPLETE, DATE, AND SIGN THE ACCOMPANYING PROXY AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE. THE PET PRACTICE, INC. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Notice of Special Meeting of Stockholders to be held July 19, 1996 King of Prussia, Pennsylvania June __, 1996 To the Holders of Common Stock of The Pet Practice, Inc.: A Special Meeting of the Stockholders of The Pet Practice, Inc., a Delaware corporation ("The Pet Practice"), will be held at the Park Ridge Hotel, 480 North Gulph Road, King of Prussia, Pennsylvania, on July 19, 1996, at 2:00 p.m., for the following purposes, as more fully described in the accompanying Joint Proxy Statement/Prospectus. 1. To consider and act upon a proposal to approve and adopt the Agreement and Plan of Reorganization (the "Merger Agreement") dated as of March 21, 1996, by and among Veterinary Centers of America, Inc., a Delaware corporation ("VCA"), Golden Merger Corporation, a Delaware corporation and a wholly owned subsidiary of VCA ("Merger Corp."), and The Pet Practice (a copy of the Merger Agreement is attached as Appendix A to the accompanying Joint Proxy -------- - Statement/Prospectus), providing for the merger of The Pet Practice with and into Merger Corp., whereupon The Pet Practice will become a wholly owned subsidiary of VCA. 2. To transact such other business as may properly come before the Meeting or any adjournment or postponements thereof. The Board of Directors has fixed the close of business on May 20, 1996 as the record date for the determination of stockholders entitled to notice of, and to vote at, the Meeting. A list of the stockholders entitled to vote at the Meeting may be examined at The Pet Practice's executive offices located in King of Prussia, Pennsylvania, during the ten-day period preceding the Meeting. By Order of the Board of Directors Warren D. Barratt Secretary YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT You are cordially invited to attend the Meeting in person. If you do not expect to be present, please promptly mark, sign, and date the enclosed form of Proxy and mail it in the enclosed return envelope, which requires no postage if mailed in the United States, so that your vote can be recorded. JOINT PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS OF VETERINARY CENTERS OF AMERICA, INC. AND SPECIAL MEETING OF STOCKHOLDERS OF THE PET PRACTICE, INC. TO BE HELD JULY 19, 1996 _______________ VETERINARY CENTERS OF AMERICA, INC. PROSPECTUS ______________ This Joint Proxy Statement/Prospectus is being furnished to holders of common stock of Veterinary Centers of America, Inc., a Delaware corporation ("VCA"), in connection with the solicitation of proxies by the Board of Directors of VCA (the "VCA Board") for use at the 1996 Annual Meeting of Stockholders (the "VCA Annual Meeting"), to be held on July 19, 1996 at VCA's offices at 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California, commencing at 10:00 a.m., local time, and at any adjournments or postponements thereof. This Joint Proxy Statement/Prospectus is also being furnished to holders of common stock, par value $.01 per share (the "Pet Practice Common Stock"), of The Pet Practice, Inc., a Delaware corporation ("Pet Practice"), in connection with the solicitation of proxies by the Board of Directors of Pet Practice (the "Pet Practice Board") for use at the Special Meeting of Stockholders of Pet Practice (the "Pet Practice Special Meeting") to be held on July 19, 1996, at the Park Ridge Hotel, 480 North Gulph Road, King of Prussia, Pennsylvania, commencing at 2:00 p.m., local time, and at any adjournments or postponements thereof. VCA has filed a registration statement on Form S-4 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), relating to shares of the VCA Common Stock that are proposed to be issued in connection with the merger (the "Merger") of Pet Practice with and into Golden Merger Corporation, a Delaware corporation and a wholly owned subsidiary of VCA ("Merger Corp."), pursuant to the Agreement and Plan of Reorganization, dated as of March 21, 1996, among VCA, Merger Corp. and Pet Practice (the "Merger Agreement") in exchange for outstanding securities of Pet Practice. Pursuant to the Merger Agreement, each share of Pet Practice Common Stock will be converted into a fraction of a share of VCA Common Stock based upon the Exchange Ratio described on page __ hereof under the caption "The Merger Agreement -- Consideration to be Received in the Merger." Based upon the closing sale price of the VCA Common Stock ($___) on the Nasdaq National Market on June __, 1996 (the last practicable day before printing this Joint Proxy Statement/Prospectus) each share of Pet Practice Common Stock will be converted into the right to receive ___ shares of VCA Common Stock in the Merger. The actual Exchange Ratio will be determined by reference to the average of the closing sale prices of the VCA Common Stock over the 20 trading days ending on the third trading day prior to the day of the VCA Annual Meeting and the Pet Practice Special Meeting (the "Average Price") and could result in a greater or lower number of shares of VCA Common Stock issued in the Merger than reflected in the prior sentence. This Joint Proxy Statement/Prospectus also constitutes the Prospectus of VCA filed as part of the Registration Statement. This Joint Proxy Statement/Prospectus and the accompanying form of proxy are first being mailed to the respective stockholders of VCA and Pet Practice on or about June __, 1996. All information contained in this Joint Proxy Statement/Prospectus concerning VCA has been furnished by VCA and information with respect to Pet Practice has been furnished by Pet Practice. Information contained in this Joint Proxy Statement/Prospectus concerning Pets' Rx, Inc. has been furnished by Pets' Rx, Inc. SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY VCA AND PET PRACTICE STOCKHOLDERS COMMENCING ON PAGE 23 AND ENDING ON PAGE 28 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Joint Proxy Statement/Prospectus does not cover any resales of the VCA Common Stock to be received by the stockholders of Pet Practice upon the consummation of the transactions contemplated by the Merger Agreement, and no person is authorized to make any use of this Joint Proxy Statement/Prospectus in connection with any such resales. The date of this Joint Proxy Statement/Prospectus is June __, 1996 ________________________________________________________ No person has been authorized to give any information or to make any representations not contained herein and the documents incorporated by reference herein, and any information or representation not contained herein or therein must not be relied upon as having been authorized by VCA, Merger Corp. or Pet Practice. Neither the delivery hereof nor any distribution of the securities being offered pursuant hereto shall, under any circumstances, create an implication that there has been no change in the information set forth herein since the date of this Joint Proxy Statement/Prospectus. This Joint Proxy Statement/Prospectus does not constitute an offer or solicitation by anyone in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. 2 AVAILABLE INFORMATION VCA and Pet Practice are each subject to the informational requirements of the Exchange Act, and in accordance therewith file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information filed with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. VCA Common Stock and Pet Practice Common Stock are listed on the Nasdaq National Market and such material may also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. VCA has filed with the Commission the Registration Statement relating to shares of VCA Common Stock that are proposed to be issued in connection with the Merger to holders of Pet Practice Common Stock. See "THE MERGER AGREEMENT-- Consideration to be Received in the Merger." This Joint Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement filed by VCA with the Commission, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Such additional information is available for inspection and copying at the offices of the Commission. Statements contained in this Joint Proxy Statement/Prospectus or in any document incorporated into this Joint Proxy Statement/Prospectus by reference as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document. 3 TABLE OF CONTENTS
PAGE AVAILABLE INFORMATION.................................................................. 3 SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS............................................ 8 The Companies....................................................................... 8 Meetings of Stockholders............................................................ 9 The Merger.......................................................................... 10 SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA............................. 17 MARKET PRICE INFORMATION............................................................... 21 COMPARATIVE PER SHARE DATA............................................................. 22 RISK FACTORS........................................................................... 23 Pending Transactions................................................................ 23 Anticipated Effects of Acquisitions................................................. 24 Rapid Expansion and Management of Growth............................................ 24 Dependence on Acquisitions for Future Growth........................................ 25 Leverage............................................................................ 25 Risks Associated with Intangible Assets............................................. 25 Guaranteed Payments................................................................. 26 Seasonality and Fluctuating Quarterly Results....................................... 26 Dependence on Key Management........................................................ 26 Joint Ventures...................................................................... 27 Competition......................................................................... 27 Government Regulation............................................................... 27 Anti-takeover Effect................................................................ 27 Impact of Shares Eligible for Future Sale........................................... 28 Possible Volatility of Stock Price.................................................. 28 THE MEETINGS OF STOCKHOLDERS........................................................... 29 General............................................................................. 29 Matters to be Considered at the Meetings............................................ 29 Record Dates; Voting Rights; Votes Required for Approval............................ 30 Proxies............................................................................. 31 No Dissenters' Rights............................................................... 32 Proxy Solicitation.................................................................. 32 THE MERGER............................................................................. 32 Background of the Merger............................................................ 32 VCA's Reasons for the Merger; Recommendations of the VCA Board...................... 34 Pet Practice's Reasons for the Merger; Recommendations of the Pet Practice Board.... 36 Opinions of Financial Advisors...................................................... 37 Interests of Certain Persons in the Merger.......................................... 43 Accounting Treatment................................................................ 44 Certain Federal Income Tax Consequences............................................. 44 Resale Restrictions................................................................. 45 Regulatory Matters.................................................................. 46 Nasdaq National Market.............................................................. 46
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PAGE THE MERGER AGREEMENT................................................................... 47 General............................................................................. 47 Consideration to be Received in the Merger.......................................... 47 Exchange of Shares.................................................................. 48 Representations and Warranties...................................................... 49 Certain Covenants................................................................... 50 Conditions to the Merger............................................................ 51 Termination of the Merger Agreement................................................. 52 Amendment and Waiver................................................................ 53 BUSINESS OF VCA........................................................................ 53 General............................................................................. 53 Recent Developments................................................................. 53 The Companion Animal Health Care Industry........................................... 54 Business Strategy................................................................... 55 Acquisition Strategy................................................................ 56 Operations and Marketing............................................................ 60 Fees and Sources of Payment......................................................... 60 Systems............................................................................. 60 Competition......................................................................... 60 Joint Venture Agreements............................................................ 61 Government Regulation............................................................... 61 Employees........................................................................... 62 Properties.......................................................................... 62 Legal Proceedings................................................................... 62 Executive Officers and Directors of VCA............................................. 63 Board Meetings and Committees....................................................... 64 Compensation of Directors........................................................... 64 Compensation Committee Interlocks and Insider Participation......................... 65 Report of the Compensation Committee................................................ 65 Summary Compensation Table.......................................................... 67 Option Grants in Last Fiscal Year................................................... 68 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values... 68 Employment Agreements............................................................... 69 Compliance with Section 16(a) of the Securities Exchange Act........................ 69 Stock Performance Graph............................................................. 70 Security Ownership of Certain Beneficial Owners and Management of VCA............... 71 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VCA................................................................................ 72 BUSINESS OF PET PRACTICE............................................................... 84 General............................................................................. 84 The Veterinary Services Industry.................................................... 84 Strategy............................................................................ 85 Patient Services.................................................................... 85 Network Development................................................................. 86 Marketing........................................................................... 87 Clinical Leadership................................................................. 88 Employer of Choice Programs......................................................... 88 Management Information Systems...................................................... 88 Competition......................................................................... 89 Licensing and Certification; Professional Associations; Regulation.................. 89 Trademarks.......................................................................... 90 Employees........................................................................... 90 Insurance........................................................................... 90 Properties.......................................................................... 91
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PAGE Legal Proceedings................................................................... 91 Executive Officers of Pet Practice.................................................. 91 Security Ownership of Certain Beneficial Owners and Management of Pet Practice...... 97 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PET PRACTICE.................................................. 98 Overview............................................................................ 98 Seasonality......................................................................... 99 Results of Operations............................................................... 100 Results of Operations for the Thirteen Weeks Ended April 3, 1996 Compared to the Thirteen Weeks Ended March 29, 1995.............................................. 100 Results of Operations for the Year Ended January 3, 1996 Compared to the Year Ended December 28, 1994..................................................... 101 Results of Operations for the Year Ended December 28, 1994 Compared to the Period October 27, 1993 (Commencement of Operations) through December 29, 1993............................................................ 102 Liquidity and Capital Resources..................................................... 103 UNAUDITED PRO FORMA FINANCIAL DATA..................................................... 105 DESCRIPTION OF VCA CAPITAL STOCK....................................................... 126 Common Stock........................................................................ 126 Redeemable Warrants................................................................. 126 VCA Preferred Stock................................................................. 127 VRI Warrants........................................................................ 127 Debentures.......................................................................... 127 Anti-takeover Provisions............................................................ 127 Section 203 of the DGCL............................................................. 128 Transfer Agent...................................................................... 128 COMPARISON OF STOCKHOLDERS' RIGHTS..................................................... 128 ELECTION OF CLASS II DIRECTORS......................................................... 130 Information with Respect to Nominees, Continuing Directors and Executive Officers... 130 PROPOSAL TO APPROVE AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF VCA TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF VCA COMMON STOCK AND VCA PREFERRED STOCK.................................................................... 131 The Amendment....................................................................... 131 Certain Effects of the Proposed Amendment........................................... 132 Recommendation and Vote............................................................. 132 PROPOSAL TO APPROVE THE ADOPTION OF THE VCA 1996 STOCK INCENTIVE PLAN.................. 132 Introduction........................................................................ 132 Purpose............................................................................. 133 Administration...................................................................... 133 Eligibility and Nondiscretionary Grants............................................. 133 Terms of Options.................................................................... 133 Adjustments upon Changes in Capitalization.......................................... 134 Amendment and Termination of the 1996 Plan.......................................... 134 Effect of Section 16(b) of the Exchange Act......................................... 134 Federal Income Tax Consequences..................................................... 135 Required Vote....................................................................... 136
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PAGE PROPOSAL TO APPROVE THE ADOPTION OF THE VCA 1996 EMPLOYEE STOCK PURCHASE PLAN.......... 136 Summary of Plan..................................................................... 136 Required Vote....................................................................... 137 PROPOSALS OF STOCKHOLDERS.............................................................. 137 INDEPENDENT PUBLIC ACCOUNTANTS......................................................... 137 LEGAL OPINION.......................................................................... 137 EXPERTS................................................................................ 137 OTHER MATTERS.......................................................................... 137 ANNUAL REPORT TO STOCKHOLDERS.......................................................... 138 INDEX TO FINANCIAL STATEMENTS.......................................................... F-1
APPENDICES Appendix A Agreement and Plan of Reorganization Appendix B Opinion of National Westminster Bank PLC Appendix C Opinion of Smith Barney Inc. Appendix D VCA 1996 Stock Incentive Plan Appendix E VCA 1996 Employee Stock Purchase Plan Appendix F Exchange Ratios 7 SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS The following is a summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus and is qualified in its entirety by reference to the more detailed information and financial statements and notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus and in the Appendices hereto. Unless the context otherwise requires, all references herein to "VCA" refer to Veterinary Centers of America, Inc. and its consolidated subsidiaries, and all references to "Pet Practice" refer to The Pet Practice, Inc. and its consolidated subsidiaries. This Joint Proxy Statement/Prospectus contains forward looking statements, which are inherently uncertain. Actual results may differ from those discussed in such forward looking statements for the reasons, among others, discussed in "Risk Factors." THE COMPANIES VCA ............ VCA was founded in 1986 and is a leading companion animal health care company. VCA has established a premier position in the animal hospital and veterinary diagnostic laboratory segments and has an emerging presence in the premium pet food segment. VCA operates the largest network of free-standing, full service animal hospitals in the country. This network has grown from one animal hospital in 1988 to 80 full service animal hospitals located in 16 states at June 20, 1996. As a leader in the industry, VCA also operates one of the largest networks of veterinary-exclusive laboratories in the nation with three full service laboratories and eight STAT (quick response) laboratories servicing over 8,000 animal hospitals located in 40 states. VCA also markets both a life-stage and a therapeutic line of premium pet food through Vet's Choice, a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company. The mailing address of VCA's principal executive offices is 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405; its telephone number is (310) 392-9599. See "BUSINESS OF VCA." Pet Practice ... Pet Practice owns and operates veterinary care group practices. Pet Practice is one of the largest and fastest growing providers of companion animal veterinary care in the United States. Pet Practice typically establishes comprehensive networks that include day clinics and 24-hour emergency/acute care clinics. In certain markets, Pet Practice also provides pet boarding and grooming services. Pet Practice believes it currently is one of the few companies pursuing a national strategy of consolidating veterinary care group practices in an effort to create comprehensive veterinary care networks. Pet Practice currently operates 84 veterinary clinics in 11 states. Of those 84 clinics, 54 operate in three established networks, 18 operate in one network in the integration stage and 12 operate in two networks still in the development stage. All of Pet Practice's services are provided on a fee-for-service basis and customers generally remit payment at the time services are delivered. The mailing address of Pet Practice's principal executive offices is 1018 West Ninth Avenue, King of Prussia, Pennsylvania 19406; its telephone number is (610) 992-8800. See "BUSINESS OF PET PRACTICE." 8 MEETINGS OF STOCKHOLDERS VCA ............ The 1996 Annual Meeting of Stockholders of VCA (the "VCA Annual Meeting") will be held on July 19, 1996 at 10:00 a.m. (Pacific Daylight Time), at VCA's offices, 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California. The purpose of the VCA Annual Meeting is to consider and vote on the following proposals: (i) the issuance of shares of VCA Common Stock in exchange for shares of Pet Practice Common Stock pursuant to the Merger Agreement, (ii) to elect two Class II Directors to the VCA Board, (iii) an amendment to VCA's Certificate of Incorporation to increase the number of authorized shares of VCA Common Stock from 30,000,000 shares to 75,000,000 shares and to increase the number of authorized shares of VCA Preferred Stock from 1,000,000 shares to 2,000,000 shares, (iv) to adopt the VCA 1996 Stock Incentive Plan, (v) to adopt the VCA 1996 Employee Stock Purchase Plan, and (vi) such other matters as may properly be brought before the VCA Annual Meeting. Holders of record of VCA Common Stock at the close of business on May 20, 1996 (the "VCA Record Date") will be entitled to notice of and to vote at the VCA Annual Meeting. On the VCA Record Date, there were 13,179,882 shares of VCA Common Stock outstanding and entitled to vote. Each share of VCA Common Stock is entitled to one vote on each matter that is properly presented to the stockholders for a vote at the VCA Annual Meeting. Under the Delaware General Corporation Law (the "DGCL"), the affirmative vote of the holders of a majority of the shares of VCA Common Stock present at the VCA Annual Meeting and entitled to vote is required to approve the issuance of shares of VCA Common Stock in exchange for shares of Pet Practice Common Stock pursuant to the Merger Agreement (the "Merger Proposal"). See "THE MEETINGS OF STOCKHOLDERS -- Record Dates; Voting Rights; Votes Required for Approval." Proxies (including revocations of previously delivered proxies) may be delivered (i) by United States mail or courier service to Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004, or (ii) by facsimile to (212) 509-5150. As of the VCA Record Date, directors and executive officers of VCA and their affiliates as a group beneficially owned 810,017 shares of VCA Common Stock (excluding shares subject to exercisable options), or approximately 6.1% of those shares outstanding as of such date. Pet Practice ... The Special Meeting of Stockholders of Pet Practice (the "Pet Practice Special Meeting" and collectively with the VCA Annual Meeting, the "Stockholder Meetings") will be held on July 19, 1996 at 2:00 p.m. (Eastern Daylight Time) at the Park Ridge Hotel, 480 North Gulph Road, King of Prussia, Pennsylvania. The purpose of the Pet Practice Special Meeting is to consider and vote on (i) a proposal to approve and adopt the Merger Agreement, and (ii) such other matters as may properly be brought before the Pet Practice Special Meeting. 9 Holders of record of Pet Practice Common Stock at the close of business on May 20, 1996 (the "Pet Practice Record Date") will be entitled to notice of and to vote at the Pet Practice Special Meeting. On the Pet Practice Record Date, there were 8,623,720 shares of Pet Practice Common Stock outstanding and entitled to vote. Each share of Pet Practice Common Stock is entitled to one vote on each matter that is properly presented to stockholders for a vote at the Pet Practice Special Meeting. Under the DGCL, the affirmative vote of the holders of a majority of the outstanding shares of Pet Practice Common Stock is required to approve and adopt the Merger Agreement. See "THE MEETINGS OF STOCKHOLDERS -- Record Dates; Voting Rights; Votes Required for Approval." Proxies (including revocations of previously delivered proxies) may be delivered (i) by United States mail or courier service to American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, or (ii) by facsimile to (718) 921-8331. As of the Pet Practice Record Date, directors and executive officers of Pet Practice and their affiliates as a group beneficially owned 3,901,567 shares of Pet Practice Common Stock (excluding shares subject to exercisable options), or approximately 45.2% of those shares outstanding as of such date. In connection with the Merger Agreement, a holder of 41.8% of the outstanding shares of Pet Practice Common Stock has executed and delivered an irrevocable proxy to VCA to vote its shares in favor of the Merger. See "THE MEETINGS OF STOCKHOLDERS -- Record Dates; Voting Rights; Votes Required for Approval." THE MERGER Conversion of Securities .. Upon consummation of the transactions contemplated by the Merger Agreement, (a) Pet Practice will be merged with and into Merger Corp., which will result in Pet Practice becoming a wholly owned subsidiary of VCA, (b) each issued and outstanding share of Pet Practice Common Stock will be converted into the right to receive shares of VCA Common Stock by reference to an Exchange Ratio, and (c) each outstanding option of Pet Practice will be assumed by VCA in accordance with the Merger Agreement and will be exercisable upon the same terms and conditions as under the applicable agreement or plan representing such option, except that each option shall be exercisable for that number of shares of VCA Common Stock (to the nearest whole share) into which the number of shares of Pet Practice Common Stock subject to such option immediately prior to the Effective Time (as defined below) would be converted under the Merger Agreement and the exercise price per share of each such option shall be adjusted in the manner set forth in the Merger Agreement. 10 Conversion (cont.) .... The Exchange Ratio will be determined by reference to the average closing price of VCA Common Stock over the 20 trading days ending on the third trading day before the meetings at which the stockholders of VCA and Pet Practice consider the merger (the "Average Price"). If the Average Price of the VCA Common Stock ranges from $25 to $30 per share, the Exchange Ratio shall be determined by dividing $10 by the Average Price of the VCA Common Stock, resulting in a valuation of $10 per share of Pet Practice Common Stock throughout the range. If the Average Price of the VCA Common Stock is less than $24 per share, the Exchange Ratio will be increased (from 0.395 at $24 per share) by 0.005 for each dollar of such reduction down to $18.50 per share of VCA Common Stock, and if the Average Price of VCA Common Stock is more than $31 per share, the Exchange Ratio shall be reduced (from 0.3350 at $31 per share) by 0.005 for each dollar of such increase up to $49.00 per share. No further adjustment shall be made if the Average Price of VCA Common Stock shall be less than $18.50. If the Average Price of the VCA Common Stock is greater than $49.00, the Exchange Ratio shall be determined by dividing $12.005 by the Average Price. In all cases, a proportionate reduction or increase, as the case may be, shall be made if the price of VCA Common Stock is less than a round dollar. Based on the foregoing, the resulting valuation of the merger consideration per share of Pet Practice Common Stock will range from $7.82 per share (if the Average Price is $18.50 per share) to $12.005 per share (if the Average Price is $49.00 per share). By way of illustration (i) at $___ per share of VCA Common Stock (the closing price of the VCA Common Stock on June ___, 1996, the last practicable date before the printing of this Joint Proxy Statement/Prospectus), the Exchange Ratio would be ___, resulting in a valuation of $___ per share of Pet Practice Common Stock, (ii) at $20 per share of VCA Common Stock, the Exchange Ratio would be 0.4150, resulting in a valuation of $8.30 per share of Pet Practice Common Stock, and (iii) at $28.00 per share of VCA Common Stock, the Exchange Ratio would be 0.3571, resulting in a valuation of $10.00 per share of Pet Practice Common Stock. Based upon the number of shares of Pet Practice Common Stock outstanding at the Pet Practice Record Date and upon the closing price of VCA Common Stock ($_____) on the Nasdaq National Market on June __, 1996 (the last practicable date before the printing of this Joint Proxy Statement/Prospectus), the former Pet Practice stockholders will hold, immediately after the Merger, approximately ___% of the aggregate number of outstanding shares of VCA Common Stock. Pet Practice and VCA have established a phone number which may be called by VCA stockholders and Pet Practice stockholders to obtain more current estimates of the Exchange Ratio based upon the foregoing. Please call (800) 223-2064 for a current estimate of the Exchange Ratio based upon more recent market closing prices of the VCA Common Stock. See "THE MERGER AGREEMENT -- Consideration to be Received in the Merger." 11 Fractional Shares ....... Fractional shares of VCA Common Stock will not be issued in connection with the Merger. A holder otherwise entitled to a fractional share will be paid cash in lieu of such fractional share in an amount equal to the product of the Average Price (as defined) of a share of VCA Common Stock multiplied by the fraction of a share to which such holder would otherwise be entitled. See "THE MERGER AGREEMENT -- Consideration to be Received in the Merger." Concurrent Transactions... VCA's growth strategy is dependent principally on its ability to acquire existing animal hospitals and veterinary diagnostic laboratories. During the period from January 1, 1996 to June 20, 1996, VCA acquired (i) Pets' Rx, the owner and operator of 16 animal hospitals, (ii) three veterinary diagnostic laboratories, and (iii) 11 individual animal hospitals, one of which was consolidated into an existing facility. VCA continues to evaluate acquisitions and negotiate with several potential acquisition candidates. VCA may effect one or more such acquisitions from the date of this Joint Proxy Statement/Prospectus through the date of the closing of the Merger with Pet Practice. VCA's Reasons for the Merger; Recommendations of the VCA Board....... The VCA Board, by unanimous vote, has determined that the Merger is in the best interests of the stockholders of VCA and recommends that the stockholders of VCA vote in favor of the Merger Proposal. The decision of the VCA Board to enter into the Merger Agreement and to recommend that stockholders vote in favor of the Merger Proposal is based upon its evaluation of a number of factors including, among others, the opinion of National Westminster Bank PLC, New York Branch ("NatWest"), VCA's financial advisor for the Merger, to the effect that, as of such date and based upon and subject to certain matters stated therein, the consideration to be paid by VCA pursuant to the Merger Agreement is fair to VCA from a financial point of view. See "THE MERGER -- VCA's Reasons for the Merger; Recommendations of the VCA Board" and " -- Opinions of Financial Advisors -- VCA." Pet Practice's Reasons for the Merger; Recommendations of the Pet Practice Board .... The Pet Practice Board, by unanimous vote, has determined that the Merger is in the best interests of the stockholders of Pet Practice and recommends that the stockholders of Pet Practice vote to approve the Merger and the Merger Agreement. The decision of the Pet Practice Board to enter into the Merger Agreement and to recommend that stockholders vote to approve the Merger and the Merger Agreement is based upon its evaluation of a number of factors. See "THE MERGER -- Pet Practice's Reasons for the Merger; Recommendations of the Pet Practice Board" and " -- Opinions of Financial Advisors -- Pet Practice." 12 Opinion of VCA's Financial Advisor....... On March 21, 1996, prior to the execution of the Merger Agreement, NatWest rendered to the VCA Board its written opinion to the effect that, as of such date and based upon and subject to certain matters stated therein, the consideration to be paid by VCA pursuant to the Merger Agreement is fair to VCA from a financial point of view. A copy of the full text of the written opinion of NatWest, which sets forth the assumptions made, procedures followed, matters considered and limits of its review, is attached to this Joint Proxy Statement/Prospectus as Appendix B, and should be read carefully in its entirety. NatWest's opinion does not address any other aspect of the Merger or the related transactions and does not constitute a recommendation to any stockholder as to how such stockholder should vote at the VCA Annual Meeting. See "THE MERGER -- Opinions of Financial Advisors -- VCA." Opinion of Pet Practice's Financial Advisor...... Smith Barney Inc. ("Smith Barney") has acted as financial advisor to Pet Practice in connection with the Merger and delivered an oral opinion to the Pet Practice Board on March 21, 1996 (subsequently confirmed by delivery of a written opinion dated such date) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to the holders of Pet Practice Common Stock. The full text of the written opinion of Smith Barney dated March 21, 1996, which sets forth the assumptions made, matters considered and limitations on the review undertaken, is attached as Appendix C to this Joint Proxy Statement/Prospectus and should be read carefully in its entirety. Smith Barney's opinion is directed only to the fairness of the Exchange Ratio from a financial point of view, does not address any other aspect of the Merger or related transactions and does not constitute a recommendation to any stockholder as to how such stockholder should vote at the Pet Practice Special Meeting. See "THE MERGER -- Opinions of Financial Advisors -- Pet Practice." Interests of Certain Persons in the Merger.. In considering the recommendation of the Pet Practice Board with respect to the Merger Agreement and the transactions contemplated thereby, stockholders should be aware that certain members of the management of Pet Practice and the Pet Practice Board have certain interests in the Merger that are in addition to the interests of stockholders of Pet Practice generally. See "THE MERGER-- Interests of Certain Persons in the Merger." Conditions to the Merger. The obligations of VCA and Pet Practice to consummate the Merger are subject to the satisfaction of certain conditions, including, among others, (i) obtaining requisite stockholder approvals, (ii) the expiration or termination of the waiting period applicable to the consummation of the Merger under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (iii) the effectiveness of the Registration Statement, and receipt of approvals under state securities laws, (iv) the absence of any material adverse change in the financial condition, business, operations or prospects of the other party, (v) the absence of any injunction prohibiting consummation of the Merger, (vi) the receipt of certain legal opinions with respect to the tax consequences of the Merger and (vii) the receipt of accountants' letters with respect to customary "cold comfort" matters. See "THE MERGER AGREEMENT -- Conditions to the Merger." 13 Effective Time of the Merger............. The Merger will become effective (the "Effective Time") upon the filing of a Certificate of Merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware which certificate will be filed as promptly as practicable after the requisite stockholder approvals have been obtained and all other conditions to the Merger have been satisfied or waived. Subject to the satisfaction (or waiver) of the other conditions to the obligations of VCA and Pet Practice to consummate the Merger, it is presently expected that the Merger will be consummated on July 19, 1996 or as soon thereafter as such conditions are satisfied. See "THE MERGER AGREEMENT -- General." Exchange of Stock Certificates........... Upon consummation of the Merger, each holder of a certificate or certificates representing shares of Pet Practice Common Stock ("Certificates") outstanding immediately prior to the Merger will, upon the surrender thereof (duly endorsed, if required) to a designated exchange agent (the "Exchange Agent"), be entitled to receive a certificate or certificates representing the number of whole shares of VCA Common Stock into which such shares of Pet Practice Common Stock will have been automatically converted as a result of the Merger. After the consummation of the Merger, the Exchange Agent will mail a letter of transmittal with instructions to all holders of record of Pet Practice Common Stock as of the Effective Time for use in surrendering their Certificates in exchange for certificates representing shares of VCA Common Stock. Certificates should not be surrendered until the letter of transmittal and instructions are received. See "THE MERGER AGREEMENT -- Exchange of Shares." No Dissenters' Rights.... Holders of Pet Practice Common Stock are not entitled to dissenters' rights in connection with the Merger. See "THE MEETINGS OF STOCKHOLDERS --No Dissenters' Rights." Termination.............. The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after the approval by the stockholders of VCA and Pet Practice, respectively, in a number of circumstances, which include, among others: (a) by the mutual written consent of VCA and Pet Practice; (b) by either VCA or Pet Practice if the Average Price of VCA Common Stock is equal to or less than $18.50; (c) by action of the Board of Directors of either VCA or Pet Practice if (i) the Merger shall not have been consummated by September 1, 1996, (ii) the approval of the Merger Proposal by VCA's stockholders shall not have been obtained at a stockholders' meeting duly convened for such purpose (or any adjournment thereof) or (iii) the adoption of the Merger Agreement and the approval of the transactions contemplated thereby by Pet Practice's stockholders shall not have been obtained at a stockholders' meeting duly convened for such purpose (or any adjournment thereof); (d) by action of the Pet Practice Board, if (i) any material condition to the obligations of Pet Practice is not substantially satisfied at the times contemplated and the condition is not waived, or (ii) there has been a breach by VCA of any representation, warranty, covenant or agreement contained in the Merger Agreement such that the conditions to the obligations of Pet Practice would not be satisfied which is not curable or, if curable, VCA 14 does not exercise reasonable efforts to cure; or (e) by action of the VCA Board, if (i) any material condition to the obligations of VCA is not substantially satisfied at the times contemplated and the condition is not waived, or (ii) there has been a breach by Pet Practice of any representation, warranty, covenant or agreement contained in the Merger Agreement such that the conditions to the obligations of VCA would not be satisfied which is not curable or, if curable, Pet Practice does not exercise reasonable efforts to cure. See "THE MERGER AGREEMENT -- Termination of the Merger Agreement." Termination Fee.......... If, following any proposal relating to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Pet Practice or any of its subsidiaries, Pet Practice effects any such transaction, or the Merger Agreement is terminated, Pet Practice is obligated to pay to VCA $3.5 million. See "THE MERGER AGREEMENT -- Certain Covenants -- Termination Fee." Certain Federal Income Tax Consequences....... The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), so that no gain or loss would be recognized by VCA, Pet Practice or Merger Corp. and no gain or loss would be recognized by the stockholders of Pet Practice, except in respect of cash received in lieu of fractional shares. No ruling from the Internal Revenue Service will be obtained with respect to the tax consequences. A condition to the consummation of the Merger is that VCA and Pet Practice each receive from their respective counsel a legal opinion to the effect that the Merger will constitute a tax free reorganization. See "THE MERGER -- Certain Federal Income Tax Consequences." Nasdaq National Market... The VCA Common Stock is traded on the Nasdaq National Market under the symbol "VCAI." VCA will apply for listing of the additional shares of VCA Common Stock issued to the Pet Practice stockholders in connection with the Merger on the Nasdaq National Market. See "THE MERGER -- Nasdaq National Market." Regulatory Matters....... The Merger is subject to the requirements of the HSR Act, and the rules and regulations thereunder, which provide that certain transactions may not be consummated until required information and materials are furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the Federal Trade Commission (the "FTC") and the requisite waiting period has expired or is terminated. VCA and Pet Practice filed the required information and materials with the Antitrust Division and the FTC effective April 26, 1996 and the requisite waiting period has expired. See "THE MERGER -- Regulatory Matters." Accounting Treatment..... The Merger will be accounted for as a "purchase" under generally accepted accounting principles. See "THE MERGER -- Accounting Treatment." 15 Resale Restrictions...... All shares of VCA Common Stock received by Pet Practice stockholders in the Merger will be freely transferable, except that shares of VCA Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Act) of Pet Practice and/or VCA will be subject to certain resale restrictions. Abbingdon Venture Partners Limited Partnership - II, a Delaware limited partnership which is the principal stockholder of Pet Practice (the "Principal Stockholder"), has agreed not to transfer or otherwise dispose of the Pet Practice Common Stock owned by it except to its partners who agree not to transfer or otherwise dispose of the VCA Common Stock received in the Merger with respect to such Pet Practice Common Stock for a period ending on April 30, 1997; provided, that, 33% of such shares of VCA Common Stock shall no longer be subject to such restriction on November 1, 1996 and the remaining shares shall no longer be subject to such restriction on May 1, 1997. See "THE MERGER -- Resale Restrictions." 16 SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA The historical financial data of VCA, Pet Practice and Pets' Rx for the periods indicated have been derived from their respective historical consolidated financial statements, and should be read in conjunction with such consolidated financial statements and the notes thereto, certain of which are incorporated by reference or included in this Joint Proxy Statement/Prospectus. The selected unaudited pro forma financial data of VCA and Pet Practice and the selected unaudited pro forma financial data of VCA, Pet Practice and Pets' Rx are derived from, or prepared on a basis consistent with, the unaudited pro forma combined condensed financial statements of VCA and Pet Practice and VCA, Pet Practice and Pets' Rx, respectively, and should be read in conjunction with such unaudited pro forma statements and notes thereto which are included in this Joint Proxy Statement/Prospectus. The unaudited pro forma data are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have existed if the Merger had occurred on January 1, 1995 (in the case of VCA and Pet Practice) or if the Merger had occurred on January 1, 1995 and the transaction with Pets' Rx (collectively, the "Transactions") had been consummated on January 1, 1993 (in the case of VCA, Pet Practice and Pets' Rx pro forma data), nor are they necessarily indicative of future operating results or financial position of VCA. No pro forma data reflecting the combination of VCA and Pets' Rx have been presented because such information would not be relevant to any transaction involving Pet Practice.
Years Ended December 31, Pro Forma ----------------------------------------------- ------------------------- Three Three Months Months VCA: Ended Year Ended Ended (In thousands, except per March 31, December March 31, share data) 1991 1992 1993 1994 1995 1996 31, 1995 1996 ------- ------- ------- ------- -------- --------- ---------- --------- STATEMENT OF OPERATIONS DATA: Revenues $14,572 $18,476 $25,313 $42,233 $ 92,072 $ 31,004 $143,514 $ 36,390 Operating income (loss) 1,640 1,115 (2,140) 1,796 9,351 3,453 14,447 3,470 Net income (loss) 510 258 (1,858) 589 2,564 1,012 2,479 878 Earnings (loss) per common share: Primary $0.14 $0.05 $(0.36) $0.09 $ 0.24 $ 0.07 $ 0.22 $ 0.06 Fully diluted $0.14 $0.05 $(0.29) $0.09 $ 0.23 $ 0.07 $ 0.21 $ 0.06 Weighted average common shares used for computing earnings (loss) per share: Primary 3,560 5,471 5,165 6,432 10,703 15,110 11,448 15,377 Fully diluted 3,842 5,639 6,238 6,906 11,238 15,492 11,983 15,759 BALANCE SHEET DATA: Cash and equivalents $13,668 $11,067 $12,419 $ 5,553 $ 46,799 $ 37,615 $115,548 Total assets 30,141 35,596 40,273 52,199 141,465 157,048 245,170 Current portion of long-term obligations and notes payable 2,312 1,303 1,542 4,850 6,009 7,563 8,020 Long-term obligations, less current portion 6,533 9,152 11,285 14,071 27,352 29,588 116,506 Guaranteed purchase price contingently payable in cash or common stock 665 542 542 72 -- -- -- Total stockholders' equity 18,956 22,299 20,590 23,397 91,794 102,145 102,382
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For the Period October 27, Pro Forma 1993 ----------------------- (Commencement Thirteen Thirteen of Year Ended Weeks Weeks PET PRACTICE: Operations) to December Year Ended Ended Year Ended Ended (In thousands, except per December 29, 28, January April 3, January 3, April 3, share data) 1993 1994 3, 1996 1996 1996 1996 -------------- ---------- ---------- ---------- ----------- ---------- STATEMENT OF OPERATIONS DATA: Revenues $1,201 $15,111 $40,571 $13,404 $58,828 $13,579 Operating (loss) income (446) (3,101) (1,230) (650) 1,254 (639) Net loss (629) (4,888) (3,175) (899) (1,727) (910) Net loss per common share $(0.15) $ (1.20) $ (0.54) $ (0.10) $ (0.29) $ (0.11) Weighted average common shares used for computing loss per share 4,059 4,059 5,863 8,614 6,044 8,626 BALANCE SHEET DATA: Cash and equivalents $ 74 $ 910 $10,097 $ 4,916 Total assets 11,653 35,417 80,462 79,715 Current portion of long-term obligations and notes payable (1) 65 1,609 3,696 3,820 Long-term obligations, less current portion 9,503 18,885 15,786 16,216 Total stockholders' (deficit) equity (427) (3,649) 53,220 52,521 May 28, 1991 (Commencement of Three Operations) Months PETS' RX: to December Years Ended December 31, Ended (In thousands, except per 31, ------------------------------------------------ March share data) 1991 1992 1993 1994 1995 31, 1996 ------------- ------- ------- ------- ------- -------- STATEMENT OF OPERATIONS DATA: Revenues $ 346 $3,657 $ 5,785 $ 9,638 $15,622 $ 4,228 Operating loss (282) (726) (1,191) (1,837) (1,017) (116) Net loss (292) (844) (1,522) (2,805) (1,977) (358) Net loss per common share $(0.22) $(0.55) $ (0.85) $ (0.46) $ (0.32) $ (0.06) Average common shares used for computing loss per share 1,309 1,527 1,793 6,069 6,266 6,267 BALANCE SHEET DATA: Cash and equivalents $ 2024 $ 889 $ 548 $ 2,254 $ 752 $ 251 Total assets 3,821 6,418 12,316 17,283 15,332 14,581 Current portion of long-term obligations and notes 67 428 776 702 1,412 1,167 payable Long-term obligations, less current portion 477 3,007 9,280 10,986 9,426 9,219 Total stockholders' equity (deficit) 523 268 (1,315) 606 (1,142) (1,299)
________________________ (1) Excludes $10,067 of borrowings under line of credit at December 28, 1994. 18
Year Ended December 31, 1995 ------------------------------------------------------- VCA and Pet Practice VCA AND PET PRACTICE PRO FORMA: VCA Pet Practice Pro Forma Pro Forma (In thousands, except per share data) Pro Forma Pro Forma Adjustments Combined --------- ------------ ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenues $143,514 $58,828 $202,342 Operating income 14,447 1,254 $(1,612) 14,089 Net income (loss) 2,479 (1,727) (974) (222) Earnings (loss) per common share: Primary $ 0.22 $ (0.02) Fully diluted $ 0.21 Weighted average common shares used for computing earnings (loss) per share: Primary 11,448 3,273 14,721 Fully diluted 11,983 Three Months Ended March 31, 1996 -------------------------------------------------------- VCA and Pet Practice VCA Pet Practice Pro Forma Pro Forma Pro Forma Pro Forma Adjustments Combined --------- ------------ ----------- ----------- Revenues $ 36,390 $13,579 $ 49,969 Operating income 3,470 (639) $ (215) 2,616 Net income (loss) 878 (910) 61 29 Earnings per common share: Primary $ 0.06 $ 0.00 Fully diluted $ 0.06 $ 0.00 Weighted average common shares used for computing earnings per share: Primary 15,377 3,273 18,650 Fully diluted 15,759 3,273 19,032 VCA and Pet Practice VCA Pet Practice Pro Forma Pro Forma BALANCE SHEET DATA: Pro Forma Historical Adjustments Combined --------- ------------ ----------- --------- Cash and equivalents $115,548 $ 4,916 $(3,400) $117,064 Total assets 245,170 79,715 33,804 358,689 Current portion of long-term obligations and notes payable 8,020 3,820 11,840 Long-term obligations, less current portion 116,506 16,216 132,722 Total stockholders' equity 102,382 52,521 33,804 188,707
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Year Ended December 31, 1995 ------------------------------------------------------------------------ VCA, Pet Practice and Pets' Rx VCA, PET PRACTICE AND PETS' RX: VCA Pro Pet Practice Pets' Rx Pro Forma Pro Forma (In thousands, except per share data) Forma Pro Forma Historical Adjustments Combined -------- ------------ ---------- ----------- ------------ STATEMENT OF OPERATIONS DATA: Revenues $143,514 $58,828 $15,622 $217,964 Operating income (loss) 14,447 1,254 (1,017) $(3,413) 11,271 Net income (loss) 2,479 (1,727) (1,977) (2,775) (4,000) Earnings (loss) per common share: Primary $ 0.22 $(0.26) Fully diluted $ 0.21 Weighted average common shares used for computing earnings (loss) per share: Primary 11,448 4,074 15,522 Fully diluted 11,983 Three Months Ended March 31, 1996 -------------------------------------------------------------------------- VCA, Pet Practice and Pets' Rx VCA Pro Pet Practice Pets' Rx Pro Forma Pro Forma Forma Pro Forma Historical Adjustments Combined -------- ------------ ---------- ----------- ------------ Revenues $ 36,390 $13,579 $ 4,228 $ 54,197 Operating income (loss) 3,470 (639) (116) $ (109) 2,606 Net income (loss) 878 (910) (358) 167 (223) Earnings (loss) per common share: Primary $ 0.06 $(0.01) Fully diluted $ 0.06 Weighted average common shares used for computing earnings (loss) per share: Primary 15,377 4,074 19,451 Fully diluted 15,759 VCA, Pet Practice and Pets' Rx VCA Pet Practice Pets' Rx Pro Forma Pro Forma Pro Forma Historical Historical Adjustments Combined --------- ------------ ---------- ----------- ------------ BALANCE SHEET DATA: Cash and equivalents $115,548 $ 4,916 $ 251 $(3,400) $117,315 Total assets 245,170 79,715 14,581 30,529 369,995 Current portion of long-term obligations and notes payable 8,020 3,820 1,167 13,007 Long-term obligations, less current portion 116,506 16,216 9,219 141,941 Total stockholders' equity (deficit) 102,382 52,521 (1,299) 33,476 187,080
20 MARKET PRICE INFORMATION The VCA Common Stock and the Pet Practice Common Stock are listed for quotation on the Nasdaq National Market. The table below sets forth, for the calendar quarters indicated, the high and low closing sales prices per share reported on the Nasdaq National Market for the VCA Common Stock and the Pet Practice Common Stock. Price information for the Pet Practice Common Stock is supplied since August 1, 1995, the first business day following Pet Practice's initial public offering.
VCA PET PRACTICE COMMON STOCK COMMON STOCK --------------------- ---------------------- HIGH LOW HIGH LOW --------- ------- -------- ------- 1994: First Quarter........................... 9 6 Second Quarter.......................... 8 6 Third Quarter........................... 7 1/4 5 7/8 Fourth Quarter.......................... 9 1/2 6 5/8 1995: First Quarter........................... 11 3/16 8 Second Quarter.......................... 12 1/4 10 3/8 Third Quarter........................... 17 11/16 11 1/2 14 3/4 12 5/8 Fourth Quarter.......................... 16 29/32 12 5/8 14 5/8 9 3/4 1996: First Quarter............................ 29 3/8 13 5/8 10 3/4 7 Second Quarter (through June 19, 1996)... 32 3/8 23 10 1/8 8 3/4
The last reported sale prices per share of the VCA Common Stock and the Pet Practice Common Stock on March 21, 1996, the last trading day preceding public announcement of the Merger, were $25.75 and $8.875, respectively. On June ___, 1996, the latest practicable trading day before the printing of this Joint Proxy Statement/Prospectus, the closing sale price per share of VCA Common Stock was $_____________ and the closing sale price per share of Pet Practice Common Stock was $___________. Because the market price of VCA Common Stock is subject to fluctuation, and because the number of shares of VCA Common Stock to be received by Pet Practice stockholders in the Merger fluctuates based upon the market price of the VCA Common Stock, the market value of the shares of VCA Common Stock that holders of Pet Practice Common Stock will receive in the Merger may increase or decrease prior to the Merger. See "THE MERGER -- Consideration to be Received in the Merger." As of May 20, 1996, VCA and Pet Practice had approximately 356 and 68 holders of record, respectively. Neither VCA nor Pet Practice has paid any dividends on their common stock. Each of VCA and Pet Practice currently intends to retain earnings for use in their respective businesses and does not anticipate paying cash dividends on their common stock in the foreseeable future. In addition, the Merger Agreement prohibits the payment of any dividends by Pet Practice prior to the Effective Time. 21 COMPARATIVE PER SHARE DATA The following table contains historical per share data of VCA, Pet Practice, and Pets' Rx and unaudited pro forma combined per share data after giving effect to the Merger or the Transactions assuming (x) that .379 of a share of VCA Common Stock (based upon an assumed Average Price of $26.38) is issued in exchange for each share of Pet Practice Common Stock, and (y) that .08592 of a share of VCA Common Stock is issued in exchange for each share of common stock, par value $.001 per share, of Pets' Rx. This data should be read in conjunction with the Selected Historical and Unaudited Pro Forma Financial Data, the pro forma condensed combined financial statements and historical financial statements of VCA, Pet Practice and Pets' Rx, and the notes thereto, incorporated in or included elsewhere in this Joint Proxy Statement/Prospectus. The unaudited pro forma condensed combined financial data are not necessarily indicative of the operating results that would have been achieved had the Merger or the Transactions been effected as of the beginning of the periods presented and should not be construed as representative of future operations.
Years Ended December 31, Three Months -------------------------- Ended 1993 1994 1995 March 31, 1996 ------ ------ ------ --------------- VCA Primary (Loss) Earnings Per Share (based on VCA equivalent shares) : VCA pro forma combined (1)................................ $(0.36) $ 0.09 $ 0.22 $ 0.06 VCA and Pet Practice pro forma (2)........................ (0.36) 0.09 (0.02) 0.00 VCA, Pet Practice and Pets' Rx pro forma (3).............. (0.90) (0.26) (0.26) (0.01) Book Value VCA pro forma combined.................................... 7.77 VCA and Pet Practice pro forma............................ 11.47 VCA, Pet Practice and Pets' Rx pro forma.................. 10.84 Pet Practice Primary (Loss) Earnings Per Share (based on Pet Practice equivalent shares): Pet Practice pro forma combined........................... (0.29) (0.11) Pet Practice and VCA pro forma............................ (0.01) 0.00 Pet Practice, VCA and Pets' Rx pro forma.................. (0.09) 4.35 Book Value Pet Practice pro forma combined........................... 6.08 Pet Practice and VCA pro forma............................ 4.35 Pet Practice, VCA and Pets' Rx pro forma.................. 4.11
- -------------------------- (1) For the years ended December 31, 1993 and 1994, the amounts shown represent the historical net earnings per share of VCA Common Stock. For the year ended December 31, 1995 and the three months ended March 31, 1996, the amounts shown represent the pro forma combined net earnings per share of VCA Common Stock as if each acquisition completed by VCA during fiscal 1995 and 1996 had been effected as of January 1, 1995 and January 1, 1996, respectively. (2) For the years ended December 31, 1993 and 1994, the amounts shown represent the historical net earnings per share of VCA Common Stock. For the year ended December 31, 1995 and the three months ended March 31, 1996, the amounts shown represent VCA and Pet Practice pro forma net earnings per share. (3) For the years ended December 31, 1993 and 1994, the amounts shown represent VCA and Pets' Rx pro forma net earnings per share. For the year ended December 31, 1995 and the three months ended March 31, 1996, the amounts shown represent VCA, Pet Practice and Pets' Rx pro forma net earnings per share. 22 RISK FACTORS VCA stockholders and Pet Practice stockholders should consider carefully the following factors, as well as the other information appearing elsewhere or incorporated in this Joint Proxy Statement/Prospectus in evaluating the Merger. PENDING TRANSACTIONS VCA acquired Pets' Rx, the owner and operator of 16 animal hospitals in California and Nevada, on June 19, 1996. VCA has entered into the Merger Agreement with Pet Practice and acquired Pets' Rx with the expectation that the transactions will result in beneficial synergies for the combined business. These include the potential to realize improved operating margins at animal hospitals through a strategy of centralizing various corporate and administrative functions and leveraging fixed costs while providing customers with improved services. Achieving these anticipated business benefits will depend in part on whether the operations of Pet Practice and Pets' Rx, or either of them, can be integrated with the operations of VCA in an efficient, effective and timely manner. There can be no assurance that this will occur. The combination of two or three of the companies will require, among other things, integration of the companies' management staffs, coordination of the companies' sales and marketing efforts, integration and coordination of the companies' development teams and the identification and elimination of redundant and/or unnecessary overhead and poor-performing hospitals. The success of this process will be significantly influenced by the ability of the combined business to retain key management and marketing and development personnel. There is no assurance that this integration will be accomplished smoothly or successfully or that VCA will be successful in retaining key members of management. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations with distinct cultures. The integration of operations of two or three of the companies following the mergers will require the dedication of management resources, which may temporarily distract attention from the day-to- day business of the combined business. The inability of management to integrate successfully the operations of two or three of the companies could have an adverse effect on the business and results of the combined business. In addition, even if the operations of the three companies are ultimately successfully integrated, it is anticipated that the integration will be accomplished over time and, in the interim, the combination may have an adverse effect on the business, results of operations and financial condition of the combined business. In addition, there can be no assurance that the present and potential customers of VCA, Pet Practice and Pets' Rx will continue their current utilization patterns without regard to the proposed mergers or that the proposed mergers will not have an adverse impact upon relationships with veterinarians and other animal health care professionals currently employed by VCA, Pet Practice and Pets' Rx. Any significant reduction in utilization patterns by VCA, Pet Practice and Pets' Rx's customers, or any significant adverse impact on relationships with the veterinarians and other animal health care professionals currently employed by VCA, Pet Practice or Pets' Rx, could have an adverse effect on the near-term business and results of operations of the combined business. Pet Practice commenced operations in October 1993, although the initial business Pet Practice acquired has, and most of the veterinary hospitals acquired since have, operated over a substantial period. Pet Practice had net losses of $4,888,000 in fiscal 1994, $3,175,000 in fiscal 1995 and $899,000 for the thirteen weeks ended April 3, 1996 and an accumulated deficit of $9,591,000 as of April 3, 1996 relating to net losses in the period from October 27, 1993 (commencement of operations) through December 29, 1993, fiscal 1994 and 1995 and the thirteen weeks ended April 3, 1996. In view of Pet Practice's significant recent growth and the impact of certain charges on Pet Practice's 1994 and 1995 results, Pet Practice's historical financial performance may not be indicative of its future performance (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PET PRACTICE"). There can be no assurance that Pet Practice will achieve profitability or successfully implement its business strategy. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PET PRACTICE." Pets' Rx commenced operations on May 28, 1991. Pets' Rx had net losses of approximately $2,805,000 in fiscal 1994, $1,977,000 in fiscal 1995 and $358,000 for the three months ended March 31, 1996 and an accumulated deficit of $8,505,000 as of March 31, 1996. Further losses are expected to be recorded for fiscal 1995 if the Pets' Rx merger with VCA is 23 consummated as a result of anticipated pooling adjustments. In view of Pets' Rx's recent growth and the impact of nonrecurring charges and certain other charges on Pets' Rx's 1994 and 1995 results, Pets' Rx's historical financial performance may not be indicative of its future performance. There can be no assurance that Pets' Rx will achieve profitability or successfully implement its business strategy. ANTICIPATED EFFECTS OF ACQUISITIONS VCA is currently evaluating the operations of the businesses of Pet Practice and Pets' Rx for purposes of developing a plan for the integration of the businesses to be acquired with VCA's existing operations. Although this plan is not complete at the time of the mailing of this Joint Proxy Statement/Prospectus, it is anticipated that a significant restructuring of the combined operations will be required as a result of the mergers. As a consequence of this restructuring and the consummation of the mergers, VCA anticipates incurring one-time restructuring and related charges in the second and/or third quarters of 1996. The magnitude of these charges has not been quantified at this time. The Pets' Rx acquisition is intended to be accounted for on a pooling of interests basis. Under the pooling rules, the historical financial results of VCA will be restated to reflect the combination, following certain adjustments. Pets' Rx incurred a loss in each of the three fiscal years ended December 31, 1995 and in the first quarter ended March 31, 1996. Following the consummation of the merger, the historical results of VCA will be restated to reflect the historical losses of Pets' Rx. In addition, Pets' Rx is expected to continue to incur losses in the second quarter of 1996. Further, under the pooling rules, the costs incurred by VCA and Pets' Rx in consummating the merger will be expensed during the second quarter. The Pet Practice Merger is intended to be accounted for as a purchase. Under the purchase rules, the Merger is expected to result in a significant increase in the goodwill and other intangibles recorded on VCA's balance sheet. This increase in goodwill and other intangibles will be in addition to the increase resulting from the combination with Pets' Rx, which also has significant goodwill and other intangibles recorded on its balance sheet. As a result, VCA expects that its amortization expense will significantly increase over historical levels. The combined effect of the restructuring and other charges discussed above, the pooling treatment in the Pets' Rx acquisition and the increased amortization expense will have an adverse effect on the results of operations of VCA in each of the second and third quarters of 1996. Further, the effect of the increased amortization expense is expected to temper reported earnings of VCA in the fourth quarter and subsequent periods. RAPID EXPANSION AND MANAGEMENT OF GROWTH Due to the number and size of acquisitions completed since January 1, 1994, VCA and Pet Practice have experienced rapid growth. In 1994, VCA completed six acquisitions (five animal hospitals and one veterinary diagnostic laboratory) and in 1995, VCA completed 32 acquisitions (25 animal hospitals, six veterinary diagnostic laboratories and the remaining 30 percent interest in Professional Animal Laboratory ("PAL")). As a result of these acquisitions, VCA's revenues have grown from $25.3 million in 1993 to $42.2 million in 1994 and to $92.1 million in 1995. In addition, during this period, VCA entered two new lines of business, veterinary diagnostic laboratories and premium pet food. In 1994, Pet Practice acquired 30 veterinary hospitals and in 1995, Pet Practice acquired 38 veterinary hospitals. As a result of these acquisitions, Pet Practice's revenues have grown from $1.2 million in the period from October 27, 1993 to December 29, 1993 to $15.1 million in fiscal 1994 and to $40.6 million in fiscal 1995. VCA's and Pet Practice's growth and pace of acquisitions have placed, and will continue to place, a substantial strain on their respective management, operational, financial and accounting resources. The successful management of this growth will require VCA and Pet Practice to continue to implement and improve their respective financial and management information systems and to train, motivate and manage their respective employees. There can be no assurance that the combined business will be able to identify, consummate or integrate acquisitions without substantial delays, costs or other problems. Once integrated, acquisitions may not achieve sales, profitability and asset productivity commensurate with the combined business' other operations. In addition, acquisitions involve several other risks, including adverse short-term effects on the combined business' reported operating results, impairments of goodwill and other intangible assets, the diversion of management's attention, the dependence on retention, hiring and training of key personnel, the amortization of intangible assets and risks 24 associated with unanticipated problems or legal liabilities. The combined business' failure to manage growth effectively would have a material adverse effect on the combined business' results of operations and its ability to execute its business strategy. In addition, the growth experienced by VCA and Pet Practice, and the corresponding increased need for timely information, have placed significant demands on VCA's and Pet Practice's existing accounting and management information systems. As a result, Pet Practice is in the process of upgrading, and VCA intends to upgrade, these systems in 1996. No assurance can be given that these upgrades will be completed successfully or that the new systems can be successfully integrated or that the new systems will effectively serve the combined business' future information requirements. DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH VCA's, Pet Practice's and the combined business' respective growth strategies are dependent principally on their ability to acquire existing animal hospitals and (in the case of VCA and the combined business) veterinary diagnostic laboratories. Successful acquisitions involve a number of factors which are difficult to control, including the identification of potential acquisition candidates, the willingness of the owners to sell on reasonable terms and the satisfactory completion of negotiations. In addition, 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 VCA, Pet Practice and the combined business' respective operations through the assessment of fines or penalties against VCA, Pet Practice and the combined business or the possible requirement of divestiture of one or more of VCA's, Pet Practice's and the combined business' operations. There can be no assurance that the combined business will be able to identify and acquire acceptable acquisition candidates on terms favorable to the combined business in a timely manner in the future. Assuming the availability of capital, VCA's plans include an aggressive acquisition program involving the acquisition by the combined business of at least 15 to 25 facilities per year. During the period from January 1, 1996 to June 20, 1996, VCA acquired (i) Pets' Rx, the owner and operator of 16 animal hospitals, (ii) three veterinary diagnostic laboratories and (iii) 11 animal hospitals, one of which was consolidated into an existing facility. During this same period, Pet Practice has acquired three veterinary hospitals. Each of VCA and Pet Practice continues to evaluate acquisitions and negotiate with several potential acquisition candidates (although Pet Practice is precluded by the Merger Agreement from effecting any acquisition while the Merger is pending without the approval of VCA). The failure to complete acquisitions and continue expansion could have a material adverse effect on VCA's, Pet Practice's and the combined business' financial performance. As the combined business proceeds with its acquisition strategy, it will continue to encounter the risks associated with the integration of acquisitions described above. LEVERAGE VCA, Pet Practice and Pets' Rx have each incurred substantial indebtedness to finance the acquisition of their respective animal hospitals and (in the case of VCA) veterinary diagnostic laboratories. Giving effect to debt incurred in acquisitions subsequent to March 31, 1996 through June 20, 1996 (excluding the acquisition of Pets' Rx), VCA had at March 31, 1996, consolidated long-term obligations (including current portion) of approximately $38.8 million. Pet Practice had at April 3, 1996 consolidated long-term obligations (including current portion) of approximately $20.0 million. At March 31, 1996, Pets' Rx had consolidated long-term obligations (including current portion) of $10.4 million. In addition, on April 17, 1996, VCA issued subordinated debt in an aggregate principal amount of $84.4 million (the "Debentures"). At December 31, 1995 and March 31, 1996, VCA's ratio of long-term debt to total stockholders' equity was 36.3% and 36.4%, respectively. As of March 31, 1996, after giving effect to the Transactions and the sale of the Debentures, the ratio of long-term debt to total stockholders' equity will be 82.8%. VCA expects to incur additional indebtedness in the future to continue its acquisition strategy. RISKS ASSOCIATED WITH INTANGIBLE ASSETS A substantial portion of the assets of VCA, Pet Practice and Pets' Rx consists of intangible assets, including goodwill and covenants not to compete relating to the acquisition of animal hospitals and veterinary diagnostic laboratories. At March 31, 1996, VCA's balance sheet reflected $85.2 million of intangible assets of these types, a substantial portion of VCA's $157.0 million in total assets at such date. At April 3, 1996, Pet Practice's balance sheet reflected $53.8 million of intangible assets of these types, a significant portion of Pet Practice's $79.7 million in total assets. At March 31, 1996, Pets' Rx's balance sheet reflected $9.3 million of intangible assets of these types, a significant portion of Pets' Rx's $14.6 million in total assets at such date. VCA expects the aggregate amounts of goodwill and other intangible assets on its balance sheet to increase in the future 25 in connection with additional acquisitions. This increase will have an adverse impact on earnings as goodwill and other intangible assets will be amortized against earnings. In the event of any sale or liquidation of VCA, there can be no assurance that the value of these intangible assets will be realized. In addition, the respective companies continually evaluate whether events and circumstances have occurred that indicate the remaining balance of intangible assets may not be recoverable. When factors indicate that these intangible assets should be evaluated for possible impairment, they may be required to reduce the carrying value of intangible assets, which could have a material adverse effect on results of operations during the periods in which such reduction is recognized. In accordance with this policy, VCA recognized a writedown of goodwill and related assets in the amount of $2.3 million in 1993 in connection with three of VCA's facilities which were not performing. There can be no assurance that the combined business will not be required to writedown assets further in future periods. In connection with an accounting change related to the pooling of interests of Pets' Rx, the combined company will recognize a pretax writedown of $2.1 million in each of 1993 and 1995. GUARANTEED PAYMENTS In connection with acquisitions in which the purchase price consists, in part, of VCA Common Stock (the "Guarantee Shares"), VCA often guarantees (the "Guarantee Right") that the value of such stock (the "Measurement Price") two to three years following the date of the acquisition (the "Guarantee Period") will equal or exceed the value of the stock on the date of acquisition (the "Issue Price"). In the event the Measurement Price does not equal or exceed the Issue Price, VCA typically is obligated either to (i) pay to the seller in cash, notes payable or additional shares of VCA Common Stock the difference between the Issue Price and the Measurement Price multiplied by the number of Guarantee Shares then held by the seller, or (ii) purchase the Guarantee Shares then held by the seller. Once the Guarantee Shares are registered for resale under the Act, which registration VCA covenants to effect generally within six months of issuance of the Guarantee Shares, the seller's Guarantee Right typically terminates if the VCA Common Stock trades at 110% to 120% of the Issue Price for five to 15 consecutive days, depending on the terms of the specific acquisition at issue. There are 285,444 Guarantee Shares outstanding at March 31, 1996 with Issue Prices ranging from $11.70 to $17.49 that have not been registered for resale. If the value of the VCA Common Stock decreases and is less than an Issue Price at the end of the respective Guarantee Period for these shares, VCA may be obligated to compensate these sellers. In connection with the Pet Practice merger, VCA will assume the Guarantee Rights issued by Pet Practice (which generally operate similarly to the Guarantee Rights issued by VCA, except that there is no provision for a release of the Guarantee Right). Giving effect to the terms of the Merger, the number of Guarantee Shares issued by Pet Practice is not material to the capitalization of the combined business. SEASONALITY AND FLUCTUATING QUARTERLY RESULTS A large portion of the businesses of VCA, Pet Practice and Pets' Rx is seasonal, with operating results varying substantially from quarter to quarter. Historically, VCA's revenues have been greater in the second and third quarters than in the first and fourth quarters. The demand for VCA's veterinary services are significantly higher during warmer months because pets spend a greater amount of time outdoors, where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of infestation of fleas, heartworms and ticks, and the number of daylight hours, as well as general economic conditions. A substantial portion of VCA's and the combined business' costs are fixed and do not vary with the level of demand. Consequently, net income for the second and third quarters at individual animal hospitals generally has been higher than that experienced in the first and fourth quarters. DEPENDENCE ON KEY MANAGEMENT VCA's and the combined business' success will continue to depend to a significant extent on VCA's executive officers and other key management, particularly its Chief Executive Officer, Robert L. Antin. VCA has an employment contract with Mr. Robert Antin, Mr. Arthur Antin, Chief Operating Officer of VCA, Mr. Neil Tauber, Senior Vice President of VCA, and Mr. Tomas Fuller, Chief Financial Officer of VCA, each of which expires in December 1998. VCA has no other written employment agreements with its executive officers. None of VCA's officers are parties to noncompetition covenants which extend beyond the term of their employment with VCA. VCA maintains "key man" life insurance on Mr. Robert Antin in the amount of $3.0 million, of which VCA is the sole beneficiary. VCA does not maintain any insurance on the lives of its other senior management. As VCA continues to grow, it will continue to hire, appoint or otherwise change senior managers and other 26 key executives. There can be no assurance that VCA will be able to retain its executive officers and key personnel or attract additional qualified members to management in the future. In addition, the success of certain of VCA's acquisitions may depend on VCA's ability to retain selling veterinarians of the acquired companies. The loss of services of any key manager or selling veterinarian could have a material adverse effect upon VCA's business. JOINT VENTURES VCA conducts a portion of its veterinary diagnostic laboratory business through a joint venture with Vet Research, Inc. ("VRI"), and conducts its pet food business through a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company. VCA has an option (the "VCA Option Agreement") in January 1997 to acquire the remaining 49 percent interest in the laboratory joint venture for $18.6 million in cash plus an additional amount based upon the earnings of the joint venture to be paid over six years. Based on current information available to it, VCA expects to exercise its purchase option in January 1997. If for any reason VCA does not exercise the option, VRI has the option to purchase from VCA its entire 51 percent interest for $3.5 million. On the earlier of a change in control of VCA or January 1, 2000, Heinz Pet Products has the option to purchase all of VCA's interest in the Vet's Choice joint venture at a purchase price equal to the fair market value of such interest. The proposed acquisition of Pet Practice will not result in a change in control for purposes of the Vet's Choice joint venture. There can be no assurance that VCA will not have to sell these joint venture interests. COMPETITION The companion animal health care industry is highly competitive and subject to continual change in the manner in which services are delivered and providers are selected. VCA believes that the primary competitive factors in connection with animal hospitals are convenient location, recommendation of friends, reasonable fees, quality of care and convenient hours. VCA's primary competitors for its animal hospitals in most markets are individual practitioners or small, regional multi-clinic practices. In addition, certain national companies in the pet care industry, including the operators of super- stores, are developing multi-regional networks of animal hospitals in markets which include VCA's animal hospitals. Among veterinary diagnostic laboratories, VCA believes that quality, price and the time required to report results are the major competitive factors. There are many clinical laboratory companies which provide a broad range of laboratory testing services in the same markets serviced by VCA. In addition, several national companies provide on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests. VCA's major competitors in the premium pet food industry are Hill's and Iams, both of which have extensive experience in the manufacture of premium pet food and possess research and development, marketing and financial resources far greater than that of Vet's Choice. GOVERNMENT REGULATION The laws of some states prohibit veterinarians from splitting fees with non-veterinarians and prohibit business corporations from providing veterinary services through the direct employment of veterinarians. These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. Although VCA and Pet Practice believe their respective operations as currently conducted are in material compliance with existing applicable laws, there can be no assurance that VCA's and Pet Practice's existing operational structure will not be successfully challenged in one or more states as constituting the unlicensed practice of veterinary medicine. Such a determination in a state could adversely affect the operations of VCA and the combined business through the assessment of fines or penalties against VCA or the combined business or the possible requirement of divestiture of VCA's operations in the state. In addition, there can be no assurance that state legislation or regulations will not change so as to restrict VCA's or, in the future, the combined business' existing operations or the expansion of such operations. ANTI-TAKEOVER EFFECT A number of provisions of VCA's Certificate of Incorporation and bylaws and certain Delaware laws and regulations relating to matters of corporate governance, certain rights of directors and the issuance of preferred stock without stockholder approval, may be deemed to have and may have the effect of making more difficult, and thereby discouraging, a merger, tender offer, proxy contest or assumption of control and change of incumbent management, even when stockholders other than VCA's principal stockholders consider such a transaction to be in their best interest. In addition, H.J. Heinz Company has an option to purchase VCA's interest in the Vet's Choice joint venture upon the occurrence of a change in control (as defined in the joint 27 venture agreement), which may have the same effect. Accordingly, stockholders may be deprived of an opportunity to sell their shares at a substantial premium over the market price of the shares. IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE Future sales by existing stockholders could adversely affect the prevailing market price of the VCA Common Stock. As of March 31, 1996, VCA had 12,873,129 shares of common stock outstanding, most of which are either freely tradeable in the public market without restriction or tradeable in accordance with Rule 144 under the Act. There are also 159,197 shares which VCA is obligated to issue in connection with certain acquisitions; 583,333 shares issuable upon conversion of outstanding preferred stock; 1,505,821 shares of VCA Common Stock issuable upon exercise of outstanding stock options; 1,607,983 shares of VCA Common Stock issuable upon exercise of outstanding warrants; and 6,635 shares issuable upon conversion of convertible notes. Shares may also be issued under price guarantees delivered in connection with acquisitions. These shares will be eligible for immediate sale upon issuance. In addition, if the Pets' Rx and the Pet Practice transactions are consummated, VCA will be obligated to issue an aggregate of approximately 801,000 shares (subject to adjustment) and approximately 3,273,000 shares (assuming the VCA Common Stock has an average price at that time of $26.375), respectively. In addition, on April 17, 1996, VCA issued $84.4 million of 5.25% convertible subordinated debentures which are convertible into 2,457,060 shares of VCA Common Stock at a rate of $34.35 per share. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the VCA Common Stock could be subject to significant fluctuations caused by variations in quarterly operating results, litigation involving VCA, announcements by VCA or its competitors, general conditions in the companion animal health care industry and other factors. The stock market in recent years has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of publicly traded companies. The broad fluctuations may adversely affect the market price of the VCA Common Stock. See "MARKET PRICE INFORMATION." 28 THE MEETINGS OF STOCKHOLDERS GENERAL This Joint Proxy Statement/Prospectus is being furnished to holders of VCA Common Stock in connection with the solicitation of proxies by the VCA Board for use at the VCA Annual Meeting to be held on July 19, 1996, at VCA's offices located at 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405, commencing at 10:00 a.m., local time, and at any adjournment or postponement thereof. This Joint Proxy Statement/Prospectus is also being furnished to holders of Pet Practice Common Stock in connection with the solicitation of proxies by the Pet Practice Board for use at the Pet Practice Special Meeting to be held on July 19, 1996 at the Park Ridge Hotel, 480 North Gulph Road, King of Prussia, Pennsylvania 19406, commencing at 2:00 p.m., local time, and at any adjournment or postponement thereof. This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are first being mailed to stockholders of VCA and Pet Practice on or about June __, 1996. MATTERS TO BE CONSIDERED AT THE MEETINGS VCA Annual Meeting. At the VCA Annual Meeting, holders of VCA Common Stock will consider and vote upon: (i) the issuance of shares of VCA Common Stock in exchange for shares of Pet Practice Common Stock pursuant to the Merger Agreement (the "Merger Proposal"); (ii) the election of two Class II Directors to the VCA Board (the "Director Proposal"); (iii) the amendment to VCA's Certificate of Incorporation to increase the number of authorized shares of VCA Common Stock from 30,000,000 to 75,000,000 and to increase the number of authorized shares of VCA Preferred Stock from 1,000,000 to 2,000,000 (the "Certificate Proposal"); (iv) the adoption of the VCA 1996 Stock Incentive Plan; (v) the adoption of the VCA 1996 Employee Stock Purchase Plan (collectively with the proposal set forth in clause (iv) above, the "Plan Proposals"); and (vi) such other matters as may properly be brought before the VCA Annual Meeting, or any postponements or adjournments of the VCA Annual Meeting. Pet Practice Special Meeting. At the Pet Practice Special Meeting, holders of Pet Practice Common Stock will consider and vote upon a proposal to approve and adopt the Merger Agreement and such other matters as may properly be brought before the Pet Practice Special Meeting, or any postponements or adjournments of the Pet Practice Special Meeting. Boards of Directors' Recommendations. THE VCA BOARD HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL, THE DIRECTOR PROPOSAL, THE CERTIFICATE PROPOSAL AND THE PLAN PROPOSALS AND RECOMMENDS A VOTE FOR APPROVAL OF SUCH PROPOSALS. THE PET PRACTICE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. 29 RECORD DATES; VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL VCA. The VCA Board has fixed the close of business on May 20, 1996, as the VCA Record Date. Only holders of record of shares of VCA Common Stock on the VCA Record Date are entitled to notice of and to vote at the VCA Annual Meeting. As of May 20, 1996, there were 13,179,882 shares of VCA Common Stock outstanding and entitled to vote held by approximately 356 stockholders of record. Each holder of record as of the VCA Record Date of VCA Common Stock is entitled to cast one vote per share. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of VCA Common Stock entitled to vote is necessary to constitute a quorum at the VCA Annual Meeting. The approval of the Certificate Proposal will require the affirmative vote of the holders of a majority of the outstanding shares of VCA Common Stock. Approval of the Director Proposal will require the affirmative vote of a plurality of the votes cast for the election of directors at the VCA Annual Meeting. The approval of the Merger Proposal and the Plan Proposals will require the affirmative vote of the holders of a majority of the shares of VCA Common Stock present at the VCA Annual Meeting and entitled to vote. The approval of the issuance of shares of VCA Common Stock pursuant to the Merger is required by the rules of the National Association of Securities Dealers, Inc. governing corporations with securities listed on the Nasdaq National Market. As of May 20, 1996, directors and executive officers of VCA, and their affiliates as a group beneficially owned 810,017 shares of VCA Common Stock (excluding shares subject to exercisable options), or approximately 6.1% of the shares of VCA Common Stock outstanding as of such date. Each of the directors and executive officers of VCA has advised VCA that he or she intends to vote or direct the vote of all shares of VCA Common Stock over which he or she has voting control for approval of the Merger Proposal, the Certificate Proposal, the Director Proposal and the Plan Proposals. As of May 20, 1996, Pet Practice owned no outstanding shares of VCA Common Stock. Pet Practice. The Pet Practice Board has fixed the close of business on May 20, 1996 as the Pet Practice Record Date. Only holders of record of shares of Pet Practice Common Stock on the Pet Practice Record Date are entitled to notice of and to vote at the Pet Practice Special Meeting. On May 20, 1996, there were 8,623,720 shares of Pet Practice Common Stock outstanding and entitled to vote at the Pet Practice Special Meeting held by approximately 68 stockholders of record. Each holder of record as of the Pet Practice Record Date of Pet Practice Common Stock is entitled to cast one vote per share. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Pet Practice Common Stock entitled to vote is necessary to constitute a quorum at the Pet Practice Special Meeting. Under the DGCL, the affirmative vote, in person or by proxy, of the holders of a majority of the shares of Pet Practice Common Stock outstanding on the Pet Practice Record Date and entitled to vote on the Merger and the Merger Agreement is required to approve and adopt the Merger and the Merger Agreement. In connection with the Merger Agreement, the Principal Stockholder, the holder of approximately 41.8% of the outstanding shares of Pet Practice Common Stock, has executed and delivered an irrevocable proxy (the "Proxy") to VCA to vote its shares in favor of the Merger. As of May 20, 1996, directors and executive officers of Pet Practice and their affiliates as a group beneficially owned approximately 3,901,567 shares of Pet Practice Common Stock (including the 3,600,000 shares beneficially owned by the Principal Stockholder which are subject to the Proxy, but excluding shares subject to exercisable options), or approximately 45.2% of the shares of Pet Practice Common Stock outstanding as of the Pet Practice Record Date. Each of the directors and executive officers of Pet Practice has advised Pet Practice that he or she intends to vote or direct the vote of all shares of Pet Practice Common stock over which he or she has voting control for approval and adoption of the Merger Agreement. As of May 20, 1996, VCA owned no outstanding shares of Pet Practice Common Stock. Effects of Abstentions and "Broker Non-Votes." At the VCA Annual Meeting, (i) in determining whether the Certificate Proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have the same effect as a vote against such Proposal; (ii) in determining whether the Director Proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have no effect on the outcome of the vote on the Director Proposal; and (iii) in 30 determining whether the Merger Proposal or a particular Plan Proposal has received the requisite number of affirmative votes, (a) abstentions will be counted and will have the same effect as a vote against such Proposal and (b) broker non-votes will have no effect on the outcome of the vote on such Proposal. At the Pet Practice Special Meeting, in determining whether the proposal to approve and adopt the Merger Agreement has received the requisite number of affirmative votes, abstentions and broker non-votes will have the same effect as a vote against such proposal. At both the VCA Annual Meeting and the Pet Practice Special Meeting, abstentions and broker non-votes will be counted for purposes of determining the presence or absence of a quorum. PROXIES This Joint Proxy Statement/Prospectus is being furnished to VCA and Pet Practice stockholders in connection with the solicitation of proxies by and on behalf of the VCA Board and the Pet Practice Board for use at the VCA Annual Meeting and the Pet Practice Special Meeting, respectively. All shares of VCA Common Stock and Pet Practice Common Stock which are entitled to vote and are represented at the relevant stockholder meeting by properly executed proxies received prior to or at the relevant stockholder meeting, and not revoked, will be voted at such stockholder meeting in accordance with the instructions indicated on such proxies. If no instructions are indicated (other than in the case of broker non-votes), such proxies will be voted: (i) in the case of the VCA Annual Meeting, for approval of the Merger Proposal, the Certificate Proposal, the Director Proposal and the Plan Proposals; and (ii) in the case of the Pet Practice Special Meeting, for approval and adoption of the Merger Agreement. Proxies may be delivered by United States mail or courier service, in the case of VCA stockholders, to Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 or by facsimile to (212) 509-5150 and in the case of Pet Practice stockholders, to American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 or by facsimile to (718) 921- 8331. If any other matters are properly presented at the stockholder meetings for consideration, including, among other things, consideration of a motion to adjourn either stockholder meeting to another time and/or place (including, without limitation, for the purpose of soliciting additional proxies), the persons named in the enclosed forms of proxy and acting thereunder will have discretion to vote on such matters in accordance with their best judgment. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Secretary of VCA or Pet Practice, as the case may be, c/o Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 (or if by facsimile, to (212) 509-5150) or c/o American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 or by facsimile to (718) 921-8331, respectively, at or before the taking of the vote at the relevant stockholder meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later dated proxy relating to the same shares and delivering it to the Secretary of VCA or Pet Practice, as the case may be, c/o Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 (or if by facsimile, to (212) 509-5150) or c/o American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 (or by facsimile to (718) 921-8331), respectively, before the taking of the vote at the relevant stockholder meeting or (iii) attending a stockholder meeting and voting in person (although attendance at a stockholder meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent so as to be delivered in the case of VCA stockholders, to Secretary, Veterinary Centers of America, Inc., c/o Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 (or if by facsimile, to (212) 509-5150), and in the case of Pet Practice stockholders, to Secretary, The Pet Practice, Inc., c/o American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 or by facsimile to (718) 921-8331, at or before the taking of the vote at the relevant stockholder meeting. 31 NO DISSENTERS' RIGHTS No holder of Pet Practice Common Stock will have any dissenters' rights in connection with, or as a result of, the matters to be acted upon at the Pet Practice Special Meeting. PROXY SOLICITATION All expenses of this solicitation, including the cost of preparing and mailing this Joint Proxy Statement/Prospectus will be borne by VCA and Pet Practice. In addition to solicitation by mail, proxies may be solicited in person by directors, officers and employees of VCA or Pet Practice or by telephone, telegram, facsimile or other means of communication. Such directors, officers or employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses incurred in connection with such solicitation. Arrangements will be made with brokerage houses and other custodians, nominees and fiduciaries to send proxy material to beneficial owners; and VCA or Pet Practice, as the case may be, will, upon request, reimburse them for their reasonable expenses in so doing. VCA and Pet Practice each have retained Georgeson & Company Inc. to aid in the solicitation of proxies at a fee in the aggregate of approximately $11,000 plus expenses. To the extent necessary in order to ensure sufficient representation at the VCA Annual Meeting or the Pet Practice Special Meeting, VCA or Pet Practice, as the case may be, may request by telephone or telegram the return of proxies. The extent to which this will be necessary depends entirely upon how promptly proxies are returned. HOLDERS OF PET PRACTICE COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING PET PRACTICE COMMON STOCK WITH THE ENCLOSED PROXY CARD. IF THE TRANSACTION IS APPROVED, A LETTER OF TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING SHARES OF PET PRACTICE COMMON STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. PET PRACTICE STOCKHOLDERS SHOULD SEND CERTIFICATES REPRESENTING PET PRACTICE COMMON STOCK TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH THE INSTRUCTIONS CONTAINED IN, THE LETTER OF TRANSMITTAL. THE MERGER This section of the Joint Proxy Statement/Prospectus describes certain of the more important aspects of the Merger. The following description does not purport to be complete and the reader is encouraged to review the entire Merger Agreement, a copy of which is set forth in Appendix A to this Joint Proxy -------- - Statement/Prospectus, and the other Appendices to this Joint Proxy Statement/Prospectus, all of which are incorporated herein by this reference. BACKGROUND OF THE MERGER VCA has been one of the premier owners and operators of animal hospitals in the United States for several years. Pet Practice has also been a premier owner-operator of animal hospitals in the United States for over two years. Both companies have been engaged in a business strategy emphasizing growth by acquisition and consolidation of the industry. The possibility of a strategic combination was first raised in general terms in several conversations in January 1996 between senior executives of VCA and Pet Practice at a professional veterinary conference they were both attending. Following this conversation, the senior management teams of both companies began exploring the feasibility of a strategic business combination. On January 22, 1996, as part of a regularly scheduled VCA board meeting, the management of VCA made an initial presentation on the considerations regarding, and received the questions and comments of the VCA Board with respect to, a possible combination with Pet Practice, including (i) a preliminary analysis of the strategic factors associated with a possible strategic business combination, (ii) a preliminary comparative review of VCA's and Pet Practice's market capitalization, revenues, earnings, and margins, and (iii) a preliminary presentation regarding each companies' respective positioning in their respective market places. The VCA Board authorized and instructed management to explore the possibility of combining VCA with Pet Practice and to continue discussions with representatives of Pet Practice. Also, during this period, VCA had been considering a concurrent, but unrelated, acquisition of Pets' Rx. Discussions between representatives of VCA and representatives of Pets' Rx continued through February 27, 1996, at which time an 32 Agreement and Plan of Reorganization was entered into between VCA and Pets' Rx. On April 11, 1996, May 23, 1996 and June 7, 1996, the Agreement and Plan of Reorganization was amended in a writing signed by representatives of both VCA and Pets' Rx. The closing of the merger between VCA and Pets' Rx is not conditioned upon the consummation of the Merger with Pet Practice and the closing of the Merger between VCA and Pet Practice is not conditioned upon the consummation of the merger between VCA and Pets' Rx. There were ongoing discussions between Pet Practice management and members of the Pet Practice Board from time to time in late January 1996 about a possible business combination with VCA. On January 28, 1996 and during the following week, Robert L. Antin, Chief Executive Officer of VCA, and Mr. Nagy as well as Peter J. Cohen, President and Chief Executive Officer of Pet Practice, had various telephone conversations during which they each expressed their interest in pursuing exploratory discussions regarding a proposed transaction. On February 5, 1996, VCA and Pet Practice executed a non-disclosure agreement providing for the exchange of non-public information. On February 6, 1996, as part of a regularly scheduled meeting of the Pet Practice Board which convened telephonically, Mr. Nagy, Chairman of the Pet Practice Board, made an initial presentation to the Pet Practice Board regarding, and received the questions and comments of the Pet Practice Board with respect to, a possible combination with VCA. The Pet Practice Board authorized Mr. Nagy and other members of Pet Practice's management to pursue discussions with VCA with respect to a possible combination. On February 14, 1996, several senior executives of VCA met with senior executives of Pet Practice in Los Angeles, California. Discussions at this meeting focused on long-term business and market strategies and possible synergies that could be realized through a business combination. From February 14, 1996 through February 28, 1996, representatives of VCA and Pet Practice and their respective counsel and financial advisors conducted preliminary business, legal and financial due diligence regarding a proposed Merger. On February 28, 1996, senior executives of VCA and senior executives of Pet Practice and their respective counsel and financial advisors, met in New York City to discuss preliminarily the basis upon which a possible strategic business combination might be possible and to discuss the organizational, operational and financial issues attendant thereto. Between February 28, 1996 and March 21, 1996, VCA's and Pet Practice's legal counsel and executive officers had further discussions regarding the terms of a proposed Merger Agreement and related documents, VCA's and Pet Practice's financial advisors had further discussions regarding valuation issues relevant to negotiation of a mutually acceptable Exchange Ratio, and VCA and Pet Practice, and their respective counsel, accountants and financial advisors conducted business, legal and financial due diligence and exchanged draft Merger Agreements. The Exchange Ratio was determined by negotiation between the representatives of VCA and Pet Practice and not by any third party. During this same period, there were numerous discussions between Mr. Nagy and the members of the Pet Practice Board on an individual basis concerning the status of the ongoing negotiations with VCA and the terms of the draft Merger Agreement and the proposed Exchange Ratio. Throughout this period, the Pet Practice Board instructed Mr. Nagy that it was reasonable and appropriate for Pet Practice management to proceed with negotiations. On March 18, 1996, the VCA Board met and heard presentations from management and from its financial and legal advisors concerning the ongoing negotiations with Pet Practice. VCA's financial advisor presented a preliminary evaluation of the proposed Exchange Ratio and the draft Merger Agreement and the VCA Board discussed various factors and alternatives to the proposed Merger. The VCA Board reviewed the terms of the draft Merger Agreement and related valuation issues. The VCA Board concluded that it was reasonable and appropriate for the officers to proceed with negotiations. Negotiations regarding the terms of the proposed Merger Agreement were held in separate sessions between March 18, 1996 and March 21, 1996. On March 21, 1996, VCA and Pet Practice reached preliminary agreement with one another on the terms of the proposed Merger Agreement, including the Exchange Ratio, subject to the approval of the respective boards of directors. The Merger was unanimously approved at a special meeting of the VCA Board held on March 21, 1996 at 7:00 p.m., Pacific Standard Time, at the executive offices of VCA. At that meeting, NatWest reviewed in detail its financial analysis of the proposed Merger. The VCA Board received a written opinion from NatWest that, as of March 21, 1996 and based upon 33 and subject to certain matters stated therein, the consideration to be paid by VCA pursuant to the Merger Agreement is fair to VCA from a financial point of view. The VCA Board reviewed and fully discussed the terms of the Merger Agreement and then unanimously approved the Merger Agreement and the Merger. On March 21, 1996 at 6:00 p.m., Eastern Standard Time, a special meeting of the Pet Practice Board was held in New York at the offices of Haythe & Curley, Pet Practice's legal advisors. At the meeting, Mr. Nagy made a brief address to the Pet Practice Board in which he reiterated his views of the strategic advantages and business fit of the proposed combination previously discussed on an individual basis with the members of the Pet Practice Board. Smith Barney then made a presentation to the Pet Practice Board of its financial analysis and rendered to the Pet Practice Board its oral opinion (which opinion was subsequently confirmed by delivery of a written opinion dated March 21, 1996) to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the Exchange Ratio was fair, from a financial point of view, to the holders of Pet Practice Common Stock. (See "Opinions of Financial Advisors--Pet Practice.") Pet Practice's legal advisors reviewed various legal considerations with the Pet Practice Board as well as the significant provisions of the Merger Agreement. The Pet Practice Board voted unanimously to approve and adopt the Merger and the Merger Agreement and to recommend that the Pet Practice stockholders vote in favor of the Merger and approve and adopt the Merger Agreement. On the evening of March 21, 1996, VCA and Pet Practice executed and delivered the Merger Agreement. The Merger Agreement was announced by the issuance of a joint press release at 7:30 a.m., New York time, on March 22, 1996. VCA'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE VCA BOARD The VCA Board has unanimously approved the Merger and determined that the Merger is advisable and fair and in the best interests of VCA and its stockholders. The VCA Board unanimously recommends to the VCA stockholders that they vote FOR the approval and the adoption of the Merger Proposal. The VCA Board believes that the Merger will enhance VCA's position as the leading animal health care company in the United States. Upon consummation of the Merger, the combined business will have over 145 animal hospitals making it the largest chain of animal hospitals in the United States. The combined business will be further enhanced by the consummation of the merger with Pets' Rx, which will increase the size of the VCA chain to in excess of 160 animal hospitals. The Merger also will accelerate the expansion of VCA's hospital operations into several new markets and strengthen VCA's position in the Chicago, Boston and Florida areas and the mid-Atlantic states. The combined business' animal hospital operations will extend to 20 states located in each region of the country. The VCA Board also considered the positive effect on VCA's complementary businesses, veterinary laboratory services and the marketing and distribution of premium pet food. The expanded veterinary hospital operations provide the combined business new markets for its laboratory services and pet food and provide a basis for expansion into additional geographic regions. The Merger also provides the combined business with significant opportunities to realize the efficiencies and synergies available by operating with one corporate overhead. VCA believes that it can realize significant cost savings in the combination of the two companies, particularly in the areas of purchasing (both medical supplies and office supplies), insurance, communications and other administrative expense. VCA believes economies can also be realized in such areas as marketing, advertising, training and continuing education. The VCA Board also considered negative factors relating to the Merger, including (i) the risks that the benefits sought in the Merger would not be fully achieved, (ii) the risk that the Merger would not be consummated, and the effect of the public announcement of the Merger on VCA's sales and operating results, (iii) the risks attendant to the integration of the two companies and possibly a third company, Pets' Rx, and (iv) the other risks described above under "RISK FACTORS." The VCA Board believes that these risks were outweighed by the potential benefits to be gained by the Merger. In the course of its deliberations during board meetings held on January 22, 1996, March 18, 1996 and March 21, 1996, the VCA Board reviewed with VCA management a number of factors relevant to the Merger, including the strategic overview and prospects for VCA. The VCA Board also considered among other factors (i) information concerning VCA's and Pet Practice's respective businesses, prospects, financial performance and condition, operations, management and competitive position; (ii) the financial condition, results of operations and businesses of VCA and Pet Practice before, and after, giving effect to the Merger; and (iii) current financial market conditions and historical market prices, volatility and trading information with 34 respect to the VCA Common Stock and the Pet Practice Common Stock. In addition, the directors reviewed the consideration to be issued to Pet Practice's stockholders in the Merger and the principal terms of the Merger Agreement and related agreements. The VCA Board considered the financial analyses prepared by NatWest, including the written opinion of NatWest delivered at the March 21, 1996 meeting of the VCA Board, to the effect that, as of such date and based upon and subject to certain matters stated therein, the consideration to be paid by VCA pursuant to the Merger Agreement is fair to VCA from a financial point of view. The VCA Board also took into account that VCA would be the surviving corporation and its board of directors and officers would continue as senior management of the combined business. In view of the wide variety of factors, both positive and negative, considered by the VCA Board, the VCA Board did not find it practical to, and did not, quantify or otherwise assign relative weights to the specific factors considered. THE VCA BOARD UNANIMOUSLY RECOMMENDS THAT VCA STOCKHOLDERS VOTE TO APPROVE THE MERGER PROPOSAL. 35 PET PRACTICE'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE PET PRACTICE BOARD THE PET PRACTICE BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AND THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT PET PRACTICE STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AND THE MERGER AGREEMENT. Prior to taking action on the Merger, the Pet Practice Board reviewed a draft of the Merger Agreement and received presentations from, and reviewed the terms and conditions of the transactions contemplated by the Merger Agreement with, Pet Practice management and Pet Practice's legal and financial advisors. The Pet Practice Board considered a number of factors in reaching the recommendations described above. The factors considered favorably by the Pet Practice Board include the following: i) the opportunity for Pet Practice stockholders to receive an equity interest in a larger, financially stronger, veterinary services company and the prospects for that combined company; ii) the financial condition, results of operations and prospects of Pet Practice as an independent public company, including the dependency of a portion of Pet Practice's projected future growth on effecting the acquisition of a substantial number of veterinary hospitals each year and the constraints on its ability to finance that growth, including the dilutive impact of additional equity financing; iii) the similar cultures and strategies of Pet Practice's and VCA's management; iv) the financial condition, results of operations and prospects of VCA; v) the synergies created by combining the management systems possessed by each of VCA and Pet Practice, which would create a more highly developed infrastructure than on a stand-alone basis without having to incur costs and management time to duplicate, and which could be utilized without significant additional development expense; vi) the combined benefits from VCA's and Pet Practice's pooling of their experienced managers to assist in managing their projected rapid growth, as well as the significant number of veterinarians in the combined network, and their recruitment capabilities, which could help service their recruitment needs; vii) the ability to provide enhanced levels of care by offering a more comprehensive range of veterinary services through a combination of the various operations of the two companies; viii) recent and historical market prices of Pet Practice Common Stock and VCA Common Stock; ix) based upon the market prices of Pet Practice Common Stock and VCA Common Stock at the close of business on March 21, 1996, Pet Practice stockholders would receive a premium in excess of 12.67% over the then closing sale price of Pet Practice Common Stock of $8.875 per share; x) the oral opinion of Smith Barney (which opinion was subsequently confirmed by delivery of a written opinion dated March 21, 1996) to the effect that, as of the date of such opinion and based upon and subject to certain matters stated in such opinion, the Exchange Ratio was fair, from a financial point of view, to the holders of Pet Practice Common Stock; xi) the tax-free nature of the proposed transaction; and xii) the negotiations regarding the Merger and the Merger Agreement. In evaluating VCA and its business, the Pet Practice Board also considered the following factors to be generally negative: 36 (i) the value placed on the Pet Practice Common Stock implicit in the proposed Exchange Ratio compared with the initial public offering price of Pet Practice Common Stock; and (ii) the risks attendant to the integration of the two companies. The members of the Pet Practice Board evaluated the factors listed above in light of their knowledge of the business and operations of Pet Practice and their business judgment. In view of the variety of factors considered in connection with their respective evaluations of the transaction, the Pet Practice Board found it impracticable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in its determination. However, the Pet Practice Board placed special emphasis on the complementary strengths of the Pet Practice and VCA and the potential for revenue and profit enhancing synergies to result from a combination, the prospects for the Pet Practice remaining as an independent public company and its ability to sustain revenue and earnings growth, and the opportunity provided by the Merger for Pet Practice stockholders to maintain, on a tax-free basis, an equity interest in a combined enterprise that has greater assets and financial resources, a more diversified position in the veterinary services industry and for which there will be a larger public market with respect to its common stock than, in each case, currently exists for Pet Practice. THE PET PRACTICE BOARD UNANIMOUSLY RECOMMENDS THAT PET PRACTICE STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER AGREEMENT. OPINIONS OF FINANCIAL ADVISORS VCA VCA engaged NatWest to render financial advisory services and to render a written opinion (the "Fairness Opinion") as to the fairness, from a financial point of view, to VCA, of the consideration to be paid in the Merger. NatWest is an internationally recognized investment banking firm with experience in the valuation of businesses and their securities in connection with mergers, acquisitions, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. VCA selected NatWest to be its financial advisor in this transaction because of NatWest's significant experience in providing investment banking services to companies in the health care industry. NatWest rendered the Fairness Opinion on March 21, 1996 to the effect that, as of such date and based upon and subject to certain matters set forth therein, the consideration to be paid by VCA pursuant to the Merger Agreement is fair to VCA from a financial point of view. NatWest's opinion does not address any other aspect of the Merger or the related transactions and does not constitute a recommendation to any stockholder as to how such stockholder should vote at the VCA Annual Meeting. The scope of NatWest's engagement and NatWest's review of the transaction was limited as set forth in the Fairness Opinion. The complete text of the Fairness Opinion is included as Appendix B to this Joint -------- - Proxy Statement/Prospectus and is incorporated herein by reference. Stockholders of VCA are urged to read in its entirety the Fairness Opinion, which sets forth the assumptions made and matters considered by NatWest. Upon consummation of the Merger, VCA will pay NatWest a fee (the "Success Fee") for its services equal to 1.1% of the consideration to be paid by VCA in the Merger. VCA agreed to pay NatWest a fee of $200,000 (the "Fairness Opinion Fee") upon delivery of the Fairness Opinion. The Fairness Opinion Fee shall be credited against the Success Fee. NatWest shall bear the out-of-pocket expenses incurred by it in connection with its engagement, including all fees and expenses of its counsel. VCA has agreed to indemnify NatWest against certain expenses and liabilities in connection with its engagement. In arriving at the Fairness Opinion, and as the basis therefor, NatWest, among other things, (i) reviewed the Merger Agreement; (ii) reviewed historical financial and operating data of VCA and Pet Practice; (iii) reviewed financial and operating forecasts with respect to Pet Practice provided to NatWest by management representatives of VCA; (iv) considered public information of selected comparable companies, and compared Pet Practice, from a financial point of view, with such companies; (v) considered the terms, to the extent publicly available, of selected transactions comparable to the Merger and compared the 37 consideration to be paid by VCA with the consideration involved in such transactions; (vi) reviewed market price data and trading activities for VCA's and Pet Practice's Common Stock; and (vii) conducted such other financial studies, analysis and investigations as NatWest deemed appropriate. NatWest also held discussions with management representatives and representatives of the independent accountants of VCA and Pet Practice concerning the business and prospects of Pet Practice and the strategic and operating benefits anticipated by VCA to be derived from the Merger. NatWest was not engaged to verify independently the accuracy or completeness of any information which it reviewed in arriving at the Fairness Opinion, and in rendering such opinion it relied on the accuracy and completeness of all such information without independent verification. With respect to the financial and operating forecasts provided to it, NatWest assumed, with the VCA Board's approval, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of VCA as to the future financial and operating performance of Pet Practice, consistent with historical data. NatWest also assumed, with the VCA Board's approval, that a reasonable likelihood exists that the strategic and operating benefits anticipated by VCA to be derived from the Merger will be realized. NatWest was not engaged to conduct a physical inspection of any properties or make an independent valuation or appraisal of the assets or liabilities, including any contingent liabilities, of Pet Practice, nor were any such valuations or appraisals furnished to NatWest. NatWest was not engaged to review any legal, accounting or tax aspects of the Merger. The Fairness Opinion is based upon economic, monetary, regulatory and market conditions existing on the date of such opinion. No limitations were imposed by VCA on NatWest with respect to the investigation made or procedures followed by NatWest. NatWest calculated the total value of the consideration to be paid by VCA pursuant to the Merger Agreement to be $86 million, based upon the closing price of the VCA Common Stock of $25.75 on March 21, 1996. The following paragraphs summarize the significant qualitative and quantitative analyses performed by NatWest in arriving at its opinion. In its analysis, NatWest made numerous assumptions with respect to VCA, Pet Practice, general business, economic, market and financial conditions, industry performance and other matters, many of which are beyond the control of the parties to the Merger. The Fairness Opinion and the financial analyses performed by NatWest were only one of several factors considered by the VCA Board in its evaluation of the Merger, and they should not be viewed as determinative of the VCA Board's or VCA management's views with respect to the consideration to be paid by VCA in the proposed Merger. Strategic Considerations. In reaching its opinion as to the fairness of the consideration to be paid by VCA, NatWest considered the strategic and operating benefits anticipated by VCA to be realized from the Merger, and assumed, with the approval of the VCA Board, that a reasonable likelihood exists that such benefits will be realized. Such anticipated benefits include the enhancement of VCA's position as the leading animal health care company in the United States, the combined business having over 145 animal hospitals and being the largest chain of animal hospitals in the United States; the expansion of VCA's hospital operations into several new markets and the strengthening of VCA's position in the Chicago, Boston and Florida areas and the mid-Atlantic states; the positive effect on VCA's complementary businesses, veterinary laboratory services and the marketing and distribution of premium pet food; and the significant opportunities to realize the efficiencies and synergies available by operating with one corporate overhead. NatWest was unable to, and did not, quantify the extent of such anticipated benefits. Comparable Company Trading Multiple Analysis. NatWest used VCA's adjusted forecasts of Pet Practice's profitability in 1996 and 1997 to derive implied purchase price multiples and compared those multiples to the trading multiples of selected publicly traded companies. The selected companies were divided into two (2) groups: a "Physician Practice Peer Group" of companies, which consisted of Apogee, Inc., EMCR Holdings, Inc., FPA Medical Management, Inc., MedCath, Inc., MedPartners, Inc., NovaCare, Inc., Occusystems, Inc., Orthodontic Centers of America, Inc., Pediatric Services of America, Inc. and Physicians Resource Group, Inc.; and a "Pet Products Peer Group" of companies, which consisted of Petco Animal Supplies, Inc. and PETsMART, Inc. The Physician Practice Peer Group and the Pet Products Peer Group are referred to herein as, the "Comparable Companies." NatWest believes that the Comparable Companies are comparable in certain respects to Pet Practice, although none of them is, of course, identical to Pet Practice. Accordingly, a complete analysis of the results of the calculations performed by NatWest cannot be limited to a quantitative review of such results and involves considerations and judgments concerning differences in financial and operating characteristics of the Comparable Companies and other factors that could affect the public trading value of the Comparable Companies. In addition, the 1996 and 1997 earnings per share ("EPS") estimates for the Comparable Companies are based on projections prepared by research analysts using only publicly available information. Accordingly, such estimates may or may not prove to be accurate. 38 For the Comparable Companies, NatWest examined certain financial data that was publicly available, including the last 12 months ("LTM") revenues, LTM earnings before interest, taxes, depreciation and amortization ("EBITDA"), LTM earnings before interest and taxes ("EBIT") and LTM EPS. In view of the 1995 net loss sustained by Pet Practice, however, comparable LTM financial data for Pet Practice did not exist. NatWest examined calendar year 1996 and 1997 analysts' projections of EPS for the Comparable Companies published by First Call (an on-line data service which compiles estimates developed by research analysts) and the per share closing stock prices of the Comparable Companies on March 20, 1996. Using this data, NatWest calculated the price/earnings multiples for the respective Peer Groups based on 1996 and 1997 EPS estimates for each of the Comparable Companies. NatWest observed that Pet Practice was projected to be only slightly profitable in 1996 using VCA's adjusted forecast figures. Using the data for 1997, the Physician Practice Peer Group trading multiples of projected EPS were as follows: the multiples ranged from 11.7x to 35.5x with a mean of 23.4x and a median of 24.4x. The Pet Products Peer Group trading multiples ranged from 29.2x to 30.1x with the mean and median both being 29.7x. NatWest used two scenarios provided by VCA of Pet Practice's adjusted forecast 1997 financial performance to derive an implied purchase price multiple. The first case assumed 1997 Pet Practice earnings of approximately $3.56 million and the more conservative second case assumed 1997 Pet Practice earnings of $2.72 million. These two cases yielded implied Pet Practice purchase price multiples of 1997 earnings of 24.2x and 31.6x, respectively. Comparable Transaction Analysis. NatWest considered the terms, to the extent publicly available, of selected transactions comparable to the Merger and sought to compare the consideration to be paid by VCA with the consideration involved in such transactions. In view of the 1995 net loss sustained by Pet Practice, there was no basis for the comparison of transaction multiples. NatWest reviewed and analyzed the premiums paid per share above market value in selected merger and acquisition transactions in the health care industry (collectively, the "Comparable Transactions") and compared these premiums paid to the premium to be paid for Pet Practice implied by an assumed equity value of $10.00 per share of Pet Practice Common Stock. For purposes of the following calculations, market value equals the per share closing stock price as of the relevant measuring date. The Comparable Transactions and the dates they were announced were as follows: HealthSouth Corporation acquisition of Advantage Health Corporation (December 1995); MedPartners/Mullikin, Inc. acquisition of Pacific Physician Services, Inc. (December 1995); Living Centers of America, Inc. acquisition of Rehability Corporation (April 1995); HealthSouth Corporation acquisition of ReLife, Inc. (September 1994); NovaCare, Inc. acquisition of RehabClinics, Inc. (October 1993); NovaCare, Inc. acquisition of Rehab Systems Company (June 1991). NatWest analyzed the premiums paid in these transactions at three different times prior to the public announcement of the transactions. As of the date four (4) weeks prior to announcement of the acquisitions, the premiums paid above market value ranged from 16.9% to 91.9% with a mean of 48.2% and a median of 42.8%. As of the date one week prior to public announcement of the acquisitions, the premiums paid above market value ranged from 15.4% to 87.6% with a mean of 39.5% and a median of 34.8%. As of the date one day prior to public announcement of the acquisitions, the premiums paid above market value ranged from 12.2% to 74.4% with a mean of 33.4% and a median of 31.1%. No company, transaction or business used in the "Comparable Company Trading Multiple Analysis" or the "Comparable Transaction Analysis" as a comparison is identical to VCA, Pet Practice or the Merger. Accordingly, an analysis of the foregoing results is not solely mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the Comparable Companies, Comparable Transactions or the business segment, company or transactions to which they are being compared. Pro Forma Merger Analysis. NatWest analyzed the financial impact resulting exclusively from the Merger on the pro forma combined company's EPS for 1996 and 1997 based on forecasts provided by VCA and compared the pro forma EPS with VCA's EPS as projected by various research analysts. NatWest considered the pro forma merger analysis to be relevant to its fairness determination because, among other things, such analysis estimated the extent to which the transaction could be accretive or dilutive to the existing stockholders of VCA. This analysis indicated that in 1996 the pro forma impact of the Merger could be dilutive. The analysis further indicated that in 1997 the pro forma impact of the Merger could be accretive. Using the first 39 scenario provided by VCA of Pet Practice's adjusted forecast 1997 earnings of approximately $3.56 million, the impact of the Merger also could be accretive. Using the more conservative second case provided by VCA of Pet Practice's adjusted forecast 1997 earnings of approximately $2.72 million, the impact of the Merger could be accretive. The results of the pro forma merger analysis are not necessarily indicative of future operating results or financial position and variations could be material. Contribution Analysis. NatWest analyzed, among other things, the respective contributions of VCA and Pet Practice to the estimated revenue, EBITDA, EBIT and net income of the combined company for the years 1995 through 1997. This analysis indicated that in the years 1995 through 1997, VCA would contribute approximately 69.4%, 70.8% and 70%, respectively, of revenue, 96%, 84.2% and 79.7%, respectively, of EBITDA, 100%, 89.9% and 82.7%, respectively, of EBIT and 100%, 96.1% and 85.5%, respectively, of net income, and Pet Practice would contribute approximately 30.6%, 29.2% and 30%, respectively, of revenue, 4%, 15.8% and 20.3%, respectively, of EBITDA, 0%, 10.1% 17.3%, respectively, of EBIT and 0%, 3.9% and 14.5%, respectively, of net income of the combined company. Immediately following consummation of the Merger, stockholders of VCA and Pet Practice would own approximately 80.1% and 19.9%, respectively, of the combined company. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, NatWest did not attribute any particular weight to any analysis or factor considered by it described above. Subject to the matters set forth in the Fairness Opinion, the judgments made by NatWest as to its analyses and the factors considered by it caused NatWest to be of the opinion that the consideration payable by VCA in the Merger, having a value of $86 million, based on the $25.75 closing price of the VCA Common Stock on March 21, 1996, is fair, from a financial point of view, to VCA. NatWest believes that its analyses must be considered as a whole and that considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth herein. Estimated values do not purport to be appraisals or to reflect the prices at which businesses or companies may be sold in the future and such estimates are inherently subject to uncertainty. NatWest has performed investment banking and financial advisory services for VCA from time to time, for which it has received customary compensation. In the ordinary course of business, NatWest's affiliates actively trade the securities of VCA and Pet Practice for their own account and the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. NatWest may provide investment banking and financial advisory services to VCA in the future. See Appendix B, "Opinion of National Westminster Bank PLC." It is not -------- - currently contemplated that such opinion will be updated. Pet Practice Smith Barney was retained by Pet Practice to act as its financial advisor in connection with the Merger. In connection with such engagement, Pet Practice requested that Smith Barney evaluate the fairness, from a financial point of view, to the holders of Pet Practice Common Stock of the consideration to be received by such holders in the Merger. On March 21, 1996, at a meeting of the Pet Practice Board held to evaluate the proposed Merger, Smith Barney delivered an oral opinion (subsequently confirmed by delivery of a written opinion dated such date) to the Pet Practice Board to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the Exchange Ratio was fair, from a financial point of view, to the holders of Pet Practice Common Stock. In arriving at its opinion, Smith Barney reviewed the Merger Agreement and held discussions with certain senior officers, directors and other representatives and advisors of Pet Practice and certain senior officers and other representatives and advisors of VCA concerning the businesses, operations and prospects of Pet Practice and VCA. Smith Barney examined certain publicly available business and financial information relating to Pet Practice and VCA as well as certain financial forecasts and other data for Pet Practice and VCA which were provided to Smith Barney by or otherwise discussed with the respective managements of Pet Practice and VCA, including information relating to certain strategic implications and operational 40 benefits anticipated to result from the Merger. Smith Barney reviewed the financial terms of the Merger as set forth in the Merger Agreement in relation to, among other things: current and historical market prices and trading volumes of Pet Practice Common Stock and VCA Common Stock; the respective companies' historical and projected earnings and operating data; and the capitalization and financial condition of Pet Practice and VCA. Smith Barney also considered, to the extent publicly available, the financial terms of certain other similar transactions recently effected which Smith Barney considered relevant in evaluating the Merger and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations Smith Barney considered relevant in evaluating those of Pet Practice and VCA. Smith Barney also evaluated the potential pro forma financial impact of the Merger on VCA. In addition to the foregoing, Smith Barney conducted such other analyses and examinations and considered such other financial, economic and market criteria as Smith Barney deemed appropriate in arriving at its opinion. Smith Barney noted that its opinion was necessarily based upon information available, and financial, stock market and other conditions and circumstances existing and disclosed, to Smith Barney as of the date of its opinion. In rendering its opinion, Smith Barney assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to or otherwise reviewed by or discussed with Smith Barney. With respect to financial forecasts and other information and data furnished to or otherwise reviewed by or discussed with Smith Barney, the respective managements of Pet Practice and VCA advised Smith Barney that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of Pet Practice and VCA as to the future financial performance of Pet Practice and VCA and the strategic implications and operational benefits anticipated to result from the Merger. Smith Barney assumed, with the consent of the Pet Practice Board, that the Merger will be treated as a tax-free reorganization for federal income tax purposes. Smith Barney's opinion, as set forth therein, relates to the relative values of Pet Practice and VCA. Smith Barney did not express any opinion as to what the value of the VCA Common Stock actually will be when issued to Pet Practice stockholders pursuant to the Merger or the price at which the VCA Common Stock will trade subsequent to the Merger. Smith Barney did not make and was not provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Pet Practice or VCA nor did Smith Barney make any physical inspection of the properties or assets of Pet Practice or VCA. Smith Barney was not asked to consider, and its opinion does not address, the relative merits of the Merger as compared to any alternative business strategies that might exist for Pet Practice or the effect of any other transaction in which Pet Practice might engage. Although Smith Barney evaluated the Exchange Ratio from a financial point of view, Smith Barney was not asked to and did not recommend the specific consideration payable in the Merger, which consideration was determined by Pet Practice and VCA through negotiation. No other limitations were imposed by Pet Practice on Smith Barney with respect to the investigations made or procedures followed by Smith Barney in rendering its opinion. It is not currently contemplated that such opinion will be updated. THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED MARCH 21, 1996, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED -------- - HEREIN BY REFERENCE. HOLDERS OF PET PRACTICE COMMON STOCK ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE PET PRACTICE SPECIAL MEETING. In preparing its opinion, Smith Barney performed a variety of financial and comparative analyses, including those described below. The summary of such analyses does not purport to be a complete description of the analyses underlying Smith Barney's opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, Smith Barney believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and its opinion. In its analyses, Smith Barney made numerous assumptions with respect to Pet Practice, VCA, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Pet Practice and VCA. The estimates contained in such analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be 41 significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. Smith Barney's opinion and financial analyses were only one of many factors considered by the Pet Practice Board in its evaluation of the Merger and should not be viewed as determinative of the views of the Pet Practice Board or management with respect to the Exchange Ratio or the proposed Merger. Selected Company Analysis. Using publicly available information, Smith Barney analyzed, among other things, the market values and trading multiples of Pet Practice and the following selected companies in the pet care industry: VCA, PETsMART, Inc. and Petco Animal Supplies, Inc. (the "Selected Companies"), and compared these multiples with the multiples implied for Pet Practice by the Exchange Ratio. Smith Barney compared market values as multiples of, among other things, estimated calendar 1996 and 1997 net income, and adjusted market values (market value, plus total debt, less cash) as multiples of, among other things, latest 12 months net revenue. Net income projections for the Selected Companies were based on estimates of selected investment banking firms and net income projections for Pet Practice and VCA were based on estimates of selected investment banking firms and internal estimates of the managements of Pet Practice and VCA. All multiples were based on closing stock prices as of March 20, 1996 (the last trading day prior to the execution of the Merger Agreement). Applying representative multiples for the Selected Companies of estimated calendar 1996 and 1997 net income of 39.4x to 48.3x and 31.0x to 34.3x, respectively, and latest 12 months revenue of 1.6x to 3.1x, this analysis resulted in an equity reference range for Pet Practice of approximately $8.00 to $11.50 per share, as compared to the per share value implied by the Exchange Ratio of approximately $10.00 based on a closing stock price of VCA Common Stock on March 20, 1996. Selected Merger and Acquisition Transactions Analysis. Using publicly available information, Smith Barney analyzed, among other things, the implied transaction value multiples paid or proposed to be paid in the following selected merger and acquisition transactions (acquiror/target): PETsMART, Inc./Petstuff Inc.; and VCA/Pets' Rx, Inc. (the "Selected Transactions"), and compared these multiples with the multiples implied for Pet Practice by the Exchange Ratio. Smith Barney compared transaction values as a multiple of, among other things, latest 12 months revenue. All multiples were based on information available at the time of announcement of the transaction. Applying representative multiples for the Selected Transactions of latest 12 months revenue of 0.8x to 1.6x, this analysis resulted in an equity reference range for Pet Practice of approximately $2.68 to $6.45 per share, as compared to the per share value implied by the Exchange Ratio of approximately $10.00 based on a closing stock price of VCA Common Stock on March 20, 1996. No company, transaction or business used in the "Selected Company Analysis" or "Selected Merger and Acquisition Transactions Analysis" as a comparison is identical to Pet Practice, VCA or the Merger. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the Selected Companies, Selected Transactions or the business segment, company or transaction to which they are being compared. Discounted Cash Flow Analysis. Smith Barney performed a discounted cash flow analysis of the projected free cash flow of Pet Practice for the fiscal years ending December 31, 1996 through 2000, assuming, among other things, discount rates of 20.0%, 22.5% and 25.0% and terminal multiples of unlevered net income of 14.0x to 20.0x. This analysis resulted in an equity reference range for Pet Practice of approximately $5.52 to $9.96 per share. Contribution Analysis. Smith Barney analyzed, among other things, the respective contributions of Pet Practice and VCA to the estimated revenue, EBITDA, EBIT and net income of the combined company for fiscal years 1995 through 1997. This analysis indicated that in fiscal years 1995 through 1997, Pet Practice would contribute approximately 30.6%, 34.4% and 38.3%, respectively, of revenue, 9.2%, 26.2% and 34.6%, respectively, of EBITDA, (6.9%), 20.3% and 31.5%, respectively, of EBIT and (334.2%), 18.7% and 27.7%, respectively, of net income, and VCA would contribute approximately 69.4%, 65.6% and 61.7%, respectively, of revenue, 90.8%, 73.8% and 65.4%, respectively, of EBITDA, 106.9%, 79.7% and 68.5%, respectively, of EBIT and 434.2%, 81.3% and 72.3%, respectively, of net income, of the combined company. Immediately following consummation of the Merger, stockholders of Pet Practice and VCA would own approximately 19.9% and 80.1%, respectively, of the combined company. Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects resulting from the Merger, including, among other things, the impact of the Merger on the projected EPS of VCA for fiscal years 1996 and 1997 based on internal 42 estimates of the managements of VCA and Pet Practice. The results of the pro forma merger analysis suggested that the Merger could be accretive to VCA's EPS in each of the fiscal years analyzed. The actual results achieved by the combined company may vary from projected results and the variations may be material. Other Factors and Comparative Analyses. In rendering its opinion, Smith Barney considered certain other factors and conducted certain other comparative analyses, including, among other things: (i) a review of historical and projected financial results of Pet Practice and VCA; (ii) the history of trading prices and volume for Pet Practice Common Stock and VCA Common Stock and the relationship between movements of such Common Stock and movements in the S&P 500 index; (iii) selected analysts' reports on VCA, including analysts' estimates as to the earnings growth potential of VCA; (iv) the premiums paid in selected stock-for-stock transactions having transaction values of $75 million to $150 million; and (v) the pro forma ownership of the combined company. Pursuant to the terms of Smith Barney's engagement, Pet Practice has agreed to pay Smith Barney for its services in connection with the Merger an aggregate financial advisory fee equal to 1.5% of the total consideration payable in connection with the Merger. Pet Practice has also agreed to reimburse Smith Barney for reasonable travel and other out-of-pocket expenses incurred by Smith Barney in performing its services, including reasonable legal fees and expenses, and to indemnify Smith Barney and related persons against certain liabilities, including liabilities under the federal securities laws, arising out of Smith Barney's engagement. Smith Barney has advised Pet Practice that, in the ordinary course of business, Smith Barney and its affiliates may actively trade or hold the securities of Pet Practice and VCA for their own account or for the account of customers and, accordingly, may at any time hold a long or short position in such securities. Smith Barney has in the past provided certain investment banking services to Pet Practice unrelated to the proposed Merger, for which services Smith Barney has received compensation. In addition, Smith Barney and its affiliates (including Travelers Group Inc. and its affiliates) may maintain relationships with Pet Practice, VCA and their respective affiliates. Smith Barney is a nationally recognized investment banking firm and was selected by Pet Practice based on Smith Barney's experience, expertise and familiarity with Pet Practice and its business. Smith Barney regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. INTERESTS OF CERTAIN PERSONS IN THE MERGER As of the VCA Record Date directors and executive officers of VCA and their affiliates may be deemed to be beneficial owners of approximately 6.1% of the outstanding shares of VCA Common Stock (excluding shares subject to exercisable options). Each of the directors and executive officers of VCA has advised VCA that he or she intends to vote or direct the vote of all of the outstanding shares of VCA Common Stock over which he or she has voting control in favor of approval of the Merger Proposal, the Certificate Proposal, the Director Proposal and the Plan Proposals. As of the Pet Practice Record Date, directors and executive officers of Pet Practice and their affiliates may be deemed to be beneficial owners of approximately 45.2% of the outstanding shares of Pet Practice Common Stock (excluding shares subject to exercisable options). Each of the directors and executive officers of Pet Practice has advised Pet Practice that he or she intends to vote or direct the vote of all of the outstanding shares of Pet Practice Common Stock over which he or she has voting control in favor of approval and adoption of the Merger Agreement. The executive officers of Pet Practice who will continue as officers and employees of VCA will participate in the VCA 1996 Stock Incentive Plan. See "PROPOSAL TO APPROVE THE ADOPTION OF THE VCA 1996 STOCK INCENTIVE PLAN." As provided in the Merger Agreement, by virtue of the Merger, all options (the "Pet Practice Options") outstanding at the Effective Time under the Pet Practice 1994 Stock Option Plan, whether or not then exercisable, will be assumed by VCA and converted into and become a right with respect to VCA Common Stock. Each Pet Practice Option assumed by VCA will be exercisable upon the same terms and conditions as under the Pet Practice 1994 Stock Option Plan and the option agreement 43 issued thereunder, and VCA will assume the Pet Practice 1994 Stock Option Plan for such purposes. Pursuant to the Merger Agreement, at and after the Effective Time, (i) each Pet Practice Option assumed by VCA may be exercised solely for VCA Common Stock, (ii) the number of shares of VCA Common Stock subject to each Pet Practice Option will be equal to the number of shares of VCA Common Stock (rounded to the nearest whole share) into which the number of shares of Pet Practice Common Stock subject to the Pet Practice Option immediately prior to the Effective Time, would be converted under the Merger Agreement, (iii) the per share exercise price for each Pet Practice Option will be equal to (a) the per share exercise price of the Pet Practice Option in effect immediately prior to the Effective Time multiplied by the number of shares of Pet Practice Common Stock subject to such Pet Practice Option immediately prior to the Effective Time, divided by (b) the number of shares of VCA Common Stock subject to such Pet Practice Option immediately after the Effective Time. Approval of the Merger Proposal by the stockholders of VCA will constitute stockholder approval of the assumption by VCA of the rights and obligations of Pet Practice under the Pet Practice 1994 Stock Option Plan and of the amendment of such plan to provide for, among other things, the conversion at the Effective Time of each outstanding stock option into an option to purchase shares of VCA Common Stock at the exercise price set forth above. Pet Practice has agreed, upon the consummation of the Merger at the Effective Time, to award a bonus (the "Merger Bonuses") to each of the President and the Chief Financial Officer of Pet Practice in the amounts of $100,000 and $25,000, respectively, each in recognition of their efforts in effectuating the Merger. In addition, in connection with the Merger, the vesting provisions with respect to 5,000 shares of Pet Practice Common Stock held by each of the members of the Pet Practice Board (other than Messrs. Foster and Nagy) have been waived, subject to consummation of the Merger. The Merger Agreement provides that, from and after the Effective Time, VCA shall cause Merger Corp. to include as part of its Certificate of Incorporation and bylaws provisions relating to the indemnification of all current and former directors, officers, employees and agents of Pet Practice which are substantially similar to the provisions contained in Pet Practice's Certificate of Incorporation and bylaws. Such provisions shall not be amended, repealed or otherwise modified after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of Pet Practice in respect to actions or omissions occurring at or prior to the Effective Time (including, without limitation, actions or omissions which occur in connection with the transactions contemplated by the Merger Agreement), unless such modification is required by law. ACCOUNTING TREATMENT The Merger will be accounted for as a "purchase" under generally accepted accounting principles. Under the purchase method of accounting, the purchase price of Pet Practice, including direct costs of the Merger, will be allocated to the assets acquired and liabilities assumed based upon their estimated relative fair values, with the excess purchase consideration allocated to goodwill. The merger between VCA and Pets' Rx is expected to be treated as a "pooling of interests" for accounting purposes. This accounting method permits the recorded assets and liabilities of both VCA and Pets' Rx to be carried forward to the surviving corporation at the recorded historical amounts and no recognition of goodwill in the combination is required of either company in the merger. The Unaudited Pro Forma Condensed Combined Financial Statements appearing elsewhere in this Joint Proxy Statement/Prospectus are based upon certain assumptions and allocate the purchase price in the Merger to assets and liabilities based upon preliminary estimates of their respective fair values. The unaudited pro forma adjustments and combined amounts are included for informational purposes only. If the Merger is consummated, VCA's financial statements will reflect effects of acquisition adjustments only from the Effective Time. The actual allocation of the purchase price may differ significantly from the allocation reflected in the Unaudited Pro Forma Condensed Combined Financial Statements. See "UNAUDITED PRO FORMA FINANCIAL DATA." CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material federal income tax consequences of the Merger to Pet Practice and the stockholders of Pet Practice and reflects the opinions of tax counsel attached as Exhibits 8.1 and 8.2 to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part. Such opinions are based upon certain assumptions noted 44 in such opinions. The discussion below is based on current law. This summary is provided for information purposes only and relates only to Pet Practice Common Stock held as a capital asset within the meaning of Section 1221 of the Code by persons who are citizens or residents of the United States. This discussion does not address aspects of federal taxation other than income taxation, nor does it address all aspects of federal income taxation, including, without limitation, aspects of income taxation that may be applicable to particular stockholders, such as stockholders who are foreign persons, tax- exempt organizations, insurance companies, financial institutions and dealers in stocks and securities or persons who acquired all their Pet Practice Common Stock in a compensation transaction, such as an exercise of an employee option. No rulings will be sought from the Internal Revenue Service with respect to the federal income tax consequences of the Merger. PET PRACTICE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER. Based upon the advice of its legal counsel, VCA and Pet Practice believe that the Merger will be treated as a reorganization within the meaning of Section 368 of the Code, and accordingly (i) no gain or loss will be recognized by Pet Practice as a result of the Merger; (ii) no gain or loss will be recognized by the Pet Practice stockholders upon the receipt of VCA Common Stock in exchange for Pet Practice Common Stock in connection with the Merger (except as discussed below with respect to cash received in lieu of a fractional interest in VCA Common Stock); (iii) the tax basis of the VCA Common Stock to be received by the Pet Practice stockholders in connection with the Merger will be the same as the basis in the Pet Practice Common Stock surrendered in exchange therefor (reduced by any amount allocable to a fractional share interest for which cash is received); and (iv) the holding period of the VCA Common Stock to be received by the Pet Practice stockholders in connection with the Merger will include the holding period of the Pet Practice Common Stock surrendered in exchange therefor, provided that the Pet Practice Common Stock is held as a capital asset at the Effective Time. Pet Practice's obligation to consummate the Merger is conditioned upon the receipt of a written opinion from its legal counsel to this effect. Based upon the advice of its legal counsel, VCA believes that the Merger will result in no gain or loss to VCA on the exchange of shares of Pet Practice Common Stock. VCA's obligation to consummate the Merger is conditioned upon the receipt of a written opinion from its legal counsel to this effect. See "THE MERGER AGREEMENT --- Conditions to the Merger." A Pet Practice stockholder who is entitled to receive cash in lieu of a fractional share interest of VCA Common Stock in connection with the Merger will recognize gain (or loss) equal to the difference between such cash amount and the stockholder's basis in the fractional share interest as long as the cash payment is not essentially equivalent to a dividend. In such event, any gain or loss recognized will be capital gain (or loss) if the Pet Practice Common Stock is held by such stockholder as a capital asset at the Effective Time. THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGES COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. EACH VCA AND PET PRACTICE STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAWS OR OTHER TAX LAWS. RESALE RESTRICTIONS All shares of VCA Common Stock received by Pet Practice stockholders in the Merger will be freely transferable, except that shares of VCA Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Act) of Pet Practice prior to the Merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Act (or Rule 144 in the case of such persons who become affiliates of VCA) or as otherwise permitted under the Act. Persons who may be deemed to be affiliates of Pet Practice or VCA generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. The Merger Agreement requires Pet Practice to exercise its reasonable efforts to cause each of its affiliates to execute a written agreement to the effect that such person will not offer 45 to sell, transfer or otherwise dispose of any of the shares of VCA Common Stock issued to such person in or pursuant to the Merger unless (a) such sale, transfer or other disposition has been registered under the Act, (b) such sale, transfer or other disposition is made in conformity with Rule 145 under the Act or (c) in the opinion of counsel, such sale, transfer or other disposition is exempt from registration under the Act. In addition, the Principal Stockholder has agreed not to transfer or otherwise dispose of the Pet Practice Common Stock owned by it except to its partners who agree not to transfer or otherwise dispose of the VCA Common Stock received in the Merger with respect to such Pet Practice Common Stock for a period ending on April 30, 1997; provided, that, 33% of such shares of VCA Common Stock shall no longer be subject to such restriction on November 1, 1996 and the remaining shares shall no longer be subject to such restriction on May 1, 1997. REGULATORY MATTERS Under the HSR Act and the rules promulgated thereunder by the FTC, the Merger may not be consummated until notifications have been given and certain information has been furnished to the Antitrust Division and the FTC and specified waiting period requirements have been satisfied. VCA and Pet Practice each filed with the Antitrust Division and the FTC a Notification and Report Form (the "Notification and Report Form") with respect to the Merger on April 26, 1996. The initial waiting period for each of these filings expired on May 26, 1996. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the Merger. At any time before or after the Stockholder Meetings, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the Merger or seeking the divestiture of substantial assets of Pet Practice or its subsidiaries or VCA or its subsidiaries. In addition, state antitrust authorities may also bring legal action under the antitrust laws. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of certain assets of VCA or Pet Practice. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if such a challenge is made, of the results thereof. NASDAQ NATIONAL MARKET VCA expects to apply for the listing of the additional shares of VCA Common Stock to be issued to the Pet Practice stockholders in connection with the Merger on the Nasdaq National Market. It is a condition to the Merger that these shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. 46 THE MERGER AGREEMENT The following is a summary of the material provisions of the Merger Agreement, a copy of which is attached as Appendix A to this Joint Proxy -------- - Statement/Prospectus and is incorporated herein by reference. Stockholders of VCA and Pet Practice are urged to read the Merger Agreement in its entirety for a more complete description of the Merger. GENERAL Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the Effective Time, Pet Practice will be merged with and into Merger Corp. As a result of the Merger, Pet Practice will become a wholly owned subsidiary of VCA. As part of the Merger, stockholders of Pet Practice will receive the consideration described below. Upon the satisfaction or waiver of all conditions to the Merger, and provided that the Merger Agreement has not been terminated or abandoned, VCA and Pet Practice will cause the Certificate of Merger to be executed, acknowledged and filed with the Secretary of State of the State of Delaware as provided in Section 251 of the DGCL. Such filing is anticipated to take place as soon as practicable after the last of the conditions precedent to the Merger set forth in the Merger Agreement have been satisfied or, where permissible, waived, which is expected to occur shortly after the Stockholder Meetings. CONSIDERATION TO BE RECEIVED IN THE MERGER Upon consummation of the Merger, pursuant to the Merger Agreement, (i) each share of Pet Practice Common Stock issued and outstanding at the Effective Time, will be converted into a fraction of a share of VCA Common Stock determined by reference to the Exchange Ratio (defined below), (ii) all shares of Pet Practice Common Stock will be canceled and cease to exist, and (iii) all Pet Practice treasury stock, if any, will be canceled and retired without payment of any consideration therefor. The Exchange Ratio is determined by reference to the following formula: (a) if the Average Price (defined below) is between $25.00 and $30.00 (inclusive), the Exchange Ratio shall be determined by dividing $10.00 by the Average Price, (b) if the Average Price is between $24.00 and $19.00 (inclusive), the Exchange Ratio shall be 0.3950 at $24.00 and increased 0.005 for each whole dollar by which the Average Price is less than $24.00, (c) if the Average Price is $18.50 or less, the Exchange Ratio shall be 0.4225, (d) if the Average Price is equal to or greater than $31.00 and less than $49.00, the Exchange Ratio shall be 0.3350 at $31.00 and reduced 0.005 for each whole dollar by which the Average Price is greater than $31.00, (e) if the Average Price is within the ranges described in clause (b) and (d) above, but the Average Price is not a whole dollar, then the Exchange Ratio shall be determined as that which would have been computed at the nearest whole dollar increased or decreased (as applicable) by an amount equal to 0.005 multiplied by a fraction, the numerator of which shall be the difference between the Average Price and such nearest whole dollar, and the denominator of which shall be $1.00, (f) if the Average Price is between $19.00 and $18.50 (exclusive), the Exchange Ratio shall be 0.4200 increased by an amount equal to 0.0025 multiplied by a fraction, the numerator of which is the difference between $19.00 and the Average Price and the denominator of which is $.50, (g) if the Average Price is between $24.00 and $25.00 (exclusive), the Exchange Ratio shall be 0.3950 increased by an amount equal to 0.005 multiplied by a fraction, the numerator of which is the difference between the Average Price and $24.00 and the denominator of which is $1.00, (h) if the Average Price is between $30.00 and $31.00 (exclusive), the Exchange Ratio shall be 0.3333 increased by an amount equal to 0.0017 multiplied by a fraction, the numerator of which is the difference between the Average Price and $30.00 and the denominator of which is $1.00, and (i) if the Average Price is equal to or greater than $49.00, the Exchange Ratio shall be determined by dividing $12.005 by the Average Price. The Average Price means the average of the closing prices of the VCA Common Stock on the Nasdaq National Market over the 20 trading day period ending on (and including) the third trading day immediately preceding the date of the Pet Practice Special Meeting. Based on the foregoing, the resulting valuation of the merger consideration per share of Pet Practice Common Stock will range from $7.82 per share (if the Average Price is $18.50 per share) to $12.005 per share (if the Average Price is $49.00 per share). The following table presents the Exchange Ratios and resulting valuation of the merger consideration to be received in the Merger for each share of Pet Practice Common Stock at the Average Prices indicated. 47
Average Price $ 18.50 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 23.00 $ 24.00 $ 25.00 $ 26.00 $ 27.00 $ 28.00 Exchange Ratio 0.4225 0.4200 0.4150 0.4100 0.4050 0.4000 0.3950 0.4000 0.3846 0.3704 0.3571 Market Value of $ 7.82 $ 7.98 $ 8.30 $ 8.61 $ 8.91 $ 9.20 $ 9.48 $ 10.00 $ 10.00 $ 10.00 $ 10.00 Merger Consideration Average Price $ 29.00 $ 30.00 $ 31.00 $32.00 $ 33.00 $ 34.00 $ 35.00 $ 36.00 $ 37.00 $ 38.00 $ 39.00 Exchange Ratio 0.3448 0.3333 0.3350 0.3300 0.3250 0.3200 0.3150 0.3100 0.3050 0.3000 0.2950 Market Value of $ 10.00 $ 10.00 $ 10.39 $ 10.56 $ 10.73 $ 10.88 $ 11.03 $ 11.16 $ 11.29 $ 11.40 $ 11.51 Merger Consideration Average Price $ 40.00 $ 41.00 $ 42.00 $ 43.00 $ 44.00 $ 45.00 $ 46.00 $ 47.00 $ 48.00 $ 49.00 Exchange Ratio 0.2900 0.285 0.2800 0.2750 0.2700 0.2650 0.2600 0.2550 0.2500 0.2450 Market Value of $ 11.60 $ 11.69 $ 11.76 $ 11.83 $ 11.88 $ 11.93 $ 11.96 $ 11.99 $ 12.00 $12.005 Merger Consideration
For a more complete listing of the Exchange Ratios applicable at various Average Prices, see Appendix F to this Proxy Statement. Pet Practice and VCA have established a toll-free phone number which may be called by VCA stockholders and Pet Practice stockholders to obtain more current estimates of the Exchange Ratio based upon the foregoing. Please call (800) 223-2064 for a current estimate of the Exchange Ratio based upon more recent market closing prices of the VCA Common Stock. Each outstanding Pet Practice Option will be assumed by VCA in accordance with the Merger Agreement and will be exercisable upon the same terms and conditions as under the applicable agreement or plan representing such option, except that (i) each option shall be exercisable for that number of shares of VCA Common Stock (to the nearest whole share) into which the number of shares of Pet Practice Common Stock subject to such option immediately prior to the Effective Time would be converted under the Merger Agreement and (ii) the exercise price per share of each such option shall be equal to (x) the per share exercise price of such option in effect immediately prior to the Effective Time multiplied by the number of shares of Pet Practice Common Stock subject to such option immediately prior to the Effective Time, divided by (y) the number of shares of VCA Common Stock subject to such option immediately after the Effective Time. Approval of the Merger Agreement by the stockholders of VCA will constitute stockholder approval of the assumption by VCA of the rights and obligations of Pet Practice under the Pet Practice 1994 Stock Option Plan and of the amendment of such plan to provide for, among other things, the conversion at the Effective Time of each outstanding stock option into an option to purchase shares of VCA Common Stock. EXCHANGE OF SHARES Promptly after the Effective Time, transmittal forms will be mailed to each holder of record of shares of Pet Practice Common Stock to be used in forwarding Certificates evidencing such shares for surrender and exchange for certificates evidencing the shares of VCA Common Stock to which such holder has become entitled and, if applicable, cash in lieu of a fractional share of VCA Common Stock. After receipt of such transmittal form, each holder of Certificates formerly representing Pet Practice Common Stock should surrender such Certificates, together with a duly completed transmittal form, to the Exchange Agent, and each such holder will receive in exchange therefor certificates evidencing the whole number of shares of VCA Common Stock to which he or she is entitled and any cash which may be payable in lieu of a fractional share. Such transmittal forms will be accompanied by instructions specifying other details of the exchange. 48 PET PRACTICE STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. No fractional shares of VCA Common Stock will be issued and any holder of shares of Pet Practice Common Stock entitled under the Merger Agreement to receive a fractional share will be entitled to receive only a cash payment in lieu thereof, which payment will be in an amount equal to the product of the Average Price (defined above) of a share of VCA Common Stock multiplied by the fractional percentage of a share of VCA Common Stock to which such holder would otherwise be entitled. No dividends or other distributions on shares of VCA Common Stock will be paid with respect to any shares of Pet Practice Common Stock until the Certificate representing such shares is surrendered for exchange as provided in the Merger Agreement. Subject to applicable laws, such dividends and distributions, if any, will be accumulated and, at the time of such surrender, all such unpaid dividends and distributions, together with any cash payment in lieu of a fractional share, will be paid, without interest. At or after the Effective Time, there will be no transfers on the transfer books of Pet Practice of shares of Pet Practice Common Stock which were outstanding immediately prior to the Effective Time. Any portion of the monies from which cash payments in lieu of fractional interests in shares of VCA Common Stock will be made (including the proceeds of any investments thereof) and any shares of VCA Common Stock that are unclaimed by the former stockholders of Pet Practice one year after the Effective Time will be delivered to VCA. Any former stockholders of Pet Practice who have not theretofore complied with the exchange procedures in the Merger Agreement may thereafter look to VCA only as a general creditor for payment of their shares of VCA Common Stock, cash in lieu of fractional shares, and any unpaid dividends and distributions on shares of VCA Common Stock, deliverable in respect of each share of Pet Practice Common Stock such stockholder holds. Notwithstanding the foregoing, none of Pet Practice, VCA, the Exchange Agent or any other person will be liable to any former holder of shares of Pet Practice Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. In the event that any Certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by VCA, the posting by such person of a bond in such reasonable amount as VCA may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of VCA Common Stock, cash in lieu of fractional shares, and any unpaid dividends and distributions on shares of VCA Common Stock, as described above. REPRESENTATIONS AND WARRANTIES The Merger Agreement contains various customary representations and warranties relating to, among other things, (i) due organization, valid existence and good standing of each of VCA and Pet Practice and each of their respective subsidiaries and certain corporate matters; (ii) the capital structure of each of VCA and Pet Practice; (iii) the authorization, execution, delivery and enforceability of the Merger Agreement, the consummation of the transactions contemplated by the Merger Agreement and related matters; (iv) conflicts under charters or bylaws, required consents or approvals and violations of any instruments or laws; (v) documents and financial statements filed by each of VCA and Pet Practice with the Commission and the accuracy of information contained therein; (vi) undisclosed liabilities; (vii) the absence of certain material adverse events or changes; (viii) taxes, tax returns and audits; (ix) properties; (x) intellectual properties; (xi) agreements, contracts and commitments; (xii) litigation; (xiii) environmental matters, hazardous materials and hazardous material activities; (xiv) employee benefit plans; (xv) compliance with laws; (xvi) interested party transactions; (xvii) the accuracy of information supplied by each of VCA and Pet Practice in connection with the Registration Statement and this Joint Proxy Statement/Prospectus; (xviii) the absence of existing discussions with other parties; (xix) opinions of financial advisors; (xx) inapplicability to the Merger of certain provisions of the DGCL; and (xxi) the interim operations of Merger Corp. 49 CERTAIN COVENANTS Conduct of Business Pending the Merger. Pursuant to the Merger Agreement, VCA and Pet Practice have made various customary covenants relating to the Merger. Pet Practice has agreed that, prior to the Effective Time, Pet Practice and its subsidiaries will conduct their operations according to their usual, regular and ordinary course of business. Specifically, Pet Practice has agreed, among other things: (i) to preserve intact its business organization, relationships and goodwill and to keep available the services of its officers and employees; (ii) not to amend its certificate of incorporation or bylaws; (iii) not to grant, confer or award any bonuses (other than the Merger Bonuses) or other forms of cash incentives to any officer, director or key employee except consistent with past practice or grant or confer any awards (other than those granted as of the date of the Merger Agreement) under the Pet Practice 1994 Stock Option Plan, not to increase any compensation under any employment agreement with any of its present or future officers, directors or employees, except for normal increases consistent with past practice, grant any severance or termination pay to, or enter into any employment or severance agreement with any officer or director or amend any such agreement in any material respect other than severance arrangements which are consistent with past practice with respect to employees terminated by Pet Practice, and not to adopt any new employee benefit plan (including any stock option, stock benefit or stock purchase plan) or amend any existing employee benefit plan in any material respect; (iv) not to issue new Pet Practice capital stock (except pursuant to the exercise of contractual rights existing prior to the execution of the Merger Agreement to acquire any shares of its capital stock), effect a stock split or change its current capitalization; (v) not to declare any dividends or make any distributions with respect to its capital stock or redeem any of its capital stock or stock of its subsidiaries; (vi) not to acquire any corporation, partnership or any other business organization or division thereof; (vii) not to incur any indebtedness for borrowed money; (viii) not to sell, pledge, dispose of or encumber any of its properties or assets except in the ordinary course of business consistent with past practices; (ix) not to change its accounting practices; and (x) not to authorize or make capital expenditures in excess of $500,000 in the aggregate. VCA has agreed that, prior to the Effective Time, it will, among other things: (i) conduct its operations in the ordinary course of business and in a manner consistent with past practices, (ii) preserve intact its business organization, relationships and goodwill and keep available the services of its officers and employees, and (iii) not amend any of the material terms of its securities, except such amendments that affect all shares of VCA Common Stock equally. No Solicitation of Transactions. Pursuant to the Merger Agreement, Pet Practice has agreed that prior to the Effective Time, neither it nor any of its subsidiaries will permit its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its subsidiaries) to initiate, solicit or encourage, directly or indirectly, any inquiries or make or implement any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Pet Practice or any of its subsidiaries (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal. Pet Practice also agreed to cease and cause to be terminated any existing activities, discussions or negotiations with any parties with respect to any of the foregoing and to take the necessary steps to inform the individuals or entities referred to above of Pet Practice's obligations with respect to an Acquisition Proposal. Pet Practice has further agreed that it will notify VCA immediately if any such inquiries or proposals are received by, any such information is received from, or any such negotiations or discussions are sought to be initiated or continued with, it. However, the Pet Practice Board is not prohibited from (i) furnishing information to, or entering into discussions or negotiations with, any person or entity that makes an unsolicited bona fide proposal to acquire Pet Practice pursuant to a merger, consolidation, share exchange, purchase of a substantial portion of the assets, business combination or other similar transaction, if, and only to the extent that (A) the Pet Practice Board determines in good faith that such action is required for the Pet Practice Board to comply with its fiduciary duties to stockholders imposed by law, (B) the Pet Practice Board has received a legal opinion from its legal counsel that such action is required for the Pet Practice Board to comply with its fiduciary duties to stockholders imposed by law, (C) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Pet Practice provides written notice to VCA to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or entity, and (D) subject to any confidentiality agreement with such person or entity (which such party determined in good faith was required to be executed in order for the Pet Practice Board to comply with its fiduciary duties to stockholders imposed by law), Pet Practice keeps VCA informed of the status (not the terms) of any such discussions or negotiations; and (ii) to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Pet Practice may not terminate the Merger 50 Agreement (except pursuant to the termination provisions contained in the Merger Agreement), enter into any agreement with respect to, or in any way facilitate, an Acquisition Proposal while the Merger Agreement remains in effect, or fail to comply with any of its obligations under the Merger Agreement. Termination Fee. If, following any Acquisition Proposal, Pet Practice subsequently effects any merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Pet Practice or any of its subsidiaries, or the Merger Agreement is thereafter terminated, Pet Practice shall pay to VCA an amount equal to $3.5 million. Meetings of Stockholders. Pursuant to the Merger Agreement, each of VCA and Pet Practice has agreed to take all necessary action, in accordance with applicable law and its respective Certificate of Incorporation and bylaws, to convene promptly the Stockholder Meetings. The VCA Board and the Pet Practice Board have agreed to recommend such approval and to take all lawful action to solicit such approvals. However, either the VCA Board or Pet Practice Board, in the exercise of its good faith judgment and based on the advice of outside counsel as to its fiduciary duties to its stockholders imposed by law, may change its recommendation or withdraw its solicitation. Indemnification and Insurance. The Merger Agreement provides that, from and after the Effective Time, VCA shall cause Merger Corp. to include as part of its Certificate of Incorporation and bylaws provisions relating to the indemnification of all current and former directors, officers, employees and agents of Pet Practice which are substantially similar to the provisions contained in Pet Practice's Certificate of Incorporation and bylaws. Such provisions shall not be amended, repealed or otherwise modified after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of Pet Practice in respect to actions or omissions occurring at or prior to the Effective Time (including, without limitation, actions or omissions which occur in connection with the transactions contemplated by the Merger Agreement), unless such modification is required by law. Other Actions. Pursuant to the Merger Agreement, both VCA and Pet Practice have agreed to use their best efforts to take, or cause to be taken, all other action and to do, or cause to be done, all other things necessary, proper or appropriate to consummate the transactions contemplated by the Merger Agreement. Certain Other Covenants. Both VCA and Pet Practice have also agreed: (i) to make promptly their respective filings, and any other submissions, under the HSR Act and obtain all other consents, approvals or permits from the necessary federal and state governments and regulatory agencies (including any national securities exchange) prior to the Effective Time; (ii) to consult with each other prior to issuing any press release or public statement; (iii) to allow all designated officers, attorneys, accountants and representatives of the other reasonable access to offices, records and files (including information relating to commitments, contracts, titles and financial position) and to instruct their respective employees, counsel and financial advisors to cooperate with each other's investigation; (iv) to cooperate in the filing of the Registration Statement and obtain all necessary state securities laws permits or approvals; (v) that Pet Practice will use all reasonable efforts to deliver or cause to be delivered to VCA an affiliate letter, in a form reasonably acceptable to VCA, from each of the persons deemed to be "affiliates" of Pet Practice as such term is defined under the Act at least 20 days prior to the Effective Time; and (vi) that all costs and expenses incurred in connection with the Merger shall be paid by the party incurring such costs and expenses except that the filing fees associated with the HSR filing and the Registration Statement filing as well as the expenses incurred in connection with the printing and mailing of the Registration Statement and the Joint Proxy Statement/Prospectus shall be shared equally by VCA and Pet Practice. CONDITIONS TO THE MERGER The obligations of VCA and Pet Practice to consummate the Merger are conditioned on the fulfillment of the following: (i) the effectiveness of the Registration Statement and the absence of any stop order suspending the effectiveness thereof and no proceeding for that purpose having been initiated by the Commission; (ii) approval, in the manner required by law or the applicable stock exchange or regulatory body, of the stockholders of VCA and the stockholders of Pet Practice, of the Merger Agreement and all transactions contemplated thereby; (iii) expiration or termination of the applicable waiting period under the HSR Act; (iv) neither VCA nor Pet Practice shall be subject to any order or injunction of a court of competent jurisdiction which prohibits the consummation of the transactions contemplated in the Merger Agreement; (v) the approval for listing of the VCA Common Stock issued to the Pet Practice stockholders in connection with the Merger on the Nasdaq National Market; 51 (vi) the receipt by VCA and Pet Practice from their respective counsels of an opinion to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368 of the Code; and (vii) for a period of 30 days prior to the Effective Date, there will not have been a suspension in trading on the Nasdaq National Market, the declaration of a banking moratorium, any suspension of payments in respect of banks, an outbreak or major escalation of hostilities between the United States and any foreign power or any limitation by any governmental authority on credit by financial institutions. The obligation of VCA to consummate the Merger is conditioned on the fulfillment of the following conditions: (i) the performance by Pet Practice, in all material respects, of its obligations required to be performed on or prior to the Effective Time and contained in the Merger Agreement; (ii) the representations and warranties made by Pet Practice in the Merger Agreement shall be true in all material respects as of the Effective Time; (iii) the receipt by VCA of an opinion from counsel for Pet Practice customary in merger transactions; (iv) no material adverse changes in the business, financial condition or operations of Pet Practice shall have occurred; (v) all material filings, registrations, covenants, permits, authorizations and regulatory approvals necessary for the consummation of the Merger shall have been obtained or made; (vi) VCA shall have received a "comfort" letter from Pet Practice's independent public accountants; (vii) VCA shall have received an "affiliate" letter from each affiliate of Pet Practice; (viii) VCA shall have received a letter from the Principal Stockholder of Pet Practice agreeing not to dispose of the shares of VCA Common Stock received in the Merger for a period ending on April 30, 1997; provided, that, 33% of such shares of VCA Common Stock shall no longer be subject to such restriction on November 1, 1996; and (ix) no law or order has been enacted or entered which would make the Merger illegal or materially delay the Effective Time, require VCA or Pet Practice to divest shares of Pet Practice Common Stock or a material portion of the business, assets or properties of VCA or Pet Practice or impose any material limitation on the ability of either of them to conduct their respective businesses and own their respective assets or properties, or impose limitations on the ability of VCA to control in any material respect the business operations of Pet Practice. The obligation of Pet Practice to consummate the Merger is conditioned on the fulfillment of the following conditions: (i) the performance by VCA, in all material respects, of its obligations required to be performed on or prior to the Effective Time and contained in the Merger Agreement; (ii) the representations and warranties made by VCA in the Merger Agreement shall be true in all material respects as of the Effective Time ; (iii) the receipt by Pet Practice of an opinion from counsel for VCA customary in merger transactions; and (iv) no law or order has been enacted or entered which would make the Merger illegal or delay the Effective Time beyond September 1, 1996. TERMINATION OF THE MERGER AGREEMENT The Merger Agreement is subject to termination at the option of either VCA or Pet Practice if the Merger is not consummated on or before September 1, 1996. In addition, prior to such time, the Merger Agreement is subject to termination upon: (i) the disapproval of the Merger Proposal by the VCA stockholders voting thereon or the disapproval of the Merger Agreement by the Pet Practice stockholders voting thereon; (ii) the issuance by a court or governmental, regulatory or administrative agency, of an order, decree or ruling permanently restraining, enjoining or otherwise prohibiting the consummation of the Merger; (iii) the Average Price being equal to or less than $18.50; or (iv) the mutual consent of VCA and Pet Practice. The Merger Agreement may be terminated by the Pet Practice Board at any time prior to the Effective Time if (i) there has been a breach by VCA of any representation, warranty, covenant or agreement in the Merger Agreement such that the conditions to the obligations of Pet Practice would not be satisfied and such breach is not curable, or if curable prior to September 1, 1996, VCA is not exercising reasonable efforts to cure such breach; or (ii) any material condition to the obligations of Pet Practice is not substantially satisfied at the time contemplated thereby and such condition is not waived by Pet Practice. The Merger Agreement may be terminated by the VCA Board at any time prior to the Effective Time if (i) there has been a breach by Pet Practice of any representation, warranty, covenant or agreement in the Merger Agreement such that the conditions to the obligations of VCA would not be satisfied and such breach is not curable, or if curable prior to September 1, 1996, Pet Practice is not exercising reasonable efforts to cure such breach; or (ii) any material condition to the obligations of VCA is not substantially satisfied at the time contemplated thereby and such condition is not waived by VCA. 52 AMENDMENT AND WAIVER The Merger Agreement may be amended at any time by action taken or authorized by the respective boards of directors of VCA and Pet Practice, but after approval by the stockholders of VCA and Pet Practice of the matters presented in connection with the Merger to them, no amendment shall be made which by law requires further approval by such stockholders, without such further approval. VCA and Pet Practice by action taken or authorized by their respective boards of directors, may extend the time for performance of the obligations or other acts of the other parties to the Merger Agreement, may waive inaccuracies in the representations or warranties contained in the Merger Agreement, and may waive compliance with any agreements or conditions contained in the Merger Agreement. BUSINESS OF VCA GENERAL VCA was founded in 1986 and is a leading companion animal health care company. VCA has established a premier position in the animal hospital and veterinary diagnostic laboratory segments and has an emerging presence in the premium pet food segment. VCA operates one of the largest networks of free- standing, full service animal hospitals in the country and one of the largest networks of veterinary-exclusive laboratories in the nation. VCA also markets both a life-stage and a therapeutic line of premium pet foods through Vet's Choice, a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company. Animal hospitals, veterinary diagnostic laboratories and premium pet foods represented approximately 55%, 40% and 5%, respectively, of VCA's revenues for the year ended December 31, 1995. VCA's animal hospitals offer a full range of general medical and surgical services and also perform specialty surgeries such as orthopedics for small animals, including dogs, cats, birds and other household pets. In addition to treating disease and injury, VCA's animal hospitals emphasize pet wellness and offer programs to encourage routine vaccinations, health examinations, spaying and neutering and dental care. VCA's veterinary laboratories offer a full range of diagnostic and reference tests. Laboratory tests are used by veterinarians to diagnose, monitor and treat diseases through the detection of substances in blood, urine or tissue samples and other specimens. VCA does not conduct experiments on animals and is not engaged in animal research. Vet's Choice markets a complete line of life-stage and therapeutic premium pet foods under the brand names Select Balance and Select Care, respectively. RECENT DEVELOPMENTS Recent Acquisitions Since January 1, 1996 through June 20, 1996, VCA has acquired (i) Pets' Rx, Inc., the owner and operator of 16 animal hospitals in California and Nevada, and (ii) 11 animal hospitals in the states of Maryland, Massachusetts, Pennsylvania, Florida, Hawaii, Virginia and California. In addition, VCA has acquired three veterinary laboratories, one of which was Southwest Veterinary Diagnostics, Inc. ("Southwest"), a veterinary diagnostic laboratory located in Phoenix, Arizona. The acquisition of Southwest, which services more than 1,900 veterinary hospitals in the states of Arizona, California, New Mexico, Texas, Kansas, Nebraska and Missouri, and other portions of the Midwest, expands the customer base of VCA's laboratory division, providing VCA with the opportunity to serve over 8,000 veterinary hospitals daily. In connection with the acquisitions which were accounted for as a purchase, VCA paid an aggregate consideration of $28,718,000 consisting of $13,614,000 in cash, $8,066,000 in debt, 242,926 shares of VCA Common Stock, with a value of $3,868,000, and the assumption of liabilities totaling $3,170,000, including acquisition costs. In connection with the acquisitions which were treated as a pooling of interests, VCA issued 952,091 shares of VCA Common Stock. The Pet Practice, Inc. On March 21, 1996, VCA signed the Merger Agreement with Pet Practice, pursuant to which VCA will acquire all of the outstanding securities of Pet Practice. Pet Practice operates 84 veterinary hospitals in 11 states. For a description of the Merger with Pet Practice, see "THE MERGER." 53 Debt Offering On April 17, 1996, VCA issued $84.4 million of 5.25% convertible subordinated debentures due in 2006. The debentures, non-callable for three years, will be convertible into approximately 2.5 million shares of VCA Common Stock at a price of $34.35 per share. The proceeds of this offering are intended to be used to repay acquisition related debt and for general corporate purposes. THE COMPANION ANIMAL HEALTH CARE INDUSTRY The market segments in which VCA operates had total domestic revenues in 1994 of approximately $10.0 billion, composed of approximately $8.2 billion for veterinary care (animal hospitals and veterinary diagnostic laboratories) and approximately $1.8 billion for premium pet food. Approximately 95% of VCA's revenues for the year ended December 31, 1995 were derived from the veterinary care segment of the market with the balance coming from premium pet food sales. VCA classifies its markets by service or product type into three segments, Animal Hospital, Laboratory and Premium Pet Food. Animal Hospitals Veterinarians diagnose and treat animal illnesses and injuries, perform surgeries, provide routine medical exams and prescribe medication. Some veterinarians specialize by type of medicine, such as orthopedics, dentistry, ophthalmology or dermatology and may specialize by type of animal. The United States market for veterinary services is highly fragmented with approximately 115 million dogs and cats cared for by an estimated 55,000 veterinarians practicing at 16,000 animal hospitals. These animal hospitals are primarily single site, sole practitioner facilities. VCA believes that the principal factors in a pet owner's decision as to which veterinarian to use include convenient location, recommendation of friends, reasonable fees and convenient hours. The animal hospital industry is consolidating. Factors contributing to this trend include (i) the desire of some owners of animal hospitals to diversify their investment portfolio by selling all or a portion of their investment in the animal hospital, (ii) the buying, marketing and administrative cost advantages which can be realized by a large, multiple location, multi- practitioner veterinary provider, (iii) the desire of veterinarians to practice veterinary medicine rather than spend a large portion of their working time performing the administrative tasks necessary to operate an animal hospital, (iv) the cost of financing equipment purchases and upgrading technology necessary for a successful practice, and (v) the desire of many veterinarians for more flexible work hours and benefits than are typically available to a sole practitioner or single site provider. Veterinary Diagnostic Laboratories Given the inability of the patient to communicate verbally with the doctor, laboratory testing is an important part of the diagnostic process in veterinary medicine. Clinical laboratory tests are used by veterinarians to diagnose, monitor and treat diseases through the detection of substances in blood or tissue samples and other specimens. Veterinary laboratory tests are performed primarily at the animal hospital, using on-site diagnostic equipment, or at outside veterinary diagnostic laboratories. On-site diagnostic equipment is sold by a number of manufacturers. For many types of tests, on-site diagnostic equipment can provide more timely results than outside laboratories but requires the animal hospital or veterinarian to purchase the equipment and provide trained personnel to operate it. Veterinary diagnostic laboratories, such as those operated by VCA, can provide a wider range of tests than are generally available on-site at most animal hospitals and do not require any up-front investment on the part of the animal hospital or veterinarian. Veterinary laboratory services are also available through universities and several national laboratory companies. The veterinary laboratory industry is highly fragmented and is primarily characterized by local and regional competitors. VCA believes that veterinarians usually prefer to use laboratories that specialize in the veterinary market and that offer individual attention, rapid test reporting and response to inquiries by veterinary professionals, a broad spectrum of tests, convenient sample pick-up times, and customized testing services. Achieving rapid sample pick-up, diagnostics and reporting, at competitive prices, is benefited by high throughput volumes. VCA believes that the industry will continue to consolidate as participants seek to gain a cost advantage. 54 Premium Pet Food Retail sales of pet food in 1994 approximated $8.8 billion, of which premium pet food accounted for approximately $1.8 billion. Over the past ten years, the supermarket share of pet food retail sales has decreased from approximately 95% to approximately 55% as customers have gained increased product knowledge and sought higher quality products offered by premium pet food retailers, including super-stores and veterinary professionals. Moreover, a recommendation from a veterinarian can be instrumental in heightening awareness and stimulating demand for a particular premium brand. Premium pet food differentiates itself from pet food typically offered by supermarkets primarily through its fixed formulas and high quality ingredients. Within the premium pet food segment, brands distinguish themselves through superior palatability and digestibility as well as offering product lines tailored to specific life-stages and health conditions. BUSINESS STRATEGY VCA's goal is to become the leading companion animal health care company serving the animal hospital and veterinary diagnostic laboratory markets. VCA intends to achieve this goal by continuing to (i) expand its animal hospital and laboratory businesses through acquisitions and internal growth, (ii) achieve cost savings by consolidating operations and realizing economies of scale in purchasing and administrative support functions and by implementing VCA's standard management programs, (iii) take advantage of its unique opportunity to deliver its products and services through multiple channels to its customers, primarily veterinarians and pet owners, and (iv) capitalize on its leadership position within the companion animal health care industry to expand into other products and services for veterinarians and pet owners. Expand through Acquisitions in New and Existing Markets. Since 1988 VCA has expanded rapidly from a single animal hospital in Los Angeles to a nationwide network of 80 animal hospitals in 16 states at June 20, 1996. As a result of these acquisitions and their successful integration into VCA's operations, VCA has gained a leadership position in the animal hospital industry, allowing it to expand into the veterinary diagnostic laboratory business. Since March 1994, VCA has acquired 10 veterinary diagnostic laboratories, making it the nation's largest network of veterinary-exclusive diagnostic laboratories serving over 8,000 animal hospitals located in 40 states. Assuming the availability of capital, VCA plans to continue its aggressive acquisition program. VCA will also consider acquiring multiple hospital organizations and veterinary diagnostic laboratories, as opportunities arise. Consolidate Operations to Enhance Profitability. Upon the acquisition of an animal hospital or veterinary diagnostic laboratory, VCA immediately begins to implement management programs to enhance the productivity of veterinarians and to improve operating results. VCA's business model enables it to realize improved operating margins at its animal hospitals and veterinary diagnostic laboratories through a strategy of centralizing various corporate and administrative functions and leveraging fixed costs while providing its customers with improved services. This model includes the following objectives: Centralize Administrative Functions. VCA consolidates most administrative functions at its corporate office, including purchasing, accounting, payroll, data processing, personnel, accounts payable, information services, marketing, planning and budgeting and other administrative functions. Consolidate Purchasing. When advantageous, VCA purchases its supplies on a consolidated basis in order to negotiate better prices and terms from vendors. Standardize Training Procedures. VCA implements standardized training procedures for its administrators and professional personnel. These programs are developed in conjunction with the Medical Advisory Board and Client Services Advisory Board, two entities which are staffed by VCA personnel to recommend medical standards and to establish service and training standards for local hospitals and laboratories. Increase Internal Revenues. VCA also seeks to expand through internal growth. To achieve this, VCA (i) increases veterinarian productivity by freeing the veterinarian from administrative tasks and providing state-of-the-art equipment and technical support, (ii) expands the services and operating hours of certain of its facilities in selected markets, (iii) provides its facilities with access to medical specialists, (iv) adds VCA's name to the acquired facilities to enhance customer awareness, and 55 (v) implements sales programs to attract new customers. By implementing these strategies, VCA seeks to become the most convenient and most recognized provider of veterinary services in its markets. Improve Management Information Systems. As soon as possible, the acquired company's computer system is replaced with one compatible with VCA's main computer system. VCA's financial and customer records and laboratory results are stored in computer databases, most of which may be accessed by VCA's management. VCA's management information systems provide VCA with efficient access to financial and operating data to monitor operating data and target marketing programs to highly specific customer bases. Continue to Capitalize on Existing Relationships to Leverage Lines of Business. VCA believes that its three lines of business -- animal hospitals, veterinary diagnostic laboratories and premium pet food -- are complementary. As a result of VCA's national presence and name recognition throughout the veterinary services industry, VCA believes it is building a reputation of professional integrity and trust among veterinary professionals and brand identification among pet owners. VCA's strategy is to leverage this professional reputation and leadership position to expand its operations, both in other geographic areas and related products and services. An example of the results of this strategy is VCA's joint venture, Vet's Choice, to market premium pet food. VCA uses its relationships, as well as its national presence and name recognition in one line of business to facilitate growth in other lines. Often, new business opportunities arise in one line of business from contacts made in connection with and relations developed through VCA's other lines of business. For example, animal hospital acquisitions may be developed through contacts initially established in VCA's veterinary diagnostic laboratory business or from marketing and other promotional efforts in connection with the sale of its premium pet food. ACQUISITION STRATEGY Animal Hospitals. VCA seeks to enter a new market through the acquisition of one or more relatively large, high quality animal hospitals. It has been VCA's experience that this initial acquisition in a new market requires substantially more time to identify, negotiate and consummate than additional acquisitions in the same market. Following this initial acquisition, VCA seeks to increase its presence in such market as opportunities arise. VCA identifies potential candidates for acquisition through its reputation in the professional community, direct contacts, finder relationships and advertisements. VCA believes that acquisition opportunities will continue to increase as it expands the geographic scope of its operations and the products and services it offers to the companion animal health care community. The typical acquisition candidate targeted by VCA is located in a 4,000-6,000 square foot, free-standing facility, has annual revenues of between $700,000 and $1.5 million per year, employs two to six veterinarians, has an operating history of at least five years and has achieved positive cash flow at an attractive location with an established reputation in the community. Veterinary Diagnostic Laboratories. VCA intends to expand its nationwide network of veterinary-exclusive diagnostic laboratories through acquisitions and internal growth. VCA seeks acquisition opportunities in the veterinary diagnostic laboratory industry which will complement its existing business or which will expand the geographic area which it services. VCA has been able to realize significant cost savings at its veterinary diagnostic laboratories by consolidating acquired operations into the existing operations, reducing fixed overhead, sample collection, analysis and the reporting of results to veterinarians. By obtaining additional testing volume for the laboratories and spreading fixed costs over a larger revenue base, the unit costs of providing laboratory services to clients should decline, producing improved operating margins. As a result of these economies of scale, VCA has the ability to reduce or maintain prices for testing services to customers. Acquisition Consideration. Historically, consideration for acquisitions has consisted of a combination of cash, the assumption of liabilities, promissory notes and VCA Common Stock. VCA normally obtains noncompetition and employment agreements from the selling owners. VCA presently is evaluating and negotiating a number of potential acquisitions, none of which are, individually, material to VCA. There can be no assurance, however, that VCA will be able to identify and acquire animal hospitals or veterinary diagnostic laboratories on terms favorable to VCA in the future, or in a timely manner, or convert the acquisitions to the VCA business model as planned. See "RISK FACTORS--Rapid Expansion and Management of Growth." 56 OPERATIONS AND MARKETING Animal Hospitals VCA believes it operates one of the largest networks of free-standing full-service animal hospitals in the United States. At June 20, 1996, VCA owned 80 animal hospitals, 19 of which were located in Northern California, 18 in Southern California, eight in Pennsylvania, six in Massachusetts, five in Nevada, four in Maryland and three in each of Alaska, Florida and New Mexico, two in each of Colorado, Utah and Virginia, and one in each of Arizona, Georgia, Hawaii, Illinois and Delaware. VCA's animal hospitals offer a full range of general medical and surgical services for small animals, including dogs, cats, birds and other household pets. In addition to treating disease and injury, VCA's hospitals emphasize pet wellness through pet health education and preventative care and offer programs to encourage routine vaccinations, health examinations, spaying and neutering and dental care. VCA offers specialized treatment, including advanced diagnostic services, internal medicine, surgery, oncology, ophthalmology, dermatology and cardiology. Additional services provided by VCA at certain locations include grooming, bathing and boarding. VCA also sells specialty pet products at its hospitals, including pet food, a full range of pharmaceuticals, vitamins, therapeutic shampoos and conditioners, flea collars and sprays and other accessory products. VCA's facilities are open an average of 10 to 15 hours per day, six to seven days per week. Several of its facilities provide 24-hour emergency care service. VCA seeks to provide a uniform and broad range of quality veterinary services. To accomplish this goal, VCA actively recruits highly qualified veterinarians and technicians and is committed to supporting continuing professional education for its professional and lay staff. VCA operates two of the largest teaching programs maintained at privately owned animal hospitals. VCA believes that these programs enhance its reputation in the veterinary profession and provide it with access to qualified recruits among graduating classes of veterinarians. VCA believes it is an employer of choice for veterinarians because it offers an increased patient flow and a diverse case mix, employee benefits not generally available to a sole practitioner, continuing education, management opportunities, scheduling flexibility to accommodate personal lifestyles and the ability to relocate to different regions of the country. To support VCA's operations, VCA has established a Medical Advisory Board, whose function is to recommend medical standards, and a Service Advisory Committee that establishes service and training standards for local hospitals. The committees are comprised of leading veterinarians and managers representing different geographic regions and medical specialties served by VCA. Seeking to provide state-of-the-art medical care in a clean, attractive environment, VCA renovates facilities and upgrades its equipment on a periodic basis. In addition, VCA provides, at some of its locations, board certified or board eligible veterinarians in such specialized fields as internal medicine, surgery, oncology, ophthalmology, dermatology, orthopedics and cardiology to expand the range of services available at its facilities. VCA's animal hospitals generally require a staff of between 10 to 60 full-time equivalent employees, depending upon the facility's size and customer base. The staff includes administrative and technical support personnel, two or more veterinarians, an office manager who supervises the day-to-day activities of the facility and a small office staff. VCA employs a relatively small corporate staff to provide centralized administrative services to all of its veterinary hospitals. Financial control is maintained through uniform fiscal and accounting policies which are established at the corporate level for use at the hospitals. Financial information is centralized through a computerized data collection and processing system at the corporate level. Use of veterinary services has traditionally been seasonal. In addition, use of veterinary services may be affected by weather conditions, levels of infestation of fleas, heartworms and ticks, the number of daylight hours and general economic conditions. The seasonality of the use of veterinary services may cause operating results to vary significantly from quarter to quarter. In each of the last five years, demand for VCA's services has been greater in the second and third quarters than in the first and fourth quarters. 57 VCA's internal marketing programs rely heavily on its existing client- base in order to increase the frequency and intensity of the services used by its clients. Reminder notices are used to increase awareness among VCA's customers of the advantages of regular, comprehensive veterinary medical care, including preventive care, such as vaccinations, dental screening and geriatric care. VCA seeks to obtain referrals from veterinarians by promoting its specialized diagnostic and treatment capabilities to veterinarians and veterinary practices which cannot offer their clients such services. As the number of hospitals in a single regional network grows, media advertising of VCA's services will become increasingly cost effective. VCA believes that an effective media advertising program will allow VCA to establish brand identification as well as expand the revenues derived from the sale of new and existing services and products. Such programs, services and products, VCA believes, may increase the opportunities to expand VCA's market share in the regional markets for veterinary services in which it competes. Veterinary Diagnostic Laboratories VCA operates one of the largest networks of veterinary-exclusive diagnostic laboratories in the United States, servicing approximately 8,000 animal hospitals located in 40 states. VCA operates three full-service laboratories located in Irvine, California (serving Southern California and the Southwest), Valparaiso, Indiana (serving the Chicago metropolitan area and other parts of the Midwest) and Farmingdale, New York (serving the East Coast). These laboratories also serve as STAT (quick response) laboratories, which are in addition to VCA's STAT laboratories located in Dallas and Houston, Texas; Kansas City, Missouri; Phoenix, Arizona; Orlando, Florida; Reno, Nevada; San Jose, California; and Portland, Oregon. The veterinary laboratory industry is highly fragmented with many local and regional competitors, as well as several large independent laboratory companies. Veterinarians usually prefer to use laboratories that specialize in the veterinary market and that offer individual attention, rapid test reporting and response to inquiries by veterinary professionals, a broad spectrum of tests, convenient sample pick-up times and customized testing services. Because the patient cannot communicate verbally with the veterinarian, laboratory testing is an important diagnostic tool. VCA regularly performs numerous types of diagnostic laboratory tests, including chemistry, hematology, cytology, anatomical pathology as well as other disease-specific tests. Clinical tests are performed on animal fluids such as blood or urine and provide information that is used by veterinarians for medical diagnosis. VCA does not conduct experiments on animals and is not engaged in animal research. VCA performs most of its clinical tests with state-of-the-art automated laboratory testing equipment. The first step in the testing process is for a veterinarian to take a specimen from the patient and complete a test request form indicating the tests to be performed on that specimen. The specimen is then picked up by the laboratory's driver or by a commercial courier service and delivered to one of VCA's laboratories for testing. When received at the laboratory, each specimen and related request form is checked for accuracy and completeness and then given a unique identification number to ensure that the results are attributed to the appropriate animal. The test request information is entered into the laboratory's computer system, where a file of testing and billing information is established for each specimen. Once this information is entered, the tests are performed by one of the laboratory technicians or by utilizing VCA's automated testing equipment. Test results are entered into the computer system through a computer interface or, in some instances, manually, depending upon the test and the type of equipment used to conduct the test. Most routine testing is completed at night and the test results are automatically transmitted via modem or fax machine to the veterinarian before the start of business the next morning. VCA's STAT laboratories perform certain routine tests quickly and report results to veterinarians within hours of being picked up from the veterinarian. The turnaround time at VCA's STAT laboratories for reporting test results is generally three hours or less. The STAT laboratories are located in geographic areas where there is high concentration of veterinarians and an airline hub-operation. VCA may establish or close STAT laboratories depending upon the volume of tests performed and the needs of its veterinarian-clients. In addition to testing operations, VCA provides a variety of laboratory services to its veterinarian-clients which VCA believes enhances its competitive position. These include: 58 Reporting. Rapid turnaround of test results is critical to the successful operation of a clinical laboratory. Usually, routine testing is performed overnight and results are transferred to the veterinarian by modem or fax machine before 8:00 a.m. the following day. Specimen Transportation. VCA has developed an extensive network of drivers and independent couriers which enables VCA to provide timely pickup and delivery of specimens to its laboratories. Specimens are picked up from clients and transported to VCA's laboratory facilities on a daily basis, and in some areas, twice each day. Client Service. Veterinarians are not obligated to use any particular laboratory's services and can change laboratory service providers at any time. Therefore, the services offered by a laboratory are critical to client satisfaction and retention. In addition to emphasizing client service through rapid turnaround time and electronic reporting, VCA has veterinarian specialists on staff to assist the veterinarians to interpret the lab's results, make diagnoses or treat disease. Accordingly, the laboratories' staff of professionals includes board certified specialists in pathology, internal medicine, oncology, cardiology, dermatology, neurology and endocrinology. Quality Assurance. VCA's quality assurance programs are intended to ensure that specimens are collected and transported properly, tests are performed accurately, and client, patient and test information is reported and billed correctly. The quality assurance programs include testing quality control specimens of known concentration or reactivity in order to ensure accuracy and precision, routine checks and preventive maintenance of laboratory testing equipment, and personnel standards which ensure that only qualified personnel perform testing. VCA has eight full-time sales and marketing staff in its Laboratory segment. VCA also augments its sales force with field service representatives whose primary responsibility is maintaining relationships with existing customers. To support its marketing efforts, VCA, among other activities, develops marketing literature, attends trade shows, involves itself in trade associations and provides educational services. Premium Pet Food Products Through its Vet's Choice joint venture with Heinz Pet Products, VCA markets and distributes two lines of premium pet food. The first line of products offered by Vet's Choice was a complete line of premium, life-stage pet foods marketed under the brand name Select Balance. The Select Balance line consists of dry and canned dog and cat food products nutritionally tailored to meet the specific dietary needs of dogs and cats in different stages of their lives. In March 1995, the joint venture commenced to market and distribute a second product line of premium therapeutic pet foods, marketed under the brand name Select Care. The Select Care line consists of dry and canned dog and cat food products, nutritionally tailored to meet the specific dietary needs of dogs and cats afflicted with illness or disease or other medical conditions requiring special diets. Marketing and Distribution VCA began selling the Select Balance line of pet foods to veterinary hospitals and clinics in the Spring of 1994. In January 1995, VCA expanded distribution of the Select Balance line to specialty pet store and pet food super-store markets. In March 1995, VCA commenced distribution of its Select Care line of pet foods to veterinary hospitals and clinics. The Select Care line may be consumed throughout all stages of an animal's life, but because of its therapeutic attributes, the products should be used only upon the recommendation of a veterinarian. For this reason, VCA does not intend to expand distribution of the Select Care pet food line beyond veterinary hospitals and clinics. VCA markets its products to veterinary hospitals and clinics principally through its own direct sales force. VCA's sales force generates sales by calling on animal hospitals and assisting customers in inventory planning, arranging and displaying VCA's products and educating the staff about the product line. VCA intends to market its pet food to retail pet stores jointly through its sales force and through distributors. VCA is currently engaged in discussions with several other distributors throughout the United States. The activities of VCA's direct sales force are supervised by a national sales manager and three 59 regional sales managers. VCA's sales force is compensated by a salary plus commission on net sales made in their respective territories. Knowledge and acceptance of VCA's brands by veterinarians and other veterinary professionals is of significant importance to achieving widespread consumer acceptance of VCA's pet products. VCA believes that its leadership position in the animal hospital industry can therefore play a significant role in creating customer awareness and acceptance of the Select Balance and Select Care products. To assist in marketing its pet food products to the veterinary community, VCA has formed affiliations with groups of veterinary professionals in the regional markets in which it competes. These professional affiliations are established and maintained in conjunction with VCA's Partners In Management program, which provides discount purchasing programs, training and marketing programs, continuing education and other professional hospital management services to veterinary hospital owners. More than 1,300 hospitals and 5,800 animal hospital employees have joined VCA's Partners In Management program. In addition to the Partners In Management program's promotional efforts, VCA intends to actively participate in seminars, trade shows and professional conferences and to contact veterinarians and clinic personnel through direct mailings, advertising and promotional campaigns. Manufacturing VCA's Select Balance product line is manufactured by Heinz Pet Products pursuant to a manufacturing agreement between Heinz Pet Products and Vet's Choice. VCA's Select Care product line is manufactured under a contract with an independent manufacturer located in Canada. If either Heinz Pet Products or VCA's other manufacturer were to cease supplying VCA with product, VCA believes it could arrange for manufacture of its product by alternate sources. FEES AND SOURCES OF PAYMENT VCA's fees for provision of veterinary and laboratory services vary upon the complexity of the required procedure, the relative involvement of the applicable professionals and local market conditions. VCA does not incur a significant amount of accounts receivable for the provision of veterinary services since payment for these services is generally received at the time services are provided. VCA offers its laboratory services and sells its pet food on customary commercial terms, requiring payment within 30 days of the date the service or product is performed or shipped. VCA is not dependent upon third party payors for collection of its fees. SYSTEMS VCA realized the importance of management information systems in the past and thus has made a significant investment in these systems. Currently, substantially all of the animal hospitals operate on a common computer system which is linked to a computer at VCA's headquarters. All of VCA's financial and customer records and laboratory results are stored in computer databases, most of which may be accessed by VCA's management. The computer system provides VCA with efficient access to all financial and operating data to monitor operating data and target marketing programs to highly specific customer bases. VCA intends to further upgrade and integrate its management information system. When completed, VCA believes that this enhanced management information system will allow for further cost savings and provide management with a powerful tool in implementing its marketing and operating strategies. COMPETITION The companion animal health care industry is highly competitive. In its Animal Hospital segment, VCA competes primarily with independent veterinarians established in private practices or small regional multi-clinic practices. In addition, certain national companies in the pet care industry, including the operators of super-stores, are developing multi-regional networks of animal hospitals in markets which include VCA's markets. The provision of veterinary services is highly fragmented, with approximately 55,000 veterinarians nationwide practicing in an estimated 16,000 veterinary hospitals and clinics. VCA believes that convenient location, recommendation of friends, reasonable fees and convenient hours are the 60 principal factors in a pet owner's decision as to which veterinarian to use. VCA believes its facilities are competitive and are designed to respond to the needs of the pet owner. Competition in the veterinary diagnostic laboratory industry is intense. VCA believes that there are many diagnostic laboratory companies which provide a broad range of laboratory testing services in the same markets serviced by VCA. Additionally, there are many animal hospitals that provide in- house laboratory services. Competition is based primarily upon quality, price and the time required to report results. Competition among manufacturers of premium pet products is intense among all segments of the dog and cat food markets. Distribution in the veterinary practice and specialty pet shops segment is dominated by two competitors, Hill's, which manufactures Science Diet products, and Iams, which manufactures Iams and Eukanuba products. These companies have extensive experience in the manufacture of premium pet food products, use highly competitive tactics and possess research, development, manufacturing, marketing and financial resources far greater than that of Vet's Choice. VCA believes that its ability to penetrate these markets will be significantly enhanced by its leadership position in the veterinary professional market and by the experience and resources of its joint venture partner, Heinz Pet Products. JOINT VENTURE AGREEMENTS VCA is a party to joint venture agreements relating to the operation of Vet Research Laboratories, LLC ("Vet Research") and Vet's Choice. The following is a brief summary of each of these agreements. Vet Research. In January 1995, VCA significantly expanded its laboratory services to include coverage on the East Coast with the acquisition of Cenvet, Inc. ("Cenvet"). VCA then contributed the Cenvet assets to a joint venture, Vet Research, and its joint venture partner, Vet Research, Inc. ("VRI") contributed the operations of its full service laboratory. VCA is the managing partner in the joint venture and has a 51.0% undivided interest in Vet Research. The operating results of Vet Research are accounted for as part of the consolidated operations of VCA. Cash is allocated pursuant to a formula during each contract year, whereby the first $1.5 million is allocated to VRI; the next $3.0 million is allocated to VCA and the remaining cash is allocated 25 percent to VCA and 75 percent to VRI. The 1995 results include minority interest expense of 52.4 percent of Vet Research's income. VCA has the option in January 1997 to acquire the remaining 49.0 percent interest in Vet Research. Vet's Choice. VCA entered the premium pet foods market in January 1993 when it formed Vet's Choice, a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company, to develop, manufacture, market, distribute and sell premium pet products. VCA is the managing general partner in the venture, with a 50.5% equity interest and is responsible for managing the day-to-day operations of the partnership. Allocation of profits and losses is in proportion to the respective interests of the partners. On or after the earlier of a change of control in VCA or January 1, 2000, Heinz Pet Products may purchase all of VCA's interest in the partnership at a purchase price equal to the fair market value of such interest. If Heinz Pet Products fails to exercise its option prior to January 1, 2001, VCA may purchase all of Heinz Pet Products' interest in the partnership at a purchase price equal to the fair market value of such interest. The proposed acquisition of Pet Practice will not result in a change of control for purposes of the Vets' Choice joint venture. In connection with the formation of Vet's Choice, Heinz Pet Products invested $3.0 million in VCA through its purchase of 583,333 shares of non- voting Series A Convertible Preferred Stock which, at the time of the investment, represented an investment in ten percent of the outstanding equity of VCA. Other Joint Venture Arrangements. VCA also operates several of its animal hospitals through joint ventures or partnerships with one or more of the veterinarians employed at the facility. In each case, VCA is the majority owner and managing partner of the joint venture. When appropriate, VCA anticipates forming similar joint ventures in the future. GOVERNMENT REGULATION The operation of veterinary hospitals and laboratories is not subject to significant government regulation. All of the states in which VCA operates, however, impose various registration requirements. To fulfill these requirements, VCA has properly registered each of its facilities with appropriate governmental agencies and, where required, has appointed a licensed veterinarian to act on behalf of each facility. All veterinary doctors practicing in VCA's clinics are required to maintain valid, 61 unexpired and unrevoked state licenses to practice. VCA believes that some states, in which it does not currently do business, may limit the ability of a corporation to operate facilities at which veterinary medicine is practiced. In addition, although VCA does not anticipate significant additional government regulation, such developments could significantly limit its business or expansion. VCA's growth strategy is dependent principally on its ability to acquire existing animal hospitals and veterinary diagnostic laboratories. Acquisitions may be subject to pre-merger or post-merger review by governmental authorities for anti-trust and other legal compliance. Adverse regulatory action could negatively affect VCA's operations through the assessment of fines or penalties against VCA or the possible requirement of divestiture of one or more of VCA's operations. In October 1995, the staff of the FTC contacted VCA and requested information for an informal inquiry regarding VCA's formation of its Vet Research joint venture. The staff has made no allegation of wrongdoing on the part of VCA and has not initiated a formal investigation. VCA responded to the staff's request and furnished all of the requested information. VCA is not aware of the status of the inquiry. EMPLOYEES At December 31, 1995, VCA had approximately 1,150 full-time-equivalent employees, including approximately 250 licensed veterinarians. None of VCA's employees are covered by a collective bargaining agreement. VCA believes that its relations with its employees are satisfactory. PROPERTIES VCA's corporate headquarters and principal executive offices for VCA and Vet's Choice are located in Santa Monica, California, in approximately 21,000 square feet of space occupied under a lease which expires on March 3, 1999. The lease currently provides for aggregate minimum monthly rental payments of approximately $27,000. VCA maintains leased and owned facilities at 63 other locations which house its animal hospitals and laboratories. VCA owns 12 facilities and the remainder are leased from third parties. For the year ended December 31, 1995, VCA had lease costs of approximately $2,620,000 and VCA expects to have lease costs at facilities existing at December 31, 1995 of approximately $3,608,000 in 1996. Lease costs for the hospitals acquired since December 31, 1995 will amount to approximately $364,000 in 1996. VCA believes that its real property facilities are adequate for its current needs. LEGAL PROCEEDINGS VCA is not a party to any material litigation. 62 EXECUTIVE OFFICERS AND DIRECTORS OF VCA Information with respect to the directors and executive officers of VCA as of March 31, 1996 is as follows:
Name Age Position - ---- --- -------- Robert L. Antin........... 46 Chairman of the Board and Chief Executive Officer of VCA Arthur J. Antin........... 49 Chief Operating Officer, Senior Vice President, Secretary and Director Neil Tauber............... 45 Senior Vice President Tomas W. Fuller........... 38 Chief Financial Officer, Vice President and Assistant Secretary Deborah W. Moore.......... 31 Chief Accounting Officer, Vice President and Controller John B. Chickering, Jr.... 47 Director Richard Gillespie, M.D.... 62 Director John A. Heil.............. 42 Director
Robert L. Antin and Arthur J. Antin are brothers. There are no other family relationships between any director and/or any executive officer of VCA. MR. ROBERT L. ANTIN, a founder of VCA, has served as Chief Executive Officer, President and Chairman of the Board of VCA since its inception. Mr. Antin is responsible for directing all aspects of VCA's business. From September 1983 until founding VCA, Mr. Antin was President, Chief Executive Officer, a director and co-founder of AlternaCare Corp., a publicly held company which owned, operated and developed free-standing outpatient surgical centers. AlternaCare Corp. was acquired by Medical Care International in 1988. From July 1978 until September 1983, Mr. Antin was employed as an officer by American Medical International, Inc. ("AMI"), an owner and operator of health care facilities. While at AMI, Mr. Antin initially served as Director of Marketing of Professional Hospital Services, then as Director of New Business Development responsible for non-hospital related acquisitions and development, and most recently as a Vice President of AMI and President of AMI Ambulatory Center, Inc., a subsidiary of AMI operating a chain of ambulatory care centers. Mr. Antin received his MBA degree with a certification in hospital and health administration from Cornell University in 1975. MR. ARTHUR J. ANTIN, a founder of VCA, has served as Chief Operating Officer, Senior Vice President, Secretary and a Director of VCA since its inception, and is currently responsible for managing animal hospital and veterinary laboratory operations for VCA. From October 1983 to September 1986, Mr. Antin served as Director of Marketing/Investor Relations of AlternaCare Corp., in which he developed and implemented marketing strategies for a network of outpatient surgical centers. Mr. Antin received an M.A. degree in Community Health from New York University and a Post Graduate Certificate in Structured Programming and Business Application design from Columbia University. MR. NEIL TAUBER, a founder of VCA, has served as Senior Vice President and a Director of VCA since its inception and is currently responsible for identifying and effecting the acquisition of independent animal hospitals and veterinary diagnostic laboratories. From 1984 to 1986, Mr. Tauber served as the Director of Corporate Development at AlternaCare Corp., where his responsibilities included 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. MR. TOMAS W. FULLER joined VCA in January 1988 and served as Vice President and Controller until November 1990 when he became Chief Financial Officer. Prior to joining VCA, from 1980 to 1987, Mr. Fuller served as an audit manager 63 for Arthur Andersen LLP. Mr. Fuller holds a BA degree in business/economics from the University of California at Los Angeles (UCLA). MS. DEBORAH W. MOORE, a Certified Public Accountant, joined VCA in September 1992 and served as Controller until becoming Vice President, Chief Accounting Officer in 1995. Ms. Moore served as a staff accountant at Arthur Andersen LLP and subsequently as Controller for Chiat/Day/Mojo Inc. prior to joining VCA. Ms. Moore holds a BA in Economics/Accounting from Claremont McKenna College. MR. JOHN B. CHICKERING, JR., a Certified Public Accountant, is currently the Vice President - Financial Administration for Warner Bros. International Television Distribution. Prior to his employment at Warner Bros., Mr. Chickering served as a staff accountant at KPMG Peat Marwick from August 1975 to June 1977. Mr. Chickering holds an MBA degree with emphasis in accounting and finance from Cornell University. Mr. Chickering has served as a Director of VCA since November 1988. RICHARD GILLESPIE, M.D., was elected to the Board of Directors in June 1995. Dr. Gillespie is a private investor who has investments in several companies in the United States. From 1983 to 1987, Dr. Gillespie was Vice- President, a director and co-founder of AlternaCare Corp. Dr. Gillespie also has served as a director for several other companies, including Lansinoh Laboratories, Inc. and Geriatric Medical Center, and as the general partner of Outpatient Diagnostics Center. Dr. Gillespie holds an MD degree from the University of Tennessee College of Medicine. MR. JOHN A. HEIL, currently serves as the Vice President-Marketing for Heinz Pet Products. Since 1978, Mr. Heil has served in various capacities with other affiliates of the H.J. Heinz Company, including General Manager, Marketing of Ore-Ida Foods, Inc. and Vice President - Marketing and Sales of Star-Kist Foods, Inc. Mr. Heil holds a B.A. degree in economics from Lycoming College. Mr. Heil has served as a Director of VCA since May 1995. BOARD MEETINGS AND COMMITTEES The VCA Board held a total of four meetings during the fiscal year ended December 31, 1995. The VCA Board has an Audit Committee and a Compensation Committee. The VCA Board does not have a Nominating Committee or a committee performing similar functions. During the fiscal year ended December 31, 1995, each director attended at least 75% of the meetings of the VCA Board held while he was a director and of the Committees of the VCA Board on which he served. The Audit Committee met one time and the Compensation Committee met two times during the fiscal year ended December 31, 1995. The Audit Committee's functions include recommending to the VCA Board the engagement of VCA's independent auditors, reviewing and approving the services performed by the independent auditors and reviewing and evaluating VCA's accounting policies and internal accounting controls. The Compensation Committee reviews and approves the compensation of officers and key employees and determines and approves the granting of options under VCA's various stock incentive plans. During the fiscal year ended December 31, 1995, the members of the Audit Committee were Messrs. Robert L. Antin and John B. Chickering, Jr.; and the members of the Compensation Committee were Messrs. John B. Chickering, Jr. and Richard Gillespie, M.D. Mr. Jean-Charles Lignel also served on the Compensation Committee during a portion of fiscal 1995. Mr. Lignel is no longer a director of VCA. COMPENSATION OF DIRECTORS Directors of VCA who are not also employees of VCA receive $1,000 for each meeting of the VCA Board that they attend in person plus reimbursement of all out-of-pocket expenses incurred in attending such meetings. In addition, non-employee directors, John B. Chickering, Jr., John Heil, Richard Gillespie and former non-employee director Jean-Charles Lignel each were granted options to purchase 10,000 shares of VCA Common Stock upon appointment or election to the VCA Board. On the respective anniversaries of their joining the VCA Board, each of the current non-employee directors, if they retain such status, will receive an additional option to purchase 5,000 shares of VCA Common Stock. 64 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the last fiscal year, executive compensation and the grant of options under VCA's various stock incentive plans was administered by the Compensation Committee of the VCA Board. The directors of the Corporation who served on the Compensation Committee were Robert L. Antin, Jean-Charles Lignel and John B. Chickering, Jr. Mr. Robert L. Antin is the Chairman of the Board and Chief Executive Officer of VCA. None of Messrs. Lignel, Chickering or Heil is, nor has any of them ever been, an officer or employee of VCA. Mr. Lignel is no longer a director of VCA. REPORT OF THE COMPENSATION COMMITTEE The following report of the Compensation Committee to the VCA Board shall not be deemed to be included in or incorporated by reference into any filing by VCA under the Act or the Exchange Act including any filing that incorporates Securities Act or Exchange Act filings in whole or in part by reference. GENERAL The Compensation Committee of the VCA Board (the "Committee") is responsible for establishing and administering the policies that govern executive compensation for executive officers and key employees of VCA. COMPENSATION PHILOSOPHY VCA's executive compensation program is designed to (1) provide levels of compensation that integrate pay and incentive plans with VCA's strategic goals so as to align the interests of executive management with the long-term interests of VCA's stockholders; (2) attract, motivate and retain executive talent capable of achieving the strategic business goals of VCA; (3) recognize outstanding individual contributions; and (4) provide compensation opportunities which are competitive to those offered by other companies of similar size and performance. To achieve these goals, VCA's executive compensation program consists of three main elements: (i) base salary, (ii) annual cash bonus and (iii) long-term incentives. Each element of compensation has an integral role in the total executive compensation program. BASE SALARY Base salaries for executive officers are determined on an annual basis by evaluating each executive officer's, including Mr. Robert Antin's, position, duties, responsibilities, tenure, performance and potential contributions to VCA. This determination also takes into account the Committee's assessment of competitive compensation packages for comparable positions in the Southern California market. The Committee made no formal survey of similarly situated companies but instead relied upon the general experience of its members and information supplied by management in assessing the appropriate levels of base compensation. The financial performance of VCA is also considered. Finally, factors consistent with VCA's overall compensation policy are taken into account. VCA also provides to its employees (including Mr. Robert Antin and the other officers) medical insurance and other customary employee benefits. VCA pays term life insurance premiums for the benefit of Messrs. Robert Antin, Arthur Antin, Neil Tauber and Tomas Fuller, which amounted in fiscal 1995 to approximately $29,100, $20,640, $17,400 and $11,300, respectively. ANNUAL CASH BONUSES Historically, executive officers have been eligible for annual incentive bonuses in amounts determined at the discretion of the Committee. In fiscal 1995, the Committee determined to place greater weight on long-term incentives represented by stock options than on the award of annual cash bonuses. Consequently, with the concurrence of the executive officers, VCA awarded no cash bonuses to the executive officers with respect to fiscal 1995 and, in lieu thereof, provided larger individual stock option grants than had historically been the case. The Committee intends that annual cash bonuses be part of VCA's long-term executive compensation program and may elect to continue the practice in fiscal 1996 and subsequent years. Historically, the Committee has considered an award of an annual bonus subjectively, taking into account factors such as the financial performance of VCA, increases in stockholder value, the enhancement of VCA's image and reputation, expansion into new 65 markets, and the achievement of corporate goals and individual performance. The Committee has attributed various weights to these factors based upon their perceived relative importance to VCA at the time compensation determinations were made. LONG-TERM INCENTIVES The Committee provides VCA's executive officers with long-term incentive compensation through grants of stock options. The Committee is responsible for selecting the individuals to whom grants should be made, the timing of grants, the determination of the per share exercise price and the number of shares subject to each option awarded. The Committee believes that stock options provide VCA's executive officers with the opportunity to purchase and maintain an equity interest in VCA and to share in the appreciation of the value of the VCA Common Stock. The Committee believes that stock options directly motivate an executive to maximize long-term stockholder value. The options incorporate vesting periods in order to encourage key employees to continue in the employ of VCA. All options granted to executive officers during fiscal 1995 were granted at the fair market value of the VCA Common Stock on the date of grant. The Committee considers the grant of each option (including those granted to Mr. Robert Antin) subjectively, considering factors such as the individual performance of executive officers and competitive compensation packages in the industry. CHIEF EXECUTIVE OFFICER Mr. Robert Antin's base salary ($265,000 for fiscal 1996) and the size of the stock option grants during fiscal 1995 (options to purchase an aggregate of 280,000 shares of VCA Common Stock) were determined based upon Mr. Robert Antin's services to VCA and the financial performance of VCA in the fiscal year ended December 31, 1995. The most important criteria relied upon by the Committee was its assessment of the leadership and vision provided by Mr. Antin in securing substantial progress toward the achievement of VCA's long-term strategic goals. In particular, the Committee took into account the significant expansion of VCA's presence in the veterinary laboratory business in 1995 and the expansion of its premium line of pet food to include therapeutic foods. In addition, VCA continued its successful acquisition program in the veterinary hospital industry. Further, VCA achieved significant liquidity with the completion of a secondary offering of its Common Stock in November 1995. SUMMARY The Committee believes that its executive compensation philosophy of paying VCA's executive officers by means of base salaries, annual cash bonuses and stock option grants, as described in this report, serves the interests of VCA and VCA's stockholders. Compensation Committee: John B. Chickering, Jr. Richard Gillespie, M.D. Jean Charles Lignel 66 SUMMARY COMPENSATION TABLE The following table shows, as to the Chief Executive Officer and as to each of the other three most highly compensated executive officers (the "Named Executive Officers") whose salary plus bonus exceeded $100,000 during the last fiscal year, information concerning all compensation paid for services to VCA in all capacities during the last three fiscal years. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------------------------ NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTION ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS (2) COMPENSATION - -------------------------- ---- --------- ----------- ---------------- -------------- ------------ Robert L. Antin 1995 $ 241,091 $ -0- $ 8,800 280,000 -0- Chairman of the Board 1994 205,730 30,890 (3) 9,600 25,000 -0- and Chief Executive 1993 196,978 -0- 12,000 90,000 -0- Officer Arthur J. Antin 1995 170,915 -0- 7,200 140,000 -0- Chief Operating 1994 146,953 21,480 (3) 7,200 25,000 -0- Officer, Senior 1993 139,742 -0- 6,000 50,000 -0- Vice President and Secretary Neil Tauber 1995 144,038 -0- 7,200 120,000 -0- Senior Vice 1994 120,000 17,592 (3) 7,200 25,000 -0- President 1993 115,896 -0- 6,000 50,000 -0- Tomas W. Fuller 1995 101,214 -0- 6,000 110,000 -0- Chief Financial Officer 1994 92,500 13,090 (3) 6,000 10,000 -0- and Vice President 1993 88,883 -0- 6,000 50,000 -0- - ----------
(1) Includes automobile allowance. (2) All numbers reflect the number of shares of VCA Common Stock subject to options granted during the fiscal year. (3) Reflects bonus awards granted in March 1995 for services rendered during the fiscal year ended December 31, 1994. 67 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding grants of stock options made during the fiscal year ended December 31, 1995 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ------------------------------------------------------------------ Potential Realizable Value at Assumed Percent of Total Annual Rates of Stock Price Appreciation for Number of Options Granted Exercise or Option Term (1) Options to Employees In Base Price Expiration -------------------------------------------- Name Granted (2) Fiscal Year (3) Per Share (4) Date 5% 10% - ------------------ ------------- ---------------- ------------- ---------- ------------- -------------- Robert L. Antin 80,000 9.4% $10.50 3/4/05 $ 528,271 $1,338,744 200,000 23.4% 12.38 11/7/05 1,556,514 3,944,513 Arthur J. Antin 40,000 4.7% 10.50 3/4/05 264,136 669,372 100,000 11.7% 12.38 11/7/05 778,257 1,972,256 Neil Tauber 40,000 4.7% 10.50 3/4/05 264,136 669,372 80,000 9.4% 12.38 11/7/05 622,606 1,577,805 Tomas W. Fuller 40,000 4.7% 10.50 3/4/05 264,136 669,372 70,000 8.2% 12.38 11/7/05 544,780 1,380,579 - ---------------------
(1) The potential realizable value is based on the assumption that the VCA 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 VCA Common Stock. (2) The option grants set forth on this chart which expire on March 4, 2005 and November 7, 2005 are exercisable in thirty-six (36) and twenty-four (24) equal monthly installments, respectively, commencing on the date of grant. The options may, at the discretion of the administrator of the stock option plan pursuant to which such options were granted, become immediately exercisable upon certain change of control events. The options set forth above were each granted for a term of 10 years. (3) Options covering an aggregate of 854,750 shares were granted to eligible optionees during the fiscal year ended December 31, 1995. (4) The exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares, subject to certain conditions. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth, for each of the Named Executive Officers, certain information regarding the exercise of stock options during the fiscal year ended December 31, 1995 and the value of unexercised options at December 31, 1995 based upon the closing price of the VCA Common Stock on the Nasdaq National Market on December 29, 1995 ($16.875 per share). AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF ALL UNEXERCISED SHARES ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL ON VALUE OPTIONS AT FISCAL YEAR-END YEAR END(1) NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ----------------- ---------------- -------- -------------------------- -------------------------------- Robert L. Antin -0- -0- 165,750/274,584 $1,992,407/$1,448,193 Arthur J. Antin -0- -0- 130,111/147,889 1,669,647/840,128 Neil Tauber -0- -0- 117,027/127,639 1,464,306/745,464 Tomas W. Fuller -0- -0- 116,361/104,306 1,480,689/615,042
68 EMPLOYMENT AGREEMENTS On January 1, 1994, VCA entered into employment agreements with each of Robert L. Antin, Arthur J. Antin, and Neil Tauber, which currently expire on December 31, 1998. Pursuant to the terms of these agreements, during the fiscal year ended December 31, 1996, Messrs. Robert L. Antin, Arthur J. Antin and Neil Tauber will receive an annual base salary of $265,000, $189,000 and $162,000, respectively. This base salary is subject to annual upward adjustment at the discretion of the VCA Board, with a mandatory annual increase by a percentage amount at least equal to the cost of living increase. In addition, the VCA Board has determined that executive officers of VCA may earn bonuses during each calendar year based upon management achieving performance goals established by the Compensation Committee of the VCA Board on an annual basis. VCA may terminate each of the employment agreements for cause or upon mutual agreement. In each of these employment agreements, events constituting "termination by the employee for cause" include (i) the willful breach of any of the material obligations of VCA to the employee under his employment agreement; (ii) the relocation of the chief executive offices of VCA outside of Los Angeles County, California; or (iii) in the case of employees who also serve as members of the VCA Board, the failure of the employee to be reelected to, or the removal of the employee from, the VCA Board. Events constituting "termination by VCA for cause" include (i) conviction of the employee of any felony involving the embezzlement, theft or misappropriation of monies or other property or moral turpitude, or the employee's commission of any fraud or embezzlement against VCA or any of its subsidiaries; or (ii) the willful and continued neglect by the employee of his duties under the employment agreement which continues for 60 days following receipt by the employee of written notice. Both the employee and VCA have the right immediately to terminate the employment agreement without cause by delivery of written notice of the termination to the other. If employment is terminated due to death, the agreements provide that VCA will pay the affected employee severance pay equal to two years' salary. If employment is terminated due to the disability of the employee, without cause or if VCA's principal executive office is moved from Los Angeles, the affected employee is entitled to severance pay in an amount equal to three years' base salary. If employment is terminated due to a change in control of VCA, the affected employee is entitled to severance pay in an amount equal to the greater of (a) three years' base salary and (b) the base salary such employee would have received during the period between the date of such employee's termination and the scheduled expiration date of his employment agreement. If employment is terminated due to the scheduled expiration of an employment agreement, the affected employee is entitled to severance pay in an amount equal to one year's base salary. "Change of control" is defined in each of these agreements to include (a) a consolidation or merger of VCA into another entity in which VCA is not the continuing or surviving corporation or pursuant to which shares of VCA Common Stock would be converted into cash, securities or other property, other than a merger of VCA in which the VCA stockholders immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (b) any sale, lease or other transfer of all or a significant portion of the assets of VCA, (c) the approval by the VCA stockholders of any plan or proposal for the liquidation or dissolution of VCA, (d) the ownership by any person, who at the effective date of the employment agreement owned less than 10% of the VCA Common Stock, of 20% or more of the VCA Common Stock or (e) during any consecutive two year periods, individuals who at the beginning of such period constitute the entire VCA Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the VCA stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. In April 1992, VCA entered into an agreement with Tomas W. Fuller, Chief Financial Officer, Vice President and Assistant Secretary of VCA, pursuant to which it agreed that if Mr. Fuller's employment is terminated without cause (as defined above), VCA will pay to Mr. Fuller severance pay equal to six months' salary. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Exchange Act requires VCA's executive officers, directors and persons who own more than ten percent of a registered class of VCA's equity securities to file reports of ownership and changes in ownership with the Commission. Executive officers, directors, and greater-than-ten percent stockholders are required by the regulations of the Commission to furnish VCA with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, VCA believes that, during the year ended December 31, 1995, all relevant Section 16(a) filing requirements were complied with, except as follows: Ms. Moore, an executive officer, filed one report late relating to her position as an executive officer; Mr. Gillespie, a director, filed one report late relating to his position as a director; Mr. Fuller, 69 an executive officer, filed one report late for a transaction involving the sale of 1,500 warrants and a transaction involving the grant of an option to purchase 40,000 shares of VCA Common Stock; Mr. Robert L. Antin, an executive officer and director, filed one report late involving nine separate transactions relating to the sale, in the aggregate, of 25,500 warrants and the grant of an option to purchase 80,000 shares of VCA Common Stock and one report late involving three separate transactions relating to the sale, in the aggregate, of 30,000 warrants. VCA is aware of no other failures to file required forms. STOCK PERFORMANCE GRAPH COMPARISON OF 50 MONTH CUMULATIVE TOTAL RETURN* AMONG VETERINARY CENTERS OF AMERICA, INC., THE NASDAQ STOCK MARKET - US INDEX AND THE RUSSELL 2000 INDEX [PERFORMANCE GRAPH APPEARS HERE] * $100 INVESTED ON 10/10/91 IN STOCK OR ON 09/30/91 IN INDEX -INCLUDING REINVESTMENT OF DIVIDENDS FISCAL YEAR ENDING DECEMBER 31.
Cumulative Total Return ------------------------------------------------ 10/91 12/91 12/92 12/93 12/94 12/95 Veterinary Ctrs. Amer. Inc. VCAI 100 69 116 116 149 300 NASDAQ STOCK MARKET - US INAS 100 112 130 150 146 207 RUSSELL 2000 IR20 100 106 126 149 146 188
70 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF VCA The following table sets forth certain information provided by VCA regarding beneficial ownership of VCA Common Stock as of May 20, 1996 and as adjusted to reflect the issuance of 3,272,993 shares of VCA Common Stock in connection with the Merger by (i) each director and Named Executive Officer of VCA; (ii) each person known to VCA to be the beneficial owner of more than 5% of the outstanding VCA Common Stock, and (iii) all directors and executive officers of VCA as a group. Except as may be indicated in the footnotes to the table, each of such persons has the sole voting and investment power with respect to the shares owned, subject to applicable community property laws. The address of each person listed is in care of VCA, 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405, unless otherwise set forth below such person's name.
PERCENT OF CLASS PERCENT OF CLASS OWNED OWNED NAME AND ADDRESS NUMBER OF SHARES(1) PRIOR TO MERGER AFTER MERGER(2) - ------------------------------ --------------------- ------------------- ---------------- Savannah Investments Limited 950,000 7.2% 5.7% Kirk House, 4th Floor Grand Cayman British West Indies The TCW Group, Inc. 730,500 5.5% 4.4% 865 South Figueroa Street Los Angeles, California 90017 Robert L. Antin (3) 854,563 6.4% 5.0% Arthur J. Antin (4) 339,398 2.5% 2.0% Neil Tauber (5) 191,472 1.4% 1.1% Tomas W. Fuller (6) 120,390 * * John B. Chickering, Jr. (7) 13,333 * * Richard Gillespie, M.D. (8) 20,000 * * John A. Heil -- -- -- All of VCA's executive officers and 1,541,156 11.1% 8.8% directors as a group (8 persons) (3)(4)(5)(6)(7)(8)(9) - ------------------------------------
* Less than one percent. (1) Under Rule 13d-3 of the Exchange Act, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of VCA Common Stock actually outstanding at May 20, 1996. (2) Assumes the issuance of 3,272,993 shares of VCA Common Stock in the Merger in exchange for 8,632,520 shares of Pet Practice Common Stock, including 8,800 shares of Pet Practice Common Stock underlying options which were exercisable on, or which will become exercisable within, 60 days of May 20, 1996. (3) Includes (i) 101,866 shares held by Mr. Robert Antin's minor children and (ii) 248,805 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. 71 (4) Includes (i) 50,000 shares which Mr. Arthur J. Antin holds as custodian for Mr. Robert L. Antin's minor children under the California Uniform Gifts to Minor's Act, (ii) 43,666 shares held by Mr. Arthur J. Antin's minor children; and (iii) 175,139 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. (5) Includes 156,472 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. (6) Consists of 120,390 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. (7) Consists of 13,333 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. (8) Includes (i) 5,000 shares of VCA Common Stock underlying warrants, and (ii) 10,000 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. (9) Includes, with respect to other executive officers, 2,000 shares of VCA Common Stock reserved for issuance upon exercise of stock options which are or will become exercisable on or prior to July 19, 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Founded in 1986, VCA is a leading companion animal health care company operating in the markets for veterinary care, veterinary diagnostic laboratories and premium pet food. VCA made its first animal hospital acquisition in December 1986, when it acquired West Los Angeles Animal Hospital, one of the largest privately-owned teaching animal hospitals in the United States. Between 1987 and 1992, VCA's operations were directed primarily at establishing a corporate infrastructure and building a network of animal hospitals in selected regional markets. During this period, VCA grew with the acquisition of 17 additional animal hospitals and one veterinary diagnostic laboratory. In 1993, VCA implemented its current business strategy and began to expand the scope of its operations in order to realize its goals of integrating the markets for veterinary care, veterinary diagnostic laboratories and premium pet food. The integration of these three markets is the foundation of VCA's business strategy to leverage its access to its primary customers, veterinarians and pet owners. From January 1, 1993 through December 31, 1995, VCA acquired and integrated into its operations 36 animal hospitals. Also in 1993, VCA entered into a joint venture called Vet's Choice, with Heinz Pet Products, an affiliate of H.J. Heinz Company to develop, manufacture and market a full-line of premium pet food. In March 1994, VCA expanded its veterinary diagnostic laboratory operations by acquiring a 70 percent interest in Professional Animal Laboratory ("PAL"). In January 1995, VCA acquired an additional veterinary diagnostic laboratory, Cenvet, Inc. ("Cenvet"), which it then contributed in March 1995 for a 51 percent interest in a joint venture, Vet Research Laboratories, LLC ("Vet Research"), which combined the operations of Cenvet with that of a full-service veterinary laboratory known as Vet Research, Inc. ("VRI"). In 1995, VCA further expanded its veterinary diagnostic laboratory operations by acquiring three smaller, regional veterinary diagnostic laboratories and by purchasing the remaining 30 percent interest in PAL and four smaller laboratories. RECENT DEVELOPMENTS For a discussion of recent developments see "Business of VCA--Recent Developments." ANTICIPATED EFFECTS OF ACQUISITIONS VCA is currently evaluating the operations of the businesses of Pet Practice and Pets' Rx for purposes of developing a plan for the integration of the businesses to be acquired with VCA's existing operations. Although this plan is not complete 72 at the time of the mailing of this Joint Proxy Statement/Prospectus, it is anticipated that a significant restructuring of the combined operations will be required as a result of the mergers. As a consequence of this restructuring and the consummation of the mergers, VCA anticipates incurring one-time restructuring and related charges in the second and/or third quarters of 1996. The magnitude of these charges has not been quantified at this time. The Pets' Rx acquisition is intended to be accounted for on a pooling of interests basis. Under the pooling rules, the historical financial results of VCA will be restated to reflect the combination, following certain adjustments. Pets' Rx incurred a loss in each of the three fiscal years ended December 31, 1995 and in the first quarter ended March 31, 1996. Following the consummation of the merger, the historical results of VCA will be restated to reflect the historical losses of Pets' Rx. In addition, Pets' Rx is expected to continue to incur losses in the second quarter of 1996. Further, under the pooling rules, the costs incurred by VCA and Pets' Rx in consummating the merger will be expensed during the second quarter. The Pet Practice Merger is intended to be accounted for as a purchase. Under the purchase rules, the Merger is expected to result in a significant increase in the goodwill and other intangibles recorded on VCA's balance sheet. This increase in goodwill and other intangibles will be in addition to the increase resulting from the combination with Pets' Rx, which also has significant goodwill and other intangibles recorded on its balance sheet. As a result, VCA expects that its amortization expense will significantly increase over historical levels. The combined effect of the restructuring and other charges discussed above, the pooling treatment in the Pets' Rx acquisition and the increased amortization expense will have an adverse effect on the results of operations of VCA in each of the second and third quarters of 1996. Further, the effect of the increased amortization expense is expected to temper reported earnings of VCA in the fourth quarter and subsequent periods. BASIS OF REPORTING VCA reports its operations in three business lines--Animal Hospital, Laboratory and Premium Pet Food. Animal Hospital operations include the operations of VCA's animal hospitals. Laboratory operations include the operations of VCA Lab (merged into PAL in March 1994), PAL (acquired in March 1994), Cenvet (from the date acquired, January 1, 1995 through the formation of Vet Research in March 1995), Vet Research and five smaller veterinary laboratories since the date of acquisition. VCA acquired the remaining 30 percent interest in PAL from its minority interest partner effective July 1, 1995. VCA currently owns a 51 percent interest in Vet Research. Premium Pet Food includes the operations of the Vet's Choice joint venture of which VCA owns a 50.5 percent interest. During 1993, Vet's Choice was primarily engaged in developing and testing the formulas for its first product line, Select Balance, and building a marketing infrastructure in anticipation of commencing distribution in 1994. Vet's Choice began to generate revenue in March 1994 with the launch of Select Balance. In 1995, Vet's Choice began selling its second product line, Select Care. VCA's operating results include the results of operations of the joint ventures on a consolidated basis. VCA's animal hospitals use VCA's veterinary diagnostic laboratory services and purchase and resell the pet food products of Vet's Choice. Revenue and the corresponding expense from intercompany sales totaling $1,727,000, $759,000, $344,000 in 1995, 1994, 1993, respectively, and $278,000 and $733,000 in the three months ended March 31, 1995 and 1996, respectively, have been eliminated from VCA's operating results. 73 RESULTS OF OPERATIONS Three months ended March 31, 1996 compared to three months ended March 31, 1995. Revenues The following table summarizes VCA's revenues for each of the three month periods ended March 31:
1996 1995 ------------ ----------- Animal Hospital $17,831,000 $ 9,150,000 Laboratory 12,056,000 5,817,000 Premium Pet Food 1,850,000 541,000 Intercompany Sales (733,000) (278,000) ----------- ----------- $31,004,000 $15,230,000 =========== ===========
Revenues for the Animal Hospital operations increased 94.9% from 1995 to 1996. This growth was primarily the result of growth in the number of facilities owned and operated by VCA. The results for 1996 include the results of 20 veterinary hospitals acquired from April 1, 1995 to December 31, 1995, and the results, from the date of acquisition, for an additional seven veterinary hospitals acquired during the first quarter of 1996. The increase in revenues resulting from changes in volume or prices at existing facilities was approximately 9.1%. Revenues of the Laboratory operations increased 107.3% from 1995 to 1996 due to the inclusion of a full quarter of Vet Research operations and the acquisition of six other veterinary diagnostic laboratories since March 31, 1995. Vet's Choice began generating revenues in March 1994 when it commenced commercial distribution of Select Balance through VCA's network of owned animal hospitals. Distribution was expanded nationally to independent veterinary hospitals in selected regional markets beginning in the second quarter of 1994. In April 1995, Vet's Choice commenced distributing its second product line, Select Care, a complete line of therapeutic diets. Gross Profit Gross profit for each of the three month periods ended March 31, is comprised of the following:
1996 1995 ---------- --------- Animal Hospital $2,441,000 $1,488,000 Laboratory 4,670,000 1,747,000 Premium Pet Food 690,000 186,000 ---------- ---------- $7,801,000 $3,421,000 ========== ==========
Gross profit of the Animal Hospital operations represents the contribution from the hospital operations and is comprised of revenues less all costs of services and products at the hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel, facilities rent and occupancy costs and medical supply costs and costs of goods sold associated with the retail sales of pet food and pet supplies. Animal Hospital gross profit increased 64.0% from 1995 to 1996, representing 16.3% and 13.7% of Animal Hospital revenues in 1995 and 1996 respectively. The decrease in gross profit as a percentage of revenues from 1995 to 1996 was primarily attributable to increased supply costs. Gross profit of the Laboratory operations is comprised of revenues less all direct costs of services at the laboratory, including salaries of veterinarians, technicians and other non-administrative laboratory-based personnel, facilities rent and occupancy costs and supply costs. As a percentage of revenues, laboratory gross profit was 30.0% and 38.7% of revenues in 74 1995 and 1996, respectively. The increase in gross profit as a percentage of revenue from 1995 to 1996 was primarily attributable to the inclusion of a full quarter of Vet Research operations in 1996. Gross profit of Premium Pet Food is comprised of revenues less cost of goods sold, including warehousing, freight and distribution costs. Gross profit as a percentage of revenues in 1995 and 1996 was 34.4% and 37.2%, respectively. The Laboratory and Premium Pet Food operations are expected to continue to carry gross profit margins that are higher than the Animal Hospital operations. Consequently, historical gross profit margins for VCA as a whole may not be indicative of those to be expected in the future. Selling, General and Administrative Expenses VCA Corporate selling, general and administrative expense consists of administrative expense at VCA's headquarters, including the salaries of corporate officers and other personnel, accounting, legal and other professional expense and rent and occupancy. Selling, general and administrative expense for each of the three month periods ended March 31, is comprised of the following:
1996 1995 ---------- ---------- VCA Corporate $1,279,000 $ 827,000 Laboratory 915,000 500,000 Premium Pet Food 1,120,000 935,000 ---------- ---------- $3,314,000 $2,262,000 ========== ==========
VCA Corporate and Laboratory selling, general and administrative expense, as a percentage of Animal Hospital and Laboratory revenues, was 8.9% and 7.3% in 1995 and 1996, respectively. The decrease from 1995 to 1996 was primarily attributable to spreading the expenses over a larger revenue base. Premium Pet Food selling, general and administrative expense as a percentage of Premium Pet Food revenues was 172.8% and 60.5% in 1995 and 1996, respectively. The decrease as a percentage of revenue was primarily attributable to spreading the expenses over a larger revenue base. Depreciation and Amortization Depreciation and amortization expense primarily relates to the depreciation of capital assets and the amortization of excess cost over the fair value of net assets acquired (goodwill) and certain other intangibles. Depreciation and amortization expense increased from $548,000 in 1995 to $1,034,000 in 1996. VCA's policy is to amortize goodwill over the expected period to be benefited, not exceeding forty years. The increase in depreciation and amortization expense is primarily due to the acquisition of hospitals and laboratories. Restructuring Charge The operations of Cenvet (acquired January 1, 1995) were merged into Vet Research Inc.'s operations to form Vet Research Laboratories. The combined operations were restructured to eliminate duplicate operating and overhead costs. In connection with the restructuring, VCA recorded a charge of $1,086,000 in the first quarter of 1995 to accrue the estimated costs associated with the restructuring, consisting primarily of lease termination and severance costs. 75 Year ended December 31, 1996 compared to year ended December 31, 1995. The following table sets forth, for the periods indicated, the percentage of certain items in relation to revenues.
Percentage of Revenues For the Years Ended December 31, -------------------------------- 1995 1994 1993 ------ ----- ----- Revenues.................................. 100.0% 100.0% 100.0% Direct costs.............................. 73.3 75.9 80.3 ----- ----- ----- Gross profit.............................. 26.7 24.1 19.7 Selling, general and administrative....... 11.8 16.4 15.2 Depreciation and amortization............. 3.5 3.5 3.8 Restructuring charge...................... 1.2 -- -- Writedown of assets....................... -- -- 9.1 ----- ----- ----- Operating income (loss)................... 10.2 4.2 (8.4) Interest income........................... 0.8 0.9 1.7 Interest expense.......................... 2.6 3.3 3.4 ----- ----- ----- Income (loss) before minority interest, income taxes and cumulative effect of accounting change......................... 8.4 1.8 (10.1) Minority interest in income (loss) of subsidiaries........................... 3.2 (1.3) (1.3) ----- ----- ----- Income (loss) before income taxes and cumulative effect of accounting change..... 5.2 3.1 (8.8) Provision (benefit) for income taxes...... 2.4 1.7 (0.6) ----- ----- ----- Income (loss) before cumulative effect of accounting change...................... 2.8 1.4 (8.2) Cumulative effect of accounting change.... -- -- 0.9 ----- ----- ----- Net income (loss)......................... 2.8% 1.4% (7.3)% ===== ===== =====
Revenues Revenues in 1993 were derived primarily from VCA's Animal Hospital operations. Laboratory revenues increased significantly with the acquisition of PAL in March 1994 and Cenvet in January 1995 and the subsequent formation of the Vet Research joint venture in March 1995. Also in March 1994, Premium Pet Food began to generate revenues from the sale of Vet's Choice's first product line, Select Balance. Animal Hospital operations represented approximately 54.8%, 74.1% and 95.2% of total Company revenues in 1995, 1994 and 1993, respectively. Laboratory operations represented 40.1%, 23.6% and 4.8% of total Company revenues in 1995, 1994 and 1993, respectively. Premium Pet Food operations represented 5.1% and 2.3% of total Company revenues in 1995 and 1994, respectively. VCA anticipates that Animal Hospital revenues as a percentage of total revenues will continue to decline in future periods as a result of the expansion of VCA's Laboratory operations in 1994 and 1995 and the anticipated growth in sales of Select Balance and Select Care. The following table summarizes VCA's revenues for each of the three years in the period ended December 31, 1995: 76
1995 1994 1993 ----------- ----------- ----------- Animal Hospital $51,437,000 $31,846,000 $24,423,000 Laboratory 37,606,000 10,150,000 1,234,000 Premium Pet Food 4,756,000 996,000 -- Intercompany Sales (1,727,000) (759,000) (344,000) ----------- ----------- ----------- $92,072,000 $42,233,000 $25,313,000 =========== =========== ===========
Revenues of the Animal Hospital operations increased 30.4% from 1993 to 1994 and 61.5% from 1994 to 1995. This growth was primarily the result of growth in the number of facilities owned and operated by VCA. The increase in revenues resulting from changes in volume or prices at facilities operated during all of 1994 and 1995 was 6.0%. Revenues of the laboratory operations increased from 1993 to 1994 due to the acquisition of PAL in March 1994. Revenues increased 270.5% in 1995 due primarily to the acquisition of Cenvet and to the formation of the Vet Research joint venture in March 1995. Prior to 1994, the Vet's Choice Premium Pet Food operations was primarily engaged in developing and testing the formulas for its first product line and building a marketing infrastructure in anticipation of commencing distribution in 1994. Vet's Choice began generating revenues in March 1994 when it commenced commercial distribution of Select Balance through VCA's network of animal hospitals in March 1994. Distribution was expanded nationally to independent veterinary hospitals in selected regional markets beginning in the second quarter of 1994. Vet's Choice revenue increased further in 1995 with the introduction of Select Care in the beginning of 1995. Gross Profit The following table summarizes VCA's gross profit for each of the three years in the period ended December 31, 1995:
1995 1994 1993 ----------- ----------- ---------- Animal Hospital $ 9,381,000 $ 6,252,000 $4,946,000 Laboratory 13,629,000 3,577,000 42,000 Premium Pet Food 1,551,000 349,000 -- ----------- ----------- ---------- $24,561,000 $10,178,000 $4,988,000 =========== =========== ==========
Animal Hospital gross profit represents the contribution from the Animal Hospital operations and is comprised of revenues less all costs of services and products at the animal hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel, facilities rent and occupancy costs and medical supply costs. Animal Hospital gross profit increased from $4,946,000 in 1993 to $6,252,000 in 1994 and to $9,381,000 in 1995, increases of $1,306,000 or 26.4% and $3,129,000 or 50.0%, respectively. As a percentage of Animal Hospital revenues, gross profit decreased from 20.3% in 1993 to 19.6% in 1994 and 18.2% in 1995. The decrease in gross profit contributed by Animal Hospitals as a percentage of Animal Hospital revenues from 1993 to 1994 and to 1995 was attributable primarily to the lower gross profit margins at the newly acquired facilities and, additionally in 1995, to the effect of a promotional campaign designed to expand the customer base. Laboratory gross profit is comprised of revenues less all direct costs of services at the veterinary diagnostic laboratories, including salaries of veterinarians, technicians and other non-administrative laboratory-based personnel, facilities rent and occupancy costs and supply costs. Laboratory gross profit increased from $42,000 in 1993 to $3,577,000 in 1994 and to $13,629,000 in 1995, an increase of $3,535,000 and $10,052,000, respectively. As a percentage of Laboratory revenues, gross profit contributed by Laboratory operations increased from 3.4% in 1993 to 35.2% in 1994 and to 36.2% in 1995. The increase in the gross profit contributed by Laboratory operations as a percentage of revenues in 1994 over 1993 was attributable to the acquisition of PAL in March 1994 and the positive effects of combining the operations of VCA Lab into the PAL operations and, for 1995, the acquisition of Cenvet and the formation of Vet Research in January and March 1995, respectively. 77 Premium Pet Food gross profit is comprised of revenues less cost of goods sold, including freight and distribution costs. Premium Pet Food gross profit totaled $349,000 in 1994 and $1,551,000 in 1995. As a percentage of revenues, gross profit was 35.0% in 1994 and 32.6% in 1995. The decrease in gross profit as a percent of revenue was attributable to the release of Select Care in 1995, which has lower gross profit margins than Select Balance. Gross profit also decreased in 1995 due to increased sales to distributors which have lower gross profit margins than sales to veterinary hospitals, which were VCA's primary source of sales in 1994. Laboratory and Premium Pet Food are expected to continue to realize gross profit margins that are higher than that of the Animal Hospital line of business. Consequently, as these businesses represent an increasing percentage of VCA's revenues, historical gross profit margins for VCA as a whole may not be indicative of those to be expected in the future. Selling, General and Administrative Expenses The following table sets forth VCA's selling, general and administrative expense for each of the three years in the period ended December 31, 1995:
1995 1994 1993 ----------- ---------- ---------- VCA Corporate $ 3,826,000 $2,762,000 $2,248,000 Laboratory 2,921,000 737,000 -- Premium Pet Food 4,086,000 3,428,000 1,614,000 ----------- ---------- ---------- $10,833,000 $6,927,000 $3,862,000 =========== ========== ==========
VCA Corporate selling, general and administrative expense consists of administrative expense at VCA's headquarters, including the salaries of corporate officers and other personnel, accounting, legal and other professional expense, and rent and occupancy costs. VCA Corporate selling, general and administrative expense increased from $2,248,000 in 1993 to $2,762,000 in 1994, and to $3,826,000 in 1995, increases of $514,000 or 22.9%, and $1,064,000 or 38.5% respectively. As a percentage of revenues, VCA Corporate general and administrative expense decreased from 9.2% in 1993 to 8.7% in 1994 and 7.4% in 1995. The decreases from 1993 to 1995 are primarily attributable to spreading the expenses over a larger revenue base. Laboratory selling, general and administrative expense consists primarily of sales and administrative personnel and selling, marketing and promotional expense. Laboratory selling, general and administrative expense increased to $2,921,000 for the year ended December 31, 1995 from $737,000 for the comparable period in 1994, an increase of $2,184,000. As a percentage of Laboratory revenues, Laboratory selling, general and administrative expense increased to 7.8% for the year ended December 31, 1995 from 7.3% for the comparable period in 1994. The increase in selling, general and administrative expense is primarily attributable to the addition of Cenvet in January 1995 and the formation of Vet Research in March 1995. Premium Pet Food selling, general and administrative expense consists primarily of sales and administrative personnel and selling, marketing and promotional expense. Premium Pet Food general and administrative expense increased from $3,428,000 in 1994 to $4,086,000 in 1995, an increase of $658,000 or 19.2%. The increases from 1994 to 1995 were primarily attributable to additional sales and administrative personnel and increases in marketing and promotional expenses associated with the launch of Select Balance in March 1994 and the launch of Select Care in April 1995. The general and administrative expense in 1993 included $709,000 of general, administrative and start-up costs and $905,000 of research and product development costs associated with the development of Select Balance. Depreciation and Amortization Depreciation and amortization expense primarily relates to the depreciation of capital assets and the amortization of excess cost over the fair value of net assets acquired (goodwill) and certain other intangibles. Depreciation and amortization expense increased from $956,000 in 1993 to $1,455,000 in 1994 and to $3,291,000 in 1995, representing 3.8%, 3.5% and 3.5% of revenue in 1993, 1994 and 1995, respectively. VCA's policy is to amortize goodwill over the expected period to be benefited, not exceeding forty years. The increase in depreciation and amortization expense is primarily due to the acquisition of animal hospitals and veterinary diagnostic laboratories. 78 Restructuring Charge The operations of Cenvet were merged into VRI's operations to form Vet Research in March 1995. The combined operations were restructured to eliminate duplicate operating and overhead costs. The restructuring included the consolidation of facilities, staff reductions and the consolidation of ancillary operations. In connection with the restructuring, VCA recorded a charge of $1,086,000 in the first quarter of 1995 to accrue the estimated costs associated with the restructuring, consisting primarily of lease termination and severance costs. Writedown of Assets During 1993, VCA charged $2,310,000 to operations related to a writedown of goodwill and certain intangible assets at three of VCA's facilities. The three facilities that were written down in 1993 will collectively have a net loss in 1996 of approximately $100,000. VCA's goal in 1996 and 1997 is to minimize the facilities' cash flow requirements and ultimately bring the facilities to a breakeven status. Management of VCA believes that VCA's strategy of building a network of animal hospitals is served by continuing to operate these animal hospitals even though the facilities themselves may not generate profits. Operating Income Operating income increased from a loss of $2,140,000 in 1993 to income of $1,796,000 in 1994 and to $9,351,000 in 1995, an increase of $3,936,000 in 1994 and $7,555,000 in 1995. The increases primarily reflect higher operating income at most of VCA's animal hospitals and veterinary diagnostic laboratories, increased pet food sales and an increase in the number of animal hospitals and veterinary diagnostic laboratories owned and operated by VCA. As a percentage of revenues, operating income increased from a loss of 8.4% in 1993 to income of 4.2% in 1994 and to 10.2% in 1995. The operating loss in 1993 resulted from a $2,310,000 writedown of goodwill and certain other intangible assets at three of VCA's facilities (see Notes 2 and 13 of Notes to Consolidated Financial Statements). Operating income in 1995 includes the restructuring charge of $1,086,000 (see Note 14 of Notes to Consolidated Financial Statements). Operating income (loss) in 1993, 1994 and 1995 also includes the operating losses of Vet's Choice amounting to $1,614,000, $3,094,000 and $2,573,000, respectively. Excluding these items, operating income would have increased from $1,784,000 in 1993 to $4,890,000 in 1994 and to $13,010,000 in 1995, an increase of $3,106,000 and $8,120,000 in 1994 and 1995, respectively. As a percentage of revenue, operating income would have been 7.0% in 1993, 11.6% in 1994 and 14.6% in 1995. Interest Income Interest income decreased from $448,000 in 1993 to $366,000 in 1994 and increased to $729,000 in 1995, a decrease of $82,000 or 18.3% and an increase of $363,000 or 99.2%, respectively. These changes are primarily due to changes in VCA's average daily cash balances. As a percentage of revenues, interest income decreased from 1.7% in 1993 to 0.9% in 1994 and to 0.8% in 1995. Interest Expense Interest expense increased from $873,000 in 1993 to $1,382,000 in 1994 and $2,368,000 in 1995, increases of $509,000 or 58.3% and $986,000 or 71.3%, respectively. These increases are primarily due to increases in VCA's outstanding indebtedness incurred for acquisitions. As a percentage of revenues, interest expense decreased from 3.4% in 1993 to 3.3% in 1994 and 2.6% in 1995. Income Taxes Income taxes were $2,238,000, $731,000 and ($152,000) in 1995, 1994 and 1993, respectively. A reconciliation of the provision for income taxes for 1994 and 1995 to the amount computed at the Federal statutory rate is included in Note 11 of Notes to Consolidated Financial Statements. VCA's effective income tax rate for 1995 was higher than the statutory rate and VCA expects that its effective income tax rate may be higher than the statutory rate in the future primarily due to the nondeductibility for income tax purposes of the amortization of goodwill at certain of VCA's facilities. In addition, VCA's effective tax rate was higher than the statutory rate for 1993 due to the nondeductibility of the writedown of assets. 79 Minority Interest Minority interest in income (loss) of the consolidated subsidiaries was $2,910,000, ($540,000) and ($334,000) in 1995, 1994 and 1993, respectively. The increase is primarily due to the earnings of the Vet Research joint venture and the reduced losses of Vet's Choice. LIQUIDITY AND CAPITAL RESOURCES VCA's operations require continued access to cash, primarily to fund acquisitions, reduce long-term debt obligations and to fund property and equipment additions. Cash provided by operations during the years ended December 31, 1995, 1994 and 1993 and the three months ended March 31, 1996 and 1995 was $4,056,000, $1,472,000, $1,592,000, $1,332,000 and $41,000 respectively. VCA's operating and the three months ended March 31, 1996 and 1995 cash flow was adversely impacted by the Vet's Choice joint venture, which had a net cash outflow of $3,043,000, $2,878,000, $133,000, $717,000 and $1,087,000 in the same periods. Excluding the Vet's Choice operations, cash provided by operations in the years ended December 31, 1995, 1994 and 1993 and the three months ended March 31, 1996 and 1995 was $7,099,000, $4,350,000, $1,725,000, $2,049,000 and $1,128,000 respectively. During 1995, 1994, 1993 and the three months ended March 31, 1996 in connection with acquisitions, VCA used cash in the amounts of $9,107,000 (acquisition of 25 hospitals, six veterinary diagnostic laboratories and the remaining 30 percent interest in PAL), $5,948,000 (acquisition of five animal hospitals and one veterinary diagnostic laboratory), $1,021,000 (acquisition of six animal hospitals) and $9,875,000 (acquisition of seven animal hospitals and one veterinary diagnostic laboratory). Additionally, in 1995, 1994 and 1993, VCA paid $250,000, $60,000 and $250,000 to acquire options to purchase the land and building of five facilities. From April 1, 1996 through June 19, 1996, VCA used $3,739,000 in connection with the acquisition of four animal hospitals and two veterinary diagnostic laboratories. During these same periods VCA used $2,067,000, $1,052,000, $649,000 and $948,000 to purchase additions to property and equipment and $4,971,000, $2,494,000, $1,553,000 and $3,000,000 to reduce long-term obligations. In January 1995, Star-Kist Foods, Inc. through its Heinz Pet Products division, purchased 1,159,420 shares of VCA Common Stock at $8.625 per share, resulting in net proceeds to VCA of $9,980,000. In November 1995, VCA completed a secondary public offering of 2,965,026 shares of VCA Common Stock for net proceeds of approximately $33,932,000. Also in 1995, VCA received net proceeds of $8,896,000 in connection with the exercise of 1,271,508 of its redeemable warrants. In connection with the formation of Vet Research in March 1995, VCA issued warrants to purchase 363,636 shares of VCA Common Stock at $11.00 per share (the "Vet Research warrants"). The warrants were purchased at $0.001 per warrant and are exercisable until the fifth day following the last date upon which VCA is permitted to close the purchase of the remaining 49% interest. During 1995, VCA received $550,000 in connection with the exercise of 50,000 of these warrants. In the three months ended March 31, 1996, VCA received net proceeds of $5,330,000 in connection with the exercise of its warrants. In April 1996, VCA received net proceeds of $82,697,000 related to the sale, in an offshore offering and concurrent private placement in the United States, of $84,385,000 of 5.25% convertible subordinated debentures due in 2006. The debentures, non-callable for three years, will be convertible into approximately 2.5 million shares of VCA's common stock at a rate of $34.35 per share. VCA has a $3.1 million unsecured line of credit. The line of credit is at the bank prime rate and converts to a 36-month term loan at December 18, 1996, is not removed. At March 31, 1996, VCA had $3.1 million available under the line. Of its cash and equivalents on hand at December 31, 1995 and 1994, and March 31, 1996 approximately $1,907,000, $2,982,000 and $1,134,000 respectively, was restricted for use by Vet's Choice. In 1996, Vet's Choice used $773,000 of cash, primarily for increases in inventory and cost of sales. During the year ended December 31, 1995, Vet's Choice used $3,075,000 of cash to fund its operating losses, the opening of three regional warehouses, marketing and promotional expenses and an increase in its sales force. In 1994, Vet's Choice used $2,839,000 of cash primarily for start-up and operational costs. As provided for in the Joint Venture Agreement, VCA and Heinz Pet Products each contributed $1.0 million to Vet's Choice in the third quarter of 1995. In May 1996, VCA and Heinz Pet Products contributed $1,010,000 and $990,000, respectively to Vets' Choice. As sales of Premium Pet Food grow, Vet's Choice will require additional cash to fund its working capital requirements (primarily inventory and accounts receivable). Heinz Pet Products has agreed to lend Vet's Choice up to $1.0 million at its bank prime rate plus one-half percent to assist in meeting these working capital needs. Vet's Choice, however, may require additional equity or debt financing. If Vet's Choice is unable to obtain debt financing on favorable terms, it may be necessary for VCA to make additional capital contributions to the venture. 80 VCA, Pet Practice and Pets' Rx have each incurred substantial indebtedness to finance the acquisition of their respective animal hospitals and (in the case of VCA) veterinary diagnostic laboratories. Giving effect to debt incurred in acquisitions subsequent to March 31, 1996 through June 20, 1996 (excluding the acquisition of Pets' Rx), VCA had at March 31, 1996, consolidated long-term obligations (including current portion) of approximately $38.8 million. Pet Practice had at April 3, 1996 consolidated long-term obligations (including current portion) of approximately $20.0 million. At March 31, 1996, Pets' Rx had consolidated long-term obligations (including current portion) of $10.4 million. In addition, on April 17, 1996, VCA issued subordinated debt in an aggregate principal amount of $84.4 million (the "Debentures"). At December 31, 1995 and March 31, 1996, VCA's ratio of long-term debt to total stockholders' equity was 36.3% and 36.4%, respectively. As of March 31, 1996, after giving effect to the Transactions and the sale of the Debentures, the ratio of long-term debt to total stockholders' equity will be 82.8%. VCA expects to incur additional indebtedness in the future to continue its acquisition strategy. VCA has achieved its growth in the past, and anticipates it will continue its growth in the future, through the acquisition of animal hospitals and veterinary diagnostic laboratories for cash, stock and notes payable. VCA intends to fund its future cash requirements primarily from cash on hand, internally generated funds, the net proceeds from the exercise of its warrants (which, if all were exercised, would generate approximately $9.9 million of cash), and borrowings on VCA's $3.1 million unsecured line of credit. VCA believes these sources of funds will be sufficient to continue VCA's operations and planned capital expenditures for at least the next 12 months. A significant portion of VCA's cash requirements is determined by the pace and size of its acquisitions. Consequently, VCA may need to obtain additional debt or equity financings. The type, timing and cash needs, the availability of other financing sources and prevailing conditions in the financial markets. 81 NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement has been adopted by VCA effective January 1996. VCA does not expect implementation of this statement to have a material effect on its financial position or its results of operations. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." The Statement recommends changes in accounting for employee stock-based compensation plans, and requires certain disclosures with respect to these plans. The Statement's disclosures have been adopted by VCA effective January 1, 1996. SEASONALITY AND QUARTERLY FLUCTUATIONS Although not readily detectable because of the impact of acquisitions, VCA's operations are somewhat seasonal. In particular, revenues at VCA's animal hospitals historically have been greater in the second and third quarters than in the first and fourth quarters. The demand for VCA's veterinary services are significantly higher during warmer months because pets spend a greater amount of time outdoors, where they are more likely to be injured and are more susceptible to disease and parasites. In addition, use of veterinary services may be affected by levels of infestation of fleas, heartworms and ticks, the number of daylight hours, as well as general economic conditions. VCA expects its veterinary laboratory operations to experience the same seasonality as its animal hospitals. A substantial portion of VCA's costs are fixed and do not vary with the level of demand. Consequently, net income for the second and third quarters, at individual animal hospitals, generally has been higher than that experienced in the first and fourth quarters. However, should Premium Pet Food sales increase and become a larger percentage of VCA's total revenue, VCA expects these seasonality factors will be reduced. The following table sets forth revenues, gross profit and operating income for each of the quarters since January 1, 1994:
QUARTER ENDED ---------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1995 1995 1995 1995 ------------ ------------ -------- --------- 1995 Revenues........... $26,646 $26,917 $23,279 $15,230 Gross profit....... 6,798 7,632 6,710 3,421 Operating income... 2,850 2,781 3,109 611(1) QUARTER ENDED ------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1994 1994 1994 1994 --------------- ------------- --------- --------- 1994 Revenues........... $11,108 $11,842 $11,370 $ 7,913 Gross profit....... 2,878 3,282 2,642 1,376 Operating income... 538 1,330 220 (292)
__________ (1) Before a restructuring charge of $1,086,000. Including the effect of this charge, the operating loss would have been $475,000. INFLATION Historically, VCA's operations have not been materially affected by inflation. However, if Premium Pet Food sales increase and become a larger percentage of VCA's total revenue, VCA expects inflation to have a minimal impact on its 82 operations in the event that raw material prices and other market conditions change. VCA intends to pass increased costs on to its customers through price increases, although VCA may not be able to adjust its prices immediately. There can be no assurance that VCA's operations will not be affected by inflation in the future. 83 BUSINESS OF PET PRACTICE GENERAL Pet Practice owns and operates veterinary care group practices. Pet Practice is one of the largest and fastest growing providers of companion animal veterinary care in the United States. Pet Practice typically establishes comprehensive networks that include day clinics and 24-hour emergency/acute care clinics. In certain markets, Pet Practice also provides pet boarding and grooming services. Pet Practice believes it is currently one of the few companies pursuing a national strategy of consolidating veterinary care group practices in an effort to create comprehensive veterinary care networks. Pet Practice currently operates 84 veterinary clinics in 11 states. Of those 84 clinics, 54 operate in three established networks, 18 operate in one network in the integration stage and 12 operate in two networks still in the development stage. All of Pet Practice's services are provided on a fee-for-service basis and customers generally remit payment at the time services are delivered. Pet Practice was founded in October 1993 through the acquisition of 15 clinics in Detroit, Michigan. Since that time, Pet Practice has refined its operating model, put in place the existing management team and, as of April 3, 1996, completed the acquisition of 71 additional clinics and opened one newly built clinic. The majority of Pet Practice's management team and the Pet Practice Board have had extensive experience in the strategic development of public companies in fragmented service industries, including the development and implementation of acquisition and integration strategies. In addition, members of Pet Practice's management team have had substantial experience in marketing and brand name development. THE VETERINARY SERVICES INDUSTRY Veterinary care in the U.S. is provided by veterinarians, generally assisted by veterinary technicians. Veterinarians are graduates of four-year accredited veterinary schools and, in most states, become licensed to practice veterinary medicine upon passing national board examinations. They diagnose and treat animal illnesses and injuries, perform surgeries, provide check-ups and prescribe medication. Some veterinarians specialize by type of medicine, such as orthopedics, dentistry, ophthalmology and dermatology, and many specialize by type of animal. There are approximately 115 million dogs and cats in the United States with over 50% of American households owning at least one dog or cat. According to industry studies, Americans spent over $7 billion on veterinary services for companion animals and $2 billion on boarding and grooming services in 1993 out of approximately $20 billion spent on pet care. Industry studies also indicate that over the past decade, the veterinary services market has grown at a compound annual rate of approximately 9%. 84 STRATEGY Pet Practice's strategy is to develop extensive veterinary care delivery networks in selected geographic markets. Pet Practice believes that by developing a comprehensive care delivery network in a market, it can improve convenience to the customer, generate significant cost advantages, deliver higher quality care and increase its attractiveness to customers and employees. Each of Pet Practice's established networks includes a number of "spoke" day clinics that serve as referral locations to one or more strategically located 24 hour emergency/acute care "hub" clinics. In some markets, Pet Practice also provides related services such as boarding and grooming. Pet Practice's 24 hour "hub" clinics typically are larger than "spoke" clinics, utilize sophisticated medical equipment and employ specialists as well as primary care veterinarians. "Spoke" day clinics typically are open from 7 a.m. to 7 p.m. and are designed to provide routine wellness and sick care services. Pet Practice believes that its comprehensive networks provide significant opportunities to cross-refer customers between "hub" and "spoke" clinics as well as to Pet Practice's boarding and grooming programs. Pet Practice typically establishes a "pedestal" position in a market through the acquisition of a quality-oriented veterinary group practice with a significant market presence, an experienced team of veterinarians, a strong local reputation and future growth potential. Pet Practice then densifies the region around the pedestal through complementary acquisitions of practices sharing many of the qualities of the pedestal. Once Pet Practice has established a network of sufficient size in a particular geographic market, it seeks to grow internally in that market. Pet Practice promotes internal growth through (i) implementing sales and marketing programs designed to attract new customers, (ii) creating a consumer recognized brand name image for its veterinary services, (iii) expanding services to existing customers, (iv) enhancing convenience to customers by offering seven- day, extended and 24-hour service, (v) increasing productivity of veterinarians through improved support by technicians, and by freeing them from certain administrative tasks, (vi) enhancing the medical sophistication of services through the addition of specialists, and (vii) selective start-ups of new veterinary clinics. By establishing substantial networks and marketing aggressively, Pet Practice seeks to become the most convenient and most recognized provider of veterinary services in each of its markets. PATIENT SERVICES Pet Practice provides a full range of veterinary and ancillary services through six networks in 11 states, which encompass 84 clinics. The following table illustrates the locations where Pet Practice is providing services:
Number of Network Location Clinics Network Status - ---------------- ------- -------------- Metropolitan Detroit (Michigan, Northern Ohio)................. 24 Established Metropolitan Indianapolis (Indiana, Southern Ohio)............. 10 Established Metropolitan Chicago (Illinois, Northern Indiana).............. 20 Established Florida........................................................ 18 Integration Stage Mid-Atlantic (Delaware, Maryland, West Virginia, New Jersey, 9 Development Stage Eastern Ohio)............................................... Massachusetts.................................................. 3 Development Stage -- Total.......................................................... 84 ==
Veterinarians are the principal provider of veterinary services, often assisted by technicians. Pet Practice seeks to optimize the balance between veterinarians and technicians in the performance of veterinary services. Veterinary specialists are utilized in each network on an internal and external referral basis. Pet Practice provides a broad range of services including wellness care, puppy and kitten starter services encompassing spaying or neutering, vaccination series and exams, and adult pet well care for routine health care and parasite prevention. Sick care is Pet Practice's primary service and ranges from single visits to complicated treatment regimens and surgeries, sometimes involving veterinary specialists. Emergency 24 hour care at selected facilities is another of Pet Practice's important services, 85 often involving intensive care, complex orthopedic and other procedures. Many of Pet Practice's clinics also provide important ancillary services, particularly boarding and grooming. Considerable seasonality of demand for veterinary services exists in the northern half of the United States, where a majority of Pet Practice's facilities are located. Pet Practice has significantly higher revenues during warmer months because pets spend more time outdoors, where they are more likely to be injured and are susceptible to diseases and parasites, which are more prevalent during that time of the year. In the future, to the extent that Pet Practice develops more southern networks and installs programs to diminish the effects of seasonality in the northern states, Pet Practice believes that seasonality of demand will have less of an impact on revenues. NETWORK DEVELOPMENT To date, Pet Practice is developing networks in markets where it believes there are attractive veterinary service demographics and has targeted those markets based on concentration of pet ownership, population density and number of veterinarians. Based on these demographics, Pet Practice's initial network development has focused on the Upper Midwest, the Mid-Atlantic region and Florida. However, as Pet Practice becomes larger, it may pursue selectively the acquisition of large regional pedestal group practices throughout the United States. As Pet Practice completes acquisitions in a target market it begins the process of integrating them into comprehensive pet health care delivery networks of "hub and spoke" clinics. The initial pedestal acquisition in a target market generally provides one or more major clinics that can be transformed into network "hub" clinics, while densification acquisitions generally provide "spoke" clinics. Efforts are made to improve services and business performance through such initial activities as modifying hours of service, changing the mix of services, providing customer service training and improving facilities and equipment. Attention also is given to personnel matters including introduction of Pet Practice's benefit programs, Pet Practice corporate culture and productivity enhancements such as balancing veterinarian/technician ratios and payroll as a function of seasonality. Pet Practice's established networks have "hub" clinics and "spoke" clinics, and sometimes ancillary services such as boarding and grooming. Following is a summary of the types of services provided by clinics in established networks. . "Hub" Clinics. "Hub" clinics are strategically located throughout a region and are open 24-hours per day year round. These clinics are typically larger than "spoke" clinics and offer a full range of services including wellness, sick animal care, surgery, specialties such as orthopedics, dentistry, and oncology, emergency care, and in some instances boarding and grooming. Accordingly, each "hub" clinic also serves as a "center of excellence" on clinical matters. Cross- referrals and consultations among the clinics are encouraged. The "hub" clinic generally offers convenience and services greater in scope than the individual veterinarian practitioner can offer. . "Spoke" Clinics. Four or more "spoke" day clinics typically surround the "hub" clinic and are generally located within 15 miles of the "hub". "Spokes" are approximately one-half the size of "hubs" and are open typically from 7 a.m. to 7 p.m. "Spokes" provide routine wellness and sick care and refer special emergency and after-hours cases to the "hub" clinics. In some instances, "spoke" clinics also offer boarding and grooming. . Ancillary Services. Each network may be further enhanced by ancillary services such as kennels (of which Pet Practice currently operates one) and grooming. In a pet services network, kennels, which provide boarding of pets for short or extended stays, enhance Pet Practice's overall services in concert with the clinics. In addition, kennels and certain clinics offer grooming services, including bathing, hair clipping and nail clipping. Some clinics in the network are unable to provide boarding and grooming due to local ordinances or space limitations. Other clinics offer limited service in cages without the benefits of exercise room or luxury services. For more comprehensive services, the clinics will be able to refer to the network kennels (which may be located at a clinic site) as these are developed. These ancillary services, in turn, are expected to increase the loyalty of network service users through continuum of care. 86 MARKETING Marketing is an important method of attracting customers through various advertising and sales promotion programs and maintaining their loyalty through Pet Practice's customer service culture. Advertising and Sales Promotions Marketing and advertising programs for the majority of independent veterinary practices are generally unsophisticated. Independent veterinary practices have traditionally relied on location, tenure, word-of-mouth and limited advertising (e.g. Yellow Pages) as the primary means of attracting new customers. While Pet Practice will also depend on these techniques to develop and maintain its customer base, management intends to use more sophisticated marketing and advertising to attract new customers and maximize service to existing customers. Therefore, considerable investment has been made in brand name, logo and signage development. A focus of Pet Practice's advertising is women between the ages of 25 and 54, who tend to be the predominant customers for pet care services. Pet Practice targets two types of customers: (i) the relationship customer who visits a veterinary clinic for all veterinary care one or two times per year and (ii) the emergency customer who visits a veterinary clinic (particularly a 24- hour "hub" clinic) because a pet is suddenly ill or injured. Pet Practice utilizes television advertising to attract new customers, increase 24-hour emergency service awareness and to build its brand name recognition within a metropolitan community. Television advertising has been shown to be effective in creating brand name awareness and in building image. Pet Practice's television advertising reinforces Pet Practice's image as a provider of convenient, friendly and caring, high-quality and comprehensive veterinary services. Radio advertising focuses the potential customer's attention on specific, important, seasonal care issues (e.g. heartworm prevention in dogs). Such advertisements remind listeners to check the Yellow Pages for the nearest Pet Practice location. Furthermore, the Yellow Pages are generally effective as a means of attracting emergency customers. For customer convenience, Pet Practice seeks high-traffic locations with attractive signage for its clinics. Pet Practice has invested heavily in highly visible free standing signage with a common clinic sign and logo which reinforces its brand name image. This same sign and logo are reinforced through in-clinic signage and print and television advertising. Each city with multiple practice/clinic locations benefits from the exposure potential customers gain by driving past Pet Practice's other clinic locations. Because most customers choose a veterinarian located within five miles of their homes, geographically targeted direct mail programs can be effective in building market share. Additionally, promotional coupons are occasionally used to encourage return visits for regular veterinary care and increase trial use among those who have not used Pet Practice's services. Reminder cards are mailed to existing customers recommending preventive or routine care. Boarding and grooming services and related wellness services (such as vaccinations) in a convenient choice of settings within the network may further bond relationships with the customer. In each network, Pet Practice also establishes relationships with pet referral sources, such as breeders, retailers and humane societies. Customer Service Culture While Pet Practice's marketing programs seek to attract new customers through consumer awareness, its customer service culture focuses on customer satisfaction and retention. Employees undergo formal customer service training to learn the key elements of assuring customer satisfaction and retention. Company management and employees have jointly developed and monitored a number of customer service standards, policies and programs relating to customer relations and efficient delivery of service. 87 Pet Practice surveys customers on a regular basis to determine satisfaction and evaluate their visits to Pet Practice's clinics. These surveys are used to adapt continually Pet Practice's services to satisfy its customers' desire for convenient, compassionate and informative veterinary care. CLINICAL LEADERSHIP Pet Practice's corporate culture mandates giving the highest priority to assuring state-of-the-art veterinary medical practices, successful outcomes and clinical learning opportunities. Pet Practice encourages clinical learning through continuing education, internal forums, vendor supported events and participation in industry professional societies and meetings. The position of Chief Veterinary Officer ("CVO") was established to provide Pet Practice with a formal advocate for clinical excellence who not only acts as an administrator for this function but who also serves as a clearing house for the expertise that comes with each practice acquired by Pet Practice. The CVO develops relationships with prominent veterinary specialists and selected universities. Detailed interactions take place at the regional level with Veterinary Medical Policy and Procedures Committees ("VMPPCs") established for individual or contiguous areas with rotating representatives from local clinics affiliated with Pet Practice. Area VMPPCs have been instituted in the Detroit, Indianapolis, Chicago, Mid-Atlantic and Florida networks with significant results in protocol development, technology and drug selection and quality assurance. As part of many acquisitions, Pet Practice will have the opportunity to hire various specialists, some board certified by the various colleges of the American Veterinary Medical Association ("AVMA"). These highly skilled veterinarians are expected to apply their expertise in each network, or sometimes nationally in various networks. Management plans to emphasize raising the acuity of services available in the overall mix provided by Pet Practice with the aid of the specialists. Pet Practice management recognizes that pet health is controlled by pet owners. Accordingly, Pet Practice develops educational materials and training programs to support owner education, thus better enabling pet owners to make informed health care choices for their pets. Community involvement by the veterinarians as teachers of good health care practices is stressed. Media advertising is designed generally to share valuable pet care information with the public. EMPLOYER OF CHOICE PROGRAMS Pet Practice's goal is to be considered the employer of choice in the veterinary services industry. To achieve this goal, Pet Practice attempts to create a positive culture and to provide human resource programs seldom available at the individual veterinarian practitioner level. To achieve human resource program goals, Pet Practice offers an employee benefit package not generally available to independent veterinarian practitioners, job security in a changing veterinary care environment, continuing education, management opportunities and an ability to relocate within Pet Practice to different regions of the country. In addition, Pet Practice will offer the benefit of national networking of veterinary professionals which, through formal and informal sharing of resources, experience and expertise, will help ensure that Pet Practice develops and employs some of the best veterinarian practitioners in the veterinary services industry. Employee benefit programs provide health, disability and life insurance and stock option and retirement plans to Pet Practice's employees. In addition, Pet Practice offers many of its employees the opportunity to work either on a full-time or part-time basis to accommodate the personal needs of its practitioners. MANAGEMENT INFORMATION SYSTEMS Management recognizes the importance of systems in driving productivity and supporting Pet Practice's growth plans, and has made and continues to make significant investments in both practice management and financial information systems. Pet Practice is currently in the process of installing a common practice management system in all of its clinics. This practice management system will link point-of-sale terminals in each clinic with the headquarters office, allowing Pet Practice to monitor key operating data on a daily basis, including revenues and number of transactions by type of procedure, inventory activity, clinic labor hours and customer demographic data. In addition, Pet Practice plans to utilize its practice management system to 88 maintain certain of its patient medical records in electronic form, providing efficient and effective access to key clinical patient data. As of June 5, 1996, Pet Practice has substantially completed the installation of this common practice management system in 63 of its clinics. Pet Practice intends to convert the remainder of its existing clinics and clinics acquired through future acquisitions to this practice management system. To maximize administrative efficiency, Pet Practice has substantially centralized its financial information systems. COMPETITION The veterinary services industry is highly fragmented with approximately 16,000 individual small animal private practices competing for clients. Larger practices typically have two or more veterinarians in a group practice configuration. This type of practice represents the preferred source of acquisitions for Pet Practice. Several of these group practices are growing in various metropolitan markets by start-ups or absorption of smaller, weaker practices or the practices of retiring veterinarians. The local veterinarian's principal strengths tend to be strong client relationships and personal service. However, many local veterinarians are limited in their ability to practice state-of-the-art medicine due to lack of time to keep pace with medical advances, limited capital for updating equipment and facilities and recruiting, purchasing and marketing issues. Although customers show increasing preference for convenient hours, only the largest practices are able to schedule 24-hour or extended hour service. Accordingly, Pet Practice as consolidator can gain competitive advantage by nurturing client relationships and overcoming the above limitations of the smaller private practices. By extending the hours of acquired practices, Pet Practice is expected to provide early differentiation as networks are developed by Pet Practice. Furthermore, Pet Practice believes that in recent years, newly graduated veterinarians (approximately 2,050 in 1993) are less inclined to purchase or start private practices due to growing capital requirements and a desire for a less demanding lifestyle. Pet Practice believes that this trend will tend to make it an attractive place for employment and experience gathering for newly graduated veterinarians. Pet Practice is aware of at least three significant efforts to consolidate veterinary services. VCA, which operates approximately 64 clinics, is pursuing a multidirectional strategy encompassing clinic ownership, practice management, pet food development and laboratory services. In addition, Pet Practice is aware of at least two additional significant efforts to consolidate veterinary services, but has experienced no direct competition as a result of these consolidations. There are a growing number of retail chains selling pet foods and other products from large, well-stocked "superstores" in important retail locations, which are within Pet Practice's markets. Two of the leading superstore chains compete with Pet Practice in that they have initiated veterinary clinics in their stores. One of the superstore chains has plans with a veterinarian entrepreneur both to accelerate the installation of veterinary practices in its stores and increase the medical acuity of its offered services. Pet Practice believes that it can successfully compete with the leading superstore chains in that the superstore chains do not offer, for example, the number of locations, convenience and extensive range of services provided by Pet Practice's pet care delivery networks. To date, other superstore chains have chosen not to initiate such programs in an effort to align themselves with the independent veterinarian practitioner community. Accordingly, Pet Practice does not view these superstore chains as competitors and, in fact, has a co-operative referral relationship with one such superstore chain. However, there can be no assurance that, in the future, such superstore chains will not compete with Pet Practice. LICENSING AND CERTIFICATION; PROFESSIONAL ASSOCIATIONS; REGULATION Veterinary care in the U.S. is provided by veterinarians, generally assisted by veterinary technicians and assistants. Veterinarians are graduates of four-year accredited veterinary schools and, in most states, become licensed to practice veterinary medicine upon passing the National Board Examination ("NBE") and the Clinical Competency Test ("CCT") administered by the National Board of the Examination Committee. State licensure of a veterinarian is granted, in most instances, based on each state's criteria established by reference to the national passing scores on the NBE and the CCT. Veterinary technicians and assistants are regulated under most states' veterinary practice acts. Standard testing and licensing throughout the U.S. is being 89 promoted by veterinary educators with some support by the American Veterinary Medical Association ("AVMA"). The Veterinary Technician National Examination is currently being offered in 40 states. Most veterinary clinics employ on-the-job trained veterinary assistants. The AVMA is the largest organization in the veterinary services industry with more than 56,000 veterinarian members (representing about 80% of the veterinary profession), of whom more than 42,000 are engaged in clinical practice. Of that number, approximately 30,000 are engaged exclusively in small animal practice and about 5,000 are in mixed (both large animal and small animal) practices focusing predominantly on small animals. The AVMA sets policy and influences the veterinary profession's direction and coordinates activities of subordinate bodies and specialty groups, but it does not act as a regulatory body. The American Animal Hospital Association, with approximately 16,000 members, is an organization dedicated to enhancing the abilities of veterinarians to provide quality medical care to companion animals, conduct successful practices, maintain their facilities with high standards of excellence and meet the public's needs for veterinary care. Each state has an association that varies in influence and size. Some of these state associations are involved in regulatory activity in conjunction with state veterinary boards, including investigations with regard to disciplinary actions or facility inspections and/or licensing. In addition, there are numerous local county and community organizations which usually serve as social and educational organizations. The laws of some states prohibit veterinarians from splitting fees with non-veterinarians and prohibit business corporations from providing veterinary services through the direct employment of veterinarians. These laws and their interpretations vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. The states in which Pet Practice operates which have laws prohibiting business corporations from providing veterinary services through the direct employment of veterinarians are, Delaware, Illinois, Indiana, Ohio, New Hampshire, New Jersey and West Virginia. Pet Practice believes that its operations as currently conducted are in material compliance with laws concerning corporate practice of veterinary medicine based upon discussions with the appropriate governmental regulatory agency in each of the states in which it operates. TRADEMARKS Pet Practice owns a number of registered trademarks and has filed applications to register additional trademarks and service marks with the United States Patent and Trademark Office, including "The Pet Practice" and related logos. Pet Practice believes Pet Practice trademarks and logos will be important components in its merchandising and marketing strategy and that it will have all service and trademark rights necessary to conduct business under the Pet Practice name. EMPLOYEES At April 1, 1996, Pet Practice had approximately 1,125 employees. Of these, approximately 10 are corporate management, 190 are veterinarians, 875 are other clinic personnel including veterinary technicians, receptionists, veterinary assistants and groomers, 20 are field management and 30 are administrative and clerical. None of Pet Practice's employees is represented by a labor union and Pet Practice is not aware of any current activity to organize any of its employees. Management considers relations between Pet Practice and its employees to be good. INSURANCE Pet Practice believes that it maintains the types and amounts of insurance customary in the veterinary services industry, including coverage for general liability, product liability, property damage, workers' compensation and malpractice liability. In most states, pets are considered property and are covered by the owner's homeowners' insurance. The liability of a veterinarian practice for malpractice is generally limited to the cost of the pet or the medical service performed. Pet Practice considers its insurance coverage to be adequate both as to risks and amounts. 90 PROPERTIES Pet Practice's principal executive offices are located at 1018 West Ninth Avenue, King of Prussia Pennsylvania. In addition, Pet Practice leases other office space and clinical facilities and owns 10 clinics, eight of which are subject to mortgages, in various cities in the United States. See Note 5 of Notes to Pet Practice's Consolidated Financial Statements for information concerning Pet Practice's mortgages and leases for its facilities. Pet Practice does not anticipate that it will experience any difficulty in renewing any such leases upon their expiration or obtaining different space on comparable terms if such leases are not renewed. Pet Practice believes that these facilities are well maintained and are of adequate size for present needs and planned expansion in the near future. In general, Pet Practice intends to lease rather than purchase facilities. LEGAL PROCEEDINGS From time to time, Pet Practice is party to certain claims, suits and complaints which arise in the ordinary course of business. Currently, there are no such claims, suits or complaints which, in the opinion of management, would have a material adverse effect on Pet Practice's financial position, liquidity or results of operations. EXECUTIVE OFFICERS OF PET PRACTICE Certain information with respect to the executive officers of Pet Practice is set forth below:
Age at Name December 31, 1995 Position ---- ------------------ -------- Stephen F. Nagy............. 51 Chairman of the Board and Director Peter J. Cohen.............. 41 President, Chief Executive Officer and Director Andrew S. Dworkis, D.V.M.... 52 Senior Vice President -- Development, Chief Veterinary Officer and Director Warren D. Barratt........... 36 Vice President, Chief Financial Officer and Secretary Mark G. Hardin.............. 45 Controller Lori Stokes-Powers.......... 40 Vice President -- Human Resources Donna Yokich Schlitt........ 33 Director of Marketing Linda Larson................ 48 Director of Information Systems
STEPHEN F. NAGY has been Chairman of the Board of Pet Practice since March 1995 and a director of Pet Practice since October 1993. Mr. Nagy was Vice President of Pet Practice from October 1993 to March 1995. He also acted as President of Pet Practice from October 1993 to February 1994. Mr. Nagy has been Executive Vice President of Foster Management Company, an investment advisor, and general partner of investment funds managed by it since 1989. PETER J. COHEN has been President and a director of Pet Practice since February 1994 and Chief Executive Officer of Pet Practice since March 1995. Mr. Cohen was Chief Operating Officer of Pet Practice from February 1994 to March 1995. He previously served as Vice President of Sales at National Media Corporation, a leading television direct response and marketing company, from 1992 until joining Pet Practice. He was Senior Vice President of Corporate Operations at Nutri/Systems, Inc., a 1,700 clinic national weight loss management company, from 1989 until 1992; Executive Vice President of Operations and Marketing for The Circle K Corporation, a 4,600 location convenience store chain, from 1986 to 1989; and held various management positions with The Southland Corporation, the nation's largest convenience store operator, from 1977 to 1985. ANDREW S. DWORKIS, D.V.M. has been Senior Vice President--Development of Pet Practice since February 1994 and Chief Veterinary Officer and a director of Pet Practice since October 1993. Dr. Dworkis was the founder of Pet Practice's initial acquisition, Professional Veterinary Hospitals of America, Inc. ("PVH"), where he was a veterinary practitioner and served in various executive capacities, including President and Chief Veterinary Officer, from that company's inception in 1983 through February 1994. Prior to 1983, Dr. Dworkis was in private practice in the Detroit area. 91 WARREN D. BARRATT has been Vice President and Chief Financial Officer of Pet Practice since June 1994. From 1982 until joining Pet Practice, Mr. Barratt held various management positions with Price Waterhouse LLP, most recently as Senior Manager. MARK G. HARDIN has been the Controller of Pet Practice since December 1994. He previously served as Controller of Everfast, Inc., a retailer and wholesaler of decorative fabrics, from February 1991 to June 1994. From December 1986 until February 1991, Mr. Hardin served as Assistant Controller for McCrory Stores, Inc., a variety retailer. LORI STOKES-POWERS has been Vice President--Human Resources of Pet Practice since June 1994. She previously served as Employee Relations Manager for the Dairy Division of Kraft General Foods, Inc. from 1989 until joining Pet Practice. DONNA YOKICH SCHLITT has been National Director of Marketing for Pet Practice since June 1994. From August 1990 until June 1994, she was the Director of Marketing for PVH. She has 15 years of marketing experience, including her positions as Associate Brand Manager at the Stroh Brewery Company from 1986 until joining Pet Practice, Advertising Coordinator for Merrill Lynch, Pierce, Fenner and Smith Incorporated from 1985 to 1986, and in various marketing capacities for two architectural firms from 1980 to 1985. LINDA LARSON has been Director of Information Systems of Pet Practice since February 1995. Prior to joining Pet Practice, Ms. Larson was Director of Information Systems at NovaCare, Inc.'s Medical Rehabilitation Hospital Division. From 1987 to 1991, she was Manager of Information Systems at the Specialty Hospital Group of National Medical Enterprises, Inc. No family relationship exists between any directors or executive officers of Pet Practice. Executive officers serve at the discretion of the Pet Practice Board. Compensation Information The following table sets forth information concerning the compensation of Pet Practice's Chief Executive Officer and each of the other most highly compensated executive officers of Pet Practice whose total annual salary and bonus exceeded $100,000 for fiscal 1994 and 1995. Summary Compensation Table --------------------------
Annual Compensation Long Term Compensation --------------------------------------------------------------------------- Other Name and Principal Annual Awards Position Year(3) Salary($) Bonus($) Compensation($) Options(#) - --------------------------------------- ------- ------------ ---------- --------------- ------------- John H. Foster 1995 17,500(2) 0 0 0 Director (1) 1994 30,000(2) 0 0 0 Peter J. Cohen 1995 157,269 38,448 528(6) 10,000 President (1) 1994(4) 132,115 39,000(5) 0 0 Andrew S. Dworkis, D.V.M. 1995 115,492 5,291 15,128(7) 5,000 Senior Vice President--Development 1994 110,000 0 15,160(8) 0 and Chief Veterinary Officer Warren D. Barratt 1995 89,544 17,860 346(6) 7,500 Vice President and Chief Financial 1994(9) 45,500 6,951 0 0 Officer
_________________________________ (1) Effective March 13, 1995, Mr. Foster relinquished his positions as Chairman and Chief Executive Officer and Stephen F. Nagy was appointed Chairman of the Board and Peter J. Cohen was appointed Chief Executive Officer of Pet Practice. Mr. Foster is currently a director of Pet Practice. 92 (2) Represents a management fee of $2,500 per month paid to Foster Management Company, of which Mr. Foster is the sole stockholder. The agreement to pay a monthly management fee was terminated as of August 1995. (3) Pet Practice commenced operations on October 27, 1993. As a result, no executive officer of Pet Practice had an annual salary and bonus in excess of $100,000 in 1993 and therefore, no information is set forth herein with respect to 1993. (4) Mr. Cohen's employment with Pet Practice commenced on February 1, 1994. (5) Includes $7,500 paid to Mr. Cohen in 1993 as a bonus with respect to the commencement of his employment with Pet Practice. (6) Consists of contributions made by Pet Practice to The Pet Practice, Inc. 401(k) Retirement Plan (f/k/a the Professional Veterinary Hospitals of America, Inc. 401(k) Retirement Plan) (the "Retirement Plan") on behalf of such executive officer. The dollar value of other perquisites and personal benefits was less than the lesser of $50,000 or 10% of the total annual salary and bonus for such named executive officer, and, accordingly, has been omitted. (7) Consists of a $15,000 allowance for automobile and other reimbursed expenses and a $63 contribution made by Pet Practice to its Retirement Plan on behalf of Dr. Dworkis. The balance of such compensation relates to miscellaneous items. (8) Consists of a $15,000 allowance for automobile and other reimbursed expenses and a $95 contribution made by Pet Practice to its Retirement Plan on behalf of Dr. Dworkis. The balance of such compensation relates to miscellaneous items. (9) Mr. Barratt's employment with Pet Practice commenced on June 2, 1994. The following table sets forth the grants of stock options to the executive officers named in the Summary Compensation Table during the fiscal year ended January 3, 1996. The amounts shown for each of the named executive officers as potential realizable values are based on arbitrarily assumed annualized rates of stock price appreciation of five percent and ten percent over the exercise price of the options during the full terms of the options, which would result in stock prices of approximately $20.78 and $33.02, respectively. The amounts shown as potential realizable values for all stockholders represent the corresponding increases in the market value of 8,492,100 outstanding shares of the Pet Practice Common Stock held by all stockholders as of January 3, 1996, which would total approximately $176,465,838 and $280,409,142, respectively. No gain to the optionees is possible without an increase in stock price which will benefit all stockholders proportionately. These potential realizable values are based solely on arbitrarily assumed rates of appreciation required by applicable Commission regulations. Actual gains, if any, on option exercises and holdings of Pet Practice Common Stock are dependent on the future performance of the Pet Practice Common Stock and overall market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved.
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ------------------------------------------------------------ Potential Realizable Value at Assumed Percent of Annual Rates of Stock Price Total Options Appreciation for Option Term Number of Granted to Exercise ---------------------------------------- Options Employees Price Per Name Granted Fiscal Year Share Expiration Date 5% 10% - --------------------------- ---------- -------------- ----------- ----------------- ----------------- ------------------- All Stockholders' Stock Appreciation N/A N/A N/A N/A $176,465,838 $280,409,142 John H. Foster............... 0 0 N/A N/A N/A N/A Peter J. Cohen............... 10,000 11.5% $12.75 09/19/05 80,300 202,700
93 Andrew S. Dworkis, D.V.M..... 5,000 5.8% $12.75 09/19/05 40,150 101,350 Warren D. Barratt............ 7,500 6.8% $12.75 09/19/05 60,244 152,025
The following table sets forth the number and value of options held by the executive officers of Pet Practice named in the Summary Compensation Table. During the fiscal year ended January 3, 1996, none of the executive officers named in the Summary Compensation Table exercised any options to purchase Pet Practice Common Stock. FISCAL YEAR-END OPTION VALUES
Value of Unexercised Number of Unexercised In-The-Money Options at January 3, 1996 Options at January 3, 1996(1) -------------------------------- --------------------------------- Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- -------------------------------- --------------------------------- John H. Foster.............. N/A N/A Peter J. Cohen.............. 0/10,000 $0/0 Andrew S. Dworkis, D.V.M.... 0/5,000 $0/0 Warren D. Barratt........... 0/7,500 $0/0
__________________________ (1) In-the-money options are those for which the fair market value of the underlying Pet Practice Common Stock exceeds the exercise price of the option. The value of in-the-money options is determined in accordance with regulations of the Commission by subtracting the aggregate exercise price of the option from the aggregate year-end value of the underlying Pet Practice Common Stock. Director Compensation Directors of Pet Practice do not receive fees for service as directors but are reimbursed for out-of-pocket expenses. During 1994 and 1995, Pet Practice paid Foster Management Company (an investment advisor of which John H. Foster, a director of Pet Practice, is the Chairman of the Board and sole stockholder), an aggregate of $47,500 in management fees (at the rate of $2,500 per month) and approximately $48,000 as reimbursement of out-of-pocket expenses. The agreement to pay a monthly management fee terminated upon completion of Pet Practice's initial public offering. In August 1995, Pet Practice paid Foster Management Company a fee of $500,000 for its assistance in effectuating Pet Practice's initial public offering. Employment Arrangements Pet Practice has entered into an agreement, which is terminable at will, with Peter J. Cohen. The agreement provides that Mr. Cohen will receive a base salary of $150,000 per year with a possible bonus, at the discretion of the Chairman of the Board of Pet Practice, of up to 30% of such base salary each year. The agreement also sets forth other employee benefit arrangements. In connection with the acquisition by Pet Practice of PVH, Dr. Dworkis entered into a five-year employment agreement. The agreement provides for Dr. Dworkis to receive an annual base salary of $110,000, subject to merit increases as determined by the Pet Practice Board, and, during the fourth and fifth years of his employment, to earn bonuses, payable in cash and Pet Practice Common Stock, on terms approved by the Pet Practice Board. The agreement also provides that in the event that Dr. Dworkis' employment with Pet Practice is terminated other than voluntarily, by death or disability or for due cause (as defined in the agreement), Pet Practice shall pay Dr. Dworkis 70% of his base salary for a period of three years. In addition, Dr. Dworkis purchased 20,000 shares of Pet Practice Common Stock at $.055 per share. Such shares are subject to 94 repurchase by Pet Practice for $.055 per share in the event of the termination of Dr. Dworkis' employment with Pet Practice prior to January 1998. In addition, Pet Practice has entered into agreements, which are terminable at will, with each of Warren D. Barratt, Lori Stokes-Powers, Mark G. Hardin, Donna Yokich Schlitt and Linda Larson which set forth, among other things, the base salary, bonus, equity participation, and other employee benefit arrangements for each of them. Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee of the Pet Practice Board for fiscal 1995 were R. Bruce Mosbacher, John H. Foster, Stephen F. Nagy and Charles Velge. Mr. Foster, Chairman of the Board and Chief Executive Officer of Pet Practice during fiscal 1995 and a director of Pet Practice, was also Chairman of the Board, Chief Executive Officer, a director and a member of the Compensation Committee of each of NovaCare, Inc. and Apogee, Inc. during fiscal 1995. Mr. Nagy, a director of Pet Practice and since March 1995, Chairman of the Board of Pet Practice, was also a director of Hearing Health Services, Inc. (a company of which Mr. Foster is Chairman of the Board and Chief Executive Officer) and Chairman of the Board of Valley Forge Dental Associates, Inc. (a company of which Mr. Foster is a director). As discussed below, Pet Practice has engaged in a variety of transactions with a limited partnership of which John H. Foster and Stephen F. Nagy are general partners of the general partner and Foster Management Company, an investment advisor of which Mr. Foster is the Chairman of the Board and sole stockholder and Mr. Nagy is an Executive Vice President. In connection with Pet Practice's initial capitalization, the Principal Stockholder, an investment partnership operated by Foster Management Company (an investment advisor of which John H. Foster is the Chairman of the Board and sole stockholder), purchased 3,600,000 shares of Pet Practice Common Stock for $198,000, and 8,000 shares of mandatory redeemable preferred stock ("Redeemable Preferred Stock") for $800,000. In August 1995, Pet Practice redeemed the Redeemable Preferred Stock, which was mandatorily redeemable upon the completion of Pet Practice's initial public offering, for an aggregate redemption price of $800,000, plus $117,128.77 in accrued dividends. John H. Foster and Stephen F. Nagy are general partners of the general partner of the Principal Stockholder. In October 1993, Pet Practice entered into agreements with the Principal Stockholder whereby the Principal Stockholder lent Pet Practice up to $20,000,000 pursuant to 8% Promissory Notes the ("8% Promissory Notes") due August 30, 1998. Pet Practice borrowed $12,391,000 from the Principal Stockholder pursuant to the 8% Promissory Notes. In addition, the Principal Stockholder guaranteed certain loan obligations of Pet Practice. In August 1995, Pet Practice repaid the principal amount of the 8% Promissory Notes together with $1,618,265.54 in accrued interest from the net proceeds of Pet Practice's initial public offering. Finally, in August 1995, Pet Practice paid off all outstanding loan obligations which were guaranteed by the Principal Stockholder. During 1994 and 1995, Pet Practice paid Foster Management Company an aggregate of $47,500 in management fees (at the rate of $2,500 per month) and approximately $48,000 as reimbursement of out-of-pocket expenses. The agreement to pay a monthly management fee terminated upon completion of Pet Practice's initial public offering. In August 1995, Pet Practice paid Foster Management Company a fee of $500,000 for its assistance in effectuating Pet Practice's initial public offering. Pet Practice believes that the terms of such transactions with Foster Management Company are no less favorable to Pet Practice than the terms Pet Practice could have obtained from non-affiliated parties. However, since such transactions were not the result of third-party negotiations, there can be no assurance that Pet Practice could not have obtained more favorable terms from a non-affiliated party. Certain Transactions Pet Practice has engaged in a variety of transactions with the Principal Stockholder, an investment partnership of which John H. Foster and Stephen F. Nagy are general partners of the general partner, and Foster Management Company, an investment advisor of which Mr. Foster is the Chairman of the Board and sole stockholder and Mr. Nagy is the Executive Vice President. See "Compensation Committee Interlocks and Insider Participation." 95 Pet Practice sold to each of the directors and executive officers of Pet Practice the following shares of Pet Practice Common Stock in the following months for $.08 per share, which shares of Pet Practice Common Stock vest over a five-year period contingent upon continued service: in February 1994, 120,000 shares of Pet Practice Common Stock to Peter J. Cohen, President, Chief Executive Officer and a director of Pet Practice; in March 1994, 5,000 shares of Pet Practice Common Stock each to R. Bruce Mosbacher, Foster Bam, Carlo Grosso, James C. New and Charles Velge, directors of Pet Practice; and in June 1994, 10,000 shares of Pet Practice Common Stock to Warren D. Barratt, Vice President and Chief Financial Officer of Pet Practice, and 5,000 shares of Pet Practice Common Stock to Lori Stokes-Powers, Vice President--Human Resources of Pet Practice. In connection with the proposed Merger with VCA, the vesting provisions with respect to 5,000 shares of Pet Practice Common Stock have been waived for each of Messrs. Cohen, Mosbacher, Bam, Grosso, New and Velge, subject to consummation of the Merger. Pet Practice has entered into stock purchase agreements with each of its directors and executive officers (except John H. Foster and Stephen F. Nagy) (the "Stock Purchase Agreements") pursuant to which such individuals purchased their respective shares of Pet Practice Common Stock. The Stock Purchase Agreements provide for restrictions on the sale of such shares and further provide that Pet Practice has the option to repurchase any such shares which have not become vested through the passage of time at $.08 per share upon the termination, for any reason whatsoever, of such individual's directorship or employment, as the case may be, with Pet Practice. Except as provided in the immediately preceding paragraph, such restrictions and repurchase rights shall continue to be applicable on the same basis to the VCA Common Stock received by such individuals in the Merger in exchange for such shares of Pet Practice Common Stock. Pet Practice and each of Messrs. Bam, Barratt, Cohen, Grosso, Mosbacher, New and Velge and Ms. Stokes-Powers agreed that, in the event of a proposed sale of control of Pet Practice, each of such individuals will be permitted, or may be required, to sell a number of those shares of Pet Practice Common Stock covered by his or her respective Stock Purchase Agreement as shall be proportionate to the number of shares of Pet Practice Common Stock that the controlling stockholders shall sell of the shares owned by them, for the same consideration per share and on the same terms and conditions received by such controlling stockholders in such sale of control. Dr. Andrew S. Dworkis was a stockholder of PVH, which Pet Practice acquired in October 1993. In consideration for his stock in PVH, Pet Practice paid Dr. Dworkis $483,500 in cash and a contingent, non-interest bearing note in the principal amount of approximately $233,000, and agreed to pay Dr. Dworkis certain additional cash payments if the value of PVH is validated as evidenced by its achievement of certain financial and operational goals. In June 1995, Pet Practice renegotiated certain of such additional cash payments to eliminate certain performance criteria in exchange for a non-interest bearing note in the principal amount of approximately $311,000. In connection with the acquisition of PVH, Dr. Dworkis purchased 57,067 shares of Pet Practice Common Stock for $.055 per share. Dr. Dworkis is a partner in a partnership which leases six veterinary clinics to Pet Practice. The lease agreements provide for annual base rental rates currently ranging from $1,634 to $7,117 per month. All of the leases are "triple net" leases. Four of the leases expire in October 2003 with, in each case, an option to renew for five additional years. One of the leases expires in October 1998 with one five-year renewal option and one of the leases expires in February 1997 with two one-year renewal options. During the period from October 27, 1993 to December 29, 1993, and the fiscal years ended December 28, 1994 and January 3, 1996, Pet Practice paid $44,800, $268,800 and $268,800, respectively, to the partnership pursuant to the leases. In connection with the acquisition of PVH, Dr. Dworkis entered into a five-year employment agreement with Pet Practice. In addition, Dr. Dworkis purchased 20,000 shares of Pet Practice Common Stock at $.055 per share. Such shares are subject to repurchase by Pet Practice for $.055 per share in the event of the termination of Dr. Dworkis' employment with Pet Practice prior to January 1998. In connection with the proposed Merger with VCA, the vesting provisions with respect to 5,000 of such shares of Pet Practice Common Stock have been waived, subject to consummation of the Merger. See "Employment Arrangements." On August 9, 1994, Pet Practice executed a demand promissory note payable to United States Trust Company of New York ("U.S. Trust") (the "First U.S. Trust Note") in the principal amount of the lesser of the amount borrowed or $7,000,000, with an interest rate equal to U.S. Trust's prime rate. On September 28, 1994, the First U.S. Trust Note was amended and restated and the maximum principal amount thereof was increased from $7,000,000 to $8,000,000, payable on demand together with interest thereon at U.S. Trust's prime rate. Additionally, on December 5, 1994, Pet Practice executed a demand 96 promissory note payable to U.S. Trust (the "Second U.S. Trust Note") in the principal amount of the lesser of the amount borrowed or $5,000,000, with an interest rate equal to U.S. Trust's prime rate. On February 27, 1995, Pet Practice executed a demand promissory note payable to PNC Bank, National Association ("PNC Bank") (the "PNC Note") in the principal amount of the lesser of the amount borrowed or $5,000,000, with an interest rate, at Pet Practice's option, equal to (a) the greater of (i) PNC Bank's prime rate or (ii) the federal funds rate plus 0.5% or (b) the eurodollar rate plus 2%. On July 6, 1995, the PNC Note was amended and restated and the maximum principal amount thereof was increased from $5,000,000 to $6,000,000. The Principal Stockholder unconditionally guaranteed the payment of Pet Practice's obligations to U.S. Trust and PNC Bank under all such notes, and secured the guarantee to U.S. Trust by a pledge of cash deposits. In August 1995, Pet Practice repaid the $13,000,000 aggregate principal amount outstanding under the First U.S. Trust Note and the Second U.S. Trust Note, together with accrued interest thereon in the aggregate amount of $154,611.11, from the net proceeds of Pet Practice's initial public offering. In August 1995, Pet Practice repaid the $5,926,692 principal amount outstanding under the PNC Note, together with accrued interest thereon of $46,822, from the net proceeds of Pet Practice's initial public offering. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PET PRACTICE The stockholders (including any "group" as that term is used in Section 13(d)(3) of the Exchange Act) who, to the knowledge of the Pet Practice Board, owned beneficially more than five percent of Pet Practice's one class of outstanding voting securities as of April 1, 1996, each director and each executive officer named in the Summary Compensation Table of Pet Practice and all directors and officers of Pet Practice as a group, and their respective share holdings as of such date (according to information furnished by them to Pet Practice), are set forth in the following table. Except as indicated in the footnotes to the table, all of such shares are owned with sole voting and investment power. The address of each person listed is in care of Pet Practice, 1018 West Ninth Avenue, King of Prussia, Pennsylvania 19406, unless otherwise set forth below such person's name.
PERCENT OF CLASS PERCENT OF CLASS OWNED PRIOR TO OWNED AFTER NAME AND ADDRESS NUMBER OF SHARES MERGER MERGER(1) - ------------------------------------------ ------------------------- -------------------- ---------------- Abbingdon Venture Partners 3,600,000 41.8% 8.6% Limited Partnership-II(9) 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 John H. Foster 3,614,000(2) 41.9% 8.6% Foster Management Company 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Stephen F. Nagy 3,601,000(3) 41.8% 8.6% Foster Management Company 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Weiss, Peck & Greer, L.L.C. 581,500(4) 6.7% 1.4% One New York Plaza New York, New York 10004 The Kaufmann Fund Inc. 500,000(5) 5.8% 1.2% 140 E. 46th Street, 43rd Floor New York, New York 10017 Peter J. Cohen 120,000 1.4% * Andrew S. Dworkis, D.V.M. 77,067 * * Foster Bam 54,500(6) * * Warren D. Barratt 10,000 * *
97
PERCENT OF CLASS PERCENT OF CLASS OWNED PRIOR TO OWNED AFTER NAME AND ADDRESS NUMBER OF SHARES MERGER MERGER(1) - ------------------------------------------- ------------------- -------------------- ---------------- Carlo Grosso 5,000 * * R. Bruce Mosbacher 5,000(7) * * James C. New 5,000 * * Charles Velge 5,000 * * Directors and officers as a 3,904,067(2)(3)(6)(7) 45.3% 9.3% group (14 persons) (8) - ----------------------------
* Less than one percent. (1) Assumes the issuance of 3,272,993 shares of VCA Common Stock in the Merger in exchange for 8,632,520 shares of Pet Practice Common Stock, including 8,800 shares of Pet Practice Common Stock underlying options which were exercisable on, or which will become exercisable within, 60 days of April 1, 1996. (2) Includes 3,600,000 shares of Pet Practice Common Stock owned by the Principal Stockholder, a limited partnership of which Mr. Foster is a general partner of the general partner. (3) Includes 3,600,000 shares of Pet Practice Common Stock owned by the Principal Stockholder, a limited partnership of which Mr. Nagy is a general partner of the general partner. (4) Information as to the holdings of Weiss, Peck & Greer, L.L.C. ("WPG") is as of December 31, 1995 and is based upon a report on Schedule 13G filed with the Commission. Such report indicates that 581,500 shares were beneficially owned by WPG with shared voting power and shared dispositive power. (5) Information as to the holdings of The Kaufmann Fund Inc. (the "Kaufmann Fund") is as of December 31, 1995 and is based upon a report on Schedule 13G filed with the Commission. Such report indicates that 500,000 shares were beneficially owned by the Kaufmann Fund with sole voting power and sole dispositive power. (6) Includes 45,500 shares of Pet Practice Common Stock owned by Foster & Foster, an investment partnership of which Mr. Bam is the Managing Partner. (7) Represents shares of Pet Practice Common Stock owned by the Mosbacher/Ditz Living Trust, of which Mr. Mosbacher is the trustee and is a beneficiary. (8) Includes 2,500 shares of Pet Practice Common Stock presently issuable to executive officers of Pet Practice upon the exercise of stock options. (9) Investment decisions with respect to the shares of Pet Practice Common Stock owned by the Principal Stockholder are made by its general partner, Abbingdon-II Partners, a New York general partnership ("Abbingdon-II"). The general partners of Abbingdon-II are John H. Foster, Stephen F. Nagy, trusts for the benefit of the children of Messrs. Foster and Nagy, and Caroline H. Fleming. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PET PRACTICE OVERVIEW Pet Practice owns and operates veterinary care group practices. Pet Practice is one of the largest and fastest growing providers of companion animal veterinary care in the United States. Pet Practice typically establishes comprehensive networks 98 that include day clinics and 24-hour emergency/acute care clinics. In certain markets, Pet Practice also provides pet boarding and grooming services. Pet Practice believes it is currently one of the few companies pursuing a national strategy of consolidating veterinary care group practices in an effort to create comprehensive veterinary care networks. Pet Practice currently operates 84 veterinary clinics in 11 states. All of Pet Practice's services are provided on a fee-for-service basis and customers generally remit payment at the time services are delivered. Pet Practice believes that by developing comprehensive care delivery networks in selected geographic markets, it can improve convenience to the customer, generate significant cost advantages, deliver higher quality care and increase its attractiveness to customers and employees. For instance, as a result of its scale, Pet Practice can employ a full range of veterinary specialists, support the operation of 24-hour emergency "hub" clinics and finance sophisticated marketing programs including television, radio and print advertising designed to build brand name awareness and educate customers. Pet Practice believes, based on market studies conducted by independent consultants, that convenience and brand name awareness are two of the most important factors affecting a customer's choice of veterinarian. In addition, Pet Practice's larger size relative to traditional providers of veterinary care enables it to leverage corporate overhead, achieve economies of scale in purchasing and support the development of management information systems. Finally, Pet Practice is able to leverage labor costs, employing part-time and full-time practitioners and offering a full complement of employee benefits. Pet Practice has a short operating history and has grown rapidly through acquisitions. Pet Practice was founded in October 1993 through the acquisition of 15 clinics in Detroit, Michigan. From October 1993 through June 1994, Pet Practice refined its operating model, put in place the existing management team and began to put in place the infrastructure to execute its growth and acquisition strategies. In July 1994, Pet Practice initiated its growth plan and through April 3, 1996, completed the acquisition of 71 additional clinics and opened one newly-built clinic. Of the additional acquired clinics, Pet Practice added 25 during the fiscal quarter ended September 28, 1994, five during the fiscal quarter ended December 28, 1994, 11 during the fiscal quarter ended March 29, 1995, five during the fiscal quarter ended September 27, 1995, 22 during the fiscal quarter ended January 3, 1996 and three during the fiscal quarter ended April 3, 1996. During the period April 4 to June 5, 1996, Pet Practice closed two of its lower volume clinics, the impact of which is not material to Pet Practice's results of operations. The following table sets forth the growth in the number of clinics operated by Pet Practice since commencement of its operations in October 1993 through June 5, 1996.
Fiscal Quarter Ended --------------------------------------------------------- October 27 to Year Ended March June September April 4 to December 29, December 28, 29, 28, 27, January 3, April 3, June 5, 1993 1994 1995 1995 1995 1996 1996 1996 ------------ ------------- -------- ------- ------------ ---------- -------- ---------- Number of clinics at beginning of period........ - 15 44 55 55 60 83 86 Number of clinics acquired during period.............. 15 30 11 - 5 22 3 - Number of new clinics opened during period....... - - - - - 1 - - Number of clinics consolidated during period. - (1) - - - - - (2) Number of clinics at end of ---- ---- ---- ---- ---- ---- ---- -- period..................... 15 44 55 55 60 83 86 84 ==== ==== ==== ==== ==== ==== ==== ==
SEASONALITY Considerable seasonality of demand for veterinary services exists in the northern half of the United States, where a majority of Pet Practice's current clinics are located. Pet Practice has significantly higher revenues during warmer months because pets spend more time outdoors, where they are more likely to be injured and are susceptible to diseases and parasites, which are more prevalent during that time of year. Demand for veterinary services is less seasonal in the southern states. 99 While Pet Practice's revenues are highly seasonal, with peak demand for veterinary services occurring in the second and third quarters of Pet Practice's fiscal year and significantly reduced demand in the first and fourth fiscal quarters, a majority of Pet Practice's cost of revenues, including labor and occupancy costs, are fixed or semi-fixed and, thus, are not generally subject to significant seasonal variation. As a result, gross profit both on an absolute dollar basis and as a percentage of revenues is significantly higher in the second and third fiscal quarters as compared to the first and fourth fiscal quarters. RESULTS OF OPERATIONS Pet Practice's fiscal year is a 52-53 week year which ends on the Wednesday nearest to December 31. Cost of revenues includes clinic labor and labor-related costs, clinic occupancy costs, clinic materials and supplies and clinic marketing costs. Clinic marketing costs comprise substantially all of Pet Practice's marketing costs and include costs of clinic-specific direct mail and localized media marketing programs. Pet Practice uses such marketing programs primarily to attract new customers and maximize service to existing customers and, thus, classifies the costs of these programs as a cost of revenues. General and administrative expenses include all costs related to corporate and field management and administrative support operations, including labor and labor-related costs, occupancy costs, professional fees (primarily legal and accounting) and non-clinic related insurance. The following table sets forth, for the periods indicated, the relative percentages which certain items in Pet Practice's Consolidated Statement of Operations bear to net revenues:
Period from October 27, Year Ended Thirteen Weeks Ended 1993 (commencement of --------------------------- ---------------------- operations) to December 28, January 3, March 29, April 3, December 29, 1993 1994 1996 1995 1996 ----------------------- ---------------------------- ---------------------- Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........................... 105.0% 92.2% 85.7% 93.6% 90.3% ----- ----- ----- ----- ----- Gross profit............................... (5.0%) 7.8% 14.3% 6.4% 9.7% General and administrative expenses........ 29.0% 25.6% 14.3% 16.1% 11.1% Amortization of excess of cost over fair value of net assets acquired and other intangible assets......................... 3.2% 2.7% 3.0% 3.3% 3.4% ----- ----- ----- ----- ----- Loss from operations....................... (37.2%) (20.5%) (3.0%) (13.0%) (4.8%) Interest expense........................... 15.2% 10.5% 5.8% 9.1% 2.4% Interest income............................ - - (1.2%) (0.1%) (0.7%) ----- ----- ----- ----- ----- Loss before income taxes................... (52.4%) (31.0%) (7.6%) (22.0%) (6.5%) Provision for income taxes................. - 1.3% 0.2% (0.3%) (0.2%) ----- ----- ----- ----- ----- Net loss................................... (52.4%) (32.3%) (7.8%) (22.3%) (6.7%) ===== ===== ===== ===== =====
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1996 COMPARED TO THE THIRTEEN WEEKS ENDED MARCH 29, 1995 Net revenues increased from $7,607 for the thirteen weeks ended March 29, 1995 to $13,404 for the thirteen weeks ended April 3, 1996, representing an increase of $5,797, or 76%. Of this increase approximately $1,144 was attributable to the inclusion in the first fiscal quarter of 1996 of a full quarter's results of operations of 11 clinics acquired during the first fiscal 100 quarter of 1995, approximately $4,074 was attributable to the acquisition of a total of 31 additional clinics during the third and fourth fiscal quarters of 1995 and the first fiscal quarter of 1996, and approximately $579 was attributable to internal growth of Pet Practice's clinics owned for all or a part of the first fiscal quarter of 1995. Gross profit increased to $1,300 in the first fiscal quarter of 1996 from $487 in the first fiscal quarter of 1995. Gross profit as a percentage of net revenues increased to 9.7% in the first fiscal quarter of 1996 from 6.4% in the first fiscal quarter of 1995. This increase was primarily attributable to internal growth of Pet Practice's clinics owned for all or a part of the first fiscal quarter of 1995, and the acquisition of clinics during the first, third and fourth fiscal quarters of 1995 and the first fiscal quarter of 1996, with relatively higher aggregate, average gross profit margins than the aggregate, average gross profit margins of Pet Practice's clinics owned for all of the first fiscal quarter of 1995. General and administrative expenses increased from $1,223 in the first fiscal quarter of 1995 to $1,490 in the first fiscal quarter of 1996. This increase in costs relating to corporate and field management and administrative support functions was primarily attributable to the rapid expansion of Pet Practice's operations subsequent to the first fiscal quarter of 1995. General and administrative expenses as a percentage of net revenues decreased from 16.1% in the first fiscal quarter of 1995 to 11.1% in the first fiscal quarter of 1996. This decrease was primarily the result of the leveraging of general and administrative costs over a significantly increased revenue base. Amortization of excess of cost over fair value of the net assets acquired and other intangible assets increased to $460 for the first fiscal quarter of 1996 from $248 for the same period in 1995. This increase was attributable to inclusion of a full quarter of amortization of intangible assets relating to the additional 31 clinics acquired by Pet Practice during the third and fourth fiscal quarters of 1995 and the first fiscal quarter of 1996. Interest expense decreased to $321 for the thirteen weeks ended April 3, 1996 as compared to $697 for the thirteen weeks ended March 29, 1995. This net decrease was primarily due to the fact that Pet Practice repaid all of its borrowings from banks and approximately $12,391 of indebtedness to related parties outstanding during the first fiscal quarter of 1995 with a portion of the net proceeds of its initial public offering consummated in August 1995. Interest income increased to $93 in the first fiscal quarter of 1996 as compared to $6 in the first fiscal quarter of 1995. This increase was primarily attributable to interest income earned on the remaining net cash proceeds from Pet Practice's August 1995 initial public offering. RESULTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1996 COMPARED TO THE YEAR ENDED DECEMBER 28, 1994 Net revenues increased from $15,111 for the year ended December 28, 1994 to $40,571 for the year ended January 3, 1996, representing an increase of $25,460, or 168%. Of this increase approximately $13,625 was attributable to the inclusion of a full year's results of operations for clinics acquired during 1994, approximately $8,753 was attributable to the acquisition of 38 clinics during the year ended January 3, 1996 and approximately $3,082 was attributable to internal growth of Pet Practice's clinics owned for all or a part of the year. Gross profit increased to $5,795 for the year ended January 3, 1996 from $1,175 for the year ended December 28, 1994. Gross profit as a percentage of net revenues increased to 14.3% for the year ended January 3, 1996 from 7.8% for the year ended December 28, 1994. This increase was primarily attributable to internal revenue growth of Pet Practice's clinics owned for all or a part of the year ended January 3, 1996 and the acquisition of clinics during the fourth fiscal quarter of 1994 and the first three fiscal quarters of 1995 with relatively higher aggregate gross profit margins than the aggregate gross profit margins of Pet Practice's clinics owned for all or a part of the first nine months of 1994. General and administrative expenses increased from $3,867 for the year ended December 28, 1994 to $5,796 for the year ended January 3, 1996. This increase in costs relating to corporate and field management and administrative support functions was primarily attributable to the rapid expansion of Pet Practice's operations during 1995. General and administrative expenses as a percentage of net revenues decreased from 25.6% for the year ended December 28, 1994 to 14.3% for the year ended January 3, 1996. This decrease was primarily the result of the leveraging of general and administrative costs over a significantly increased revenue base. 101 Amortization of excess of cost over fair value of net assets acquired and other intangible assets increased to $1,229 for the year ended January 3, 1996 from $409 for the year ended December 28, 1994. This increase was attributable to the acquisition of clinics as outlined above. Interest expense increased to $2,336 for the year ended January 3, 1996 as compared to $1,594 for the year ended December 28, 1994. This increase was primarily due to an increase in borrowings from banks under line of credit agreements and indebtedness to related parties during the first half of the year ended January 3, 1996 as compared to the same period in the prior year, and an increase in the amount of outstanding indebtedness to sellers in connection with acquisitions. These increases were partially offset by the repayment of all of Pet Practice's borrowings from banks under line of credit agreements and approximately $12,391 of indebtedness to related parties with a portion of the proceeds of its initial public offering consummated in August 1995. See Notes 5 and 10 of Notes to Pet Practice's Consolidated Financial Statements. Interest income increased from approximately $7 for the year ended December 28, 1994 to approximately $475 for the year ended January 3, 1996. This increase was primarily attributable to interest income earned on the net cash proceeds from Pet Practice's August 1995 initial public offering. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1994 COMPARED TO THE PERIOD OCTOBER 27, 1993 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER 29, 1993 Results of operations for these periods are generally not comparable because the results of operations for the period October 27, 1993 through December 29, 1993 represent only approximately two months of operations. Net revenues increased from $1,201 for the period October 27, 1993 through December 29, 1993 to $15,111 for the year ended December 28, 1994, representing an increase of $13,910, or 1,158%. Of this increase approximately $7,213 was attributable to the inclusion for the year ended December 28, 1994 of a full year's results of operations of the 15 clinics acquired during the period October 27, 1993 through December 29, 1993, approximately $5,488 was attributable to the acquisition of 30 additional clinics during the year ended December 28, 1994 and approximately $1,209 was attributable to internal growth of Pet Practice's clinics owned for all or a part of the year ended December 28, 1994. Gross profit increased to $1,175 for the year ended December 28, 1994 from a loss of $60 for the period October 27, 1993 through December 29, 1993. Gross profit as a percentage of net revenues increased to 7.8% for the year ended December 28, 1994 from a negative 5.0% for the period October 27, 1993 through December 29, 1993. This increase was primarily attributable to internal revenue growth, the acquisition of clinics during 1994 with relatively higher aggregate, average gross profit margins than the aggregate, average gross profit margins of Pet Practice's clinics owned for all or a part of the period October 27, 1993 through December 29, 1993, and the negative impact of late fall/early winter seasonality during the period October 27, 1993 through December 29, 1993. General and administrative expenses increased from $348 for the period October 27, 1993 through December 29, 1993 to $3,867 for the year ended December 28, 1994. This increase in costs relating to corporate and field management and administrative support functions was primarily attributable to the rapid expansion of Pet Practice's operations during 1994 and the inclusion of a full year's results of operations in 1994. General and administrative expenses as a percentage of net revenues decreased from 29.0% in the period October 27, 1993 through December 29, 1993 to 25.6% for the year ended December 28, 1994. This decrease was primarily the result of the leveraging of the general and administrative costs over a significantly increased revenue base. Amortization of excess of cost over fair value of net assets acquired and other intangible assets increased to $409 for the year ended December 28, 1994 from $38 for the period October 27, 1993 through December 29, 1993. This increase was attributable to inclusion of a full year of amortization of intangible assets relating to the acquisition made in 1993 and amortization of intangible assets relating to the additional 30 clinics acquired by Pet Practice during 1994. Interest expense increased to $1,594 for the year ended December 28, 1994 as compared to $183 for the period October 27, 1993 through December 29, 1993. This increase was primarily due to the inclusion of a full year of interest expense on debt incurred during the period October 27, 1993 through December 29, 1993 and additional debt incurred to finance acquisitions and operations in 1994. 102 LIQUIDITY AND CAPITAL RESOURCES Pet Practice's operations require continued access to cash, primarily to fund acquisitions, purchases of property and equipment, debt repayments, payments pursuant to earn-out arrangements and working capital requirements. Pet Practice's operations and acquisitions through July 1995 were financed primarily through debt provided by Pet Practice's major stockholder and borrowings under an aggregate of $19,000 in demand credit facilities with banks, which were unconditionally guaranteed by Pet Practice's major stockholder. All of such debt was repaid in August 1995 using a portion of the net proceeds of Pet Practice's initial public offering of 4,300,000 shares of Pet Practice Common Stock, which was consummated on August 4, 1995. Pet Practice's demand credit facilities with banks were terminated effective with the public offering. Net proceeds of Pet Practice's initial public offering, after repayment of approximately $34,000 of certain debt and mandatorily redeemable preferred stock and related interest and dividends thereon, were approximately $23,000. Such net proceeds were added to Pet Practice's working capital and have been used primarily to finance acquisitions and capital expenditures and for general corporate purposes. Pet Practice had a working capital deficit of approximately $186 and cash and cash equivalents of approximately $4,916 at April 3, 1996, working capital of approximately $4,161 and cash and cash equivalents of approximately $10,097 at January 3, 1996, and a working capital deficit of approximately $16,168 and cash and cash equivalents of approximately $910 at December 28, 1994. The increases in both working capital and cash and cash equivalents from December 28, 1994 were primarily attributable to the net proceeds of Pet Practice's initial public offering, less cash used for acquisitions, purchases of property and equipment and working capital during the period from August 1995 through April 3, 1996. Cash used by operating activities was $1,239 for the thirteen weeks ended April 3, 1996, and $4,486 and $2,117 for the years ended January 3, 1996 and December 28, 1994, respectively. During the thirteen weeks ended April 3, 1996 and the years ended January 3, 1996 and December 28, 1994, Pet Practice used cash totalling approximately $2,116, $13,082 and $9,557, respectively, for acquisitions. Pet Practice has achieved a substantial portion of its growth in the past, and anticipates it will derive a substantial part of its growth in the future, through acquisitions of veterinary clinics for a combination of cash, notes payable and stock. Subject to available capital, Pet Practice anticipates it will complete the acquisition of a significant number of additional clinics in 1996. Pet Practice has issued cash, notes and shares of Pet Practice Common Stock to sellers in connection with acquisitions of practices to date. Pet Practice is obligated to pay additional consideration to sellers of businesses primarily contingent upon achievement of certain financial criteria over periods of one to five years from the dates of acquisition. Although the amount of additional consideration to be issued cannot be determined until the earn-out periods expire and the attainment of criteria is established, Pet Practice expects that the additional consideration issued to sellers pursuant to these arrangements will constitute a significant portion of the total consideration for certain acquisitions. If such criteria are attained, but not exceeded, Pet Practice will be obligated to make cash payments of approximately $2,881 and issue approximately 90,000 shares of Pet Practice Common Stock over the next five years. A lesser amount of cash would be paid and a lesser number of shares of Pet Practice Common Stock would be issuable under certain acquisition agreements if the financial criteria are not met and a greater amount of cash would be paid and a greater number of shares of Pet Practice Common Stock would be issuable under certain acquisition agreements if the financial criteria are exceeded. For example, if the financial criteria with respect to certain of the acquisitions were to be exceeded by 20%, Pet Practice would be obligated to make cash payments of approximately $3,167 and issue approximately 109,000 shares of Pet Practice Common Stock over the next five years. During the thirteen weeks ended April 3, 1996 and the years ended January 3, 1996 and December 28, 1994, Pet Practice used approximately $905, $4,662 and $206, respectively, for purchases of property and equipment. Pet Practice anticipates that it will use between $2,000 and $4,000 for purchases of property and equipment in 1996. Pet Practice intends to fund its future cash requirements primarily from cash on hand, internally generated funds and other sources of financing currently being explored by Pet Practice. Pet Practice's cash requirements for 1996 exceed the aggregate of cash currently on hand and cash expected to be generated internally. As a result, Pet Practice is currently 103 exploring potential sources for additional financing. There can be no assurances that such suitable financing can be obtained. If Pet Practice is unable to obtain such additional financing, management may need to modify the pace of acquisitions and/or the planned level of capital expenditures. As discussed further in "THE MERGER" and Note 12 of Notes to Pet Practice's Consolidated Financial Statements, on March 22, 1996 Pet Practice announced that it had signed a definitive agreement (the "Merger Agreement") providing for the merger of Pet Practice with VCA. If completed, the Merger will result in Pet Practice becoming a wholly owned subsidiary of VCA. Consummation of the merger is expected in the second or third quarter of 1996 and is subject to certain conditions. Pursuant to the terms of the Merger Agreement, Pet Practice is subject to certain restrictions on actions it can take between the date of the Merger Agreement and the closing of the Merger of Pet Practice and VCA. In particular, there are restrictions on capital expenditures and on Pet Practice's ability to make acquisitions. The restrictions set forth in the Merger Agreement may impact Pet Practice's plans with respect to acquisitions and capital expenditures. Recently Issued Accounting Standards In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123, the disclosure provisions of which must be implemented for fiscal years beginning subsequent to December 15, 1995, establishes a fair value based method of accounting for stock based compensation plans, the effect of which can either be disclosed or recorded. Pet Practice will adopt the disclosure provisions of SFAS 123 in 1996. Pet Practice intends to retain the intrinsic value method of accounting for stock based compensation which it currently follows. 104 UNAUDITED PRO FORMA FINANCIAL DATA VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES The following unaudited pro forma financial data and explanatory notes give effect to all acquisitions (36 animal hospitals and nine veterinary diagnostic laboratories) completed by VCA during 1995 and 1996 (through June 7, 1996) (the "VCA Acquired Companies"), VCA's issuance on April 17, 1996 of the Debentures and the pending acquisition of four animal hospitals (the "Pending VCA Acquisitions"). 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 and the Pending VCA Acquisitions. The acquisitions have been accounted for under purchase accounting except for the acquisition of two animal hospitals which have been accounted for as a pooling of interests. 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 statements of operations for VCA represent the historical results of operations of VCA for the year ended December 31, 1995 and the three months ended March 31, 1996 adjusted to reflect the acquisitions of the VCA Acquired Companies and the Pending VCA Acquisitions 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 March 31, 1996 adjusted to reflect the issuance of the Debentures and the acquisitions of the VCA Acquired Companies acquired after March 31, 1996 and the Pending VCA Acquisitions as if such acquisitions had occurred on March 31, 1996. 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 issuance of the Debentures and the acquisitions of the VCA Acquired Companies and the Pending VCA Acquisitions had been consummated at the beginning of the period presented and March 31, 1996 respectively, nor are they necessarily indicative of future operating results or financial position. 105 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 PRO PRO VCA VCA ACQUIRED FORMA FORMA PENDING PRO FORMA PRO FORMA VCA COMPANIES(1) ADJUSTMENTS COMBINED ACQUISITIONS(25) ADJUSTMENTS COMBINED --------- --------- ----------- --------- ---------------- ---------- ----------- Revenues Animal hospital............. $51,437 $30,458 $ 81,895 $3,310 $ 85,205 Laboratory.................. 37,606 17,674 $ 125 (2) 55,405 55,405 Pet food.................... 4,756 4,756 4,756 Intercompany sales.......... (1,727) (125)(3) (1,852) (1,852) ------- ------- ------- -------- ------ -------- -------- 92,072 48,132 140,204 3,310 143,514 ------- ------- ------- -------- ------ -------- -------- Direct costs Animal hospital............. 42,056 28,015 (1,308)(4) 68,763 3,076 $ 76(4) 71,915 Laboratory.................. 23,977 10,155 (5)(5) 34,127 34,127 Pet food.................... 3,205 3,205 3,205 Intercompany sales.......... (1,727) (125)(3) (1,852) (1,852) ------- ------- ------- -------- ------ -------- -------- 67,511 38,170 (1,438) 104,243 3,076 76 107,395 ------- ------- ------- -------- ------ -------- -------- Gross profit Animal hospital............. 9,381 2,443 1,308 13,132 234 (76) 13,290 Laboratory.................. 13,629 7,519 130 21,278 21,278 Pet food.................... 1,551 1,551 1,551 ------- ------- ------- -------- ------ -------- -------- 24,561 9,962 1,438 35,961 234 (76) 36,119 Selling, general and administrative.............. 10,833 5,411 (993)(6) 15,251 15,251 Depreciation and amortization................ 3,291 977 937(7) 5,205 24 106(7) 5,335 Royalty fees................. 118 (118)(8) Restructuring charge......... 1,086 1,086 1,086 ------- ------- ------- -------- ------ -------- -------- Operating income............. 9,351 3,456 1,612 14,419 210 (182) 14,447 Interest expense, net........ 1,639 318 1,593(9) 3,550 37 139(9) 3,726 ------- ------- ------- -------- ------ -------- -------- Income before minority interest and provision for income taxes................ 7,712 3,138 19 10,869 173 (321) 10,721 Minority interest in income of subsidiaries............. 2,910 7 346(10) 3,263 3,263 ------- ------- ------- -------- ------ -------- -------- Income before provision for income taxes................ 4,802 3,131 (327) 7,606 173 (321) 7,458 Provision for income taxes... 2,238 102 2,698(11) 5,038 (59)(11) 4,979 ------- ------- ------- -------- ------ -------- -------- Net income................... $ 2,564 $ 3,029 $(3,025) $ 2,568 $ 173 $ (262) $ 2,479 ======= ======= ======= ======== ====== ======== ======== Primary earnings per share... $ 0.24 $ 0.22 $ 0.22 ======= ======== ======== Weighted average common shares used for computing primary earnings per share.. 10,703 745(12) 11,448 11,448 ======= ======= ======== ======== Fully diluted earnings per share....................... $ 0.23 $ 0.21 $ 0.21 ======= ======== ======== Weighted average common shares used for computing fully diluted earnings per share...................... 11,238 745(12) 11,983 11,983 ======= ======= ======== ========
106 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (In thousands, except per share data)
VCA PRO PRO VCA VCA ACQUIRED FORMA FORMA PENDING PRO FORMA PRO FORMA VCA COMPANIES(28) ADJUSTMENTS COMBINED ACQUISITIONS(27) ADJUSTMENTS COMBINED --------- ------------- ----------- --------- ---------------- ----------- ----------- Revenues Animal hospital............. $17,831 $2,049 $19,880 $790 $20,670 Laboratory.................. 12,056 2,547 14,603 14,603 Pet food.................... 1,850 1,850 1,850 Intercompany sales.......... (733) (733) (733) ------- ------ ------ ------- ---- ---- ------- 31,004 4,596 35,600 790 36,390 ------- ------ ------ ------- ---- ---- ------- Direct costs Animal hospital............. 15,390 1,929 $(150)(4) 17,169 723 $ 32(4) 17,924 Laboratory.................. 7,386 1,618 (21)(5) 8,983 8,983 Pet food.................... 1,160 1,160 1,160 Intercompany sales.......... (733) (733) (733) ------- ------ ------ ------- ---- ---- ------- 23,203 3,547 (171) 26,579 723 32 27,334 ------- ------ ------ ------- ---- ---- ------- Gross profit Animal hospital............. 2,441 120 150 2,711 67 (32) 2,746 Laboratory.................. 4,670 929 21 5,620 5,620 Pet food.................... 690 690 690 ------- ------ ------ ------- ---- ---- ------- 7,801 1,049 171 9,021 67 (32) 9,056 Selling, general and administrative.............. 3,314 1,147 (78)(6) 4,383 4,383 Depreciation and amortization 1,034 37 100 (7) 1,171 5 27 (7) 1,203 ------- ------ ------ ------- ---- ---- ------- Operating income............. 3,453 (135) 149 3,467 62 (59) 3,470 Interest expense, net........ 296 16 176 (9) 488 36 (9) 524 ------- ------ ------ ------- ---- ---- ------- Income before minority interest and provision for income taxes................ 3,157 (151) (27) 2,979 62 (95) 2,946 Minority interest in income of subsidiaries............. 1,346 1,346 1,346 ------- ------ ------ ------- ---- ---- ------- Income before provision for income taxes................ 1,811 (151) (27) 1,633 62 (95) 1,600 Provision for income taxes... 799 (64)(11) 735 (13)(11) 722 ------- ------ ------ ------- ---- ---- ------- Net income................... $ 1,012 $ (151) $ 37 $ 898 $ 62 $(82) $ 878 ======= ====== ====== ======= ==== ==== ======= Primary earnings per share... $ 0.07 $ 0.06 $ 0.06 ======= ======= ======= Weighted average common shares used for computing primary earnings per share. 15,110 267 (12) 15,377 15,377 ======= ====== ======= ======= Fully diluted earnings per share....................... $ 0.07 $ 0.06 $ 0.06 ======= ======= ======= Weighted average common shares used for computing fully diluted earnings per share....................... 15,492 267 (12) 15,759 15,759 ======= ====== ======= =======
107 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 (In thousands)
SECOND PRO PRO VCA VCA QUARTER FORMA FORMA PENDING PRO FORMA PRO FORMA VCA ACQUISITIONS(13) ADJUSTMENTS COMBINED ACQUISITIONS(26) ADJUSTMENTS COMBINED -------- ---------------- ----------- -------- --------------- ------------ --------- ASSETS Current assets: Cash and equivalents $ 37,615 $78,958 (14) $116,573 $(1,025)(14) $115,548 Accounts receivable, net 8,816 $ 3 (1)(15) 8,818 $260 (235)(15) 8,843 Other current assets 5,497 51 (10)(16) 5,538 113 (63)(16) 5,588 -------- ---- ------- -------- ---- ----- ------- 51,928 54 78,947 130,929 373 (1,323) 129,979 Property and equipment, net 15,981 654 1,053 (17) 17,688 379 (254)(17) 17,813 Other assets: Notes receivable 1,183 1,183 1,183 Goodwill 79,637 3,829 (18) 83,466 37 2,026 (18) 85,529 Covenants 5,573 407 (19) 5,980 252 (19) 6,232 Other 2,746 1,688 (20) 4,434 4 (4)(21) 4,434 -------- ---- ------- -------- ---- ------- -------- $157,048 $708 $85,924 $243,680 $793 $ 697 $245,170 ======== ==== ======= ======== ==== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 7,563 $ 232 (22) $ 7,795 $167 $ 58 (22) $ 8,020 Accounts payable 5,794 $ 21 5,815 146 (146)(23) 5,815 Other accrued liabilities 5,577 174 150 (22) 5,901 31 134 (22) 6,066 -------- ---- ------- -------- ---- ----- ------- 18,934 195 382 19,511 344 46 19,901 Long-term obligations, less current portion 29,588 322 85,496 (24) 115,406 210 890 (24) 116,506 Deferred income taxes 1,538 1,538 1,538 Minority interest 4,843 4,843 4,843 Stockholders' equity 102,145 191 46 (25) 102,382 239 (25) (239)(25) 102,382 -------- ---- ------- -------- ---- ----- -------- $157,048 $708 $85,924 $243,680 $793 $ 697 $245,170 ======== ==== ======= ======== ==== ===== ========
108 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; Northboro Veterinary Clinic, Inc., April 1996; Diagnostic Veterinary Services, Inc., May 1996; the assets pertaining to the veterinary business of APL Healthcare Group Inc., May 1996; Beacon Hill Cat Hospital, Inc., May 1996; Old Town Veterinary Hospital, Inc., May 1996; North Rockville Veterinary Hospital Inc., June 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 $597,000 and $107,000 for the twelve months ended December 31, 1995 and the three months ended March 31, 1996, respectively, 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 $685,000 and $74,000 for the twelve months ended December 31, 1995 and the three months ended March 31, 1996, respectively, 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) Represents principally an adjustment of $86,000 and $21,000 for the twelve months ended December 31, 1995 and the three months ended March 31, 1996, respectively, related to (i) 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 laboratory land and buildings previously leased, 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. 109 (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 $55,247,000. Other intangibles acquired in 1995 and 1996 amounted to $6,412,000. 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 additional interest expense that would have been incurred on the indebtedness of $27,558,000 issued by VCA in connection with the acquisitions of the VCA Acquired Companies ($1,325,000 related to the VCA Pending Acquisitions). Annual interest rates on such indebtedness range from approximately 5.0 percent to 9.0 percent. (10) 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. (11) Represents an adjustment to provide income taxes at the effective rate. (12) To reflect the issuance of approximately 1,469,200 and 393,940 shares of VCA Common Stock for the twelve months ended December 31, 1995 and the three months ended March 31, 1996, respectively, in connection with the acquisition of the VCA Acquired Companies. (13) Reflects the combined financial position of the VCA Acquired Companies acquired after March 31, 1996 (the "Second Quarter Acquisitions"). See Note 1. (14) Represents (i) the net proceeds received in connection with the issuance of the Debentures ($82,697,000) net of cash consideration paid in connection with the Second Quarter Acquisitions ($3,739,000) and (ii) cash consideration ($1,025,000) to be paid in connection with the VCA Pending Acquisitions. (15) Reflects an adjustment to net realizable value of accounts receivable acquired from certain companies. (16) Reflects an adjustment to reflect other current assets, principally inventory, at fair market value. (17) Reflects an adjustment to fair market value of property and equipment, net, acquired. (18) Reflects the excess of cost over the fair value of the net tangible assets acquired in connection with the acquisitions. (19) Represents the value of consideration given in connection with non-compete agreements obtained in connection with the acquisitions. (20) Represents the deferred financing costs related to the issuance of the Debentures. (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 acquisitions, 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 Second Quarter Acquisitions. (24) Reflects long-term indebtedness incurred in connection with the acquisition of certain Second Quarter Acquisitions and VCA Pending Acquisitions at annual interest rates ranging from 5.0 percent to 8.0 percent. (25) Reflects the elimination of the stockholders' equity of the Second Quarter Acquisitions and VCA Pending Acquisitions. (26) Reflects the pending acquisition of four animal hospitals scheduled to be consummated before July 15, 1996. 110 (27) Reflects the acquisition of animal hospitals and laboratories which occurred in 1996. See Note 1. The operations of Conawago Veterinary Practice, Animal Hospital of St. Petersburg, Inc. and Kaneohe Veterinary Clinic which were acquired on January 2, 1996 are included in "VCA Acquired Companies." 111 PET PRACTICE The following unaudited pro forma financial data and explanatory notes give effect to all acquisitions (41 animal hospitals during 1995 and through June 7, 1996) completed by Pet Practice (collectively, the "Pet Practice Acquired Companies"). The unaudited pro forma financial data should be read in conjunction with Pet Practice's historical consolidated financial statements and notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus. The unaudited pro forma financial data have been prepared utilizing the historical financial statements of Pet Practice and the historical financial statements of the Pet Practice Acquired Companies. The unaudited pro forma financial data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma financial data. The unaudited pro forma condensed consolidated statements of operations represent the historical results of operations of Pet Practice for the period ended January 3, 1996 and the thirteen weeks ended April 3, 1996 adjusted to reflect acquisitions of the Pet Practice Acquired Companies as if they had occurred at the beginning of the periods presented. Each of the acquisitions has been accounted for as a purchase. The 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 Pet Practice Acquired Companies had been consummated at the beginning of the periods presented, nor are they necessarily indicative of future operating results or financial position. 112 THE PET PRACTICE, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1996 (In thousands, except per share data)
PET PRACTICE PET PRACTICE ACQUIRED PRO FORMA PRO FORMA PET PRACTICE COMPANIES (1) ADJUSTMENTS COMBINED --------------- ---------------- ------------ ------------- Revenues $40,571 $18,257 $58,828 Costs of revenues 34,776 15,914 $(761)(2) 49,929 ------- ------- ----- ------- Gross profit 5,795 2,343 761 8,899 General and administrative 5,796 410 (410)(3) 5,796 Amortization of excess of cost over fair value of net assets acquired and other intangible assets 1,229 620 (4) 1,849 ------- ------- ----- ------- Operating income (loss) (1,230) 1,933 551 1,254 Interest expense, net 1,861 290 746 (5) 2,897 ------- ------- ----- ------- Income (loss) before provision for (3,091) 1,643 (195) (1,643) income taxes Provision for income taxes 84 84 ------- ------- ----- ------- Net income (loss) $(3,175) $ 1,643 $(195) $(1,727) ======= ======= ===== ======= Loss per share $ (0.54) $ (0.29) ======= ===== ======= Weighted average common shares used for computing loss per share 5,863 181 (6) 6,044 ======= ===== =======
113 THE PET PRACTICE, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 3, 1996 (In thousands, except per share data)
PET PRACTICE PET PRACTICE ACQUIRED PRO FORMA PRO FORMA PET PRACTICE COMPANIES (1) ADJUSTMENTS COMBINED ------------ ------------- ----------- ------------ Revenues $13,404 $175 $13,579 Costs of revenues 12,104 172 $(18)(2) 12,258 ------- ---- ---- ------- Gross profit 1,300 3 18 1,321 General and administrative 1,490 1,490 Amortization of excess of cost over fair value of net assets acquired and other intangible assets 460 10 (4) 470 ------- ---- ---- ------- Operating income (loss) (650) 3 8 (639) Interest expense, net 228 12 10 (5) 250 ------- ---- ---- ------- Loss before provision for income taxes (878) (9) (2) (889) Provision for income taxes 21 21 ------- ---- ---- ------- Net Loss $ (899) $ (9) $ (2) $ (910) ======= ==== ==== ======= Loss per share $ (0.10) $ (0.11) ======= ======= Weighted average common shares used for computing loss per share 8,614 12 (6) 8,626 ======= ==== =======
114 THE PET PRACTICE, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Reflects the historical statement of operations data for the Pet Practice Acquired Companies for the period from December 29, 1994 to the earlier of the respective dates of the acquisition of such companies or January 3, 1996. Each of the acquisitions has been accounted for as a purchase. Accordingly, the results of operations of each of the Pet Practice Acquired Companies is included in the results of operations of Pet Practice from the date of acquisition. The following animal hospitals represent the Pet Practice Acquired Companies: Marietta Animal Hospital, Inc.; W. Harold Davis, D.V.M. (d/b/a Zionsville Animal Clinic); S.V. Rowell D.V.M., Ltd. (d/b/a La Grange Park Pet Hospital); Salvatore M. Zeitlin, V.M.D.; P.A. (d/b/a Palm Beach County Animal Medical Clinic); Forrest D. Hayes, P.A. (d/b/a Atlantic Animal Clinic); Glen R. Redeker, D.V.M. (d/b/a Oakton Animal Clinic); Charles R. McCune, D.V.M. (d/b/a 46th Street Pet Clinic); Mary L. Jutte, D.V.M. (d/b/a Southland Hospital for Animals and Taylor Veterinary Clinic); Academy Animal Hospital of Hillsboro, Inc.; Robert S. Legg, D.V.M., P.A. (d/b/a Colonial Animal Hospital); Riviera Animal Hospital, Inc.; Academy Animal Inc.; Andreas Wurzer, D.V.M. (d/b/a Chicago Heights Animal Hospital); Richard R. Brown, D.V.M. (d/b/a Golfview Animal Clinic); Westboro Animal Hospital, P.C.; Andrew M. Payson, D.V.M., P.A. (d/b/a Boca Grove Animal Hospital & Pet Supplies); Edward A. Jones, D.V.M. (d/b/a Companion Animal Hospital and Oldsmar Animal Hospital); Edgebrook Veterinary Hospital P.C.; George D. Brodsky, D.V.M. (d/b/a Bourbonnais Animal Clinic); Bowie Hospital, Inc. and Crofton Animal Hospital, Inc.; Peter E. Coakley, V.M.D. (d/b/a Animal Extra Care); Academy Animal Hospital of Boca, Inc.; Academy Animal Hospital of Cooper City, Inc.; Academy Animal Hospital of Coral Springs, Inc.; Peticare Animal Medical Center, P.C.; Peter V. Birzon, D.V.M., Animal Hospital of North Miami Beach, P.A.; Jon J. Rappaport, D.V.M. and Craig Horowitz, D.V.M. and Miami Shores Animal Hospital, P.A.; Edward D. Lukuch, D.V.M. (d/b/a Midpark Animal Hospital); Joanne Nelson (d/b/a Collins & South Pompano Animal Hospital); Dr. Jenifer Preston, Inc. (d/b/a Westerville East Animal Hospital); Donald Denoff, D.V.M., P.A. (d/b/a Wellington Animal Hospital); and Neshaminy Animal Medical Center, P.C. (2) The adjustments to costs of revenues consist primarily of reductions or increases to certain of the Pet Practice Acquired Companies' historical amounts of compensation for services provided by owner/veterinarians for the difference between such historical amounts and amounts specified in employment contracts for comparable positions in Pet Practice, net of certain general and administrative expenses of the Pet Practice Acquired Companies which have been reclassified as costs of revenues. (3) The adjustments to general and administrative expenses consist primarily of (i) reductions or increases to certain of the Pet Practice Acquired Companies' historical amounts of compensation for certain owners and administrative personnel between such historical amounts and amounts specified in employment contracts for such individuals, (ii) elimination of certain non-recurring charges and credits attributable to the acquisitions of the Pet Practice Acquired Companies and (iii) reclassifications of certain amounts to cost of revenues. (4) The adjustment to amortization of excess of cost over fair value of net assets acquired and other intangible assets relates to the additional amortization over periods of three to 40 years of the excess of cost over fair value of net assets acquired and other intangible assets of the Pet Practice Acquired Companies. (5) The adjustment reflects the additional interest expense that would have been incurred and the reduction of interest income had the consideration in the form of cash and notes for the acquisitions of the Pet Practice Acquired Companies been paid on December 29, 1994, net of the elimination of approximately $290,000 of interest expense relating to outstanding debt of certain of the Pet Practice Acquired Companies that was not assumed by Pet Practice. The notes relating to the acquisition of the Pet Practice Acquired Companies bear interest at annual rates of 6.0% to 8.0%. (6) Reflects the issuance of an aggregate of approximately 221,000 shares of Pet Practice Common Stock in connection with the Pet Practice Acquired Companies. 115 VCA AND PET PRACTICE The unaudited pro forma financial data and explanatory notes set forth below give effect to VCA's acquisition of the VCA Acquired Companies, the VCA Pending Acquisitions, the issuance of the Debentures and the Merger with Pet Practice, including the acquisition by Pet Practice of the Pet Practice Acquired Companies. The unaudited pro forma financial data should be read in conjunction with the historical consolidated financial statements and notes thereto of Pet Practice appearing elsewhere in this Joint Proxy Statement/Prospectus. The Merger is to be accounted for as a purchase. The unaudited pro forma financial data have been prepared utilizing VCA's unaudited pro forma financial data and Pet Practice's unaudited pro forma financial data. 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 statements of operations represent the unaudited pro forma results of operations of VCA and Pet Practice for the year ended December 31, 1995 and January 3, 1996, respectively, and the period ended March 31, 1996 and April 3, 1996, respectively, giving effect to the Merger as if it had occurred at the beginning of the period. The unaudited pro forma condensed combined balance sheet was prepared to reflect the Merger as if it had occurred on March 31, 1996. 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 had been consummated at the beginning of the periods presented nor are they necessarily indicative of future operating results or financial position. 116 VCA AND PET PRACTICE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share data)
VCA AND VCA PET PRACTICE PET PRACTICE PRO FORMA PRO FORMA PRO FORMA PRO FORMA COMBINED COMBINED ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ Revenues Animal hospital........................... $ 85,205 $ 58,828 $144,033 Laboratory................................ 55,405 55,405 Pet food.................................. 4,756 4,756 Intercompany sales........................ (1,852) (1,852) -------- -------- ------- -------- 143,514 58,828 202,342 Direct costs Animal hospital........................... 71,915 49,929 $ (636)(1) 121,208 Laboratory................................ 34,127 34,127 Pet food.................................. 3,205 3,205 Intercompany sales........................ (1,852) (1,852) -------- -------- ------- -------- 107,395 49,929 (636) 156,688 Gross profit Animal hospital........................... 13,290 8,899 636 22,825 Laboratory................................ 21,278 21,278 Pet food.................................. 1,551 1,551 -------- -------- ------- -------- 36,119 8,899 636 45,654 Selling, general and administrative........ 15,251 5,796 (152)(1) 20,895 Amortization of excess of cost over fair value of net assets acquired and other intangible assets......................... 1,849 (1,849)(1) Depreciation and amortization.............. 5,335 4,249 (1)(2) 9,584 Restructuring charge....................... 1,086 1,086 -------- -------- ------- -------- Operating income........................... 14,447 1,254 (1,612) 14,089 Interest expense, net...................... 3,726 2,897 6,623 -------- -------- ------- -------- Income (loss) before minority interest and provision for income taxes............ 10,721 (1,643) (1,612) 7,466 Minority interest in income of subsidiaries.............................. 3,263 3,263 -------- -------- ------- -------- Income (loss) before provision for 7,458 (1,643) (1,612) 4,203 income taxes.............................. Provision for income taxes................. 4,979 84 (638)(3) 4,425 -------- -------- ------- -------- Net income (loss).......................... $ 2,479 $ (1,727) $ (974) $ (222) ========= ======== ======= ======== Primary earnings (loss) per share.......... $ 0.22 $ (0.02) ========= ======== Weighted average common shares used for computing primary earnings (loss) per share................................. 11,448 3,273 (8) 14,721 ========= ======= ======== Fully diluted earnings (loss) per share.... $ 0.21 ========= Weighted average common shares used for computing fully diluted earnings per share................................. 11,983 =========
117 VCA AND PET PRACTICE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (In thousands, except per share data)
VCA AND VCA PET PRACTICE PET PRACTICE PRO FORMA PRO FORMA PRO FORMA PRO FORMA COMBINED COMBINED ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ Revenues Animal hospital........................... $20,670 $13,579 $34,249 Laboratory................................ 14,603 14,603 Pet food.................................. 1,850 1,850 Intercompany sales........................ (733) (733) ------- ------- ------ ------- 36,390 13,579 49,969 Direct costs Animal hospital........................... 17,924 12,258 $ (343)(1) 29,839 Laboratory................................ 8,983 8,983 Pet food.................................. 1,160 1,160 Intercompany sales........................ (733) (733) ------- ------- ------ ------- 27,334 12,258 (343) 39,249 Gross profit Animal hospital........................... 2,746 1,321 343 4,410 Laboratory................................ 5,620 5,620 Pet food.................................. 690 690 ------- ------- ------ ------- 9,056 1,321 343 10,720 Selling, general and administrative........ 4,383 1,490 (42)(1) 5,831 Amortization of excess of cost over fair value of net assets acquired and other intangible assets......................... 470 (470)(1) Depreciation and amortization.............. 1,203 1,070 (1)(2) 2,273 ------- ------- ------ ------- Operating income (loss).................... 3,470 (639) (215) 2,616 Interest expense, net...................... 524 250 774 ------- ------- ------ ------- Income (loss) before minority interest and provision for income taxes............ 2,946 (889) (215) 1,842 Minority interest in income of subsidiaries.............................. 1,346 1,346 ------- ------- ------ ------- Income (loss) before provision for income taxes.............................. 1,600 (889) (215) 496 Provision for income taxes................. 722 21 (276)(3) 467 ------- ------- ------ ------- Net income (loss).......................... $ 878 $ (910) $ 61 $ 29 ======= ======= ====== ======= Primary earnings per share................. $ 0.06 $ 0.00 ======= ======= Weighted average common shares used for computing primary earnings per share..................................... 15,377 3,273 (8) 18,650 ======= ====== ======= Fully diluted earnings per share........... $ 0.06 $ 0.00 ======= ======= Weighted average common shares used for computing fully diluted earnings per share................................. 15,759 3,273 (8) 19,032 ======= ====== =======
118 VCA AND PET PRACTICE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT MARCH 31, 1996 (IN THOUSANDS)
VCA AND VCA PET PRACTICE PRO FORMA PRO FORMA PRO FORMA COMBINED PET PRACTICE ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ ASSETS Current assets: Cash and equivalents $115,548 $ 4,916 $ (3,400)(4) $117,064 Accounts receivable, net 8,843 836 9,679 Other current assets 5,588 5,010 10,598 -------- ------- -------- -------- 129,979 10,762 (3,400) 137,341 Property and equipment, net 17,813 15,029 (857)(5) 31,985 Other assets: Notes receivable 1,183 1,183 Goodwill 85,529 90,309 (6)(9) 175,838 Covenants 6,232 96 (9) 6,328 Excess of cost over fair value of net assets acquired and other intangible assets 53,775 (53,775)(9) Other 4,434 149 1,431 (9) 6,014 -------- ------- -------- -------- $245,170 $79,715 $ 33,804 $358,689 ======== ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,020 $ 3,820 $ 11,840 Accounts payable 5,815 2,169 7,984 Other accrued liabilities 6,066 4,989 11,055 -------- ------- -------- -------- 19,901 10,978 30,879 Long-term obligations, less current 116,506 16,216 132,722 portion Other liabilities Deferred income taxes 1,538 1,538 Minority interest 4,843 4,843 Stockholders' equity 102,382 52,521 $ 33,804 (7)(8) 188,707 -------- ------- -------- -------- $245,170 $79,715 $ 33,804 $358,689 ======== ======= ======== ========
119 VCA AND PET PRACTICE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) To reclassify depreciation expense and amortization of excess of cost over fair value of net assets acquired and other intangible assets to conform with VCA's presentation. (2) Represents depreciation of assets acquired and amortization of goodwill and other intangibles. (3) Represents an adjustment to provide income taxes at the effective rate. (4) Represents transaction costs including financial advisor, legal and accounting fees. (5) Represents an adjustment to fair market value of the property and equipment acquired. (6) Represents the excess of cost over the fair value of the net tangible assets acquired in connection with the acquisition of Pet Practice. (7) Adjustment to reflect the elimination of Pet Practice's stockholders' equity in connection with the acquisition. (8) Represents the issuance of approximately 3,273,000 shares of VCA Common Stock in connection with the acquisition assuming the average closing price of VCA Common Stock, for purposes of computing the exchange ratio, is $26.375 per share. (9) To reclassify Pet Practice balances to conform with VCA's presentation. 120 VCA, PET PRACTICE AND PETS' RX The following unaudited pro forma financial data and explanatory notes give effect to the combination of VCA (as adjusted for the acquisitions of the VCA Acquired Companies, the VCA Pending Acquisitions and the issuance of the Debentures), Pet Practice (as adjusted for the acquisitions of the Pet Practice Acquired Companies) and Pets' Rx. The combination with Pet Practice is reflected as a purchase and the combination with Pets' Rx is reflected as a pooling of interests. The unaudited pro forma combined financial data should be read in conjunction with the historical Consolidated Financial Statements and Notes thereto of VCA, Pet Practice and Pets' Rx and the unaudited pro forma financial data of VCA and Pet Practice which are included elsewhere in this Joint Proxy Statement/Prospectus. This unaudited pro forma data have been prepared utilizing VCA's unaudited pro forma financial data, Pet Practice's financial data and the historical financial statements of Pets' Rx. The unaudited pro forma financial data are based on the estimates and assumptions set forth in the notes to the unaudited pro forma financial data. The unaudited pro forma condensed combined statements of operations reflecting the combination of VCA, Pet Practice and Pets' Rx represent the historical results of operations of VCA for the three years ended December 31, 1995 and the three months ended March 31, 1996 adjusted to reflect (i) the acquisitions of the VCA Acquired Companies, the VCA Pending Acquisitions and the Merger with Pet Practice as if such transactions had occurred on January 1, 1995, and (ii) the acquisition of Pets' Rx as if it had occurred on January 1, 1993. The unaudited pro forma condensed combined balance sheet was prepared to reflect certain of the transactions as if they had occurred at March 31, 1996. 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 Pet Practice and the merger with Pets' Rx had been consummated at the beginning of the period, nor are they necessarily indicative of future operating results or financial position. 121 VCA, PET PRACTICE AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996 (In thousands, except per share data)
1993 1994 1995 MARCH 31, 1996 -------- -------- --------- -------------- Revenues Animal hospital............................................ $30,208 $41,484 $159,655 $38,477 Laboratory................................................. 1,234 10,150 55,405 14,603 Pet food................................................... 996 4,756 1,850 Intercompany sales......................................... (344) (759) (1,852) (733) ------- ------- -------- ------- 31,098 51,871 217,964 54,197 Direct costs Animal hospital............................................ 24,714 34,373 134,444 33,346 Laboratory................................................. 1,192 6,573 34,127 8,983 Pet food................................................... 647 3,205 1,160 Intercompany sales......................................... (344) (759) (1,852) (733) ------- ------- -------- ------- 25,562 40,834 169,924 42,756 Gross profit Animal Hospital............................................ 5,494 7,111 25,211 5,131 Laboratory................................................. 42 3,577 21,278 5,620 Pet food................................................... 349 1,551 690 ------- ------- -------- ------- 5,536 11,037 48,040 11,441 Selling, general and administrative......................... 4,916 8,704 23,098 6,361 Depreciation and amortization............................... 1,410 2,065 10,437 2,474 Restructuring charge........................................ 1,086 Writedown of assets......................................... 4,506 2,148 ------- ------- -------- ------- Operating (loss) income..................................... (5,296) 268 11,271 2,606 Interest expense, net....................................... 756 1,984 7,533 991 ------- ------- -------- ------- (Loss) income provision before minority interest (6,052) (1,716) 3,738 1,615 and (benefit) for income taxes............................. Minority interest in (loss) income of subsidiaries.......... (334) (540) 3,313 1,371 ------- ------- -------- ------- (Loss) income before (benefit) provision for income taxes (5,718) (1,176) 425 244 and cumulative effect of accounting change................. (Benefit) provision for income taxes........................ (152) 731 4,425 467 ------- ------- -------- ------- Loss before cumulative effect of accounting change.......... (5,566) (1,907) (4,000) (223) Cumulative effect of accounting change...................... 221 ------- ------- -------- ------- Net loss.................................................... $(5,345) $(1,907) $ (4,000) $ (223) ======= ======= ======== ======= Loss per share.............................................. $ (0.90) $ (0.26) $ (0.26) $ (0.01) ======= ======= ======== ======= Weighted average common shares used for computing loss per share.............................. 5,966 7,233 15,522 19,451 ======= ======= ======== =======
122 VCA, PET PRACTICE AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT MARCH 31, 1996 (In thousands)
VCA, PET VCA AND PET PRACTICE AND PETS' PRACTICE PRO FORMA POOLING RX PRO FORMAT COMBINED (1) PETS' RX (2) ADJUSTMENTS COMBINED ------------------ ------------ ---------------- ----------------- ASSETS Current Assets Cash and equivalents......................... $117,064 $ 251 $117,315 Accounts receivable, net..................... 9,679 178 9,857 Other current assets......................... 10,598 480 11,078 -------- ------- ------- -------- 137,341 909 138,250 Property and equipment, net................... 31,985 3,993 35,978 Other assets: Notes receivable............................. 1,183 100 1,283 Goodwill..................................... 175,838 8,872 (3,116)(3) 181,594 Covenants.................................... 6,328 438 (159)(3) 6,607 Other........................................ 6,014 269 6,283 -------- ------- ------- -------- $358,689 $14,581 $(3,275) $369,995 ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt............ $ 11,840 $ 1,167 $ 13,007 Accounts payable............................. 7,984 1,061 9,045 Other accrued liabilities.................... 11,055 1,217 12,272 -------- ------- ------- -------- 30,879 3,445 34,324 Long-term obligations, less current portion... 132,722 9,219 141,941 Deferred income taxes......................... 1,538 1,538 Minority interest............................. 4,843 269 5,112 Redeemable convertible preferred stock........ 2,947 $(2,947)(4) Stockholders' equity (deficit)................ 188,707 (1,299) (328)(3)(4) 187,080 -------- ------- ------- -------- $358,689 $14,581 $(3,275) $369,995 ======== ======= ======= ========
123 PETS' RX, INC. CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, 1995 AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (In thousands, except per share data)
1993 1994 1995 MARCH 31, 1996 ----------- -------- -------- -------------- Revenues...................................... $ 5,785 $ 9,638 $15,622 $4,228 Direct costs.................................. 5,237 8,779 13,236 3,507 ------- ------- ------- ------ Gross profit.................................. 548 859 2,386 721 Selling, general and administrative........... 1,054 1,777 2,203 530 Depreciation and amortization................. 562 919 1,200 307 Writedown of assets........................... 123 ------- ------- ------- ------ Operating loss................................ (1,191) (1,837) (1,017) (116) Interest expense, net......................... 331 968 910 217 ------- ------- ------- ------ Loss before minority interest................. (1,522) (2,805) (1,927) (333) Minority interest in income of subsidiaries... 50 25 ------- ------- ------- ------ Net loss...................................... $(1,522) $(2,805) $(1,977) $ (358) ======= ======= ======= ====== Loss per share................................ $ (0.85) $ (0.46) $ (0.32) $(0.06) ======= ======= ======= ====== Weighted average common shares used for computing loss per share................ 1,793 6,069 6,266 6,267 ======= ======= ======= ======
124 VCA, PET PRACTICE AND PETS' RX NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) Represents the historical financial position of VCA and the Pet Practice combined as if the purchase of Pet Practice took place on March 31, 1996. (2) Represents the historical financial position of Pets' Rx at March 31, 1996. (3) To reflect the write down of assets, amounting to $3.9 million, related to conforming the Pets' Rx method for evaluating the impairment of long lived assets to VCA's method net of an adjustment of $632,000 to reflect the reclassification of certain intangibles to conform to VCA policy. 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 the exchange of the redeemable convertible preferred stock as part of the Pets' Rx merger. 125 DESCRIPTION OF VCA CAPITAL STOCK The total number of shares that VCA is authorized to issue is 31,000,000, consisting of 30,000,000 shares of VCA Common Stock, par value $0.001 per share, and 1,000,000 shares of Preferred Stock, par value $0.001 per share ("VCA Preferred Stock"). The following statements are brief summaries of certain provisions relating to VCA's capital stock. COMMON STOCK The holders of VCA Common Stock are entitled to one vote for each share held of record on all matters to be voted on by the VCA stockholders. The holders of VCA Common Stock are entitled to receive ratably dividends when, as and if declared by the VCA Board out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of VCA, the holders of VCA Common Stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of stock, if any, having preference over the VCA Common Stock. The holders of VCA Common Stock, as such, have no conversion, preemptive or other subscription rights and there are no redemption provisions applicable to the VCA Common Stock. All the outstanding shares of VCA Common Stock are validly issued, fully paid and nonassessable. VCA distributes periodic reports and other information, including notices of annual meetings and special meetings of the stockholders of VCA, to recordholders of VCA Common Stock at the addresses indicated on VCA's stock records. REDEEMABLE WARRANTS At May 20, 1996 there were 1,129,011 shares of VCA Common Stock issuable upon exercise of outstanding warrants (the "Redeemable Warrants"). The Redeemable Warrants were issued in registered form pursuant to an agreement, dated October 10, 1991 (the "Warrant Agreement"), between VCA and Continental Stock Transfer & Trust Company (the "Warrant Agent"). The following discussion of certain terms and provisions of the Redeemable Warrants is qualified in its entirety by reference to the detailed provisions of the Warrant Agreement. One Redeemable Warrant represents the right of the registered holder to purchase one share of VCA Common Stock at an exercise price of 120% of the initial offering price of VCA Common Stock per share, subject to adjustment (the "Purchase Price"). The Redeemable Warrants are entitled to the benefit of adjustments in the Purchase Price and in the number of shares of VCA Common Stock and/or other securities deliverable upon the exercise thereof in the event of a stock dividend, stock split, reclassification, reorganization, consolidation or merger. VCA has the right to reduce the Purchase Price or increase the number of shares of VCA Common Stock issuable upon the exercise of the Redeemable Warrants. Unless previously redeemed, the Redeemable Warrants may be exercised at any time commencing April 10, 1992 and prior to the close of business on October 10, 1996 (the "Expiration Date"). On and after the Expiration Date, the Redeemable Warrants become wholly void and of no value. VCA may at any time extend the Expiration Date of all outstanding Redeemable Warrants for such increased period of time as it may determine. The Redeemable Warrants may be exercised at the office of the Warrant Agent. VCA has the right at any time after April 10, 1992 to redeem the Redeemable Warrants in whole for cancellation at a price of $0.20 each, by written notice mailed 30 days prior to the redemption date to each Redeemable Warrant holder at his address as it appears on the books of the Warrant Agent. Such notice may be given within ten days following any period of 20 consecutive trading days during which the high closing bid of the shares of VCA Common Stock on the Nasdaq National Market exceeds a per share price equal to $9.00 (150% of the initial public offering price of the VCA Common Stock), subject to adjustments for stock dividends, stock splits and the like. If the Redeemable Warrants are called for redemption, they must be exercised prior to the close of business on the date of any such redemption or the right to purchase the applicable shares of VCA Common Stock is forfeited. 126 No holder, as such, of Redeemable Warrants is entitled to vote or receive dividends or be deemed the holder of shares of VCA Common Stock for any purpose whatsoever until such Redeemable Warrants have been duly exercised and the Purchase Price has been paid in full. If required, VCA will file a new registration statement with the Commission with respect to the securities underlying the Redeemable Warrants prior to the exercise of the Redeemable Warrants and deliver a prospectus with respect to such securities to all Redeemable Warrant holders as required by Section 10(a)(3) of the Act. VCA PREFERRED STOCK The VCA Board has the authority to issue the authorized and unissued VCA Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the VCA Board. Accordingly, the VCA Board is empowered, without stockholder approval, to issue VCA Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of VCA Common Stock. On December 22, 1992, VCA completed the sale of 583,333 shares of Series A Convertible Preferred Stock, par value $0.001 per share (the "Series A Shares"), for net proceeds of $2,985,000. The Series A Shares are convertible into 583,333 shares of VCA Common Stock commencing December 22, 1997. The Series A Shares participate in any dividend payments on VCA Common Stock on an as converted basis. The Series A Shares have a liquidation preference of $5.14 per share and are callable by VCA any time after March 22, 1998 at a price of $5.14 per share. The Series A Shares have no voting rights, other than certain protective rights in the event of an adverse change in the rights, preferences or privileges of the Series A Shares as provided by the DGCL. As a result of the issuance of the Series A Shares, 416,667 shares of VCA Preferred Stock remain authorized and unissued and may be issued in one or more series with such designations, rights and preferences as may be determined from time to time by the VCA Board. In the event of issuance, the VCA Preferred Stock could be utilized under certain circumstances as a way of discouraging, delaying or preventing an acquisition or change in control of VCA. VCA does not currently intend to issue any shares of VCA Preferred Stock. VRI WARRANTS In connection with the formation of Vet Research, VCA issued warrants to purchase 363,636 shares of VCA Common Stock at $11.00 per share (the "VRI Warrants"). At May 20, 1996, there were 179,636 shares of VCA Common Stock issuable upon exercise of outstanding VRI Warrants. The warrants were purchased at $0.001 per share and are exercisable until the fifth day following the last day upon which VCA is permitted to close the purchase of VRI's interest in Vet Research pursuant to the VCA Option Agreement. On April 26, 1995, VCA filed a Registration Statement on Form S-3 with respect to the shares of VCA Common Stock issuable upon exercise of the VRI Warrants. Holders of the VRI Warrants agreed to a restriction upon the sale of any shares issuable upon exercise of the VRI Warrants which will lapse with respect to 50,000 shares issuable to each of the two holders upon exercise of the VRI Warrants at the time of exercise and with respect to an additional 50,000 shares every 90 days thereafter, but which in any event will lapse entirely on April 30, 1997. DEBENTURES On April 17, 1996, VCA issued the Debentures which mature on May 1, 2006. The Debentures become convertible into shares of VCA Common Stock on July 27, 1996 initially at a conversion price of $34.35 per share (equivalent to approximately 29.11 shares of VCA Common Stock for each $1,000 principal amount of Debentures). VCA has agreed to file a registration statement relating to the resale of the Debentures and the shares of VCA Common Stock issuable on conversion of the Debentures no later than August 15, 1996. ANTI-TAKEOVER PROVISIONS VCA's Certificate of Incorporation and bylaws include a number of provisions which may have the effect of discouraging persons from pursuing non- negotiated takeover attempts. These provisions include a classified board of directors, the inability of stockholders to take action by written consent without a meeting, the inability of stockholders to call for a special 127 meeting of stockholders under certain circumstances without the approval of the board and the inability of stockholders to remove directors without cause. The Certificate of Incorporation also contains a provision that requires a 66 2/3 percent vote to amend any of the previously discussed provisions. In addition, the availability of a large number of shares of VCA Common Stock and VCA Preferred Stock for issuance by the VCA Board without further stockholder approval could have the effect of making it more difficult, and thereby discouraging, a merger, tender offer, proxy contest or assumption of control and change of incumbent management. Further, H.J. Heinz Company has an option to purchase VCA's interest in the Vet's Choice joint venture upon the occurrence of a change in control (as defined in the joint venture agreement). SECTION 203 OF THE DGCL VCA is a Delaware corporation and is subject to Section 203 of the DGCL. Section 203 of the DGCL prevents an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock or an affiliate of such person) from engaging in a "business combination" (as defined) with a Delaware corporation for three years following the date such person became an interested stockholder unless (i) before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by vote of the holders of two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. Under Section 203 of the DGCL, the restrictions described above also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or became an interested stockholder with the approval of a majority of the corporation's directors. The provisions of Section 203 of the DGCL requiring a super majority vote of disinterested shares to approve certain corporate transactions could enable a minority of VCA's stockholders to exercise veto power over such transactions. TRANSFER AGENT VCA's transfer and warrant agent is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004. COMPARISON OF STOCKHOLDERS' RIGHTS At the Effective Time, the stockholders of Pet Practice will become stockholders of VCA, and their rights will be governed by the DGCL and VCA's Certificate of Incorporation (the "VCA Certificate") and bylaws (the "VCA Bylaws"). The following discussion is not intended to be complete and is qualified in its entirety by reference to the DGCL, the VCA Certificate, the VCA Bylaws, Pet Practice's Certificate of Incorporation (the "Pet Practice Certificate") and bylaws (the "Pet Practice Bylaws"). The VCA Certificate and VCA Bylaws are incorporated by reference herein and will be sent to holders of shares of Pet Practice Common Stock upon request. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Since both VCA and Pet Practice are organized under the laws of the State of Delaware, any differences in the rights of holders of VCA Common Stock and Pet Practice Common Stock will arise solely from differences in their respective Certificates and Bylaws. The VCA Certificate and VCA Bylaws are substantially similar to the Pet Practice Certificate and Bylaws, respectively, except for certain matters as described herein. Authorized Capital. The total number of authorized shares of capital stock of VCA is 31,000,000 shares, consisting of 30,000,000 shares of VCA Common Stock and 1,000,000 shares of VCA Preferred Stock. If the Certificate Proposal is approved at the VCA Annual Meeting, the number of authorized shares of VCA Common Stock will increase to 75,000,000 shares. The total number of authorized shares of capital stock of Pet Practice is 21,000,000 shares, consisting of 20,000,000 shares of Pet Practice Common Stock and 1,000,000 shares of preferred stock, $.01 par value per share. 128 Directors. The VCA Bylaws provide that the number of directors shall not be less than three and no more than nine persons. The Pet Practice Bylaws provide that the number of directors shall be no fewer than one and no more than 12 persons. The VCA Certificate establishes three classes of directors, as nearly equal in number of directors as possible, with each director elected for a term expiring at the third succeeding annual meeting of stockholders after his or her election. The Pet Practice Board is not divided into separate classes. Each Pet Practice director serves until the next annual meeting of stockholders after his or her election. The VCA Bylaws provide for a quorum of a majority of the total number of its directors. The Pet Practice Bylaws provide for a quorum of one-third of the Pet Practice Board. Removal of Directors. The VCA Bylaws provide that any director may be removed, for cause only, by a vote of the majority of the outstanding shares entitled to vote in connection with the election of such director, regardless of class, voting together as a class. The Pet Practice Bylaws provide that any director may be removed by the affirmative vote of a majority of the shares of stock entitled to vote at the meeting to remove such director. Filling Vacancies on the Board of Directors. The VCA Bylaws provide that any vacancy on the VCA Board, however resulting, shall be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. The Pet Practice Bylaws provide that any vacancy in the office of a director occurring for any reason other than removal by the stockholders may be filled by a majority of the directors then in office or by a sole remaining director. With respect to a vacancy created by the removal of a director by the stockholders, such vacancy shall be filled by the stockholders at a meeting of stockholders called for that purpose. Stockholder Action Without a Meeting. Under the VCA Certificate, no action may be taken by the stockholders except at a meeting. Under the Pet Practice Bylaws, the stockholders may act by written consent executed by holders of outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Business Combinations. Under Section 203 of the DGCL ("Section 203"), certain "business combinations" with "interested stockholders" (as each term is defined in Section 203) of Delaware corporations are subject to a three- year moratorium unless specified conditions are met. The provisions of Section 203 apply to VCA but do not apply to Pet Practice because in the Pet Practice Certificate, Pet Practice elected not to be subject to the provisions of Section 203. Anti-takeover Provisions. The VCA Certificate and Bylaws include a number of provisions which may have the effect of discouraging persons from pursuing non-negotiated takeover attempts. These provisions include a classified board of directors, the inability of stockholders to take action by written consent without a meeting, the inability of stockholders to call for a special meeting of stockholders under certain circumstances without the approval of the board and the inability of stockholders to remove directors without cause. The VCA Certificate also contains a provision that requires a 66 2/3 percent vote to amend any of the previously discussed provisions. In addition, the availability of a large number of shares of VCA Common Stock and VCA Preferred Stock for issuance by the VCA Board without further stockholder approval could have the effect of making it more difficult, and thereby discouraging, a merger, tender offer, proxy contest or assumption of control and change of incumbent management. Further, H.J. Heinz Company has an option to purchase VCA's interest in the Vet's Choice joint venture upon the occurrence of a change in control (as defined in the joint venture agreement). 129 ELECTION OF CLASS II DIRECTORS In accordance with the VCA Certificate and the VCA Bylaws, the VCA Board is divided into three classes. At each Annual Meeting of Stockholders of VCA, directors constituting one class are elected for three-year terms. The VCA Bylaws provide that the VCA Board shall consist of not less than three and no more than nine members as determined from time to time by the VCA Board. The VCA Board currently consists of two Class I Directors, with terms expiring in 1997, two Class II Directors, with terms expiring in 1996, and two Class III Directors, with terms expiring in 1998. At the VCA Annual Meeting, two Class II Directors will be elected for terms expiring at the 1999 VCA Annual Meeting. If the number of directors is changed, any increase or decrease is to be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. Directors may be removed only with cause by the vote of a majority of the stockholders then entitled to vote. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the nominees named below. If either nominee is unable or unwilling to serve as a director at the time of the VCA Annual Meeting or any postponements or adjournments thereof, the proxies will be voted for such nominee as shall be designated by the current VCA Board to fill the vacancy. VCA has no reason to believe that either nominee will be unwilling or unable to serve if elected as a director. THE VCA BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE NOMINEES LISTED BELOW The VCA Board proposes the election of the following nominees as Class II Directors: Neil Tauber John B. Chickering, Jr. If elected, each nominee is expected to serve until the 1999 VCA Annual Meeting of Stockholders. The affirmative vote of a plurality of the shares present in person or represented by proxy at the VCA Annual Meeting and voting on the election of the Class II Directors, is required for the election of the above named nominees. INFORMATION WITH RESPECT TO NOMINEES, CONTINUING DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the nominees, continuing directors and executive officers of VCA as of March 31, 1996. See "BUSINESS OF VCA -- Executive Officers and Directors."
Year Term Name Age Principal Occupation Expires ---- --- -------------------- ------- NOMINEES: Neil Tauber 45 Senior Vice President of VCA 1996 John B. Chickering, Jr. 47 Private Investor 1996 CONTINUING DIRECTORS: Robert L. Antin 46 Chairman of the Board and Chief Executive Officer of VCA 1997 Richard Gillespie 62 Private Investor 1997 Arthur J. Antin 49 Chief Operating Officer, Senior Vice President, and Secretary of 1998 VCA John A. Heil 42 Vice President - Marketing for Heinz Pet Products 1998 OTHER EXECUTIVE OFFICERS: Tomas W. Fuller 38 Chief Financial Officer and Vice President and Assistant Secretary Deborah W. Moore 31 Chief Accounting Officer, Vice President and Controller
130 The executive officers of VCA are appointed by and serve at the discretion of the VCA Board. Robert L. Antin and Arthur J. Antin are brothers. There are no other family relationships between any director and/or any executive officer of VCA. PROPOSAL TO APPROVE AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF VCA TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF VCA COMMON STOCK AND VCA PREFERRED STOCK THE AMENDMENT On January 22, 1996, the VCA Board adopted resolutions approving and recommending that the stockholders adopt an amendment to Article Fourth of the VCA Certificate to increase the authorized VCA Common Stock from 30,000,000 shares to 75,000,000 shares, and to increase the authorized VCA Preferred Stock from 1,000,000 shares to 2,000,000 shares. The relative rights and limitations of the VCA Common and VCA Preferred Stock would remain unchanged under the amendment. The VCA Common and VCA Preferred Stock do not have preemptive rights. At May 20, 1996, VCA had 13,179,882 shares of VCA Common Stock issued and outstanding and 583,333 shares of VCA Preferred Stock issued and outstanding. In addition, VCA has reserved: (i) 1,498,404 shares of VCA Common Stock for issuance to employees, officers, directors, and consultants of VCA pursuant to options, (ii) 1,308,647 shares of VCA Common Stock for issuance upon exercise of outstanding warrants, (iii) 6,635 shares of VCA Common Stock for issuance upon conversion of convertible notes, (iv) 583,333 shares of VCA Common Stock for issuance upon conversion of VCA Preferred Stock, (v) 2,457,060 shares of VCA Common Stock for issuance upon conversion of the Debentures, and (vi) 159,197 shares of VCA Common Stock for certain acquisitions. Thus, at May 20, 1996, there were 10,966,039 authorized shares of VCA Common Stock unissued and not reserved for issuance. If the proposed mergers with Pets' Rx and Pet Practice are consummated, there will be approximately 6,892,000 authorized shares of VCA Common Stock unissued and not reserved for issuance. The proposed increase in the authorized VCA Common Stock has been recommended by the VCA Board to assure that an adequate supply of authorized unissued shares is available for general corporate needs, such as future stock dividends or stock splits or the issuance of shares under VCA's stock incentive plans. The additional authorized shares of VCA Common Stock could also be used for such purposes as raising additional capital for the operations of VCA or financing the acquisition of other animal hospitals and veterinary diagnostic laboratories or related businesses. In addition, the availability of a large number of shares of VCA Common Stock and VCA Preferred Stock for issuance by the VCA Board without further stockholder approval could have the effect of making it more difficult, and thereby discouraging, a merger, tender offer, proxy contest or assumption of control and change of incumbent management. See "DESCRIPTION OF VCA CAPITAL STOCK--Anti-takeover Provisions" for a discussion of other antitakeover provisions applicable to VCA. There currently are no plans or arrangements relating to the issuance of any of the additional shares of VCA Common Stock proposed to be authorized. If the Proposal is adopted, the amended portion of Article Fourth of the VCA Certificate will read as follows: FOURTH: The total number of shares which the Corporation shall have ------- authority to issue is 77,000,000, consisting of 75,000,000 shares of common stock, par value $0.001 per share (the "Common Stock") and 2,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). The only changes in Article Fourth which will be effected if the Proposal is approved are changes to the three numbers set forth in bold face type above. Presently, Article Fourth provides that the shares of all classes of stock which VCA may issue is 31,000,000, 30,000,000 of which are shares of VCA Common Stock and 1,000,000 of which are shares of VCA Preferred Stock. All other provisions of Article Fourth will remain unchanged. 131 CERTAIN EFFECTS OF THE PROPOSED AMENDMENT The VCA Board believes that approval of the Proposal is essential for the growth and development of VCA. However, the following should be considered by a stockholder in deciding how to vote upon this Proposal. The Proposal, if approved, would strengthen the position of the VCA Board and might make the removal of the VCA Board more difficult, even if such removal would be generally beneficial to VCA's stockholders. The authorization to issue the additional shares of VCA Common Stock would provide the VCA Board with a capacity to negate the efforts of unfriendly tender offerors through the issuance of securities to others who are friendly or desirable to the VCA Board. The Proposal is not the result of the VCA Board's knowledge of any specific effort to accumulate VCA's securities or to obtain control of VCA by means of a merger, tender offer, proxy solicitation in opposition to management or otherwise. VCA is not submitting the Proposal to enable it to frustrate any efforts by another party to acquire a controlling interest or to seek representation on the VCA Board. The submission of the Proposal is not a part of any plan by VCA's management to adopt a series of amendments to the VCA Certificate or Bylaws so as to render the takeover of VCA more difficult. The additional shares which the VCA Board would be authorized to issue upon approval of the Proposal, if so issued, would have a dilutive effect upon the percentage of equity of VCA owned by present stockholders. The issuance of such additional shares might be disadvantageous to current stockholders in that any additional issuances would potentially reduce per share dividends, if any. Stockholders should consider, however, that the possible impact upon dividends is likely to be minimal in view of the fact that VCA has never paid dividends, has never adopted any policy with respect to the payment of dividends and does not intend to pay any cash dividends in the foreseeable future. VCA instead intends to retain earnings, if any, for use in financing growth and additional business opportunities. RECOMMENDATION AND VOTE. The VCA Board has unanimously approved the amendment of the VCA Certificate to increase the authorized number of shares of VCA Common Stock and VCA Preferred Stock. The affirmative vote of a majority of the outstanding shares of VCA Common Stock is required for the approval of the adoption of such amendment to the VCA Certificate. Unless marked otherwise, proxies received will be voted for the adoption of such amendment to the VCA Certificate. THE VCA BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE AMENDMENT TO THE VCA CERTIFICATE TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF VCA COMMON STOCK AND VCA PREFERRED STOCK. PROPOSAL TO APPROVE THE ADOPTION OF THE VCA 1996 STOCK INCENTIVE PLAN INTRODUCTION The proposed VCA 1996 Stock Incentive Plan (the "1996 Plan") was adopted by the VCA Board effective as of November 7, 1995, subject to the approval of the 1996 Plan by the stockholders. The 1996 Plan supplements VCA's 1987, 1991 and 1995 stock incentive plans and provides for the issuance of options to purchase shares of the VCA Common Stock ("Shares") to selected directors, officers, employees and consultants of VCA and its subsidiaries. Subject to adjustment for stock splits, stock dividends and other similar events, the total number of Shares reserved for issuance under the 1996 Plan shall be 1,500,000 Shares. As of the VCA Record Date, options to purchase 57,888 Shares had been granted to eligible employees (none of whom were officers) of VCA pursuant to the terms of the 1996 Plan, subject to the approval of the 1996 Plan by the stockholders, at an exercise price of $12.375 per Share. The following sections summarize the principal features of the 1996 Plan, a copy of which is attached as Appendix D to this Joint Proxy -------- - Statement/Prospectus. Although this Joint Proxy Statement/Prospectus contains a summary of the principal 132 features of the 1996 Plan, this summary is not intended to be complete and reference should be made to Appendix D to this Joint Proxy Statement/Prospectus -------- - for the complete text of the 1996 Plan. PURPOSE The purpose of the 1996 Plan is to advance the interests of VCA and its stockholders by strengthening VCA's and its subsidiaries' ability to obtain and retain the services of the types of employees, consultants, officers and directors who will contribute to VCA's long term success and to provide incentives which are linked directly to increases in stock value which will inure to the benefit of all stockholders of VCA. ADMINISTRATION The 1996 Plan will be administered by a committee of the VCA Board (the "Committee"), each member of which is a non-employee member of the VCA Board, a Disinterested Person (as defined in Rule 16b-3 promulgated under the Exchange Act), and an Outside Director (as defined in Section 162(m) of the Code.) ELIGIBILITY AND NONDISCRETIONARY GRANTS The 1996 Plan provides that options may be granted to non-employee directors who are designated as eligible persons by the VCA Board, other non- employee directors (subject to the limitations described below), officers (including officers who are directors), employees and consultants of VCA and its subsidiaries. The Committee will determine the persons to be selected as optionees, the terms of vesting of options and the number of Shares to be subject to each option. Non-employee directors shall be entitled to receive the following: (i) the nondiscretionary grant of a non-statutory option to purchase 10,000 Shares upon the non-employee director's election or appointment to the VCA Board, and (ii) for so long as the non-employee director remains on the VCA Board, an annual nondiscretionary grant on the date of VCA's annual meeting of stockholders of non-statutory options to purchase 5,000 Shares. Unless designated "eligible persons," non-employee directors are not eligible for additional grants. All options granted to the non-employee directors shall have an exercise price equal to 100% of the fair market value of the Shares on the date of grant and shall vest in 12 equal monthly installments. If the VCA stockholders approve the 1996 Plan, the group identified below will receive the number of shares set forth opposite its name.
NAME AND POSITION NUMBER OF SHARES ----------------- ---------------- Chief Executive Officer 0 Current Executive Officers 0 Current Directors who are not Executive Officers 0 All employees, excluding executive officers 57,888
TERMS OF OPTIONS The terms of options granted under the 1996 Plan are determined by the Committee. In the sole and absolute discretion of the Committee, such options may be either "incentive stock options" within the meaning of Section 422 of the Code ("ISOs"), or non-statutory options. However, to the extent that the aggregate market value of the Shares with respect to which ISOs are exercisable for the first time by any individual under the 1996 Plan and all other incentive plans of VCA and any parent or subsidiary of VCA during any calendar year exceeds $100,000, such options shall not be treated as ISOs. In addition, no participant shall be granted options with respect to more than 500,000 Shares during any one year period. Each option will be evidenced by an option agreement between VCA and the optionee to whom such option is granted on such terms and conditions as shall be determined by the Committee from time to time. The terms of the option agreements need not be identical. Each option is, however, subject to the following terms and conditions: 133 Exercise of the Option. The Committee determines when options granted under the 1996 Plan may be exercisable. An option is exercised by giving written notice of exercise to VCA, specifying the number of full Shares to be purchased, and tendering payment of the purchase price. Payment for Shares issued upon exercise of an option may be made by cash, by cashier's check or certified check, by surrender of previously owned Shares (if the Committee authorizes payment in Shares and such Shares have been held for at least six months), by surrender of the number of Shares issuable upon exercise of the stock option having a fair market value on the date of exercise equal to the option exercise price (if the Committee authorizes such method of payment), or by any combination thereof or any other form of legal consideration acceptable to the Committee. The 1996 Plan provides that, upon the recommendation of the Committee, VCA may loan optionees the funds necessary to exercise their options. Option Price. The ISO exercise price shall equal or exceed the fair market value of the Shares on the date the option is granted. The exercise price for ISOs granted to individuals beneficially holding at least 10% of the outstanding securities of VCA shall equal or exceed 110% of the fair market value of Shares on the date the option is granted. Termination of Options. All options granted under the 1996 Plan expire ten years from the date of grant, or such shorter period as is determined by the Committee. No option is exercisable by any person after such expiration. If an option expires, terminates or is canceled in full, the Shares not purchased thereunder may again be available for option. Non-transferability of Options. An option is not transferable by the optionee otherwise than by will or the laws of descent and distribution and is exercisable during the optionee's lifetime only by the optionee, his or her guardian or legal representative. Other Provisions. The option agreement may contain such other terms, provisions and conditions not inconsistent with the 1996 Plan as may be determined by the Committee. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION The 1996 Plan and each option granted thereunder contain provisions for appropriate adjustments in the exercise price per Share (but not the total price) and the number of Shares subject to the option in the event of any change in the number of issued Shares which results from a split-up or consolidation of Shares, payment of a Share dividend, a recapitalization or other like capital adjustment. Options may provide for acceleration of vesting upon a change of control. Alternatively, the Committee has the right, in its sole discretion, to accelerate the vesting of options granted pursuant to the 1996 Plan in the event of such a change in control. AMENDMENT AND TERMINATION OF THE 1996 PLAN The VCA Board may amend the 1996 Plan at any time, may suspend it from time to time or may terminate it without approval of the stockholders; provided, however, that stockholder approval is required for any amendment which materially increases the number of Shares for which options may be granted, materially modifies the requirements of eligibility or materially increases the benefits which may accrue to optionees under the 1996 Plan. However, no such action by the VCA Board or stockholders may unilaterally alter or impair any option previously granted under the 1996 Plan without the consent of the optionee. In any event, the 1996 Plan shall terminate ten years from the date of stockholder approval unless sooner terminated by action of the VCA Board. EFFECT OF SECTION 16(B) OF THE EXCHANGE ACT. The acquisition and disposition of VCA Common Stock by officers, directors and more than 10% stockholders of VCA ("Insiders") pursuant to awards granted to them under the 1996 Plan may be subject to Section 16(b) of the Exchange Act. Pursuant to Section 16(b), a purchase of VCA Common Stock by an Insider within six months before or after a sale of VCA Common Stock by the Insider could result in recovery by VCA of all or a portion of any amount by which the sale proceeds exceeds the purchase price. Insiders are required to file reports of changes in beneficial ownership under Section 16(a) of the Exchange Act upon acquisitions and dispositions of shares. Rule 16b-3 provides an exemption from Section 16(b) liability for certain transactions pursuant to certain employee benefit plans. The 1996 Plan is designed to comply with Rule 16b-3. 134 FEDERAL INCOME TAX CONSEQUENCES The following general discussion of the principal tax considerations is based upon the tax laws and regulations of the United States existing as of the date hereof, all of which are subject to modification at any time. The 1996 Plan does not constitute a qualified retirement plan under Section 401(a) of the Code (which generally covers trusts forming part of a stock bonus, pension or profit- sharing plan funded by the employer and/or employee contributions which are designed to provide retirement benefits to participants under certain circumstances) and is not subject to the Employee Retirement Income Security Act of 1974 (the pension reform law which regulates most types of privately funded pension, profit-sharing and other employee benefit plans). Pursuant to Section 162(m) of the Code ("Section 162(m)"), non-performance- based compensation in excess of $1 million to certain senior executives of public companies is not deductible by such public companies. Performance-based compensation is excluded from applicable employee remuneration for Section 162(m) limitation purposes. The 1996 Plan is intended to qualify as performance- based compensation which is not subject to the $1 million limitation. In order for the 1996 Plan to qualify as performance-based compensation under Section 162(m) and therefore be exempt from the $1 million limitation, the 1996 Plan must be approved by the stockholders of VCA. Consequences to Employees: Incentive Stock Options. No income is recognized for federal income tax purposes by an optionee at the time an ISO is granted, and, except as discussed below, no income is recognized by an optionee upon his or her exercise of an ISO. If the optionee makes no disposition of the Shares received upon exercise within two years from the date such option is granted or one year from the date such option is exercised, the optionee will recognize long-term capital gain or loss when he or she disposes of his or her Shares. Such gain or loss will be measured by the difference between the exercise price of the option and the amount received for the Shares at the time of disposition. If the optionee disposes of Shares acquired upon exercise of an ISO within two years after being granted the option or within one year after acquiring the Shares, any amount realized from such disqualifying disposition will be taxable as ordinary income in the year of disposition to the extent that the lesser of (A) the fair market value of the Shares on the date the ISO was exercised or (B) the fair market value at the time of such disposition, exceeds the ISO exercise price. Any amount realized upon disposition in excess of the fair market value of the Shares on the date of exercise will be treated as long-term or short-term capital gain, depending upon whether the shares have been held for more than one year. The use of stock acquired through exercise of an ISO to exercise an ISO will constitute a disqualifying disposition if the applicable holding period requirement has not been satisfied. For alternative minimum tax purposes, the excess of the fair market value of the stock as of the date of exercise over the exercise price of the ISO is included in computing alternative minimum taxable income. Consequences to Employees: Non-statutory Options. No income is recognized by a holder of non-statutory options at the time non-statutory options are granted under the 1996 Plan. In general, at the time Shares are issued to a holder pursuant to exercise of non-statutory options, the holder will recognize ordinary income equal to the excess of the sum of cash and the fair market value of the Shares on the date of exercise over the exercise price. A holder will recognize gain or loss on the subsequent sale of Shares acquired upon exercise of non-statutory options in an amount equal to the difference between the selling price and the tax basis of the Shares, which will include the price paid plus the amount included in the holder's income by reason of the exercise of the non-statutory options. Provided the Shares are held as a capital asset, any gain or loss resulting from a subsequent sale will be long- term or short-term capital gain or loss depending upon whether the Shares have been held for more than one year. Consequences to VCA: Incentive Stock Options. VCA will not be allowed a deduction for federal income tax purposes at the time of the grant or exercise of an ISO. There are also no federal income tax consequences to VCA as a result of the disposition of Shares acquired upon exercise of an ISO if the disposition is not a disqualifying disposition. At the time of a disqualifying disposition by an optionee, VCA will be entitled to a deduction for the amount received by the optionee to the extent that such amount is taxable to the optionee as ordinary income. 135 Consequences to VCA: Non-statutory Options. VCA will be entitled to a deduction for federal income tax purposes in the year and in the same amount as the optionee is considered to have realized ordinary income in connection with the exercise of non-statutory options if provision is made for withholding of federal income taxes, where applicable. Cash Payments. The Committee may authorize VCA to provide cash payments to holders of non-statutory options to reimburse such persons for the tax they incur with respect to the exercise of non-statutory options. REQUIRED VOTE The VCA Board has unanimously approved the adoption of the 1996 Plan. The affirmative vote of a majority of the Shares present in person or represented by proxy at the VCA Annual Meeting and voting on the approval of the adoption of the 1996 Plan is required for the approval of the adoption of the 1996 Plan. Unless marked otherwise, proxies received will be voted for the adoption of the 1996 Plan. THE VCA BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE APPROVAL OF THE VCA 1996 STOCK INCENTIVE PLAN PROPOSAL TO APPROVE THE ADOPTION OF THE VCA 1996 EMPLOYEE STOCK PURCHASE PLAN SUMMARY OF PLAN The proposed VCA 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan") was adopted by the VCA Board on January 20, 1996. The Stock Purchase Plan supplements VCA's stock option plans and provides selected officers, employees and consultants of VCA and its subsidiaries with an opportunity to purchase Shares through regular payroll deductions. Subject to adjustment for stock splits, stock dividends and other similar events, the total number of Shares reserved for issuance under the Stock Purchase Plan shall be 250,000 Shares. The following sections summarize the principal features of the Stock Purchase Plan, a copy of which is attached as Appendix E to this Joint Proxy -------- - Statement/Prospectus. Although this Joint Proxy Statement/Prospectus contains a summary of the principal features of the Stock Purchase Plan, this summary is not intended to be complete and reference should be made to Appendix E to this Joint Proxy Statement/Prospectus for the complete text of - -------- - the Stock Purchase Plan. The purpose of the Stock Purchase Plan is to provide incentives to the employees by encouraging their ownership of shares of VCA Common Stock. All officers and employees of VCA and its subsidiaries who are currently employed by VCA or any of its subsidiaries who work at least 20 hours per week and who have been regularly and continuously employed by VCA or its subsidiaries for at least 90 days are eligible to participate in the Stock Purchase Plan. Executive officers of VCA are not eligible to participate in the Stock Purchase Plan. Each eligible participant may contribute to the Stock Purchase Plan a percentage of his or her base compensation ranging from 5% to 15%. VCA will contribute to the Stock Purchase Plan for each employee who is a participant, an amount up to 20% of the employee's contribution, as determined in the discretion of the VCA Board, on the first anniversary of such contribution. Up to 250,000 shares of VCA Common Stock may be issued under the Stock Purchase Plan. This number will be appropriately adjusted for stock dividends, stock splits, reclassifications and other changes affecting VCA's stock. The VCA Board may, at its discretion, terminate the Stock Purchase Plan or amend it in any respect, except that no such termination or amendment shall affect the right of a participant to receive his or her proportionate interest in shares or contributions which have vested under the Stock Purchase Plan. Approval of the Stock Purchase Plan will require the affirmative vote of the holders of a majority of the Shares present in person or by proxy at the VCA Annual Meeting. Failure of the stockholders to approve the Stock Purchase Plan will not terminate the Plan, but will merely have the effect of precluding exemption under Rule 16b-3 under the Exchange Act for purchases by officers of VCA. 136 REQUIRED VOTE The VCA Board has unanimously approved the adoption of the Stock Purchase Plan. The affirmative vote of a majority of the Shares present in person or represented by proxy at the VCA Annual Meeting and voting on the proposed Stock Purchase Plan is required for the approval of the adoption of the Stock Purchase Plan. Unless marked otherwise, proxies received will be voted for the adoption of the Stock Purchase Plan. THE VCA BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ADOPTION OF THE PROPOSED 1996 EMPLOYEE STOCK PURCHASE PLAN. PROPOSALS OF STOCKHOLDERS A proper proposal submitted by a stockholder for presentation at VCA's 1997 Annual Meeting and received at VCA's executive offices no later than February __, 1997, will be included in VCA's Proxy Statement and form of proxy relating to the 1997 VCA Annual Meeting. Under the VCA Bylaws, to bring business before an annual meeting, a stockholder must give written notice thereof to the Secretary of VCA not less than 60 nor more than 90 days before such meeting. The notice must set forth the name, address and number of shares owned by the stockholder making the proposal, a brief description of the business desired to be brought before the meeting and the reasons for conducting it at such meeting, as well as such other information as would be required to be disclosed in the solicitation of proxies under Regulation 14(a) under the Exchange Act. Nomination for the VCA Board must also include the written consent of the nominee to be elected and serve. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP, independent certified public accountants, were selected by the VCA Board to serve as independent auditors of VCA for the fiscal year ended December 31, 1995, and have been selected by the VCA Board to serve as independent auditors for the fiscal year ending December 31, 1996. Representatives of Arthur Andersen LLP are expected to be present at the VCA Annual Meeting, will have an opportunity to make a statement if they desire to do so and will respond to appropriate questions from stockholders. LEGAL OPINION The validity of VCA Common Stock issuable in the Merger has been passed upon by Troop Meisinger Steuber & Pasich, LLP, 10940 Wilshire Blvd., Los Angeles, California 90024, as counsel to VCA. EXPERTS The audited consolidated financial statements of VCA, the audited financial statements of Southwest Veterinary Diagnostic, Inc., the audited supplemental combined financial statements of VCA and the audited financial statements of Pets' Rx, Inc. included in this Joint Proxy Statement/Prospectus and elsewhere in the Registration Statement, to the extent and for the periods indicted, 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. The financial statements of Pet Practice included in this Joint Proxy Statement/Prospectus have been audited by Price Waterhouse LLP, independent accountants, as set forth in its report thereon appearing elsewhere herein. Such financial statements have been so included in reliance on such report, given on the authority of said firm as experts in auditing and accounting. OTHER MATTERS The VCA Board is not aware of any matter to be acted upon at the VCA Annual Meeting and the Pet Practice Board is not aware of any matter to be acted upon at the Pet Practice Special Meeting other than described in this Joint Proxy Statement/Prospectus. Unless otherwise directed, all shares represented by the persons named in the accompanying proxy will 137 be voted in favor of the proposals described in this Joint Proxy Statement/Prospectus. If any other matter properly comes before the meeting, however, the proxy holders will vote thereon in accordance with their best judgment. ANNUAL REPORT TO STOCKHOLDERS The VCA Annual Report for the fiscal year ended December 31, 1995 is being mailed to VCA's stockholders along with this Joint Proxy Statement/Prospectus. The VCA Annual Report is not to be considered part of the soliciting material. 138 INDEX TO FINANCIAL STATEMENTS
PAGE ---- VETERINARY CENTERS OF AMERICA, INC. Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995.................................................... F-4 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995........................................ F-5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995................................. F-6 Notes to Financial Statements............................................. F-8 Report of Independent Public Accountants.................................. F-9 Consolidated Balance Sheets at December 31, 1995 and 1994................. F-10 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994, and 1993.................................... F-11 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993......................... F-12 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993..................................... F-13 Notes to Consolidated Financial Statements................................ F-15 Report of Independent Public Accountants.................................. F-28 Supplemental Combined Balance Sheets at December 31, 1995 and 1994 and March 31, 1996.......................................... F-29 Supplemental Combined Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 and the Three Months Ended March 31, 1996 and 1995................... F-30 Supplemental Combined Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 and the Three Months Ended March 31, 1996................... F-31 Supplemental Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 and the Three Months Ended March 31, 1996 and 1995................... F-32 Notes to Supplemental Combined Financial Statements....................... F-34 THE PET PRACTICE, INC. Consolidated Balance Sheet as of April 3, 1996 and January 3, 1996...................................................... F-50 Consolidated Statement of Operations for the Thirteen Weeks Ended April 3, 1996 and March 29, 1995..................................... F-52 Consolidated Statement of Changes in Stockholders' Equity for the Thirteen Weeks Ended April 3, 1996........................... F-53 Consolidated Statement of Cash Flows for the Thirteen Weeks Ended April 3, 1996 and March 29, 1995..................................... F-54 Notes to Consolidated Financial Statements................................ F-55 Report of Independent Accountants......................................... F-58
F-1
PAGE ----- Consolidated Balance Sheet as of December 28, 1994, and January 3, 1996...................................................... F-59 Consolidated Statement of Operations for the Period October 27, 1993 to December 29, 1993 and for the Fiscal Years Ended December 28, 1994 and January 3, 1996.................... F-60 Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Period October 27, 1993 to December 29, 1993 and for the Fiscal Years Ended December 28, 1994 and January 3, 1996............................................. F-61 Consolidated Statement of Cash Flows for the Period October 27, 1993 to December 29, 1993 and for the Fiscal Years Ended December 28, 1994 and January 3, 1996.................... F-62 Notes to Consolidated Financial Statements................................ F-63 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. Report of Independent Accountants......................................... F-73 Statement of Operations for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993.................. F-74 Statement of Stockholders' Deficit for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993................................. F-75 Statement of Cash Flows for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993.................. F-76 Notes to Financial Statements............................................. F-77 PETS' RX, INC. Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995................................................ F-80 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995................................. F-81 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995........................................ F-82 Notes to Consolidated Financial Statements................................ F-83 Report of Independent Public Accountants.................................. F-84 Report of Independent Public Accountants.................................. F-85 Consolidated Balance Sheets as of December 31, 1995 and 1994............................................................. F-86
F-2
PAGE ---- Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993............................... F-87 Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993............................... F-88 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............................... F-89 Notes to Consolidated Financial Statements................................ F-90 SOUTHWEST VETERINARY DIAGNOSTICS, INC. Report of Independent Public Accountants.................................. F-102 Balance Sheet at December 31, 1995........................................ F-103 Statement of Operations for the Year Ended December 31, 1995.............................................. F-105 Statement of Stockholders' Equity for the Year Ended December 31, 1995.............................................. F-106 Statement of Cash Flows for the Year Ended December 31, 1995.............................................. F-107 Notes to Financial Statements............................................. F-108
APPENDICES Appendix A Agreement and Plan of Reorganization Appendix B Opinion of National Westminster Bank PLC Appendix C Opinion of Smith Barney Inc. Appendix D VCA 1996 Stock Incentive Plan Appendix E VCA 1996 Employee Stock Purchase Plan Appendix F Exchange Ratios F-3 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
March 31, December 31, 1996 1995 ------------ ------------ Current assets: Cash and equivalents............................................. $ 37,615,000 $ 46,799,000 Accounts receivable, less allowance for uncollectible accounts... 8,816,000 6,303,000 Inventory, prepaid expenses and other............................ 4,121,000 3,518,000 Deferred income taxes............................................ 1,126,000 1,175,000 Prepaid income taxes............................................. 250,000 494,000 ------------ ------------ Total current assets.......................................... 51,928,000 58,289,000 Property, plant and equipment, net................................. 15,981,000 13,641,000 Other assets: Goodwill, net.................................................... 79,637,000 61,359,000 Covenants not to compete, net.................................... 5,573,000 4,885,000 Building purchase options........................................ 887,000 887,000 Notes receivable................................................. 1,183,000 878,000 Deferred costs and other......................................... 1,859,000 1,526,000 ------------ ------------ $157,048,000 $141,465,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations......................... $ 7,563,000 $ 6,009,000 Accounts payable................................................. 5,794,000 4,850,000 Accrued payroll and taxes........................................ 2,238,000 1,961,000 Other accrued liabilities........................................ 3,339,000 3,593,000 ------------ ------------ Total current liabilities..................................... 18,934,000 16,413,000 Long-term obligations, less current portion........................ 29,588,000 27,352,000 Deferred income taxes.............................................. 1,538,000 1,301,000 Minority interest.................................................. 4,843,000 4,605,000 Stockholders' equity: Preferred stock, par value $0.001................................ 1,000 1,000 Common stock, par value $0.001................................... 13,000 12,000 Additional paid-in capital....................................... 99,072,000 89,734,000 Accumulated earnings............................................. 3,059,000 2,047,000 ------------ ------------ Total stockholders' equity.................................... 102,145,000 91,794,000 ------------ ------------ $157,048,000 $141,465,000 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. F-4 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1996 1995 ----------- ------------- Revenues.............................................................................. $31,004,000 $15,230,000 Direct costs.......................................................................... 23,203,000 11,809,000 ----------- ----------- Gross profit.......................................................................... 7,801,000 3,421,000 Selling, general and administrative................................................... 3,314,000 2,262,000 Depreciation and amortization......................................................... 1,034,000 548,000 Restructuring charge.................................................................. -- 1,086,000 ----------- ----------- Operating income (loss)............................................................... 3,453,000 (475,000) Interest and other investment income.................................................. 376,000 120,000 Interest expense...................................................................... 672,000 479,000 ----------- ----------- Income (loss) before minority interest and provision (benefit) for income taxes....... 3,157,000 (834,000) Minority interest in income of subsidiaries........................................... 1,346,000 21,000 ----------- ----------- Income (loss) before provision (benefit) for income taxes............................. 1,811,000 (855,000) Provision (benefit) for income taxes.................................................. 799,000 (263,000) ----------- ----------- Net income (loss)..................................................................... $ 1,012,000 $ (592,000) =========== =========== Earnings (loss) per share............................................................. $0.07 $(0.09) =========== =========== Weighted average common equivalent shares used for computing earnings (loss) per share 15,110,000 6,865,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
1996 1995 ------------- ------------ Cash flows from operating activities: Net income (loss).................................................... $ 1,012,000 $ (592,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................................... 1,034,000 548,000 Amortization of debt discount.................................... 72,000 3,000 Minority interest in income of subsidiaries...................... 1,346,000 21,000 (Increase) decrease in other assets, net......................... (325,000) 59,000 Decrease in deferred income taxes................................ 286,000 65,000 Increase in accounts receivable, net............................. (1,289,000) (1,507,000) Increase in inventory, prepaid expenses and other................ (387,000) (885,000) Decrease (increase) in prepaid income taxes...................... 244,000 (332,000) Increase in accounts payable and accrued liabilities............. 300,000 2,704,000 Payments to minority interest partners........................... (961,000) (43,000) ----------- ----------- Net cash provided by operating activities..................... 1,332,000 41,000 ----------- ----------- Cash flows from investing activities: Property and equipment additions, net................................ (948,000) (78,000) Business acquisitions, net of cash acquired.......................... (12,051,000) (2,028,000) ------------ ----------- Net cash used in investing activities......................... (12,999,000) (2,106,000) ------------ ----------- Cash flows from financing activities: Reduction of long-term obligations................................... (3,000,000) (1,471,000) Payments received on notes receivable................................ 12,000 32,000 Net proceeds from exercise of warrants............................... 5,330,000 2,108,000 Proceeds from issuance of common stock under stock option plans...... 141,000 4,000 Proceeds from issuance of common stock............................... -- 9,980,000 Repayment of line of credit.......................................... -- (1,100,000) ------------ ----------- Net cash provided by financing activities..................... 2,483,000 9,553,000 ------------ ----------- (Decrease) increase in cash and equivalents............................ (9,184,000) 7,488,000 Cash and equivalents at beginning of period............................ 46,799,000 5,553,000 ------------ ----------- Cash and equivalents at end of period.................................. $ 37,615,000 $13,041,000 ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) (continued)
1996 1995 ----------- ----------- Supplemental disclosures of cash flow information: Interest paid................................................................... $ 550,000 $ 457,000 Taxes paid...................................................................... 269,000 4,000 Supplemental schedule of non-cash investing and financing activities: In connection with acquisitions, assets acquired and liabilities assumed were as follows: Fair value of assets acquired............................................... $23,304,000 $11,571,000 Less: Consideration given Cash paid to sellers, net of cash acquired............................... 9,875,000 2,028,000 Cash paid in settlement of assumed liabilities........................... 2,176,000 -- Common stock issued...................................................... 3,868,000 2,300,000 ----------- ----------- Liabilities assumed including notes payable issued, net of payments......... $ 7,385,000 $ 7,243,000 =========== =========== In connection with the formation of the joint venture and partnerships, assets and liabilities contributed by the partners were as follows: Assets..................................................................... $ 317,000 $ 2,876,000 Liabilities................................................................ -- 1,063,000 ----------- ----------- Non-cash capital contribution of minority interest partners................ $ 317,000 $ 1,813,000 =========== =========== Non-cash increase in long-term obligations due to purchase of property..... $ -- $ 163,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-7 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) (1) GENERAL The accompanying unaudited consolidated financial statements of Veterinary Centers of America, Inc. and subsidiaries (the "Company" or "VCA") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 1995 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 25, 1996. (2) RECLASSIFICATIONS Certain 1995 balances have been reclassified to conform with the 1996 financial statement presentation. (3) ACQUISITIONS During the first quarter of 1996, the Company purchased seven veterinary hospitals and a veterinary diagnostic laboratory in separate transactions for a total consideration (including acquisition costs) of $23,304,000 consisting of $9,875,000 in cash, $6,551,000 in long-term obligations, 242,926 shares of VCA common stock, with a value of $3,868,000, and the assumption of liabilities totaling $3,010,000. On February 27, 1996, the Company signed a definitive merger agreement with Pets' Rx, Inc. ("Pets' Rx") which agreement was amended on April 11, 1996, pursuant to which the Company may acquire all of the outstanding securities of Pets' Rx for 850,000 shares of VCA common stock. Pets' Rx owns and operates 16 veterinary hospitals in the San Jose and Sacramento, California and the Las Vegas, Nevada markets. The Company expects that the Pets' Rx merger will be consummated in the second quarter of 1996. On March 21, 1996, the Company signed a definitive merger agreement with The Pet Practice, Inc. ("The Pet Practice") pursuant to which the Company may acquire all of the outstanding securities of The Pet Practice for approximately 3.2 million shares of VCA common stock. The Pet Practice currently operates 86 veterinary hospitals in 11 states. The Company expects that The Pet Practice merger will be consummated in the third quarter of 1996. (4) INCOME TAXES The provision for income taxes is greater than the amount computed using the statutory rate due primarily to nondeductible amortization of intangible assets. (5) SUBSEQUENT EVENTS On April 17, 1996, the Company received net proceeds of $82,697,000 from an offshore offering and concurrent private placement in the United States, of $84,385,000 of 5.25% convertible subordinated debentures due in 2006. The debentures, non-callable for three years, will be convertible into approximately 2.5 million shares of the Company's common stock at a rate of $34.35 per share. Under the terms of the agreement the debentures and common stock issuable upon conversion will be registered under the United States Securities Act of 1933 by October 12, 1996. F-8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Veterinary Centers of America, Inc.: We have audited the accompanying consolidated balance sheets of VETERINARY CENTERS OF AMERICA, INC. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Veterinary Centers of America, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 2 and 11 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements 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 February 23, 1996 F-9 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995 AND 1994 A S S E T S
1995 1994 ------------ ----------- CURRENT ASSETS: Cash and equivalents.................................................... $ 46,799,000 $ 5,553,000 Accounts receivable, less allowance for uncollectible accounts of $1,648,000 and $797,000 at December 31, 1995 and 1994, respectively... 6,303,000 1,745,000 Inventory, prepaid expenses and other................................... 3,518,000 965,000 Deferred income taxes................................................... 1,175,000 438,000 Prepaid income taxes.................................................... 494,000 172,000 ------------ ----------- Total current assets.............................................. 58,289,000 8,873,000 PROPERTY, PLANT AND EQUIPMENT, NET....................................... 13,641,000 8,554,000 OTHER ASSETS: Goodwill, net........................................................... 61,159,000 30,635,000 Covenants not to compete, net........................................... 4,885,000 1,946,000 Building purchase options............................................... 1,087,000 837,000 Notes receivable........................................................ 878,000 787,000 Deferred costs and other................................................ 1,526,000 567,000 ------------ ----------- $141,465,000 $52,199,000 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations................................ $ 6,009,000 $ 4,850,000 Accounts payable........................................................ 4,850,000 2,126,000 Accrued payroll and taxes............................................... 1,961,000 984,000 Other accrued liabilities............................................... 3,593,000 1,517,000 ------------ ----------- Total current liabilities......................................... 16,413,000 9,477,000 LONG-TERM OBLIGATIONS, less current portion.............................. 27,352,000 14,071,000 GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK........................................ -- 72,000 DEFERRED INCOME TAXES.................................................... 1,301,000 148,000 MINORITY INTEREST........................................................ 4,605,000 5,034,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock; $.001 par value; Authorized -- 1,000,000 shares: Issued and outstanding -- 583,333 at December 31, 1995 and 1994... 1,000 1,000 Common stock; $.001 par value; Authorized -- 30,000,000 shares: Issued and outstanding -- 12,056,607 and 5,480,998 at December 31, 1995 and 1994, respectively.......................... 12,000 5,000 Additional paid-in capital............................................. 89,734,000 23,908,000 Accumulated earnings (deficit)......................................... 2,047,000 (517,000) ------------ ----------- Total stockholders' equity..................................... 91,794,000 23,397,000 ------------ ----------- $141,465,000 $52,199,000 ============ ===========
The accompanying notes are an integral part of these consolidated balance sheets. F-10 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ----------- ------------ ------------ Revenues...................................................... $92,072,000 $42,233,000 $25,313,000 Direct costs.................................................. 67,511,000 32,055,000 20,325,000 ----------- ----------- ----------- Gross profit.................................................. 24,561,000 10,178,000 4,988,000 Selling, general and administrative........................... 10,833,000 6,927,000 3,862,000 Depreciation and amortization................................. 3,291,000 1,455,000 956,000 Restructuring charge.......................................... 1,086,000 -- -- Writedown of assets........................................... -- -- 2,310,000 ----------- ----------- ----------- Operating income (loss)....................................... 9,351,000 1,796,000 (2,140,000) Interest income............................................... 729,000 366,000 448,000 Interest expense.............................................. 2,368,000 1,382,000 873,000 ----------- ----------- ----------- Income (loss) before minority interest, income taxes and cumulative effect of accounting change....................... 7,712,000 780,000 (2,565,000) Minority interest in income (loss) of subsidiaries............ 2,910,000 (540,000) (334,000) ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of accounting change....................... 4,802,000 1,320,000 (2,231,000) Provision (benefit) for income taxes.......................... 2,238,000 731,000 (152,000) ----------- ----------- ----------- Income (loss) before cumulative effect of accounting change... 2,564,000 589,000 (2,079,000) Cumulative effect of accounting change........................ -- -- 221,000 ----------- ----------- ----------- Net income (loss)............................................. $ 2,564,000 $ 589,000 $(1,858,000) =========== =========== =========== PRIMARY EARNINGS (LOSS) PER SHARE: Earnings (loss) before cumulative effect of accounting change............................ $ 0.24 $ 0.09 $ (0.40) Cumulative effect of accounting change................... -- -- 0.04 ----------- ----------- ----------- Net earnings (loss) per common share..................... $ 0.24 $ 0.09 $ (0.36) =========== =========== =========== Average common shares used for computing primary earnings (loss) per share..................... 10,703,000 6,432,000 5,165,000 =========== =========== =========== FULLY DILUTED EARNINGS (LOSS) PER SHARE: Earnings (loss) before cumulative effect of accounting change............................ $ 0.23 $ 0.09 $ (0.33) Cumulative effect of accounting change................... -- -- 0.04 ----------- ----------- ----------- Net earnings (loss) per common share..................... $ 0.23 $ 0.09 $ (0.29) =========== =========== =========== Average common shares used for computing fully diluted earnings (loss) per share................ 11,238,000 6,906,000 6,238,000 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-11 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Common Stock Preferred Stock Additional Accumulated ------------------------------------------------------ Paid-In Earnings Shares Amount Shares Amount Capital (Deficit) --------------- -------- --------------- ------- ------------ ------------ BALANCES, December 31, 1992............ 5,133,785 $ 5,000 583,333 $1,000 $21,541,000 $ 752,000 Issued under stock option plans........ 39,171 -- -- -- 149,000 -- Net loss............................... -- -- -- -- -- (1,858,000) --------- ------- -------- ------ ----------- ----------- BALANCES, December 31, 1993............ 5,172,956 5,000 583,333 1,000 21,690,000 (1,106,000) Issued under stock option plans........ 9,499 -- -- -- 31,000 -- Business acquisitions.................. 235,329 -- -- -- 1,717,000 -- Settlement of guaranteed purchase 63,214 -- -- -- 470,000 -- price contingently payable in cash or common stock......................... Net income............................. -- -- -- -- -- 589,000 --------- ------- -------- ------ ----------- ----------- BALANCES, December 31, 1994............ 5,480,998 5,000 583,333 1,000 23,908,000 (517,000) Sale of common stock................... 4,124,446 4,000 -- -- 43,908,000 -- Sale of redeemable warrants............ -- -- -- -- 58,000 -- Exercise of redeemable warrants........ 1,271,508 2,000 -- -- 8,894,000 -- Exercise of warrants issued in connection with the Vet Research joint venture......................... 50,000 -- -- -- 550,000 -- Issued under stock option plans........ 29,367 -- -- -- 209,000 -- Business acquisitions.................. 1,075,288 1,000 -- -- 11,979,000 -- Conversion of convertible debt......... 25,000 -- -- -- 175,000 -- Settlement of guaranteed purchase price contingently payable in cash or common stock....... -- -- -- -- 53,000 -- Net income............................. -- -- -- -- -- 2,564,000 ---------- ------- -------- ------ ----------- ----------- BALANCES, December 31, 1995............ 12,056,607 $12,000 583,333 $1,000 $89,734,000 $ 2,047,000 ========== ======= ======== ====== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-12 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................. $ 2,564,000 $ 589,000 $(1,858,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................................. 3,291,000 1,455,000 956,000 Amortization of debt discount.................................. 454,000 15,000 13,000 Equity contribution for product development costs.............. -- -- 806,000 Utilization of acquired NOL carryforwards...................... 69,000 -- 40,000 Writedown of assets............................................ -- -- 2,310,000 Minority interest in income (loss) of subsidiary............... 2,910,000 (540,000) (600,000) Distributions to minority interest partners.................... (4,015,000) (904,000) (122,000) (Increase) decrease in accounts receivable, net................ (2,140,000) (124,000) 24,000 (Increase) decrease in inventory and other..................... (1,787,000) (319,000) 152,000 (Increase) decrease in prepaid income taxes.................... (322,000) (172,000) 99,000 Increase in other assets, net.................................. (227,000) (71,000) (235,000) (Increase) decrease in deferred income tax asset............... (737,000) 408,000 (872,000) Increase in accounts payable and accrued liabilities........... 3,559,000 1,399,000 467,000 (Decrease) increase in income taxes payable.................... -- (337,000) 412,000 Increase in deferred income tax liability...................... 437,000 73,000 -- ------------ ----------- ----------- Net cash provided by operating activities................... 4,056,000 1,472,000 1,592,000 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired....................... (9,107,000) (5,948,000) (1,021,000) Property and equipment additions, net............................. (2,067,000) (1,052,000) (649,000) Payments for building purchase options............................ (250,000) (60,000) (250,000) ------------ ----------- ----------- Net cash used in investing activities....................... (11,424,000) (7,060,000) (1,920,000) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayment of) proceeds from line of credit and addition of long-term obligations.............................. (1,100,000) 1,100,000 85,000 Reduction of long-term obligations and notes payable.............. (4,971,000) (2,494,000) (1,553,000) Payments received on notes receivable............................. 79,000 55,000 29,000 Payments on guaranteed purchase price contingently payable in cash or common stock.................... (19,000) -- -- Net proceeds from sale of common stock............................ 43,912,000 -- -- Net proceeds from exercise of redeemable warrants................. 8,896,000 -- -- Proceeds from exercise of warrants issued in connection with Vet Research joint venture.................. 550,000 -- -- Proceeds from sale of redeemable warrants......................... 58,000 -- -- Proceeds from issuance of common stock under stock option plans... 209,000 31,000 149,000 Capital contribution of minority interest partners................ 1,000,000 30,000 2,970,000 ------------ ----------- ----------- Net cash provided by (used in) financing activities......... 48,614,000 (1,278,000) 1,680,000 ------------ ----------- ----------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS......................... 41,246,000 (6,866,000) 1,352,000 CASH AND EQUIVALENTS AT BEGINNING OF YEAR........................... 5,553,000 12,419,000 11,067,000 ------------ ----------- ----------- CASH AND EQUIVALENTS AT END OF YEAR................................. $ 46,799,000 $ 5,553,000 $12,419,000 ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-13 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (CONTINUED)
1995 1994 1993 ------------- ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................................ $ 1,906,000 $ 1,295,000 $ 822,000 Taxes paid................................................... 2,688,000 759,000 193,000 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............................... $ 43,005,000 $15,553,000 $ 4,363,000 Less: Consideration given Cash paid................................................. (9,107,000) (5,948,000) (1,271,000) Common stock issued....................................... (11,980,000) (1,717,000) -- ------------ ----------- ----------- Liabilities assumed including notes payable issued.......... $ 21,918,000 $ 7,888,000 $ 3,092,000 ============ =========== =========== In connection with the formation of the joint venture and partnerships, assets and liabilities contributed by the partners were as follows: Assets...................................................... $ 3,224,000 $ 330,000 $ -- Liabilities................................................. 1,063,000 -- -- ------------ ----------- ----------- Non-cash capital contribution of minority interest partners......................................... $ 2,161,000 $ 330,000 $ -- ============ =========== =========== Issuance of common stock in exchange for convertible debt...................................... $ 175,000 $ -- $ -- ============ =========== =========== Settlement of guaranteed purchase price through issuance of common stock.......................... $ 53,000 $ 470,000 $ -- ============ =========== =========== Non-cash increase in long-term obligations due to purchase of equipment and building........................ $ 184,000 $ 164,000 $ 860,000 ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-14 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. THE COMPANY Veterinary Centers of America, Inc. (VCA or the Company), a Delaware corporation, was founded in 1986 and is a leading companion animal health care company. The Company operates one of the largest networks of free-standing, full service animal hospitals in the country and one of the largest networks of veterinary-exclusive diagnostic laboratories in the nation. The Company also markets both a life-stage and a therapeutic line of premium pet foods through Vet's Choice, a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company. At December 31, 1995, the Company owned 54 animal hospitals, 17 of which were located in Southern California, seven in each of Northern California and Pennsylvania, four in Massachusetts, three in each of Alaska and New Mexico, two in each of Colorado, Florida, Maryland and Utah, and one in each of Arizona, Georgia, Hawaii, Illinois and Delaware. The Company's animal hospitals provide primary care, diagnostic, surgical and boarding services for animals. In March 1994, the Company expanded its presence in the laboratory business with the acquisition of a 70 percent interest in Professional Animal Laboratory ("PAL"). During 1995, the Company further expanded its laboratory business with the acquisition of Cenvet, Inc. ("Cenvet") and its subsequent contribution to Vet Research Laboratories, LLC. ("Vet Research"). Also in 1995, the Company acquired four other veterinary diagnostic laboratories, as well as the remaining 30 percent interest in PAL. The Company's laboratories serve over 6,500 animal hospitals located in 25 states. In January 1993, the Company formed a joint venture, Vet's Choice, to develop, manufacture, market and distribute new pet products and services. The joint venture was in the development stage during all of 1993 and consequently generated no revenues or gross profit in 1993 (Note 4). The joint venture distributes two lines of premium pet food, Select Balance, a life-stage diet and Select Care, a therapeutic line. Select Balance is sold to veterinary hospitals and clinics, as well as pet stores. Select Care is sold only to veterinary hospitals. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. b. Cash Equivalents For purposes of the balance sheets and statements of cash flows, the Company considers only highly liquid investments to be cash equivalents. Of its cash on hand at December 31, 1995 and 1994, $1,907,000 and $2,982,000, respectively, was restricted for use in the conduct of the Vet's Choice joint venture. c. Inventory Inventory is valued at the lower of cost or market using the first-in, first-out method. d. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Capitalized equipment leases are 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-15 Depreciation is recorded using the straight-line method over the estimated useful lives of property and equipment (principally five to seven years) and capitalized equipment leases (principally five years). Leasehold improvements are amortized over the lives of the leases (principally 10 years). Costs of normal repairs and maintenance are expensed as incurred.
Property, plant and equipment consisted of: 1995 1994 ------------ ------------ Land..................................... $ 2,647,000 $ 2,065,000 Building and improvements................ 4,542,000 2,891,000 Leasehold improvements................... 1,728,000 1,204,000 Furniture and equipment.................. 6,531,000 3,238,000 Capitalized equipment leases............. 1,275,000 532,000 ----------- ----------- 16,723,000 9,930,000 Less -- Accumulated depreciation......... (3,082,000) (1,376,000) ----------- ----------- $13,641,000 $ 8,554,000 =========== ===========
Accumulated depreciation on equipment held under capital leases amounted to $293,000 and $170,000 at December 31, 1995 and 1994, respectively. e. Goodwill and Other Intangible Assets Goodwill relating to acquisitions represents the purchase price paid and liabilities incurred in excess of the fair market value of net assets acquired. Goodwill is amortized over the expected period to be benefited, not exceeding 40 years, on a straight-line basis. Subsequent to its acquisitions, the Company continually evaluates whether events and circumstances 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 net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable (Note 13). Other intangible assets principally include covenants not to compete. The value assigned to the covenants not to compete is amortized on a straight-line basis over the term of the agreements (principally 5 to 10 years). Accumulated amortization of goodwill and covenants not to compete and other at December 31, 1995 is $5,808,000 and $1,939,000, respectively. Accumulated amortization of goodwill and covenants not to compete and other at December 31, 1994 is $4,406,000 and $821,000, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement must be adopted by the Company no later than January 1, 1996. The Company does not expect implementation of this statement to have a material effect on its financial position or its results of operations. f. Investments Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments in Debt and Equity Securities," which establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of this Statement did not have a material effect on the financial position or results of operations of the Company. F-16 g. Accounting Change Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax 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 basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (Note 11). The cumulative effect of this accounting change, which resulted in recognizing previously unrecognized tax benefits for years prior to January 1, 1993, decreased the net loss for 1993 by $221,000. h. Reclassifications Certain 1994 balances have been reclassified to conform with the 1995 financial statement presentation. 3. ACQUISITIONS AND DISPOSITIONS During 1995, the Company purchased 25 animal hospitals for an aggregate consideration (including acquisition costs) of $29,019,000, consisting of $6,436,000 in cash, $10,859,000 in debt, 836,576 shares of common stock of the Company, with a value of $9,780,000, and the assumption of liabilities totaling $1,944,000. In addition, the Company paid $250,000 to acquire an option to purchase the land and building of two of the hospitals. Also during 1995, the Company purchased substantially all of the assets of Cenvet, a full-service veterinary diagnostic laboratory, four other veterinary diagnostic laboratories and the remaining 30 percent interest in PAL, for an aggregate consideration of $13,986,000, including acquisition costs, consisting of $2,671,000 in cash, $8,633,000 in long-term obligations, 238,712 shares of VCA common stock, with a value of $2,200,000 and the assumption of liabilities totaling $482,000. On March 20,1995, the Company and Vet Research, Inc., ("VRI"), formed Vet Research Laboratories, LLC ("Vet Research"). In connection with the formation of Vet Research, VRI contributed all of the assets and certain of the liabilities of VRI's full-service veterinary diagnostic laboratory located in Farmingdale, New York. The Company contributed substantially all of the assets and certain of the liabilities of Cenvet for a 51 percent controlling interest in the joint venture (Note 4). In connection with the formation of Vet Research, the Company issued warrants to purchase 363,636 shares of the common stock of the Company at $11.00 per share. The warrants were purchased at $0.001 per warrant and are exercisable until the fifth day following the last day upon which the Company is permitted to close the purchase of VRI's interest in Vet Research pursuant to the VCA Option Agreement. In 1994, VCA purchased four veterinary hospitals for a total consideration (including acquisition costs) of $5,754,000 consisting of $1,329,000 in cash, $3,663,000 in non-recourse promissory notes payable, 91,996 shares of VCA common stock with a value of $680,000, and the assumption of liabilities totaling $82,000. In addition, the Company paid $60,000 to acquire an option to purchase the land and building of one of the hospitals. In 1994, the Company acquired substantially all of the assets and assumed certain of the liabilities of PAL, a full-service veterinary laboratory, located in Irvine, California. In connection with the purchase, the Company also acquired from a principal shareholder of PAL, the real property and building occupied by the business of PAL. The business is operated by a partnership to which the Company contributed the veterinary laboratory that it previously owned. The net consideration (including acquisition costs) paid by the Company in connection with these transactions, totaling $9,799,000, consisted of $4,619,000 in cash, $3,446,000 in notes payable, 143,333 shares of VCA common stock with a value of $1,037,000, and the assumption of liabilities totaling $697,000. F-17 The non-recourse notes payable, with a principal amount of $3,663,000, to the previous owners of the hospitals are secured by the assets of the acquired hospitals. The fair market value of the tangible assets acquired, including accounts receivable, supplies, inventory and hospital equipment, totals approximately $360,000. In 1993, VCA purchased six veterinary hospitals for a total consideration of $4,113,000 consisting of $1,021,000 in cash, $2,967,000 in non-recourse notes payable and the assumption of liabilities totaling $125,000. In addition, the Company paid $250,000 to acquire options to purchase the land and building of two of the hospitals. The obligations of the Company to the previous owners pursuant to the non-recourse notes are secured by the assets of the companies acquired. The fair market value of the tangible assets acquired including accounts receivable, supplies, inventory and hospital equipment, totals approximately $295,000. During 1993, the Company exercised its option to purchase the land and building of one of its animal hospitals for total consideration of approximately $1,296,000 consisting of a $436,000 option payment made in 1992 and the assumption of a mortgage payable in the amount of $860,000. All acquisitions have been accounted for using the purchase method of accounting. The operations of the acquired companies are included in the accompanying consolidated financial statements from the date of acquisition. The pro forma results listed below are unaudited and reflect purchase price accounting adjustments assuming 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 operation.
(Unaudited) 1995 1994 ------------ ------------ Revenue...................................... $112,070,000 $100,229,000 Net income................................... $ 4,811,000 $ 4,018,000 Primary earnings per share................... $ 0.40 $ 0.43 Fully diluted earnings per share............. $ 0.39 $ 0.41 Weighted average shares used for computing earnings per share: Primary.................................... 11,959,000 9,420,000 Fully diluted.............................. 12,494,000 9,894,000
4. JOINT VENTURES In January 1993, the Company entered into a joint venture with Heinz Pet Products, Vet's Choice, to develop, manufacture and market new pet products and services. The Company obtained a 50.5 percent controlling interest in the joint venture for a capital contribution of $3,030,000 in cash and is the managing general partner. Heinz Pet Products ("HPP"), contributed $2,970,000 in cash for a 49.5 percent minority interest in the joint venture. Under the terms of the partnership agreement, HPP also agreed to make an additional capital contribution of their product development costs of up to $1 million. The actual costs incurred during 1993 were $806,000. Such costs were expensed and credited to the minority interest partner's equity account. Commencing January 1, 1996 the joint venture will make preferential distributions to HPP of any distributable cash in excess of $3 million in any fiscal year until such time as HPP has received preferential distributions amounting to the total development costs that it contributed. As provided by the partnership agreement, the Company and Heinz Pet Products each contributed $1 million to the joint venture in the third quarter of 1995. The joint venture agreement between the Company and HPP provides for restrictions on the transfer of each partner's respective interest in the joint venture and for reciprocal buy-sell provisions. Heinz Pet Products has agreed to lend Vet's Choice up to $1.0 million at its bank prime rate plus one-half percent for working capital. The Company operates Vet Research in a joint venture with VRI. Vet Research's operating results have been accounted for as part of the consolidated operations of the Company. Distributions of distributable cash will be made F-18 pursuant to a formula contained in the operating agreement between the Company and VRI. Pursuant to that formula, during each contract year, the first $1.5 million of distributable cash is distributed to VRI; the next $3 million of distributable cash is distributed to the Company; and the remaining distributable cash is distributed 25 percent to the Company and 75 percent to VRI. The Company has recorded minority interest expense related to the joint venture based on the estimated percentage of annual income which will be distributed to the minority interest partner pursuant to the operating agreement. The estimate is reviewed and adjusted on a quarterly basis. The 1995 results include minority interest expense of 52.4 percent of Vet Research's income. The Company has an option pursuant to an agreement with VRI to acquire VRI's entire interest in Vet Research for a purchase price as computed in accordance with the operating agreement. The Company's option is exercisable January 1, 1997 through January 31, 1997. If the Company does not exercise its option, VRI has an option to acquire the Company's interest in Vet Research. 5. LONG-TERM OBLIGATIONS Long-term obligations consisted of the following at December 31, 1995 and 1994:
1995 1994 ----------- ---------- 8 percent note payable, convertible into VCA common stock at $12.50 per share, due through 1997, secured by certain fixed and intangible assets........... $ 57,000 $ 86,000 5 percent note payable, convertible into VCA common stock at $15.00 per share due through 1997, secured by stock of certain subsidiaries.................. 196,000 391,000 11.2 percent note payable due through 1997, secured by assets of a certain subsidiary........................................................... 408,000 483,000 Adjustable rate note payable, interest at the treasury bill rate (6.3 percent at December 31, 1995) adjusted annually, due through June 2000 (discounted at 6.5 percent)................................................................... 300,000 355,000 Obligation due monthly through May 2000, secured by assets of certain subsidiary (discounted at 6.5 percent)............................................ 230,000 273,000 Obligation due quarterly through 1997, (discounted at 8.75 percent)................. 361,000 -- Obligation due quarterly through 2002, secured by assets of certain subsidiary (discounted at 8.75 percent)........................................... 2,580,000 -- Adjustable rate note payable, interest at the bank prime rate plus 0.5 percent, (capped at 8.5 percent at December 31, 1995), adjusted annually, due through 2000, secured by stock of a certain subsidiary................................... 592,000 698,000 3 percent note payable, converted into VCA common stock in June 1995 at $7.00 per share................................................................ -- 175,000 Adjustable rate notes payable, interest at the bank prime rate, adjusted annually (capped at 8.0 percent at December 31, 1995), various maturities through 2000, secured by assets and stock of certain subsidiaries............................... 2,516,000 2,899,000 Adjustable rate notes payable, interest at the bank prime rate plus 1 percent (8.0 percent to 9.5 percent at December 31, 1995), various maturities through 2002, secured by assets and stock of certain subsidiaries......................... 510,000 589,000 6 percent notes payable, due through 2002, secured by stock of certain subsidiary... 641,000 760,000 7 percent and 7.5 percent notes payable, due through 2007, secured by assets and stock of certain subsidiaries.......................................... 10,953,000 3,034,000 8 percent notes payable, various maturities through 2006, secured by stock of certain subsidiaries.............................................................. 6,915,000 339,000 9 percent and 9.8 percent notes payable, various maturities through 2005, secured by assets of certain subsidiary and building.............................. 898,000 -- Notes payable and other obligations, various maturities through 1997, secured by land, building and stock of certain subsidiaries (discounted at 10 to 12 percent)....................................................................... 299,000 471,000 10 percent notes payable, various maturities through 2005, secured by stock and assets of certain subsidiaries and land and building.......................... 2,627,000 2,867,000
F-19
1995 1994 ------------ ------------ Revolving line of credit at the bank prime rate (8.5 percent at December 31, 1995) matures December 1996, convertible into a 36 month term loan....................... -- $ 1,100,000 10.5 percent note payable, due through 1997, secured by land and building of a certain subsidiary................................................... $ 1,016,000 1,025,000 Adjustable rate notes payable, interest at bank prime rate, plus 1.5 percent (capped at 9.0 percent at December 31, 1995), due through 2001, secured by assets and stock of certain subsidiaries........................................ 707,000 803,000 11 percent note payable due through 2001, secured by assets of certain subsidiary.............................................................. 383,000 449,000 Adjustable rate notes payable at the bank prime rate, plus 1 percent (9.75 percent at December 31, 1995)................................................ 420,000 1,688,000 Notes payable, secured by assets and stock of certain subsidiaries, various maturities through 2001, interest at an average rate of 11 to 12 percent........... 123,000 152,000 ----------- ----------- Total debt obligations............................................................... 32,732,000 18,637,000 Capital lease obligations, due through 2000 (Note 9)................................. 862,000 358,000 Less -- Unamortized discount......................................................... (233,000) (74,000) ----------- ----------- 33,361,000 18,921,000 Less -- Current portion.............................................................. (6,009,000) (4,850,000) ----------- ----------- $27,352,000 $14,071,000 =========== ===========
The annual aggregate scheduled maturities of debt obligations for the five years subsequent to December 31, 1995 are presented below: 1996.......... $6,009,000 1997.......... 6,321,000 1998.......... 4,260,000 1999.......... 3,839,000 2000.......... 4,246,000 Thereafter.... 8,686,000 ----------- $33,361,000 ===========
Certain acquisition debt of the Company included above and amounting to $23,102,000 and $14,608,000 at December 31, 1995 and 1994, respectively, is non-recourse debt secured solely by the assets or the stock of the veterinary hospital acquired under security arrangements whereby the creditor's sole remedy in the event of default is the contractual right to take possession of the entire veterinary hospital regardless of the outstanding indebtedness at the time of default. The Company has an unsecured line of credit of $3.1 million. The line of credit is at the bank prime rate (8.5 percent at December 31, 1995) and expires in December 1996, at which time the outstanding balance on the line can, at the Company's option, convert to a 36-month term loan. At December 31, 1995, the Company had $3.1 million available under the line. The following disclosure of the estimated fair value of the Company's debt is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required to develop the estimates of fair value, thus the estimates provided therein are not necessarily indicative of the amounts that could be realized in a current market exchange. F-20
December 31, 1995 ----------------------- Carrying Fair Amount Value ---------- ----------- Fixed-rate long-term debt................. $23,229,000 $19,677,000 Variable-rate long-term debt.............. 4,123,000 4,123,000
The carrying values of variable-rate long-term debt is a reasonable estimate of their fair value. 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. 6. PREFERRED STOCK On December 22, 1992, the Company completed the sale of 583,333 shares of convertible preferred stock for net proceeds of $2,985,000. The shares are convertible into 583,333 shares of the Company's common stock commencing December 22, 1997. The preferred stock participates in any dividend payments on the Company's common stock on an as converted basis. The preferred stock has a liquidation preference of $5.14 per share and it is callable by the Company any time after March 22, 1998 at a price of $5.14 per share. The preferred stock has no voting rights. Under the Company's certificate of incorporation, the Company is authorized to issue additional series of preferred stock. The rights, preferences and privileges of the preferred stock are to be determined by the board of directors and do not require stockholder approval. 7. COMMON STOCK In January 1995, Star-Kist Foods, Inc. through its Heinz Pet Products division purchased 1,159,420 shares of the Company's common stock at $8.625 per share, resulting in net proceeds to the Company of $9,980,000. In November 1995, the Company completed a secondary public offering of 2,965,026 shares of common stock for net proceeds of $33,932,000. During 1995, the Company issued 1,075,226 shares of the Company's common stock valued at $11,980,000, the fair market value at the date of commitment, as a portion of the consideration for 15 animal hospitals and three veterinary diagnostic laboratories. Of this amount, 156,303 shares of common stock valued at $1,970,000 had not been issued as of December 31, 1995. Such shares are reflected as though they are outstanding in the accompanying consolidated financial statements. In conjunction with the acquisition of two hospitals and PAL in 1994, the Company issued 235,329 shares of common stock with a market value at the date of issue of $1,717,000. Also in 1994, the Company issued 63,214 shares of common stock in settlement of a guaranteed purchase price contingently payable in cash or common stock (Note 8). On October 6, 1991, the Company completed a public offering of 2,400,000 shares of common stock and 3,240,000 redeemable warrants for $12,598,000. Each redeemable warrant entitles the holder to purchase one share of common stock for $7.20 commencing April 10, 1992 until October 10, 1996, and is redeemable at the option of the Company at any time after April 10, 1992 on 30 days prior written notice, provided that the market price of the common stock equals or exceeds $9.00 per share for 20 consecutive trading days ending within 10 days prior to notice of redemption. Such market price exceeded $9.00 per share for 20 consecutive days on March 10,1995. During 1995, redeemable warrants were exercised for 1,271,508 shares of common stock. Cash proceeds from the exercise of redeemable warrants amounted to $8,896,000. Under the provisions of the Company's non-qualified and incentive stock option plans for officers and key employees, 750,000 shares of common stock were reserved for issuance at December 31, 1992. On May 5, 1995, the stockholders of the Company approved the adoption of the Veterinary Centers of America, Inc. 1995 Stock Incentive Plan, and authorized the reservation of 750,000 shares of common stock for issuance under the Plan. The options become exercisable over a two to five year period, commencing at the date of grant or one year from the F-21 date of grant depending on the option. All options expire 10 years from the date of grant. The prices of all options granted were greater than or equal to the fair market value at the date of the grant. The table below summarizes the transactions in the Company's stock option plans during 1995, 1994 and 1993:
1995 1994 1993 ---------- -------- -------- Options outstanding at beginning of year... 705,001 598,650 342,700 Granted.................................... 820,750 132,800 275,500 Exercised.................................. (21,034) (9,499) (5,838) Canceled................................... (13,200) (16,950) (13,712) --------- ------- ------- Options outstanding at end of year ($.75 to $12.38 per share)............... 1,491,517 705,001 598,650 ========= ======= ======= Exercisable at end of year................. 640,824 419,708 285,338 ========= ======= =======
In addition to the options granted under VCA's stock option plans, the Company had 45,667 and 54,000 options outstanding at December 31, 1995 and 1994, respectively, to certain members of the board of directors and to the previous owners of certain acquired companies. During 1995, 8,333 of these options were exercised. The options are exercisable at $.75 to $6.00 per share. At December 31, 1995, 45,667 of the options are exercisable. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." The statement recommends changes in accounting for employee stock-based compensation plans, and requires certain disclosures with respect to these plans. The Statement's disclosures will be adopted by the Company effective January 1, 1996. 8. GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK The Company has guaranteed the value of certain shares of its common stock issued in connection with the acquisition of certain animal hospitals in 1995. If the aggregate market value of the stock (as quoted by a nationally recognized stock exchange) at various specified valuation dates is below the value of the stock on the acquisition date, the Company has agreed to pay the difference in additional shares of stock, cash or notes payable. The Company's guarantee of the value, however, terminates if the common stock is registered for resale and trades at 110% to 120% of the issue price of the stock for five to twenty consecutive days. At December 31, 1995, there were 404,495 shares of stock outstanding with such guarantees, with issue prices ranging from $11.26 to $14.95. In connection with certain acquisitions completed prior to 1995, the Company guaranteed the price of certain shares of its common stock issued in connection with the acquisitions. If the aggregate market value of the stock (as quoted by a nationally recognized stock exchange) had not reached the guaranteed value, which exceeded the value of the stock at the acquisition date, by the various specified valuation dates, the Company agreed to pay the difference in additional shares of stock, cash, or notes payable. The guaranteed purchase price contingently payable in cash or common stock represents the liability for the difference between the aggregate guaranteed value of the common stock net of the Company's estimate of the fair market value of the stock at the date of the acquisition, discounted at 10 percent. In 1995, pursuant to two of these stock guarantee arrangements pertaining to a total of 13,494 shares, the Company paid $19,000 in cash for the difference between the guaranteed value of the stock held and the market value of the stock, as defined. The difference between the $19,000 and the $72,000 liability for the guaranteed purchase price contingently payable in cash or common stock, amounting to $53,000 was credited to additional paid-in-capital. In 1994, pursuant to a stock guarantee arrangement for 80,000 shares, the Company issued 63,214 shares of common stock for the difference between the guaranteed value of the stock held and the market value of the stock, as defined. The market value of the additional shares issued, totaling $470,000, was charged to the liability for the guaranteed purchase price contingently payable in cash or common stock. F-22 9. COMMITMENTS The Company operates many of its 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. The annual lease payments under the lease agreements have provisions for annual increases based on the Consumer Price Index. The Company also leases certain medical and computer equipment under capital leases. The future minimum lease payments at December 31, 1995 are as follows:
Capital Operating Leases Leases ----------- ------------ 1996.......................................... $ 401,000 $ 3,145,000 1997.......................................... 317,000 3,153,000 1998.......................................... 227,000 2,948,000 1999.......................................... 46,000 2,449,000 2000.......................................... 12,000 2,288,000 Thereafter.................................... -- 30,242,000 ---------- ----------- 1,003,000 $44,225,000 =========== Less -- Amount representing interest.......... (141,000) ---------- Present value of net minimum lease payments... $ 862,000 ==========
Rent expense totaled $2,936,000, $1,574,000 and $1,170,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Rental income totaled $246,000, $96,000 and $96,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company has employment agreements with three officers of the Company which currently expire on December 31, 1998. Each of the agreements provide for annual compensation (subject to upward adjustment) which aggregated $559,000 for the year ended December 31, 1995. 10. CALCULATION OF PER SHARE AMOUNTS Earnings per share calculations are based on the weighted average common shares outstanding including obligated shares (Note 7) plus common shares subject to dilutive stock options, common shares contingently issuable pursuant to the guaranteed purchase price contingently payable in cash or common stock as discussed in Note 8, convertible debt and shares issuable upon redemption of redeemable warrants and conversion of preferred stock. Stock options, common shares contingently issuable and shares issuable upon conversion of preferred stock are not included in the weighted average common shares in 1993 as they have an anti-dilutive effect. F-23 11. Income Taxes The provision for income taxes is comprised of the following:
1995 1994 1993 ----------- --------- ---------- Federal: Current.... $1,888,000 $183,000 $ 490,000 Deferred... (192,000) 296,000 (595,000) ---------- -------- --------- 1,696,000 479,000 (105,000) ---------- -------- --------- State: Current.... 560,000 239,000 141,000 Deferred... (18,000) 13,000 (188,000) ---------- -------- --------- 542,000 252,000 (47,000) ---------- -------- --------- $2,238,000 $731,000 $(152,000) ========== ======== =========
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax 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 in effect for the year in which the differences are expected to reverse. The Company reflected the impact as a cumulative adjustment in the 1993 first quarter and did not restate prior periods. The cumulative adjustment had a favorable impact of $221,000 on the net loss. The net deferred tax asset (liability) is comprised of the following:
1995 1994 ------------ ---------- Current deferred tax assets (liabilities): Accounts receivable................................ $ 301,000 $ 165,000 State taxes........................................ 156,000 34,000 Other liabilities and reserves..................... 223,000 156,000 Start-up costs..................................... 59,000 120,000 Property, plant and equipment...................... 95,000 (33,000) Restructuring...................................... 345,000 -- Other assets....................................... (4,000) (4,000) ----------- --------- Total current deferred tax asset, net... $ 1,175,000 $ 438,000 =========== ========= 1995 1994 ----------- --------- Non-current deferred tax (liabilities) assets: Net operating loss carryforwards................... $ 76,000 $ 145,000 Start-up costs..................................... 288,000 151,000 Miscellaneous...................................... -- 25,000 Other assets....................................... (119,000) (124,000) Intangible assets.................................. (1,805,000) (66,000) Valuation allowance................................ (76,000) (145,000) Property, plant and equipment...................... 335,000 (134,000) ----------- --------- Total non-current deferred tax liability, net........ $(1,301,000) $(148,000) =========== =========
F-24 A reconciliation of the provision for income taxes to the amount computed at the Federal statutory rate is as follows:
1995 1994 1993 ----- ----- ------- Federal income tax at statutory rate... 34.0% 34.0% (34.0)% Effect of amortization of goodwill..... 5.0 9.0 5.0 State taxes, net of Federal benefit.... 8.0 12.0 2.0 Cumulative impact of tax law change.... -- -- (3.0) Writedown of assets.................... -- -- 24.0 ---- ---- ------ 47.0% 55.0% (6.0)% ==== ==== ======
For financial reporting purposes, the benefit arising from the utilization of operating loss carryforwards generated by companies prior to their acquisition by VCA is accounted for as a reduction of goodwill of the acquired companies. Such benefit amounted to $40,000 and $69,000 for the years ended December 31, 1993 and 1995, respectively. No benefit was realized for the year ended December 31, 1994. For tax reporting purposes, the acquired companies have Federal net operating loss carryforwards at December 31, 1995 of approximately $260,000 expiring through 2003. 12. 401(K) PLAN During 1992, the Company established a voluntary retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers all eligible employees and provides for annual matching contributions by the Company at the discretion of the Company's board of directors. In 1995, 1994 and 1993, the Company provided a matching contribution of 20 percent, 20 percent and 15 percent, respectively of the first five percent of the employees' contributions, as defined. Such matching contributions approximated $87,000, $46,000 and $24,000 in 1995, 1994 and 1993, respectively. 13. WRITEDOWN OF ASSETS During 1993, the Company charged $2,310,000 to operations related to the writedown of goodwill and certain intangible assets at three of the Company's facilities. The determination to writedown these assets was based on the Company's estimate that forecasted losses at each facility indicated that the intangible assets would not be realized. The first of the three hospitals was purchased in March 1989, with goodwill on the acquisition of $920,000. In the five years subsequent to the acquisition, the hospital generated losses aggregating $84,000 through December 31, 1993, due primarily to severe competition in the area from the veterinarian from whom the Company acquired the hospital. In January 1994, the economy in the area where the hospital operates was adversely impacted by the "Northridge Earthquake," further impacting the hospital's revenues and operating results. The second hospital was purchased in December 1989, at a price of approximately $1 million, with goodwill on the acquisition of $997,000. Since the acquisition, the hospital generated aggregate net income of $250,000 through December 31, 1993, including a loss of $44,000 in 1992 and income of $17,000 in 1993. Included in the operating results is income of $73,000 in 1992 and $39,000 in 1993 from the rental of space at the facility to a veterinary surgery referral practice. The rental agreement was terminated in July 1993 and, due to the specialization of the services provided by the referral practice, the hospital was unable to find a suitable replacement. In addition to the impact of the loss of rental income, the hospital's revenue and income were adversely impacted by the loss of referral business from the referral practice. The departure of the group had a permanent negative impact on the hospital's net income and the recoverability of goodwill. The third hospital was purchased in December 1991 at a price of approximately $800,000, with goodwill and other intangible assets on the acquisition of $778,000. The hospital generated net income in 1992 of $52,000 and a net loss in 1993 of $59,000. The hospital provided 24-hour emergency service under an arrangement whereby a veterinary emergency group used the hospital space during the hours that the regular hospital was closed. The emergency clinic's presence in the hospital provided substantial indirect benefits to the hospital's operating results. In September 1993, the emergency group terminated its arrangement with the hospital, and the operating results were adversely impacted. The Company has determined that emergency services cannot be replaced and the impact on the hospital will be permanent. F-25 The Company's goal over the next two years is to minimize the facilities' cash flow requirements and ultimately bring the facilities to a breakeven status. The Company's strategy of building a network of hospitals in the markets they serve will be benefited by the hospitals' ability to provide services to customers in their vicinity, even though the facilities will not generate profits. 14. RESTRUCTURING CHARGE The operations of Cenvet were merged into VRI's operations to form Vet Research in March 1995. The combined operations were restructured to eliminate duplicate operating and overhead costs. The restructuring included the consolidation of facilities, staff reductions and the consolidation of ancillary operations. In connection with the restructuring, the Company recorded a charge of $1,086,000 in the first quarter of 1995 to accrue the estimated costs associated with the restructuring, consisting primarily of lease termination and severance costs. The following is a summary of the restructuring costs:
1995 ---------- Employee severance costs... $ 468,000 Lease commitments.......... 433,000 Other...................... 185,000 ---------- $1,086,000 ==========
During 1995, the Company utilized $237,000 of the reserve for restructuring. At December 31, 1995, $849,000 of the restructuring reserves remained on the Company's balance sheet. 15. LINES OF BUSINESS The Company classifies its business operations into three segments: Animal Hospital, Premium Pet Food and Laboratory. Prior to January 1993, the Company's principal line of business was owning and operating animal hospitals. On January 1, 1993, the Company formed a joint venture, Vet's Choice, to develop, market and distribute new pet products and services (Note 4). Vet's Choice began generating revenue in March 1994 when it commenced distribution of its first product line. In March 1994, the Company acquired Professional Animal Laboratory and combined its existing laboratory to form the Laboratory segment.
Animal Premium Corporate & (In thousands) Hospital Pet Food Laboratory Eliminations Total -------- --------- ---------- ------------- -------- 1995 Revenues.................. $51,437 $ 4,756 $37,606 $(1,727) $ 92,072 Gross profit.............. 9,381 1,551 13,629 -- 24,561 Restructuring cost........ -- -- 1,086 -- 1,086 Operating income (loss)... 7,455 (2,573) 8,359 (3,890) 9,351 Identifiable assets....... 62,152 3,854 29,798 45,661 141,465 1994 Revenues.................. $31,846 $ 996 $10,150 $ (759) $ 42,233 Gross profit.............. 6,252 349 3,577 -- 10,178 Operating income (loss)... 5,123 (3,094) 2,563 (2,796) 1,796 Identifiable assets....... 31,995 3,599 13,532 3,073 52,199
F-26 16. SUBSEQUENT EVENTS During the first quarter of 1996 through March 19, 1996, the Company purchased six veterinary hospitals and a veterinary diagnostic laboratory in separate transactions for a total consideration (including acquisition costs) of $22,224,000, consisting of $9,650,000 in cash, $6,151,000 in notes payable, 242,926 shares of VCA common stock with a value of $3,868,000 and the assumption of liabilities totaling $2,555,000. On February 27, 1996, the Company signed a definitive merger agreement with Pets' Rx, Inc. ("Pets' Rx"), pursuant to which the Company will acquire all of the outstanding securities of Pets' Rx. Pets' Rx owns and operates 16 veterinary hospitals in the San Jose and Sacramento, California and the Las Vegas, Nevada markets. Under the terms of the merger, the stockholders of Pets' Rx will receive approximately 970,000 shares of the Company's common stock (subject to adjustment). The Company expects that the merger will be consummated in the second quarter of 1996. The merger will be accounted for as a pooling of interests. If consummated, the merger will provide the Company with entry into the Las Vegas, Nevada market and will strengthen the Company's presence in Northern California. Consummation of the merger with Pets' Rx is subject to certain significant conditions. Consequently, the merger of Pets' Rx and the Company may never be consummated. On March 21, 1996, the Company signed a definitive merger agreement with The Pet Practice, Inc. ("TPP"), pursuant to which the Company will acquire all of the outstanding securities of TPP. TPP operates 86 veterinary hospitals in 11 states. Under the terms of the agreement, each share of TPP common stock will be converted into a fraction of a share of VCA common stock determined by a reference to the average closing price of VCA common stock over the twenty trading days ending on the third day before the shareholder meetings at which the stockholders of VCA and TPP will consider the merger. If the average price of the VCA common stock ranges from $25 to $30 per share, the exchange ratio shall be determined by dividing $10 by the average price of the VCA common stock, resulting in a valuation of $10 per share of TPP common stock throughout the range. If the average closing price of the VCA common stock is less than $24 per share, the exchange ratio will be increased (from 0.395 shares at $24 per share) by 0.005 for each dollar of such reduction down to $18.50 of VCA common stock, and if the average price of VCA common stock is more than $31 per share, the exchange ratio shall be reduced (from 0.3350 at $31 per share) by 0.005 for each dollar of such increase, up to $49.00 per share. No further adjustment shall be made if the price of VCA stock shall be less than $18.50. In each case, a proportionate reduction or increase, as the case may be, shall be made if the price of VCA common stock is less than a round dollar. If the average price of the VCA common stock is greater than $49.00, the exchange ratio should be determined by dividing $12.005 by the average price. By way of illustration, at $23 per share of VCA common stock, the exchange ratio shall be 0.400, resulting in a valuation of $9.20 per share of TPP common stock. At $32.00 per share of VCA common stock, the exchange ratio shall be 0.330, resulting in a valuation of $10.56 per share of TPP common stock. The Company expects that the merger will be consummated in the second quarter of 1996. The merger will be accounted for as a purchase. Each party has the right to terminate the definitive agreement if the average price of VCA common shares is $18.50 or less. Consummation of the merger is subject to certain significant conditions. Consequently, the merger of VCA and TPP may never be consummated. F-27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Veterinary Centers of America, Inc.: We have audited the accompanying supplemental combined balance sheets of Veterinary Centers of America, Inc. (a Delaware corporation), and subsidiaries, as of December 31, 1995 and 1994, and the related supplemental combined statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the balance sheet of Pets' Rx, Inc. as of December 31, 1995, and the related statements of operations, changes in stockholders' equity and cash flows for the year then ended included in the supplemental combined financial statements of Veterinary Centers of America, Inc. The supplemental combined historical statements give retroactive effect to the merger with Pets' Rx, Inc., on June 19, 1996, which subsequently will be accounted for as a pooling of interests as described in Note 1. These supplemental financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these supplemental financial statements based on our audits. We did not audit the 1994 and 1993 financial statements of Pets' Rx, Inc., included in the supplemental combined financial statements of Veterinary Centers of America, Inc., which statements reflect total assets and revenues constituting 25 percent and 19 percent, respectively, in 1994 and 19 percent of revenue in 1993, of the related supplemental combined totals. These statements were audited by other auditors whose reports thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Pets' Rx, Inc., in 1994 and 1993 is based solely upon the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. 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 and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audits and the reports of the other auditors, the supplemental combined financial statements referred to above present fairly, in all material respects, the combined financial position of Veterinary Centers of America, Inc. and Pets' Rx, Inc. as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, after giving retroactive effect to the merger with Pets' Rx, Inc. as described in Note 1, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California June 19, 1996 F-28 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED BALANCE SHEETS AT DECEMBER 31, 1995 AND 1994 AND MARCH 31, 1996 (UNAUDITED) ASSETS
DECEMBER 31, ----------------------------- MARCH 31, 1995 1994 1996 ------------- ------------ ------------- CURRENT ASSETS: (Unaudited) Cash and equivalents........................................................... $ 47,551,000 $ 7,807,000 $ 37,866,000 Accounts receivable, less allowance for uncollectible accounts of $1,671,000 and $797,000 at December 31, 1995 and 1994, respectively, and $1,881,000 at March 31, 1996 (unaudited)...................................... 6,508,000 1,955,000 8,994,000 Inventory, prepaid expenses and other.......................................... 3,984,000 1,326,000 4,121,000 Deferred income taxes.......................................................... 1,175,000 438,000 1,126,000 Prepaid income taxes........................................................... 494,000 172,000 730,000 ------------ ----------- ------------ Total current assets.......................................................... 59,712,000 11,698,000 52,837,000 PROPERTY, PLANT AND EQUIPMENT, NET............................................. 17,695,000 12,692,000 19,974,000 OTHER ASSETS: Goodwill, net................................................................. 66,943,000 38,264,000 85,392,000 Covenants not to compete, net................................................. 5,210,000 2,646,000 5,852,000 Building purchase options..................................................... 1,087,000 837,000 887,000 Notes receivable.............................................................. 978,000 1,080,000 1,283,000 Deferred costs and other...................................................... 1,791,000 685,000 2,129,000 ------------ ----------- ------------ $153,416,000 $67,902,000 $168,354,000 ============ =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations....................................... $ 7,421,000 $ 5,552,000 $ 8,730,000 Accounts payable............................................................... 5,930,000 2,980,000 6,855,000 Accrued payroll and taxes...................................................... 2,207,000 1,191,000 2,531,000 Other accrued liabilities...................................................... 4,705,000 2,498,000 4,264,000 ------------ ----------- ------------ Total current liabilities..................................................... 20,263,000 12,221,000 22,380,000 LONG TERM OBLIGATIONS, less current portion.................................... 36,778,000 25,057,000 38,807,000 GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK.......................................................... 72,000 DEFERRED INCOME TAXES.......................................................... 1,301,000 148,000 1,538,000 MINORITY INTEREST.............................................................. 4,856,000 5,034,000 5,112,000 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock; $.001 par value; Authorized -- 1,000,000 shares: Issued and outstanding -- 583,333 at December 31, 1995 and 1994.............. 1,000 1,000 1,000 Common stock; $.001 par value; Authorized -- 30,000,000 shares: Issued and outstanding -- 12,845,831 and 6,248,126 at December 31, 1995 and 1994 respectively, and 13,828,444 at March 31, 1996 (unaudited)................................................ 13,000 6,000 14,000 Additional paid-in capital.................................................... 99,685,000 33,630,000 109,223,000 Accumulated deficit........................................................... (9,481,000) (8,267,000) (8,721,000) ------------ ----------- ------------ Total stockholders' equity................................................... 90,218,000 25,370,000 100,517,000 ------------ ----------- ------------ $153,416,000 $67,902,000 $168,354,000
The accompanying notes are an integral part of these supplemental combined balance sheets. F-29 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
Years Ended December 31, Three Months Ended March 31, ------------------------------------------------ ----------------------------- 1995 1994 1993 1996 1995 -------------- ------------- ------------- ------------- ------------ (Unaudited) Revenues....................................... $107,694,000 $51,871,000 $31,098,000 $35,232,000 $18,652,000 Direct costs................................... 80,747,000 40,834,000 25,562,000 26,710,000 14,741,000 ------------ ----------- ----------- ----------- ----------- Gross profit................................... 26,947,000 11,037,000 5,536,000 8,522,000 3,911,000 Selling, general and administrative............ 13,036,000 8,704,000 4,916,000 3,844,000 2,761,000 Depreciation and amortization.................. 4,144,000 2,065,000 1,410,000 1,235,000 740,000 Restructuring charge........................... 1,086,000 1,086,000 Writedown of assets............................ 2,148,000 4,506,000 ------------ ----------- ----------- ----------- ----------- Operating income (loss)........................ 6,533,000 268,000 (5,296,000) 3,443,000 (676,000) Interest income................................ 828,000 404,000 469,000 388,000 145,000 Interest expense............................... 3,377,000 2,388,000 1,225,000 901,000 737,000 ------------ ----------- ----------- ----------- ----------- Income (loss) before minority interest, income taxes and cumulative effect of accounting change........................................ 3,984,000 (1,716,000) (6,052,000) 2,930,000 (1,268,000) Minority interest in income (loss) of subsidiaries.................................. 2,960,000 (540,000) (334,000) 1,371,000 31,000 ------------ ----------- ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of accounting change........ 1,024,000 (1,176,000) (5,718,000) 1,559,000 (1,299,000) Provision (benefit) for income taxes........... 2,238,000 731,000 (152,000) 799,000 (263,000) ------------ ----------- ----------- ----------- ----------- (Loss) income before cumulative effect of accounting change............................. (1,214,000) (1,907,000) (5,566,000) 760,000 (1,036,000) Cumulative effect of accounting change......... 221,000 ------------ ----------- ----------- ----------- ----------- Net (loss) income.............................. $ (1,214,000) $(1,907,000) $(5,345,000) $ 760,000 $(1,036,000) ============ =========== =========== =========== =========== (LOSS) EARNINGS PER SHARE: (Loss) earnings before cumulative effect of accounting change............................. $(0.11) $(0.26) $(0.93) $0.05 $(0.14) Cumulative effect of accounting change......... 0.03 ------------ ----------- ----------- ----------- ----------- Net (loss) earnings per common share........... $(0.11) $(0.26) $(0.90) $0.05 $(0.14) ============ =========== =========== =========== =========== Average common shares used for computing (loss) earnings per share..................... 11,504,000 7,233,000 5,966,000 15,911,000 7,666,000 ============ =========== =========== =========== ===========
The accompanying notes are an integral part of these supplemental combined financial statements. F-30 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
Common Stock Preferred Stock Additional Accumulated ------------------------ ------------------ Paid-In Earnings Shares Amount Shares Amount Capital (Deficit) ------------- --------- -------- -------- ------------ ------------- BALANCES, December 31, 1992 As previously stated.......................... 5,133,785 $ 5,000 583,000 $1,000 $ 21,541,000 $ 752,000 Pooling with Pets' Rx, Inc.................... 256,853 3,919,000 (1,335,000) ----------- ------- -------- ------ ------------ ----------- Balances, as restated......................... 5,390,638 5,000 583,000 1,000 25,460,000 (583,000) Sale of common stock.......................... 46,317 200,000 Sale of warrants.............................. 221,000 Issued under stock option plans............... 39,171 149,000 Stock dividend................................ 7,680 208,000 (208,000) Net loss...................................... (5,345,000) ----------- ------- -------- ------ ------------ ----------- BALANCES, December 31, 1993................... 5,483,806 5,000 583,000 1,000 26,238,000 (6,136,000) Sale of common stock.......................... 125,808 3,245,000 Sale of warrants.............................. 13,000 Exercise of warrants.......................... 55,580 55,000 Stock dividend................................ 8,256 224,000 (224,000) Stock issued for payment of interest.......... 30,841 223,000 Issued under stock option plans............... 32,765 198,000 Business acquisitions......................... 237,483 1,732,000 Conversion of convertible debt................ 210,373 1,000 1,232,000 Settlement of guaranteed purchase price contingently payable in cash or common stock.................................... 63,214 470,000 Net loss...................................... (1,907,000) ----------- ------- -------- ------ ------------ ----------- BALANCES, December 31, 1994................... 6,248,126 6,000 583,000 1,000 33,630,000 (8,267,000) Sale of common stock.......................... 4,129,616 4,000 44,058,000 Sale of redeemable warrants................... 4,607 58,000 Exercise of redeemable warrants............. 1,271,508 2,000 8,894,000 Exercise of warrants issued in connection with the Vet Research joint venture.......... 50,000 550,000 Issued under stock plans...................... 29,367 209,000 Business acquisitions......................... 1,075,288 1,000 11,979,000 Conversion of convertible debt................ 37,319 254,000 Settlement of guaranteed purchase price contingently payable in cash or common stock.................................... 53,000 Net loss...................................... (1,214,000) ----------- ------- -------- ------ ------------ ----------- BALANCES, December 31, 1995................... 12,845,831 13,000 583,000 1,000 99,685,000 (9,481,000) Sale of common stock (unaudited).............. 6,894 200,000 Exercise of redeemable warrants (unaudited).................................. 542,431 1,000 3,855,000 Exercise of warrants issued in connection with the Vet Research joint venture (unaudited)................................. 134,000 1,474,000 Issued under stock plans (unaudited).......... 56,363 141,000 Business acquisitions (unaudited)............. 242,925 3,868,000 Net income (unaudited)........................ 760,000 ----------- ------- -------- ------ ------------ ----------- BALANCES, March 31, 1996 (Unaudited).......... 13,828,444 $14,000 583,000 $1,000 $109,223,000 $(8,721,000) =========== ======= ======== ====== ============ ===========
The accompanying notes are an integral part of these supplemental combined financial statements. F-31 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
Three Months Ended March 31, ------------------------------ 1995 1994 1993 1996 1995 ------------ ------------- ------------- -------------- -------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................. $ (1,214,000) $(1,907,000) $(5,345,000) $ 760,000 $(1,036,000) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization................ 4,144,000 2,065,000 1,410,000 1,235,000 740,000 Gain on sale of land and building............ (19,000) (18,000) Amortization of debt discount................ 454,000 15,000 13,000 72,000 3,000 Equity contribution for product development costs....................................... 806,000 Utilization of acquired NOL carryforwards.... 69,000 40,000 Writedown of assets.......................... 2,148,000 4,506,000 Minority interest in income (loss) of subsidiary.................................. 2,960,000 (540,000) (600,000) 1,371,000 31,000 Distributions to minority interest partners.. (4,058,000) (904,000) (122,000) (961,000) (43,000) (Increase) decrease in accounts receivable, net......................................... (2,140,000) (124,000) 24,000 (1,289,000) (1,507,000) (Increase) decrease in inventory and other... (1,875,000) (203,000) 16,000 (374,000) (925,000) (Increase) decrease in prepaid income taxes.. (322,000) (172,000) 99,000 244,000 (332,000) (Increase) decrease in other assets, net..... (208,000) (122,000) (271,000) (330,000) 7,000 (Increase) decrease in deferred income tax asset....................................... (737,000) 408,000 (872,000) 286,000 65,000 Increase in accounts payable and accrued liabilities................................. 4,198,000 2,829,000 801,000 208,000 3,026,000 (Decrease) increase in income taxes payable.. (337,000) 412,000 Increase in deferred income tax liability.... 437,000 73,000 ----------- ----------- ---------- ----------- ------------ Net cash provided by operating activities... 3,837,000 1,081,000 917,000 1,222,000 11,000 ----------- ----------- ---------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired... (9,147,000) (6,810,000) (2,161,000) (12,051,000) (2,028,000) Property, plant and equipment additions, net.. (2,983,000) (1,166,000) (809,000) (1,012,000) (156,000) Sale of marketable securities................. 140,000 Proceeds from sale of land and building....... 600,000 600,000 Payments for building purchase options........ (250,000) (60,000) (250,000) ----------- ----------- ---------- ----------- ------------ Net cash used in investing activities........ (11,780,000) (8,036,000) (3,080,000) (13,063,000) (1,584,000) ----------- ----------- ---------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: (Repayment of) proceeds from line of credit and addition of long-term obligations........ (1,100,000) 1,394,000 1,511,000 (1,100,000) Reduction of long-term obligations and notes payable...................................... (6,241,000) (3,097,000) (1,908,000) (3,526,000) (2,269,000) Payments received (advances made) on notes receivable................................... 272,000 (43,000) 31,000 12,000 225,000 Payments on guaranteed purchase price contingently payable in cash or common stock. (19,000) Net proceeds from sale of common stock........ 44,062,000 3,245,000 200,000 200,000 10,080,000 Net proceeds from exercise of warrants........ 55,000 Net proceeds from exercise of redeemable warrants..................................... 8,896,000 3,855,000 2,108,000 Proceeds from exercise of warrants issued in connection with Vet Research joint venture... 550,000 1,474,000 Proceeds from sale of warrants................ 13,000 221,000 Proceeds from sale of redeemable warrants..... 58,000 Proceeds from issuance of common stock under stock option plans........................... 209,000 198,000 149,000 141,000 4,000 Capital contribution of minority interest partners..................................... 1,000,000 30,000 2,970,000 ----------- ----------- ---------- ----------- ------------ Net cash provided by financing activities... 47,687,000 1,795,000 3,174,000 2,156,000 9,048,000 ----------- ----------- ---------- ----------- ------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS.... 39,744,000 (5,160,000) 1,011,000 (9,685,000) 7,475,000 CASH AND EQUIVALENTS AT BEGINNING OF YEAR...... 7,807,000 12,967,000 11,956,000 47,551,000 7,807,000 ------------ ----------- ----------- ------------ ------------ CASH AND EQUIVALENTS AT END OF YEAR............ $ 47,551,000 $ 7,807,000 $12,967,000 $ 37,866,000 $15,282,000 ============ =========== =========== ============ ============
The accompanying notes are an integral part of these supplemental combined financial statements. F-32 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) (CONTINUED)
Three Months Years Ended December 31, Ended March 31, ----------------------------------------- -------------------------------- 1995 1994 1993 1996 1995 ------------ ---------- ---------- --------------- ------------- (Unaudited) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid...................................... $ 2,878,000 $ 2,277,000 $ 1,146,000 $ 832,000 $ 701,000 Taxes paid......................................... 2,688,000 759,000 193,000 269,000 4,000 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...................... $ 43,223,000 $19,584,000 $10,846,000 $23,304,000 $11,571,000 Less: Consideration given Cash paid to sellers, net of cash acquired........ (9,147,000) (6,810,000) (2,161,000) (9,875,000) (2,028,000) Cash paid in settlement of assumed liabilities.............................. (2,176,000) Common stock issued............................... (11,980,000) (1,732,000) (3,868,000) (2,300,000) ------------ ----------- ----------- ----------- ----------- Liabilities assumed including notes payable issued.............................. $ 22,096,000 $11,042,000 $ 8,685,000 $ 7,385,000 $ 7,243,000 ============ =========== =========== =========== =========== In connection with the formation of the joint venture and partnerships, assets and liabilities contributed by the partners were as follows: Assets............................................. $ 3,467,000 $ 330,000 $ -- $ 317,000 $ 3,119,000 Liabilities........................................ 1,063,000 1,063,000 ------------ ----------- ----------- ----------- ----------- Non-cash capital contribution of minority interest partners................................. $ 2,404,000 $ 330,000 $ -- $ 317,000 $ 2,056,000 ============ =========== =========== =========== =========== Issuance of common stock in exchange for convertible debt.................................. $ 254,000 $ 1,233,000 $ -- $ -- $ -- ============ =========== =========== =========== =========== Settlement of guaranteed purchase price through issuance of common stock.................. $ 53,000 $ 470,000 $ -- $ -- $ -- ============ =========== =========== =========== =========== Non-cash increase in long-term obligations due to purchase of equipment and building............. $ 262,000 $ 164,000 $ 860,000 $ -- $ 466,000 ============ =========== =========== =========== =========== Conversion of accounts payable to notes payable........................................... $ 381,000 $ -- $ -- $ -- $ -- ============ =========== =========== =========== =========== Payment of accrued interest on notes by issuance of common stock.......................... $ -- $ 223,000 $ -- $ -- $ -- ============ =========== =========== =========== ===========
The accompanying notes are an integral part of these supplemental combined financial statements. F-33 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) 1. BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION The Merger In June 1996, Veterinary Centers of America, Inc. ("VCA" or the "Company") merged with Pets' Rx, Inc. (Pets' Rx), in a transaction to be accounted for as a pooling of interests (the "Merger"). On or about August 15, 1996, VCA will restate its historical financial statements to reflect the pooling of interests transaction. Those restated financials will resemble these supplemental combined consolidated financial statements in all material aspects. These supplemental financial statements are presented to provide the reader with an understanding of the combined historical results of VCA. Pursuant to the Merger, each share of Pets' Rx common stock was converted into .08617 shares of VCA common stock. In aggregate, 6,323,294 million shares of Pets' Rx common stock were converted into 544,880 shares of VCA common stock. Each share of Pets' Rx redeemable convertible preferred stock outstanding immediately prior to the merger was converted into 118,329 shares of VCA common stock. Each share of convertible preferred stock outstanding immediately prior to the Merger was converted into 137,872 shares of VCA common stock. Previously reported financial information for VCA and Pets' Rx for each of the three years in the period ended December 31, 1995, is shown in the table below. To conform to consistent methods of accounting, adjustments of historical data were made. Among these were the adjustments related to the allocation of intangible assets in connection with purchase transactions and the related amortization and the writedown of intangible assets resulting from conforming to VCA's method of analyzing the realization of goodwill utilizing the undiscounted net income method.
(In thousands) Years Ended December 31, ----------------------------------- 1995 1994 1993 ----------- --------- -------- Historical VCA net income (loss) $ 2,564 $ 589 $(1,858) Historical Pets' Rx net loss (1,977) (2,805) (1,522) ------- ------- ------- Historical combined net income (loss) 587 (2,216) (3,380) Amortization of assets 347 309 108 Writedown of assets (2,148) -- (2,073) ------- ------- ------- Restated combined net loss $(1,214) $(1,907) $(5,345) ======= ======= =======
Veterinary Centers of America, Inc. Formation Veterinary Centers of America, Inc. ("VCA" or the "Company"), a Delaware corporation, was founded in 1986 and is a leading companion animal health care company. The Company operates one of the largest networks of free-standing, full service animal hospitals in the country and one of the largest networks of veterinary-exclusive diagnostic laboratories in the nation. The Company also markets both a life-stage and a therapeutic line of premium pet foods through Vet's Choice, a joint venture with Heinz Pet Products, an affiliate of H.J. Heinz Company. At June 19, 1996, the Company owned 80 animal hospitals, 19 of which were located in Northern California, 18 in Southern California, eight in Pennsylvania, six in Massachusetts, five in Nevada, four in Maryland, three in each of Alaska, Florida and New Mexico, two in each of Colorado, Utah and Virginia, and one in each of Arizona, Georgia, Hawaii, Illinois and Delaware. The Company's animal hospitals provide primary care, diagnostic, surgical and boarding services for animals. F-34 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) In March 1994, the Company expanded its presence in the laboratory business with the acquisition of a 70 percent interest in Professional Animal Laboratory ("PAL"). During 1995, the Company further expanded its laboratory business with the acquisition of Cenvet, Inc. ("Cenvet") and its subsequent contribution to Vet Research Laboratories, LLC. ("Vet Research"). Also in 1995, the Company acquired four other veterinary diagnostic laboratories, as well as the remaining 30 percent interest in PAL. The Company's laboratories serve over 8,000 animal hospitals located in 40 states. In January 1993, the Company formed a joint venture, Vet's Choice, to develop, manufacture, market and distribute new pet products and services. The joint venture was in the development stage during all of 1993 and consequently generated no revenues or gross profit in 1993 (Note 4). The joint venture distributes two lines of premium pet food, Select Balance, a life-stage diet and Select Care, a therapeutic line. Select Balance is sold to veterinary hospitals and clinics, as well as pet stores. Select Care is sold only to veterinary hospitals. Pets' Rx Formation Pets' Rx 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The supplemental combined financial statements include the financial position and results of operations of VCA and all of its subsidiaries combined with the financial position and results of operations of Pets' Rx and all of its subsidiaries. As previously discussed, these supplemental combined financial statements reflect how VCA's consolidated financial statements will look following the June 19, 1996 restatement for the merger with Pets' Rx. b. Interim Accounting Policy The accompanying unaudited supplemental combined financial statements have not been audited by independent public accountants, but in the opinion of VCA and Pets' Rx management, such unaudited statements include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the combined financial positions of VCA and Pets' Rx as of March 31, 1996 and the results of their operations and cash flows for the three months ended March 31, 1995 and 1996. Although the management of VCA and Pets' Rx believes that the disclosures in these supplemental combined financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for the three months ended March 31, 1995 and 1996 are not necessarily indicative of the results to be expected for the full year. c. Cash Equivalents For purposes of the balance sheets and statements of cash flows, the Company considers only highly liquid investments to be cash equivalents. Of its cash on hand at December 31, 1995 and 1994, $1,907,000 and $2,982,000, respectively, was restricted for use in the conduct of the Vet's Choice joint venture. d. Inventory Inventory is valued at the lower of cost or market using the first-in, first- out method. F-35 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) e. Property, Plant and Equipment Property, plant and equipment is recorded at cost. Capitalized equipment leases are 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. Depreciation is recorded using the straight-line method over the estimated useful lives of property and equipment (principally five to seven years) and capitalized equipment leases (principally five years). Leasehold improvements are amortized over the lives of the leases (principally 10 years). Costs of normal repairs and maintenance are expensed as incurred. Property, plant and equipment consisted of:
1995 1994 ------------ ------------- Land............................... $ 2,795,000 $ 2,328,000 Building and improvements.......... 6,544,000 5,378,000 Leasehold improvements............. 2,410,000 1,458,000 Furniture and equipment............ 8,633,000 4,909,000 Capitalized equipment leases....... 1,334,000 532,000 ----------- ----------- 21,716,000 14,605,000 Less -- Accumulated depreciation... (4,021,000) (1,913,000) ----------- ----------- $17,695,000 $12,692,000 =========== ===========
Accumulated depreciation on equipment held under capital leases amounted to $303,000 and $170,000 at December 31, 1995 and 1994, respectively. f. Goodwill and Other Intangible Assets Goodwill relating to acquisitions represents the purchase price paid and liabilities incurred in excess of the fair market value of net assets acquired. Goodwill is amortized over the expected period to be benefited, not exceeding 40 years, on a straight-line basis. Subsequent to its acquisitions, the Company continually evaluates whether events and circumstances 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 net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable (Note 13). Other intangible assets principally include covenants not to compete. The value assigned to the covenants not to compete is amortized on a straight-line basis over the term of the agreements (principally 5 to 10 years). Accumulated amortization of goodwill and covenants not to compete and other at December 31, 1995 is $3,563,000 and $2,986,000, respectively. Accumulated amortization of goodwill and covenants not to compete and other at December 31, 1994 is $3,792,000 and $1,259,000, respectively. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Statement was adopted by the Company F-36 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) on January 1, 1996. The Company does not expect implementation of this statement to have a material effect on its financial position or its results of operations. g. Investments Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting For Certain Investments in Debt and Equity Securities," which establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of this Statement did not have a material effect on the financial position or results of operations of the Company. h. Accounting Change Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax 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 basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (Note 11). The cumulative effect of this accounting change, which resulted in recognizing previously unrecognized tax benefits for years prior to January 1, 1993, decreased the net loss for 1993 by $221,000. i. Reclassifications Certain 1994 balances have been reclassified to conform with the 1995 financial statement presentation. 3. ACQUISITIONS AND DISPOSITIONS During 1996, through June 19, 1996, the Company purchased 11 veterinary hospitals and three veterinary diagnostic laboratories in separate transactions. In connection with the acquisitions which were accounted for as a purchase, the aggregate consideration (including acquisition costs) was $28,718,000 consisting of $13,614,000 in cash, $8,066,000 in long-term obligations, 242,926 shares of VCA common stock with a value of $3,868,000 and the assumption of liabilities totalling $3,170,000. In connection with the two acquisitions which were treated as a pooling of interests, VCA issued 151,010 shares of VCA common stock. Additionally, on June 19, 1996 the Company consummated a merger with Pets' Rx for 801,081 shares of VCA common stock. The merger with Pets' Rx will be accounted for as a pooling of interests. During 1995, the Company purchased 25 animal hospitals for an aggregate consideration (including acquisition costs) of $29,019,000, consisting of $6,436,000 in cash, $10,859,000 in debt, 836,576 shares of common stock of the Company, with a value of $9,780,000, and the assumption of liabilities totaling $1,944,000. In addition, the Company paid $250,000 to acquire an option to purchase the land and building of two of the hospitals. Also during 1995, the Company purchased substantially all of the assets of Cenvet, a full-service veterinary diagnostic laboratory, four other veterinary diagnostic laboratories and the remaining 30 percent interest in PAL, for an aggregate consideration of $13,986,000, including acquisition costs, consisting of $2,671,000 in cash, $8,633,000 in long-term obligations, 238,712 shares of VCA common stock, with a value of $2,200,000 and the assumption of liabilities totaling $482,000. On March 20,1995, the Company and Vet Research, Inc., ("VRI"), formed Vet Research Laboratories, LLC ("Vet Research"). In connection with the formation of Vet Research, VRI contributed all of the assets and certain of the liabilities of VRI's full-service veterinary diagnostic laboratory located in Farmingdale, New York. The Company contributed substantially all of the assets and certain of the liabilities of Cenvet for a 51 percent controlling interest in the joint venture (Note 4). In connection with the formation of Vet Research, the Company issued warrants to purchase 363,636 shares of the common stock of the Company at $11.00 per share. The warrants were purchased at $0.001 per warrant and are exercisable until the fifth day F-37 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) following the last day upon which the Company is permitted to close the purchase of VRI's interest in Vet Research pursuant to the VCA Option Agreement. In 1994, VCA purchased four veterinary hospitals for a total consideration (including acquisition costs) of $5,754,000 consisting of $1,329,000 in cash, $3,663,000 in non-recourse promissory notes payable, 91,996 shares of VCA common stock with a value of $680,000, and the assumption of liabilities totaling $82,000. In addition, the Company paid $60,000 to acquire an option to purchase the land and building of one of the hospitals. In 1994, the Company acquired substantially all of the assets and assumed certain of the liabilities of PAL, a full-service veterinary laboratory, located in Irvine, California. In connection with the purchase, the Company also acquired from a principal shareholder of PAL, the real property and building occupied by the business of PAL. The net consideration (including acquisition costs) paid by the Company in connection with these transactions, totaling $9,799,000, consisted of $4,619,000 in cash, $3,446,000 in notes payable, 143,333 shares of VCA common stock with a value of $1,037,000, and the assumption of liabilities totaling $697,000. The non-recourse notes payable, with a principal amount of $3,663,000, to the previous owners of the hospitals are secured by the assets of the acquired hospitals. The fair market value of the tangible assets acquired, including accounts receivable, supplies, inventory and hospital equipment, totals approximately $360,000. In 1993, VCA purchased six veterinary hospitals for a total consideration of $4,113,000 consisting of $1,021,000 in cash, $2,967,000 in non-recourse notes payable and the assumption of liabilities totaling $125,000. In addition, the Company paid $250,000 to acquire options to purchase the land and building of two of the hospitals. The obligations of the Company to the previous owners pursuant to the non-recourse notes are secured by the assets of the companies acquired. The fair market value of the tangible assets acquired including accounts receivable, supplies, inventory and hospital equipment, totals approximately $295,000. During 1993, the Company exercised its option to purchase the land and building of one of its animal hospitals for total consideration of approximately $1,296,000 consisting of a $436,000 option payment made in 1992 and the assumption of a mortgage payable in the amount of $860,000. All 1993 and 1994 acquisitions have been accounted for using the purchase method of accounting. The operations of the acquired companies are included in the accompanying consolidated financial statements from the date of acquisition. Since its inception, Pets' Rx 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 Pets' Rx results commencing from the date of acquisition. During 1995, Pets' Rx acquired a veterinary hospital for a total consideration of $218,000 consisting of $40,000 in cash, $25,000 in a secured promissory note payable, $15,000 payable under covenants not to compete, $31,000 payable under an assumed lease obligation, and $107,000 in other liabilities. During 1995, a limited liability company (LLC) was formed by combining a veterinary clinic owned by Pets' Rx 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. During 1994, Pets' Rx completed the acquisition of six veterinary hospitals 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 covenants not to compete, 2,154 shares of common stock valued at $15,000 and the assumption of $300,000 of notes payable. During 1993, Pets' Rx 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. F-38 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) The unaudited pro forma results listed below reflect purchase price accounting adjustments assuming 1994, 1995 and 1996 acquisitions (through June 19, 1996) 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.
UNAUDITED PRO FORMA INFORMATION ------------------------------- YEARS ENDED DECEMBER 31, 1995 1994 -------------- ------------ Revenue......................... $127,933,000 $113,655,000 Net income (loss)............... 1,048,000 (4,000) Net earnings (loss) per share... $ 0.08 $ (0.00)
4. JOINT VENTURES In January 1993, the Company entered into a joint venture with Heinz Pet Products, Vet's Choice, to develop, manufacture and market new pet products and services. The Company obtained a 50.5 percent controlling interest in the joint venture for a capital contribution of $3,030,000 in cash and is the managing general partner. Heinz Pet Products ("HPP"), contributed $2,970,000 in cash for a 49.5 percent minority interest in the joint venture. Under the terms of the partnership agreement, HPP also agreed to make an additional capital contribution of their product development costs of up to $1 million. The actual costs incurred during 1993 were $806,000. Such costs were expensed and credited to the minority interest partner's equity account. Commencing January 1, 1996 the joint venture will make preferential distributions to HPP of any distributable cash in excess of $3 million in any fiscal year until such time as HPP has received preferential distributions amounting to the total development costs that it contributed. As provided by the partnership agreement, the Company and Heinz Pet Products each contributed $1 million to the joint venture in the third quarter of 1995. The joint venture agreement between the Company and HPP provides for restrictions on the transfer of each partner's respective interest in the joint venture and for reciprocal buy-sell provisions. Heinz Pet Products has agreed to lend Vet's Choice up to $1.0 million at its bank prime rate plus one-half percent for working capital. The Company operates Vet Research in a joint venture with VRI. Vet Research's operating results have been accounted for as part of the consolidated operations of the Company. Distributions of distributable cash will be made pursuant to a formula contained in the operating agreement between the Company and VRI. Pursuant to that formula, during each contract year, the first $1.5 million of distributable cash is distributed to VRI; the next $3 million of distributable cash is distributed to the Company; and the remaining distributable cash is distributed 25 percent to the Company and 75 percent to VRI. The Company has recorded minority interest expense related to the joint venture based on the estimated percentage of annual income which will be distributed to the minority interest partner pursuant to the operating agreement. The estimate is reviewed and adjusted on a quarterly basis. The 1995 results include minority interest expense of 52.4 percent of Vet Research's income. The Company has an option pursuant to an agreement with VRI to acquire VRI's entire interest in Vet Research for a purchase price as computed in accordance with the operating agreement. The Company's option is exercisable January 1, 1997 through January 31, 1997. If the Company does not exercise its option, VRI has an option to acquire the Company's interest in Vet Research. F-39 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) 5. LONG-TERM OBLIGATIONS Long-term obligations consisted of the following at December 31, 1995 and 1994:
1995 1994 ----------- ---------- 8 percent note payable, convertible into VCA common stock at $12.50 per share, due through 1997, secured by certain fixed and intangible assets............ $ 57,000 $ 86,000 5 percent note payable, convertible into VCA common stock at $15.00 per share due through 1997, secured by stock of certain subsidiaries................... 196,000 391,000 11.2 percent note payable due through 1997, secured by assets of a certain subsidiary............................................................ 408,000 483,000 Adjustable rate note payable, interest at the treasury bill rate (6.3 percent at December 31, 1995) adjusted annually, due through June 2000 (discounted at 6.5 percent).................................................................... 300,000 355,000 Obligation due monthly through May 2000, secured by assets of certain subsidiary (discounted at 6.5 percent)............................................. 230,000 273,000 Obligation due quarterly through 1997, (discounted at 8.75 percent).................. 361,000 -- Obligation due quarterly through 2002, secured by assets of certain subsidiary (discounted at 8.75 percent)............................................ 2,580,000 -- Adjustable rate note payable, interest at the bank prime rate plus 0.5 percent, (capped at 8.5 percent at December 31, 1995), adjusted annually, due through 2000, secured by stock of a certain subsidiary.................................... 592,000 698,000 3 percent note payable, converted into VCA common stock in June 1995 at $7.00 per share................................................................. -- 175,000 Adjustable rate notes payable, interest at the bank prime rate, adjusted annually (capped at 8.0 percent at December 31, 1995), various maturities through 2000, secured by assets and stock of certain subsidiaries................................ 2,516,000 2,899,000 Adjustable rate notes payable, interest at the bank prime rate plus 1 percent (8.0 percent to 9.5 percent at December 31, 1995), various maturities through 2002, secured by assets and stock of certain subsidiaries.......................... 510,000 589,000 6 percent notes payable, due through 2002, secured by stock of certain subsidiary.... 641,000 760,000 7 percent and 7.5 percent notes payable, due through 2007, secured by assets and stock of certain subsidiaries........................................... 10,953,000 3,034,000 8 percent notes payable, various maturities through 2006, secured by stock of certain subsidiaries............................................................... 6,915,000 339,000 9 percent and 9.8 percent notes payable, various maturities through 2005, secured by assets of certain subsidiary and building............................... 898,000 -- Notes payable and other obligations, various maturities through 1997, secured by land, building and stock of certain subsidiaries (discounted at 10 to 12 percent)........................................................................ 299,000 471,000 10 percent notes payable, various maturities through 2005, secured by stock and assets of certain subsidiaries and land and building........................... 2,627,000 2,867,000 Revolving line of credit at the bank prime rate (8.5 percent at December 31, 1995) matures December 1996, convertible into a 36 month term loan....................... -- 1,100,000 10.5 percent note payable, due through 1997, secured by land and building of a certain subsidiary................................................... 1,016,000 1,025,000 Adjustable rate notes payable, interest at bank prime rate, plus 1.5 percent (capped at 9.0 percent at December 31, 1995), due through 2001, secured by assets and stock of certain subsidiaries........................................ 707,000 803,000 11 percent note payable due through 2001, secured by assets of certain subsidiary.............................................................. 383,000 449,000 Adjustable rate notes payable at the bank prime rate, plus 1 percent (9.75 percent at December 31, 1995)................................................ 420,000 1,688,000 Notes payable, secured by assets and stock of certain subsidiaries, various maturities through 2001, interest at an average rate of 11 to 12 percent........... 123,000 152,000 Promissory notes, secured by assets of certain subsidiaries, bearing interest at interest rates between 7% and 10% payable monthly, principal is generally due in monthly installments through July 2014...................................... 7,517,000 8,285,000 Promissory note, interest at prime plus 3% (11.75% at December 31, 1995), principal and interest payable in monthly installments through July 2000 133,000 154,000
F-40 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants)
1995 1994 ------------ ------------ Convertible promissory note payable to a shareholder, officer and director, secured by assets of certain subsidiaries, interest at 9% per annum payable semi-annually, principal due July 1996, convertible into 6,463 shares of common stock............................................................................. $ 250,000 $ 250,000 Convertible promissory notes, secured by assets of certain subsidiaries, interest at 7% per annum payable monthly, principal due through December 2003, convertible into 7,637 shares of common stock............................................ 649,000 649,000 Convertible promissory note payable to an employee, secured by assets of certain subsidiaries, interest at 8.5% per annum, interest and principal payable in monthly installments from January 1994 through December 1998, convertible into 8,617 shares of common stock............................................................. 671,000 686,000 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 and January 1996, convertible into shares of common stock at an initial conversion rate of $7.23 and $8.70............. 490,000 579,000 Obligations under covenants not to compete, payable in installments through 2003........... 782,000 1,005,000 Installment obligations bearing interest at 8% to 10.25%, due through 2005................. 295,000 -- Installment obligations, variable interest rates, periodic installments due through 1996... -- 131,000 ----------- ----------- Total debt obligations..................................................................... 43,519,000 30,376,000 Capital lease obligations, due through 2000 (Note 9)....................................... 931,000 358,000 Less -- Unamortized discount............................................................... (251,000) (125,000) ----------- ----------- 44,199,000 30,609,000 Less -- Current portion.................................................................... (7,421,000) (5,552,000) ----------- ----------- $36,778,000 $25,057,000 =========== ===========
The annual aggregate scheduled maturities of debt obligations for the five years subsequent to December 31, 1995 are presented below: 1996........................................ $ 7,421,000 1997........................................ 7,971,000 1998........................................ 5,815,000 1999........................................ 4,315,000 2000........................................ 4,675,000 Thereafter.................................. 14,002,000 ----------- $44,199,000 ===========
Certain acquisition debt of the Company included above and amounting to $33,889,000 and $26,347,000 at December 31, 1995 and 1994, respectively, is non-recourse debt secured solely by the assets or the stock of the veterinary hospital acquired under security arrangements whereby the creditor's sole remedy in the event of default is the contractual right to take possession of the entire veterinary hospital regardless of the outstanding indebtedness at the time of default. The Company has an unsecured line of credit of $3.1 million. The line of credit is at the bank prime rate (8.5 percent at December 31, 1995) and expires in December 1996, at which time the outstanding balance on the line can, at the Company's option, convert to a 36-month term loan. At December 31, 1995, the Company had $3.1 million available under the line. In April 1996, the Company received net proceeds of $82,697,000 related to the sale, in an offshore offering and concurrent private placement in the United States, of $84,385,000 of 5.25% convertible subordinated debentures due in 2006. The debentures, non-callable for three years, are convertible into approximately 2.5 million shares of the Company's common stock at a rate of $34.35 per share. The following disclosure of the estimated fair value of the Company's debt is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. F-41 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) 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................. $33,952,000 $30,104,000 Variable-rate long-term debt.............. 4,256,000 4,256,000
The carrying values of variable-rate long-term debt is a reasonable estimate of their fair value. 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. 6. PREFERRED STOCK On December 22, 1992, the Company completed the sale of 583,333 shares of convertible preferred stock for net proceeds of $2,985,000. The shares are convertible into 583,333 shares of the Company's common stock commencing December 22, 1997. The preferred stock participates in any dividend payments on the Company's common stock on an as converted basis. The preferred stock has a liquidation preference of $5.14 per share and it is callable by the Company any time after March 22, 1998 at a price of $5.14 per share. The preferred stock has no voting rights. Under the Company's certificate of incorporation, the Company is authorized to issue additional series of preferred stock. The rights, preferences and privileges of the preferred stock are to be determined by the board of directors and do not require stockholder approval. 7. COMMON STOCK In January 1995, Star-Kist Foods, Inc. through its Heinz Pet Products division purchased 1,159,420 shares of the Company's common stock at $8.625 per share, resulting in net proceeds to the Company of $9,980,000. In November 1995, the Company completed a secondary public offering of 2,965,026 shares of common stock for net proceeds of $33,932,000. During 1995, the Company issued 1,075,226 shares of the Company's common stock valued at $11,980,000, the fair market value at the date of commitment, as a portion of the consideration for 15 animal hospitals and three veterinary diagnostic laboratories. Of this amount, 156,303 shares of common stock valued at $1,970,000 had not been issued as of December 31, 1995. Such shares are reflected as though they are outstanding in the accompanying consolidated financial statements. In conjunction with the acquisition of two hospitals and PAL in 1994, the Company issued 237,483 shares of common stock with a market value at the date of issue of $1,732,000. Also in 1994, the Company issued 63,214 shares of common stock in settlement of a guaranteed purchase price contingently payable in cash or common stock (Note 8) and 30,841 shares of common stock for repayment of promissory note interest. On October 6, 1991, the Company completed a public offering of 2,400,000 shares of common stock and 3,240,000 redeemable warrants for $12,598,000. Each redeemable warrant entitles the holder to purchase one share of common stock for $7.20 commencing April 10, 1992 until October 10, 1996, and is redeemable at the option of the Company at any time after April 10, 1992 on 30 days prior written notice, provided that the market price of the common stock equals or exceeds $9.00 per share for 20 consecutive trading days ending within 10 days prior to notice of redemption. Such market price exceeded $9.00 per share for 20 consecutive days on March 10,1995. During 1995, redeemable warrants were exercised for 1,271,508 shares of common stock. Cash proceeds from the exercise of redeemable warrants amounted to $8,896,000. At December 31, 1995, there are 1,968,492 redeemable warrants outstanding. F-42 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) Under the provisions of the Company's non-qualified and incentive stock option plans for officers and key employees, 750,000 shares of common stock were reserved for issuance at December 31, 1992. On May 5, 1995, the stockholders of the Company approved the adoption of the Veterinary Centers of America, Inc. 1995 Stock Incentive Plan, and authorized the reservation of 750,000 shares of common stock for issuance under the Plan. The options become exercisable over a two to five year period, commencing at the date of grant or one year from the date of grant depending on the option. All options expire 10 years from the date of grant. The prices of all options granted were greater than or equal to the fair market value at the date of the grant. The table below summarizes the transactions in the Company's stock option plans during 1995, 1994 and 1993:
1995 1994 1993 ---------- -------- -------- Options outstanding at beginning of year... 748,172 652,894 379,021 Granted.................................... 820,965 144,993 293,423 Exercised.................................. (21,034) (32,765) (5,838) Canceled................................... (13,200) (16,950) (13,712) ---------- -------- -------- Options outstanding at end of year ($.75 to $31.91 per share).............. 1,534,903 748,172 652,894 ========== ======== ======== Exercisable at end of year................. 684,210 462,879 339,582 ========== ======== ========
In addition to the options granted under VCA's stock option plans, the Company had 45,667 and 54,000 options outstanding at December 31, 1995 and 1994, respectively, to certain members of the board of directors and to the previous owners of certain acquired companies. During 1995, 8,333 of these options were exercised. The options are exercisable at $.75 to $6.00 per share. At December 31, 1995, 45,667 of the options are exercisable. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." The statement recommends changes in accounting for employee stock-based compensation plans, and requires certain disclosures with respect to these plans. The Statement's disclosures were adopted by the Company effective January 1, 1996. 8. GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK The Company has guaranteed the value of certain shares of its common stock issued in connection with the acquisition of certain animal hospitals in 1995. If the aggregate market value of the stock (as quoted by a nationally recognized stock exchange) at various specified valuation dates is below the value of the stock on the acquisition date, the Company has agreed to pay the difference in additional shares of stock, cash or notes payable. The Company's guarantee of the value, however, terminates if the common stock is registered for resale and trades at 110% to 120% of the issue price of the stock for five to twenty consecutive days. At December 31, 1995, there were 404,495 shares of stock outstanding with such guarantees, with issue prices ranging from $11.26 to $14.95. In connection with certain acquisitions completed prior to 1995, the Company guaranteed the price of certain shares of its common stock issued in connection with the acquisitions. If the aggregate market value of the stock (as quoted by a nationally recognized stock exchange) had not reached the guaranteed value, which exceeded the value of the stock at the acquisition date, by the various specified valuation dates, the Company agreed to pay the difference in additional shares of stock, cash, or notes payable. The guaranteed purchase price contingently payable in cash or common stock represents the liability for the difference between the aggregate guaranteed value of the common stock net of the Company's estimate of the fair market value of the stock at the date of the acquisition, discounted at 10 percent. F-43 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) In 1995, pursuant to two of these stock guarantee arrangements pertaining to a total of 13,494 shares, the Company paid $19,000 in cash for the difference between the guaranteed value of the stock held and the market value of the stock, as defined. The difference between the $19,000 and the $72,000 liability for the guaranteed purchase price contingently payable in cash or common stock, amounting to $53,000 was credited to additional paid-in-capital. In 1994, pursuant to a stock guarantee arrangement for 80,000 shares, the Company issued 63,214 shares of common stock for the difference between the guaranteed value of the stock held and the market value of the stock, as defined. The market value of the additional shares issued, totaling $470,000, was charged to the liability for the guaranteed purchase price contingently payable in cash or common stock. 9. COMMITMENTS The Company operates many of its 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. The annual lease payments under the lease agreements have provisions for annual increases based on the Consumer Price Index. The Company also leases certain medical and computer equipment under capital leases. The future minimum lease payments at December 31, 1995 are as follows:
Capital Operating Leases Leases ---------- ----------- 1996.......................................... $ 425,000 $ 4,004,000 1997.......................................... 341,000 3,970,000 1998.......................................... 251,000 3,772,000 1999.......................................... 67,000 3,211,000 2000.......................................... 16,000 3,041,000 Thereafter.................................... -- 36,672,000 ---------- ----------- 1,100,000 $54,670,000 =========== Less -- Amount representing interest.......... (169,000) ---------- Present value of net minimum lease payments... $ 931,000 ==========
Rent expense totaled $3,880,000, $2,158,000 and $1,606,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Rental income totaled $246,000, $96,000 and $96,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company has employment agreements with three officers of the Company which currently expire on December 31, 1998. Each of the agreements provide for annual compensation (subject to upward adjustment) which aggregated $559,000 for the year ended December 31, 1995. 10. CALCULATION OF PER SHARE AMOUNTS Earnings per share calculations are based on the weighted average common shares outstanding including obligated shares (Note 7) plus common shares subject to dilutive stock options, common shares contingently issuable pursuant to the guaranteed purchase price contingently payable in cash or common stock as discussed in Note 8, convertible debt and shares issuable upon redemption of redeemable warrants and conversion of preferred stock. Stock options, common shares contingently issuable and shares issuable upon conversion of preferred stock are not included in the weighted average common shares in 1995, 1994 and 1993 as they have an anti-dilutive effect. F-44 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) 11. INCOME TAXES The provision for income taxes is comprised of the following:
1995 1994 1993 ----------- --------- ---------- Federal: Current.... $1,888,000 $183,000 $ 490,000 Deferred... (192,000) 296,000 (595,000) ---------- -------- --------- 1,696,000 479,000 (105,000) ---------- -------- --------- State: Current.... 560,000 239,000 141,000 Deferred... (18,000) 13,000 (188,000) ---------- -------- --------- 542,000 252,000 (47,000) ---------- -------- --------- $2,238,000 $731,000 $(152,000) ========== ======== =========
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax 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 in effect for the year in which the differences are expected to reverse. The Company reflected the impact as a cumulative adjustment in the 1993 first quarter and did not restate prior periods. The cumulative adjustment had a favorable impact of $221,000 on the net loss. The net deferred tax asset (liability) is comprised of the following:
1995 1994 ---------- --------- Current deferred tax assets (liabilities): Accounts receivable........................ $ 301,000 $ 165,000 State taxes................................ 156,000 34,000 Other liabilities and reserves............. 588,000 430,000 Start-up costs............................. 59,000 120,000 Property, plant and equipment.............. 95,000 (33,000) Restructuring.............................. 345,000 -- Other assets............................... (4,000) (4,000) Valuation allowance........................ (365,000) (274,000) ---------- --------- Total current deferred tax asset, net.... $1,175,000 $ 438,000 ========== =========
F-45 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants)
1995 1994 ----------- ----------- Non-current deferred tax (liabilities) assets: Net operating loss carryforwards...................................... $ 2,482,000 $ 1,824,000 Writedown of assets................................................... 1,587,000 779,000 Start-up costs........................................................ 288,000 151,000 Miscellaneous......................................................... -- 25,000 Other assets.......................................................... (119,000) (124,000) Intangible assets..................................................... (2,037,000) (211,000) Valuation allowance................................................... (3,760,000) (2,389,000) Property, plant and equipment......................................... 258,000 (203,000) ----------- ----------- Total non-current deferred tax liability, net....................... $(1,301,000) $ (148,000) =========== ===========
A reconciliation of the provision for income taxes to the amount computed at the Federal statutory rate is as follows:
1995 1994 1993 ------- ------- ------ Federal income tax at statutory rate.................................... 34.0% (34.0)% (34.0)% Effect of amortization of goodwill...................................... 5.0 9.0 5.0 State taxes, net of Federal benefit..................................... 8.0 12.0 2.0 Cumulative impact of tax law change..................................... -- -- (3.0) Increase in valuation allowance associated with writedown of assets and operating losses................................................. 172.0 75.0 27.0 ------ ----- ----- 219.0% 62.0% (3.0)% ====== ===== =====
For financial reporting purposes, the benefit arising from the utilization of operating loss carryforwards generated by companies prior to their acquisition by VCA is accounted for as a reduction of goodwill of the acquired companies. Such benefit amounted to $40,000 and $69,000 for the years ended December 31, 1993 and 1995, respectively. No benefit was realized for the year ended December 31, 1994. For tax reporting purposes, the acquired companies have Federal net operating loss carryforwards at December 31, 1995 of approximately $260,000 expiring through 2003. At December 31, 1995, Pets' Rx 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. 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 and the merger with VCA caused such a change in ownership and, accordingly, utilization of the Pets' Rx NOL carryforwards may be limited in future years. 12. 401(K) PLAN During 1992, the Company established a voluntary retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers all eligible employees and provides for annual matching contributions by the Company at the discretion of the Company's board of directors. In 1995, 1994 and 1993, the Company provided a matching contribution of 20 percent, 20 percent and 15 percent, respectively of the first five percent of the employees' contributions, as defined. Such matching contributions approximated $87,000, $46,000 and $24,000 in 1995, 1994 and 1993, respectively. F-46 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) 13. WRITEDOWN OF ASSETS During 1993, the Company charged $4,506,000 to operations related to the writedown of goodwill and certain intangible assets at three VCA facilities and five Pets' Rx facilities. The determination to writedown these assets was based on the Company's estimate that forecasted losses at each facility indicated that the intangible assets would not be realized. The first of the three hospitals was purchased in March 1989, with goodwill on the acquisition of $920,000. In the five years subsequent to the acquisition, the hospital generated losses aggregating $84,000 through December 31, 1993, due primarily to severe competition in the area from the veterinarian from whom the Company acquired the hospital. In January 1994, the economy in the area where the hospital operates was adversely impacted by the "Northridge Earthquake," further impacting the hospital's revenues and operating results. The second hospital was purchased in December 1989, at a price of approximately $1 million, with goodwill on the acquisition of $997,000. Since the acquisition, the hospital generated aggregate net income of $250,000 through December 31, 1993, including a loss of $44,000 in 1992 and income of $17,000 in 1993. Included in the operating results is income of $73,000 in 1992 and $39,000 in 1993 from the rental of space at the facility to a veterinary surgery referral practice. The rental agreement was terminated in July 1993 and, due to the specialization of the services provided by the referral practice, the hospital was unable to find a suitable replacement. In addition to the impact of the loss of rental income, the hospital's revenue and income were adversely impacted by the loss of referral business from the referral practice. The departure of the group had a permanent negative impact on the hospital's net income and the recoverability of goodwill. The third hospital was purchased in December 1991 at a price of approximately $800,000, with goodwill and other intangible assets on the acquisition of $778,000. The hospital generated net income in 1992 of $52,000 and a net loss in 1993 of $59,000. The hospital provided 24-hour emergency service under an arrangement whereby a veterinary emergency group used the hospital space during the hours that the regular hospital was closed. The emergency clinic's presence in the hospital provided substantial indirect benefits to the hospital's operating results. In September 1993, the emergency group terminated its arrangement with the hospital, and the operating results were adversely impacted. The Company has determined that emergency services cannot be replaced and the impact on the hospital will be permanent. In 1993, Pets' Rx recognized a writedown of goodwill of $123,000 related to a hospital that was closed in early 1994. As a result of conforming to consistent methods of accounting, four hospitals acquired by Pets' Rx in early to mid-1992 became impaired in 1993. Three of the four hospitals are located in the Sacramento area, a market which had not matured as anticipated. These three hospitals had losses excluding amortization of intangible costs totaling $91,000 for 1993. The fourth hospital located in the San Jose market had also not matured as anticipated and recorded a loss excluding amortization of $76,000 in 1993 resulting in a writedown for the four hospitals of $2,073,000. As of late 1995, it was further determined that three hospitals acquired by Pets' Rx in late 1993 and 1994 were impaired. One hospital acquired in late 1994 is also located in the depressed Sacramento market and its addition failed to improve the overall Sacramento region performance. The remaining hospitals' performance reflect factors specific to their operations and location and are not indicative of the San Jose and Las Vegas markets. These three hospitals recorded losses totaling $206,000 in 1995 and resulted in a writedown of $2,148,000. The Company's goal over the next two years is to minimize the facilities' cash flow requirements and ultimately bring the facilities to a breakeven status. The Company's strategy of building a network of hospitals in the markets they serve will be benefited by the hospitals' ability to provide services to customers in their vicinity, even though the facilities will not generate profits. 14. RESTRUCTURING CHARGE The operations of Cenvet were merged into VRI's operations to form Vet Research in March 1995. The combined operations were restructured to eliminate duplicate operating and overhead costs. The restructuring included the consolidation of facilities, staff reductions and the consolidation of ancillary operations. In connection with the restructuring, the Company recorded a charge of F-47 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) $1,086,000 in the first quarter of 1995 to accrue the estimated costs associated with the restructuring, consisting primarily of lease termination and severance costs. The following is a summary of the restructuring costs:
1995 ---------- Employee severance costs... $ 468,000 Lease commitments.......... 433,000 Other...................... 185,000 ---------- $1,086,000 ==========
During 1995, the Company utilized $237,000 of the reserve for restructuring. At December 31, 1995, $849,000 of the restructuring reserves remained on the Company's balance sheet. 15. LINES OF BUSINESS The Company classifies its business operations into three segments: Animal Hospital, Premium Pet Food and Laboratory. Prior to January 1993, the Company's principal line of business was owning and operating animal hospitals. On January 1, 1993, the Company formed a joint venture, Vet's Choice, to develop, market and distribute new pet products and services (Note 4). Vet's Choice began generating revenue in March 1994 when it commenced distribution of its first product line. In March 1994, the Company acquired Professional Animal Laboratory and combined its existing laboratory to form the Laboratory segment.
ANIMAL PREMIUM CORPORATE & (IN THOUSANDS) HOSPITAL PET FOOD LABORATORY ELIMINATIONS TOTAL - -------------- -------- -------- ---------- ------------ -------- 1995 Revenues.................. $67,059 $ 4,756 $37,606 $(1,727) $107,694 Gross profit.............. 11,767 1,551 13,629 -- 26,947 Restructuring cost........ -- -- 1,086 -- 1,086 Operating income (loss)... 4,637 (2,573) 8,359 (3,890) 6,533 Identifiable assets....... 74,073 3,854 29,798 45,661 153,416 1994 Revenues.................. $41,484 $ 996 $10,150 $ (759) $ 51,871 Gross profit.............. 7,111 349 3,577 -- 11,037 Operating income(loss).... 3,595 (3,094) 2,563 (2,796) 268 Identifiable assets....... 47,698 3,599 13,532 3,073 67,902
16. SUBSEQUENT EVENTS During 1996 through June 18, 1996, the Company purchased eleven veterinary hospitals and three veterinary diagnostic laboratories (See Note 3). On March 21, 1996, the Company signed a definitive merger agreement with The Pet Practice, Inc. ("TPP"), pursuant to which the Company will acquire all of the outstanding securities of TPP. TPP operates 86 veterinary hospitals in 11 states. Under the terms of the agreement, each share of TPP common stock will be converted into a fraction of a share of VCA common stock determined by a reference to the average closing price of VCA common stock over the twenty trading days ending on the third day before the shareholder meetings at which the stockholders of VCA and TPP will consider the merger. If the average price of the VCA common stock ranges from $25 to $30 per share, the exchange ratio shall be determined by dividing $10 by the average price of the VCA common stock, resulting in a valuation of $10 per share of TPP common stock throughout the range. If the average closing price of the VCA common stock is less than $24 per share, the exchange ratio will be increased (from 0.395 shares at $24 per share) by 0.005 for each dollar of such reduction down to $18.50 of VCA common stock, and if the average price of VCA common stock is more than $31 per share, the exchange ratio shall be reduced (from 0.3350 at $31 per share) by 0.005 for each dollar of such increase, up to $49.00 per share. No further adjustment shall be made if the price of VCA stock shall be less than F-48 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) $18.50. In each case, a proportionate reduction or increase, as the case may be, shall be made if the price of VCA common stock is less than a round dollar. If the average price of the VCA common stock is greater than $49.00, the exchange ratio should be determined by dividing $12.005 by the average price. By way of illustration, at $23 per share of VCA common stock, the exchange ratio shall be 0.400, resulting in a valuation of $9.20 per share of TPP common stock. At $32.00 per share of VCA common stock, the exchange ratio shall be 0.330, resulting in a valuation of $10.56 per share of TPP common stock. The Company expects that the merger will be consummated in the second quarter of 1996. The merger will be accounted for as a purchase. Each party has the right to terminate the definitive agreement if the average price of VCA common shares is $18.50 or less. Consummation of the merger is subject to certain significant conditions. Consequently, the merger of VCA and TPP may never be consummated. F-49 THE PET PRACTICE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
APRIL 3, 1996 JANUARY 3, (UNAUDITED) 1996 ------------- --------- ASSETS Current assets: Cash and cash equivalents........................... $ 4,916 $10,097 Accounts receivable, net of allowance for doubtful accounts of $258 at April 3, 1996 and $363 at January 3, 1996.......... 836 809 Other receivables................................... 264 534 Inventories......................................... 3,154 3,175 Other current assets, including deferred merger costs of $625 in 1996............. 1,592 966 ------- ------- Total current assets.............................. 10,762 15,581 Property and equipment, net........................... 15,029 13,465 Excess of cost over fair value of net assets acquired and other intangible assets, net................................................. 53,775 51,271 Other assets.......................................... 149 145 ------- ------- $79,715 $80,462 ======= =======
The accompanying notes are an integral part of these financial statements. F-50 THE PET PRACTICE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
LIABILITIES, MANDATORILY APRIL 3, REDEEMABLE PREFERRED STOCK, 1996 JANUARY 3, AND STOCKHOLDERS' EQUITY (UNAUDITED) 1996 ----------- ---------- Current liabilities: Current portion of long-term debt, including due to related parties of $1,741 at April 3, 1996 and $1,649 at January 3, 1996.......... $ 3,820 $ 3,696 Accounts payable..................................... 2,169 2,540 Accrued expenses and other current liabilities....... 4,959 5,184 ------- ------- Total current liabilities........................... 10,948 11,420 Long-term debt, including amounts due to related parties of $7,872 at April 3, 1996 and $7,848 at January 3, 1996........................ 16,216 15,786 Other liabilities..................................... 30 36 ------- ------- Total liabilities................................... 27,194 27,242 ------- ------- Commitments and contingencies......................... - - Mandatorily redeemable preferred stock, $0.01 par value, 10 shares authorized...................... - - ------- ------- - - Stockholders' equity: Preferred stock, $0.01 par value, 1,000 shares authorized.................................... Common stock, $0.01 par value, 20,000 shares authorized; 8,632 shares issued and outstanding at April 3, 1996 and 8,607 at January 3, 1996............................. 86 86 Capital in excess of par value....................... 62,026 61,826 Accumulated deficit.................................. (9,591) (8,692) ------- ------- Total stockholders' equity........................... 52,521 53,220 ------- ------- $79,715 $80,462 ======= =======
The accompanying notes are an integral part of these financial statements. F-51 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THIRTEEN WEEKS ENDED -------------------------- APRIL 3, MARCH 29, 1996 1995* ---------- --------- Net revenues................................................ $13,404 $ 7,607 Cost of revenues............................................ 12,104 7,120 ------- ------- Gross profit................................................ 1,300 487 General and administrative expenses......................... 1,490 1,223 Amortization of excess of cost over fair value of net assets acquired and other intangible assets......... 460 248 Loss from operations........................................ (650) (984) Non-operating expenses (income): Interest expense - related parties......................... 167 328 Interest expense - other................................... 154 369 Interest income............................................ (93) (6) ------- ------- 228 691 ------- ------- Loss before income taxes.................................... (878) (1,675) Provision for income tax expense............................ 21 19 ------- ------- Net loss.................................................... $ (899) $(1,694) ======= ======= Net loss per common share................................... $(0.10) $(0.42) ======= ======= Shares used in net loss per common share computation.......................................... 8,614 4,059 ======= =======
*Certain reclassifications have been made for comparative purposes. The accompanying notes are an integral part of these financial statements. F-52 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS) (UNAUDITED)
COMMON STOCK -------------------- CAPITAL IN ACCUM- NUMBER PAR EXCESS OF ULATED OF SHARES VALUE PAR VALUE DEFICIT TOTAL --------- ----- --------- ------- ----- Balance at January 3, 1996...... 8,607 $86 $61,826 $(8,692) $53,220 Common stock issued in connection with acquisitions... 25 - 200 - 200 Net loss........................ - - - (800) (899) ----- --- ------- ------- ------- Balance at April 3, 1996........ 8,632 $86 $62,026 $(9,591) $52,521 ===== === ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-53 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Thirteen Weeks Ended --------------------------- April 3, March 29, 1996 1995 -------- --------- Cash flows from operating activities: Net loss........................................................ $ (899) $(1,694) Adjustments to reconcile net loss to net cash provided (used) by operations: Depreciation and amortization................................. 845 448 Provision for doubtful accounts............................... (26) 28 Finance charges on mandatorily redeemable preferred stock................................... 16 Other non-cash charges........................................ 36 Changes in assets and liabilities, net of effects of businesses acquired: Increase in accounts receivable............................... (8) (90) Decrease (increase) in inventories............................ 57 (223) Decrease (increase) in other current assets................... 274 (482) Decrease in accounts payable.................................. (370) (461) Increase (decrease) in other accrued expenses and in other current liabilities.............................. (1,107) 517 Other assets and other liabilities............................ (5) 13 ------- ------- Net cash used in operating activities......................... (1,239) (1,892) ------- ------- Cash flows from investing activities: Payments for purchases of businesses, net of cash acquired of $6 in 1996 and $7 in 1995................................................ (2,116) (4,139) Purchases of property and equipment............................ (905) (850) ------- ------- Net cash used in investing activities......................... (3,021) (4,989) ------- ------- Cash flows from financing activities: Borrowings under line of credit agreements..................... - 7,194 Principal payments on long-term obligations.................... (921) (169) ------- ------- Net cash provided by (used in) financing activities........... (921) 7,025 ------- ------- Net increase (decrease) in cash and cash equivalents............ (5,181) 144 Cash and cash equivalents at beginning of period................ 10,097 910 ------- ------- Cash and cash equivalents at end of period...................... $ 4,916 $ 1,054 ======= =======
The accompanying notes are an integral part of these financial statements. F-54 PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 3, 1996 (Dollar amounts in thousands, except per share data) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited, except for the Consolidated Balance Sheet as of January 3, 1996. The statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended January 3, 1996, included in its Annual Report on Form 1O-K, as filed with the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Company management, the consolidated financial data for the unaudited interim periods presented include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement of the results of such interim periods. Operating results for the thirteen-week period ended April 3, 1996 are not necessarily indicative of the results that may be expected for a full year or any portion thereof. NOTE 2 - DEFINITIVE MERGER AGREEMENT On March 21, 1996, the Company signed a definitive agreement (the "Merger Agreement") with Veterinary Centers of America, Inc. ("VCA"), pursuant to which VCA will acquire all ...... outstanding securities of the Company. Under the terms of the Merger Agreement, each share of the Company's common stock will be converted into a fraction of a share of VCA common stock determined by reference to the average closing price of VCA common stock over the 20 trading days ending on the third day before the stockholder meetings, at which the stockholders of VCA and the Company will consider the merger. If the average price of the VCA common stock ranges from $25 to $30 per share, the exchange ratio shall be determined by dividing $10 by the average price of VCA common stock, resulting in a valuation of $10 per share of the Company's Common Stock throughout the range. If the average closing price of VCA common stock is less than $24 per share, the exchange ratio will be increased (from 0.395 shares at $24 per share) by 0.005 for each dollar of such reduction down to $18.50 of VCA common stock, and if the average price of VCA common stock is more than $31 per share, the exchange ratio shall be reduced (from 0.3350 at $31 per share) by 0.005 for each dollar of such increase, up to $49 per share. No further adjustment shall be made if the price of VCA common stock F-55 PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) APRIL 3, 1996 (Dollar amounts in thousands, except per share data) (Unaudited) shall be less than $18.50. In each case, a proportionate reduction or increase, as the case may be, shall be made if the price of VCA common stock is less than a round dollar. By way of illustration, at $23 per share of VCA common stock, the exchange ratio shall be 0.400, resulting in a valuation of $9.20 per share of the Company's Common Stock. At $32 per share of VCA common stock, the exchange ratio shall be 0.330, resulting in a valuation of $10.56 per share of the Company's Common Stock. The merger will be accounted for as a purchase. If the average price of VCA common stock is greater than $49, the exchange ratio shall be determined by dividing $12.005 by the average price. Each party has the right to terminate the definitive agreement if the average price of VCA common stock is $18.50 or less. The Company expects that the merger will be consummated in the third quarter of 1996. Consummation of the merger is subject to certain significant conditions. The Merger Agreement with VCA may be terminated by either VCA or the Company at any time prior to the closing (i) if any material condition to the obligations of the Company or VCA set forth in the Merger Agreement is not substantially satisfied at the time or times contemplated thereby, (ii) there is a material breach of any representation, warranty, condition, or agreement contained in the Merger Agreement (that is not cured within 30 days of the tune that written notice of such breach is received by the breaching party), (iii) if the merger shall not have been consummated on or before September 1, 1996, or (iv) upon their mutual consent. For all of the foregoing reasons, the merger of VCA and the Company may never be consummated. The Company filed a copy of the Merger Agreement with the Securities and Exchange Commission in its Current Report on Form 8-K dated March 21, 1996. NOTE 3 - BUSINESS ACQUISITIONS The Company acquired three clinics during the thirteen weeks ended April 3, 1996. These acquisitions have been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to assets and liabilities acquired based upon their estimated fair values at the dates of acquisition. The results of operations of the acquired companies are included in the consolidated financial statements from the respective dates of acquisition. F-56 PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) APRIL 3, 1996 (Dollar amounts in thousands, except per share data) (Unaudited) Information with respect to these acquisitions is presented below: Cash paid (net of cash acquired)................ $1,177 Common stock issued............................. 200 Notes and mortgages issued...................... 1,475 Transaction and other costs..................... 1,126 ------ Fair value of tangible assets acquired, principally accounts receivable, inventory, and property and equipment.................... 1,014 ------ Cost in excess of fair value of assets acquired and other intangible assets.......... $2,964 ====== The following unaudited pro forma consolidated results of operations of the Company and its. . subsidiaries for the thirteen weeks ended April 3, 1996 give effect on a pro forma basis to the practices acquired during the period from January 4, 1996 through May 15, 1996, as if such practices had been acquired as of January 4, 1996. Net revenues $13,579 Loss from operations (639) Net loss (910) Net loss per common share (0.11) The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions been made on January 4, 1996, or the Company's results of operations which may occur in the future. NOTE 4 - INCOME TAXES Due to the Company's operating losses, there is no provision for federal income taxes. NOTE 5 - SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION Cash paid during the thirteen weeks ended April 3, 1996 for interest and income taxes was $344 and $36, respectively. F-57 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of The Pet Practice, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of The Pet Practice, Inc. and its subsidiaries at January 3, 1996 and December 28, 1994 and the results of their operations and their cash flows for the period October 27, 1993 (commencement of operations) to December 29, 1993, the year ended December 28, 1994 and the year ended January 3, 1996 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 reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Philadelphia, PA March 22, 1996 F-58 THE PET PRACTICE, INC. CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 28, JANUARY 3, 1994 1996 ------------ ---------- ASSETS Current assets: Cash and cash equivalents........................................... $ 910 $10,097 Accounts receivable, net of allowance for doubtful accounts of $103 at December 28, 1994 and $363 at January 3, 1996............................................ 205 809 Other receivables................................................... 34 534 Inventories......................................................... 1,077 3,175 Other current assets................................................ 845 966 ------- ------- Total current assets.............................................. 3,071 15,581 Property and equipment, net.......................................... 6,148 13,465 Excess of cost over fair value of net assets acquired and other intangible assets............................................. 25,941 51,271 Other assets......................................................... 257 145 ------- ------- $35,417 $80,462 ======= ======= LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Borrowings under line of credit..................................... $10,067 $ - Current portion of long-term debt, including due to related parties of $758 at December 28, 1994 and $1,649 at January 3, 1996..................................... 1,609 3,696 Accounts payable.................................................... 1,786 2,540 Accrued expenses and other current liabilities...................... 5,777 5,184 ------- ------ Total current liabilities....................................... 19,239 11,420 Long-term debt, including amounts due to related parties of $14,921 at December 28, 1994 and $7,848 at January 3, 1996.................................................. 18,885 15,786 Other liabilities.................................................... 67 36 ------- ------ 38,191 27,242 ------- ------- Commitments and contingencies Mandatorily redeemable preferred stock, $.01 par value, 10 shares authorized, 8 shares issued at December 28, 1994, at redemption value 875 - ------- ------ Stockholders' equity (deficit): Preferred stock, $.01 par value, 1,000 shares authorized............ Common stock, $.01 par value, 20,000 shares authorized; 3,978 and 8,607 shares issued at December 28, 1994 and January 3, 1996, respectively................................. 40 86 Capital in excess of par value...................................... 1,828 61,826 Accumulated deficit................................................. (5,517) (8,692) ------- ------ Total stockholders' equity (deficit)............................ (3,649) 53,220 ------- ------ $35,417 $80,462 ======= =======
The accompanying notes are an integral part of these financial statements. F-59 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 27 TO --------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, 1993* 1994* 1996* -------------- ------------- ----------- Net revenues $1,201 $15,111 $40,571 Cost of revenues (including related party lease expense of $45, $437, and $841 for the period October 27, 1993 to December 29, 1993; the year ended December 28, 1994; and the year ended January 3, 1996, respectively)................................ 1,261 13,936 34,776 ------ ------- ------- Gross profit (loss)............................................ (60) 1,175 5,795 General and administrative expenses............................ 348 3,867 5,796 Amortization of excess of cost over fair value of net assets acquired and other intangible assets.......................... 38 409 1,229 ------ ------- ------- Loss from operations........................................... (446) (3,101) (1,230) ------ ------- ------- Non-operating (income) expenses: Interest expense--related parties............................. 145 889 991 Interest expense--other....................................... 38 705 1,345 Interest income............................................... - (7) (475) ------ ------- ------- 183 1,587 1,861 ------ ------- ------- Loss before income taxes....................................... (629) (4,688) (3,091) Provision for income tax expense............................... - 200 84 ------ ------- ------- Net loss....................................................... $ (629) $(4,888) $(3,175) ====== ======= ======= Net loss per common share...................................... $(0.15) $ (1.20) $ (0.54) ====== ======= ======= Shares used in net loss per common share computation........... 4,059 4,059 5,863 ====== ======= =======
*Certain reclassifications have been made for comparative purposes. The accompanying notes are an integral part of these financial statements. F-60 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
CAPITAL STOCK ------------------ CAPITAL IN PAR EXCESS OF ACCUMULATED SHARES VALUE PAR VALUE DEFICIT TOTAL ------ ----- ---------- ------------ -------- Common stock issued, October 27, 1993............... 3,600 $36 $ 162 $ - $ 198 Common stock issued............. 77 1 3 - 4 Net loss for the period ended December 29, 1993.............. - - - (629) (629) ----- --- ------- ------- ------- Balance, December 29, 1993...... 3,677 37 165 (629) (427) Common stock issued in connection with acquisitions... 141 1 1,652 - 1,653 Common stock issued............. 160 2 11 - 13 Net loss for the year ended December 28, 1994.............. - - - (4,888) (4,888) ----- --- ------- ------- ------- Balance, December 28, 1994...... 3,978 40 1,828 (5,517) (3,649) Common stock issued in connection with acquisitions... 329 3 3,463 - 3,466 Common stock issued through public offering................ 4,300 43 56,535 - 56,578 Net loss for the year ended January 3, 1996................ - - - (3,175) (3,175) ----- --- ------- ------- ------- Balance, January 3, 1996........ 8,607 $86 $61,826 $(8,692) $53,220 ===== === ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-61 THE PET PRACTICE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED OCTOBER 27 TO --------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, 1993 1994 1996 ------------- ------------- ----------- Cash flows from operating activities: Net loss.................................................. $ (629) $ (4,888) $ (3,175) Adjustments to reconcile net loss to net cash provided (used) by operations: Depreciation and amortization........................... 96 760 2,017 Provision for doubtful accounts......................... - 16 65 Finance charges on mandatorily redeemable preferred stock....................................... 10 64 42 Other non-cash charges.................................. - 143 - Changes in assets and liabilities, net of effects from businesses acquired: Decrease (increase) in accounts receivable............. 1 (168) (456) Increase in inventories................................ (55) (225) (1,263) Increase in other current assets....................... (23) (665) (584) Increase in accounts payable........................... 51 793 726 Increase (decrease) in accrued expenses and current liabilities................................... 224 2,079 (1,891) Other assets and other liabilities..................... - (26) 33 ------- -------- -------- Net cash used by operating activities................ (325) (2,117) (4,486) ------- -------- -------- Cash flows from investing activities: Payments for purchases of businesses, net of cash acquired of $73 for the period ended December 29, 1993, $156 for the year ended December 28, 1994, and $41 for the year ended January 3, 1996.............................. (7,430) (9,557) (13,082) Purchases of property and equipment....................... (48) (206) (4,662) ------- -------- -------- Net cash used by investing activities.................. (7,478) (9,763) (17,744) ------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................... 202 12 56,578 Proceeds from issuance of mandatorily redeemable preferred stock.............................. 800 - - Proceeds from issuance of long-term debt.................. 9,324 3,067 - Borrowings under line of credit agreements................ - 10,067 8,859 Redemption of mandatorily redeemable preferred stock......................................... - - (800) Payments of line of credit agreements..................... - - (18,926) Principal payments on long-term obligations............... (2,449) (430) (14,294) ------- -------- -------- Net cash provided by financing activities.............. 7,877 12,716 31,417 ------- -------- -------- Net increase in cash and cash equivalents.................. 74 836 9,187 Cash at beginning of period................................ - 74 910 ------- -------- -------- Cash at end of period...................................... $ 74 $ 910 $ 10,097 ======= ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................. $ 38 $ 276 $ 3,601 ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-62 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 1 -- ORGANIZATION AND OPERATION: The Pet Practice, Inc. (the "Company") was formed to provide companion animal veterinary care services. The Company's operations commenced on October 27, 1993 with the acquisition of Professional Veterinary Hospitals of America, Inc. (a Michigan corporation). Since this initial acquisition, the Company has acquired additional practices (see Note 3) such that as of January 3, 1996, the Company operates 83 veterinary clinics in 10 states, all in the Eastern half of the United States. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Fiscal year: The Company's accounting year is a 52-53 week fiscal year which ends on the Wednesday nearest to December 31. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly and beneficially owned subsidiaries ("Subsidiaries"). In response to certain regulations in certain states in which the Company operates, several Subsidiaries operate as professional corporations which, in turn, have executed management agreements with the Company. Through the terms of the management agreements, the Company has complete unilateral control over the professional corporations. The management agreements entered into with the professional corporations substantially restrict the business activities of these professional corporations and the rights of their shareholders. Under related agreements, the Company has the option to purchase, or to designate a purchaser for, the stock of the professional corporations. These professional corporations are consolidated because the Company (as opposed to affiliates of the Company) has unilateral and perpetual control over the assets and operations of the professional corporations and because, notwithstanding the lack of technical majority ownership, consolidation of the professional corporations is necessary to present fairly the financial position and results of operations of the Company due to the existence of a parent-subsidiary relationship by means other than majority ownership of the professional corporations' voting stock. The Company has perpetual control over the professional corporations because the Company does not intend to terminate any of its management agreements with the professional corporations and, upon termination of any such agreement by the veterinarian, the Company intends to exercise its option to purchase the stock of the professional corporation for $100. Fees paid to the Company under these agreements approximate the operating income, as defined, of the Subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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 those estimates. Statement of cash flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand and short-term investments with original maturities of 90 days or less. F-63 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net revenues: Net revenues are reported at the estimated amounts to be realized through payments from customers and are recognized when the services are performed. Inventories: Inventories consist of pharmaceuticals, retail pet products and other veterinary care products and are valued at the lower of first-in, first-out cost, or market. Property and equipment: Property and equipment are stated at cost less accumulated depreciation and amortization. Additions and betterments are capitalized and maintenance and repairs are charged to current operations. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are removed from the accounts and the gain or loss on such dispositions is reflected in current operations. Depreciation is provided using the straight- line method. Estimated useful lives of the assets are: Buildings....................... 20-40 years Medical equipment............... 7 years Furniture and fixtures.......... 7 years Leasehold improvements.......... Shorter of life of lease or 10 years Office equipment................ 5 years Vehicles........................ 5 years Long-lived and intangible assets: Assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. Deferred taxes have been recorded to the extent of differences between the fair value of the tax basis of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of the net assets acquired is amortized on a straight-line basis over 40 years. Other intangible assets include client lists, assembled work force, and non-competition agreements, which are amortized on a straight-line basis over periods ranging from three to six years. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), effective December 29, 1994. The carrying value of long-lived assets and certain identifiable intangible assets will be evaluated whenever changes in circumstances indicate the carrying amount of such assets may not be recoverable. In performing such review for recoverability, the Company compares the expected future cash flows to the carrying value of long-lived assets and identifiable intangibles. If the expected undiscounted future cash flows are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. If an asset being tested for recoverability was acquired in a business combination accounted for using the purchase method, the excess of cost over fair value of net assets that arose in that transaction is allocated to the assets being tested for recoverability on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangibles acquired at the acquisition date. In estimating future cash flows for determining whether an asset is impaired, and if expected future cash flows are used in measuring assets that are impaired, assets are grouped by operating unit. F-64 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) In addition, the carrying value of the excess of cost over fair value of net assets acquired is subject to a separate evaluation by estimating the expected future undiscounted net cash flows from operating activities. If these estimated net cash flows are less than the carrying amount of the excess of cost over fair value of net assets acquired, the Company recognizes an impairment loss in an amount necessary to write down the excess of cost over fair value of net assets acquired to fair value, as determined from expected future cash flows. Income taxes: The Company has applied the asset and liability approach of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, for financial accounting and reporting purposes. The Company accounts for certain items of income and expense in different time periods for financial reporting and income tax purposes. Provisions for deferred income taxes are made in recognition of such temporary differences, where applicable. A valuation allowance is established against deferred tax assets unless the Company believes it more likely than not that the benefit will be realized. Net loss per common share: Net loss per common share for the period ended December 29, 1993 and the year ended December 28, 1994 has been computed by dividing the net loss applicable to common stock by the number of shares of common stock outstanding at August 4, 1995 (the date of consummation of the Company's initial public offering of its common stock), as all shares issued prior to that date were issued at prices significantly below the offering price in the Company's initial public offering of its common stock. Net loss per common share for the year ended January 3, 1996 has been computed by dividing the net loss applicable to common stock by the weighted average number of common shares outstanding during the year. For purposes of computing such weighted average, the number of shares of common stock outstanding at August 4, 1995 was treated as outstanding for the entire period from December 29, 1994 to August 4, 1995. NOTE 3 -- BUSINESS ACQUISITIONS: On October 27, 1993, the Company acquired all of the issued and outstanding common stock of Professional Veterinary Hospitals of America, Inc. (a Michigan corporation). During 1994, the Company purchased all of the issued and outstanding common stock of three practices and certain assets of an additional 10 practices. During 1995, the Company purchased all of the issued and outstanding common stock of three practices and certain assets of an additional 38 practices. The acquisitions have been accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to assets and liabilities acquired based upon their estimated fair values at the dates of acquisition. The results of operations of the acquired companies are included in the consolidated financial statements from the respective dates of acquisition. F-65 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Information with respect to these acquisitions is presented below:
YEAR ENDED OCTOBER 27 TO ------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, 1993 1994 1996 ------------- ------------ ---------- Cash paid (net of cash acquired)........................ $7, 430 $ 9,908 $11,249 Common stock issued..................................... - 1,510 3,239 Notes issued............................................ 233 3,200 10,644 Deferred cash payments.................................. - - 500 Transaction and other costs............................. 78 2,056 2,753 ------- ------- ------- 7,741 16,674 28,385 Liabilities assumed..................................... 3,882 5,641 2,378 ------- ------- ------- 11,623 22,315 30,763 Fair value of tangible assets acquired, principally accounts receivable, inventory, and property and equipment.......................................... 2,579 4,678 4,204 ------- ------- ------- Cost in excess of fair value of assets acquired and other intangible assets.............................. $ 9,044 $17,637 $26,559 ======= ======= =======
Acquisitions made subsequent to January 3, 1996 were made for an aggregate amount of $2,135, consisting of $485 in cash, $550 in notes, and 23,000 shares of the Company's common stock. The unaudited results of operations for the year ended January 3, 1996 on a pro forma basis as if the practices acquired in fiscal 1995 and fiscal 1996 to date had been acquired as of the beginning of fiscal 1995 are as follows: Net revenues........................................... $58,828 Income from operations................................. 1,107 Net loss............................................... (1,728) Net loss per common share.............................. (0.29)
Excess of cost over fair value of net assets acquired and other intangible assets comprise the following:
DECEMBER 28, JANUARY 3, 1994 1996 ------------ ----------- Excess of cost over fair value of net assets acquired............ $25,149 $50,877 Client lists..................................................... 591 946 Assembled work force............................................. 635 1,008 Non-competition agreements....................................... 12 115 ------- ------- 26,387 52,946 Accumulated amortization....................................... (446) (1,675) ------- ------- $25,941 $51,271 ======= =======
F-66 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 4 -- PROPERTY AND EQUIPMENT:
DECEMBER 28, JANUARY 3, 1994 1996 ------------- ----------- Land.................................. $ 358 $ 1,582 Buildings............................. 2,571 3,939 Building and leasehold improvements... 1,374 1,459 Furniture and equipment............... 2,255 7,683 ------ ------- 6,558 14,663 Less: Accumulated depreciation...... (410) (1,198) ------ ------- $6,148 $13,465 ====== =======
Depreciation expense was $59 for the period October 27, 1993 to December 29, 1993, $351 for the year ended December 28, 1994, and $788 for the year ended January 3, 1996. NOTE 5 -- NOTES PAYABLE AND LONG-TERM DEBT: Notes payable and long-term debt are comprised of the following:
DECEMBER 28, JANUARY 3, 1994 1996 ------------- ----------- Subordinated notes payable to stockholder, interest at 8% due quarterly, principal due 1998.................................. $ 12,391 $ - Borrowings under lines of credit with banks (weighted average rate of 8.5% at December 28, 1994)............................. 10,067 - Notes payable (6%-13% interest) payable through 2006............ 6,002 15,529 Mortgages payable (6%-11%), payable through 2010............... 973 2,500 Capital lease obligations (9.6% - 10.4%)........................ 1,128 1,453 -------- ------- 30,561 19,482 Less: Current portion........................................ (11,676) (3,696) -------- ------- Long-term debt.................................................. $ 18,885 $15,786 ======== =======
Scheduled maturities of long-term debt outstanding excluding capital lease obligations as of January 3, 1996 were as follows: 1996.............................................. $3,633 1997.............................................. 3,787 1998.............................................. 3,427 1999.............................................. 2,558 2000.............................................. 2,647
The subordinated notes payable to stockholder at December 28, 1994 represented borrowings pursuant to a $20,000 note between the Company and one of its stockholders which permited it to borrow funds for acquisitions and general corporate purposes. F-67 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Notes and mortgages payable arose principally from acquisitions and include certain amounts due to related parties. Certain of the Company's acquisition notes payable are secured by the assets of the veterinary practice acquired. The borrowings under lines of credit with a bank at December 28, 1994 represented borrowings pursuant to a $13,000 credit facility and were made at the bank's prime rate. Such notes were secured by the guarantee of a stockholder. In February 1995, the Company entered into a $5,000 line of credit facility with another financial institution. Borrowings under this facility were made at market interest rates and were secured by a guarantee of a stockholder as well as certain of the Company's operating subsidiaries. Both of these credit facilities with banks were terminated effective with the Company's initial public offering. The book value of notes and long-term debt approximates their fair value. NOTE 6 -- INCOME TAXES: Due to the Company's operating losses, no provision for federal income taxes was recorded during any period. A provision for current state income taxes was recorded during the years ended December 28, 1994 and January 3, 1996. The reconciliation of the federal statutory tax rate to the effective tax rate is as follows:
YEAR ENDED OCTOBER 27 TO -------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, 1993 1994 1996 ------------- ----------- ----------- Federal statutory tax rate............................. (34)% (34)% (34)% State income taxes, less related federal tax benefit... - 4 3 Amortization not deductible for tax purposes........... 1 2 6 Losses for which no tax benefit was recognized......... 33 32 28 --- --- --- Effective tax rate................................... -% 4% 3% === === ===
The components of net deferred taxes are as follows:
DECEMBER 29, DECEMBER 28, JANUARY 3, 1993 1994 1996 ----------- ------------ ---------- Net operating loss carryforwards....................... $ 1,563 $ 3,113 $ 4,138 Accruals and reserves not currently deductible for tax purposes...................................... 39 226 276 ------- ------- ------- Gross deferred tax assets.............................. 1,602 3,339 4,414 Valuation allowance.................................... (1,279) (3,033) (3,730) ------- ------- ------- Net deferred tax assets................................ 323 306 684 ------- ------- ------- Depreciable assets..................................... (323) (203) (454) Intangible assets...................................... - (103) (230) ------- ------- ------- Gross deferred tax liabilities......................... (323) (306) (684) ------- ------- ------- Net deferred taxes................................... $ - $ - $ - ======= ======= =======
At January 3, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $12,200 (the estimated tax benefit of which is approximately $4,138). Their use is limited to future taxable earnings of the Company and, as specified in the Internal Revenue Code, use of certain of the net operating loss carryforwards is limited as they were acquired by the Company in a purchase of the stock of another company. The carryforwards expire in varying amounts through 2010. A valuation reserve has been established against the benefit of the net operating loss carryforwards. F-68 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 7 -- COMMITMENTS AND CONTINGENCIES: Operating leases: The Company leases certain office and veterinary care facilities as well as vehicles and equipment under noncancellable operating leases which require future minimum annual rentals as follows:
CAPITAL OPERATING LEASES LEASES ------- ---------- 1996...................................... $ 198 $2,679 1997...................................... 198 2,509 1998...................................... 198 2,294 1999...................................... 180 2,105 2000...................................... 160 1,648 Thereafter................................ 1,758 7,019 ------ 2,692 Amounts representing interest............. 1,239 ------ Present value of minimum lease payments 1,453 Less current portion.................... (63) ------ Long-term obligation...................... $1,390 ======
Certain of the leases contain renewal options and escalation clauses which require payments of additional rent to the extent of increases in related operating costs. Included in future rental commitments are payments totaling $10,178 which will be made to related parties. Six of these leases are with partnerships in which a director of the Company is a partner, and these leases expire at various dates from 1997 through 2003, although the Company has renewal options. Rent expense was $118 for the period October 27 to December 29, 1993, $971 for the year ended December 28, 1994, and $1,865 for the year ended January 3, 1996. Contingent payments related to business acquisitions: In connection with certain acquisitions (see Note 3), the Company has entered into contractual arrangements whereby additional shares of the Company's common stock and cash may be issued to former owners of acquired practices upon attainment of specified financial and non-financial criteria over periods of three to five years as set forth in the respective agreements. The number of shares of common stock and cash to be issued can not be determined until the earnout periods expire and the attainment of criteria is established. If such criteria are attained, but not exceeded, the Company will be obligated to make cash payments of approximately $2,881 and issue approximately 90,000 shares of common stock over the next five years. A lesser amount of cash would be paid and a lesser number of shares of common stock would be issuable under certain acquisition agreements if the financial criteria are not met and a greater amount of cash would be paid and a greater number of shares of common stock would be issuable under certain acquisition agreements if the financial criteria are exceeded. For example, if the financial criteria with respect to each of the acquisitions were to be exceeded by 20%, the Company would be obligated to make cash payments of $3,167 and issue approximately 109,000 shares of common stock over the next five years. Since, by the terms of the related agreements, these payments are considered contingent consideration for the acquired business, amounts payable pursuant to these provisions, if earned, will be recorded as additional purchase price in the period the criteria are attained. F-69 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) In addition, in certain circumstances, the Company is required to issue additional shares of common stock if, on the second anniversary of the acquisition closing, the market price of the common stock falls below specified levels ranging from $10.00 to $16.00 per share. Based on the market price of the common stock at January 3, 1996, an aggregate of approximately 19,000 shares would be issuable. Additionally, the number of shares of common stock delivered in connection with one acquisition as part of the purchase price was subject to adjustment, such that the value of such shares was equal to $320 as of the date of the Company's initial public offering. The Company issued an additional 1,334 shares of common stock in connection with such acquisition. Additional shares issued were recorded as an adjustment to the previously issued consideration. In connection with two acquisitions, the Company entered into arrangements with the former owners, who are now employees, that provided for amounts to be payable upon attainment of a number of specified financial and non-financial criteria. Since, by the terms of the related agreements these payments are considered compensatory, amounts payable pursuant to these provisions, if earned, are recorded as compensation expense. In June 1995, the Company renegotiated these arrangements to eliminate future payments based on performance criteria in exchange for non-interest bearing notes payable by the Company. The settlement of these arrangements resulted in one-time, non-cash charges to general and administrative expenses of approximately $383 and $705 in the years ended December 28, 1994 and January 3, 1996, respectively. One arrangement for contingent compensation payments remains in place, which calls for estimated aggregate payments of approximately $260 over the next five years if specified criteria are attained. NOTE 8 -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accrued expenses and other current liabilities are comprised of the following:
DECEMBER 28, JANUARY 3, 1994 1996 ------------- ---------- Accrued salaries, wages, and vacation... $ 507 $1,634 Accrued interest........................ 1,431 166 Other................................... 3,839 3,384 ------ ------ $5,777 $5,184 ====== ======
NOTE 9 -- EMPLOYEE BENEFITS: 401(k) Plan: Beginning in April 1994, the Company sponsored a 401(k) plan for employees with more than one year of service. Contributions to the plan totaled $10 for the period from inception of the Plan to December 28, 1994, and $14 for the year ended January 3, 1996. 1994 Stock Option Plan: The Company sponsors a stock option plan for key employees and directors. There are available for options under the Plan a total of 400,000 shares of common stock. As of January 3, 1996, total options to purchase 100,250 shares have been granted. Such options are exercisable at prices ranging between $4.00 and $15.00 per share over the next 10 years. All options are subject to a five- year vesting period. At January 3, 1996, 2,700 options were vested. No options have been exercised. F-70 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Options are granted at the market value of the underlying shares as of the grant date, therefore no compensation expense is recorded relative to the plan. NOTE 10 -- STOCKHOLDERS' EQUITY (DEFICIT) On August 4, 1995, the Company consummated its initial public offering of 4,300,000 shares of common stock at $15.00 per share. The net proceeds of the offering of approximately $56,600 were used (i) to repay $12,391 principal amount of related-party debt, together with accrued interest; (ii) to redeem $800 of the Company's Redeemable Preferred Stock, together with accrued dividends; (iii) to repay approximately $13,000 borrowed from United States Trust Company of New York pursuant to a demand line of credit facility, together with accrued interest; (iv) to repay approximately $6,000 borrowed from PNC Bank, National Association, pursuant to a demand line of credit facility, together with accrued interest; and (v) to pay a fee of $500 to Foster Management Company, of which a director of the Company is the Chairman and sole stockholder, for services in connection with the consummation of the public offering. The remaining net proceeds of approximately $23,000 were added to working capital and will be used primarily to finance future acquisitions and capital expenditures and for general corporate purposes. In October 1993, the Company sold 3,600,000 shares of common stock to an investment partnership managed by Foster Management Company at a price of $.055 per share. During 1993, the Company sold 77,067 shares of common stock to an officer of the company at a price of $.055 per share. During 1994, the Company also sold 160,000 shares of common stock to officers, directors and employees of the Company for $.08 per share. The Company has entered into stock purchase agreements with certain of its directors and certain of its executive officers pursuant to which such individuals purchased their respective shares of common stock. The stock purchase agreements provide for restrictions on the sale of such shares and for the ownership of such shares to vest ratably over a five-year period. Unvested shares may be repurchased by the Company at their original issued price in certain circumstances. NOTE 11 -- MANDATORILY REDEEMABLE PREFERRED STOCK: The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par value. The powers, designations, preferences and relative, participating, optional or other special rights are established by the Board of Directors. During 1993, the Board of Directors authorized 10,000 shares of mandatorily redeemable preferred stock, par value $.01 per share (the "Redeemable Preferred Stock"), and the Company sold 8,000 shares of such Redeemable Preferred Stock to an investment partnership managed by Foster Management Company for $100 per share. The Redeemable Preferred Stock is redeemable at $100 per share plus cumulative unpaid dividends at a rate of 8% per annum at the Company's option. Holders of the Redeemable Preferred Stock are entitled to preference payments in the event of any liquidation, dissolution or winding-up of the Company. The Redeemable Preferred Stock was mandatorily redeemed at the closing of the Company's initial public offering. Dividends on the Redeemable Preferred Stock of $10 for the period October 27, 1993 to December 29, 1993, $64 for the year ended December 28, 1994, and $42 for the year ended January 3, 1996 have been recorded as interest expense. F-71 THE PET PRACTICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NOTE 12 -- SUBSEQUENT EVENT: On March 22, 1996, the Company announced that it signed a definitive agreement providing for the merger of the Company with Veterinary Centers of America, Inc. ("VCA"). If completed, this merger will result in the Company becoming a wholly-owned subsidiary of VCA. Consummation of the merger is expected in the second quarter of 1996 and is subject to certain conditions. F-72 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Professional Veterinary Hospitals of America, Inc. In our opinion, the accompanying statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the results of operations and cash flows of Professional Veterinary Hospitals of America, Inc. for the year ended January 27, 1993 and for the period January 28, 1993 through October 26, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Philadelphia, PA March 29, 1995 F-73 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. STATEMENT OF OPERATIONS
Year ended January 28 to January 27, 1993 October 26, 1993 ---------------- ---------------- Revenues................................ $8,198,609 $6,713,526 Direct costs of services................ 7,087,949 5,334,202 ---------- ---------- Gross profit 1,110,660 1,379,324 General and administrative expenses..... 1,234,988 1,282,267 ---------- ---------- Income (loss) from operations (124,328) 97,057 Other expenses, net..................... 572,120 346,500 ---------- ---------- Net loss.............................. $ (696,448) $ (249,443) ========== ==========
The accompanying notes are an integral part of these financial statements F-74 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. STATEMENT OF STOCKHOLDERS' DEFICIT For the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993
Common stock ------------------------------------------------ Class A Class B Capital in Total shares shares excess of Accumulated stockholders' issued Amount issued Amount par value deficit deficit --------- ------- ------- ------- ---------- ------------ ------------ Balance, January 29, 1992... 3,130,000 $31,300 25,000 $25,000 $2,652,020 $(3,207,672) $ (499,352) Repurchase and retirement of Class A common stock from former officer............ (280,000) (2,800) (53,200) (56,000) Net loss.................... (696,448) (696,448) --------- ------- ------ ------- ---------- ----------- ----------- Balance, January 27, 1993... 2,850,000 28,500 25,000 25,000 2,598,820 (3,904,120) (1,251,800) Net loss.................... (249,443) (249,443) --------- ------- ------ ------- ---------- ----------- ----------- Balance, October 26, 1993... 2,850,000 $28,500 25,000 $25,000 $2,598,820 $(4,153,563) $(1,501,243) ========= ======= ====== ======= ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-75 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. STATEMENT OF CASH FLOWS
Year ended January 28 to January 27, 1993 October 26, 1993 ---------------- ---------------- Cash flows from operating activities: Net loss ............................................. $(696,448) $(249,443) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization....................... 347,579 268,224 Rent concession..................................... (19,934) 6,189 Gain (loss) on disposal of property and equipment... (1,418) 9,063 Warrant redemption finance charge................... 264,000 196,000 Changes in: Accounts receivable............................... 4,389 (11,023) Other assets...................................... (8,856) 5,212 Inventory......................................... 19,100 25,500 Prepaid expenses.................................. (17,365) 11,049 Accounts payable.................................. (17,427) (9,026) Accrued and other liabilities..................... 263,269 61,310 --------- --------- Net cash provided by operating activities....... 136,889 313,055 --------- --------- Cash flows from financing activities: Payments on long-term debt............................ (376,248) (120,332) Stock repurchase from former officer.................. (56,000) --------- --------- Net cash (used for) financing activities............ (432,248) (120,332) --------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment.......... 67,220 Capital expenditures.................................. (48,660) (216,181) --------- --------- Net cash provided by (used for) investing activities......................................... 18,560 (216,181) --------- --------- Net decrease in cash.................................... (276,799) (23,458) Cash, beginning of period............................... 373,188 96,389 --------- --------- Cash, end of period..................................... $ 96,389 $ 72,931 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest.............. $ 380,476 $ 21,182 ========= ========= Noncash financing and investing activities: Debt relieved in disposal of property and equipment............................................ $ 126,272 $ - ========= =========
The accompanying notes are an integral part of these financial statements. F-76 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - ACCOUNTING POLICIES: Basis of presentation: Professional Veterinary Hospitals of America, Inc. ("PVH" or the "Company") provides on-site veterinary services and related activities in southeastern Michigan. PVH's accounting year was a 52-53 week fiscal year which ended on the last Wednesday in January. The results of operations and changes in stockholders' equity (deficit) and cash flows presented herein are for the year ended January 27, 1993 and the period from January 28, 1993 through October 26, 1993 (see Note 9). Net revenues: Net revenues are reported at the estimated amounts to be realized through payments from customers and are recognized when the service is performed. Inventory: Inventory consists of pharmaceuticals, retail pet products and other veterinary care products and is valued at lower of market or cost determined on a first-in, first-out basis. Property and equipment: Property and equipment are stated at cost less accumulated depreciation. Additions and improvements to property and equipment are capitalized and maintenance and repairs are charged to current operations. Adjustments of the assets and the related accumulated depreciation accounts are made for retirement and disposal of property and equipment with the resulting gain or loss included in the results of operations. Depreciation is provided substantially using the straight-line method. Estimated useful lives of the assets are: Building and building improvements.. Shorter of the life of the lease or 31.5 years Leasehold improvements.............. Shorter of the life of the lease or 10 years Furniture and equipment............. 5 to 10 years
Goodwill: The excess of cost over acquired net assets (goodwill) is being amortized on a straight-line basis over its estimated useful life of 40 years. Cash equivalents: For purposes of the statement of cash flows, all highly liquid investments with a maturity of three months or less are considered cash equivalents. Income taxes: The Company has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. F-77 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) NOTE 2 - LEASES: PVH's facility leases are classified as operating leases and expire on various dates through January 21, 2002. Most leases contain renewal options. Additionally, PVH leases certain office and medical equipment under leases classified as capital with an initial or remaining term in excess of one year. Amounts charged to operations for rental expense were $606,960 and $424,328 for the fiscal year ended January 27, 1993 and the period ended October 26, 1993, respectively. NOTE 3 - FINANCING ARRANGEMENT: On January 29, 1992, the Company entered into a sale and leaseback agreement in connection with two of its hospital facilities including land, building, furniture and equipment with Mack/Inkster Properties Limited Partnership, a Michigan limited partnership. Under the sale agreement, the Company sold the facilities for $600,000. In addition, the Company entered into an agreement to leaseback the facilities for a ten-year period with varying monthly rental charges of $5,800 to $15,000 over the life of the lease. The Company made lease payments totaling $69,600 and $52,200 during the year ended January 27, 1993 and during the period from January 28 to October 26, 1993, respectively. Because the agreement provides the Company with an option to repurchase the assets, the sale-leaseback is accounted for as a financing from the partnership. The net book value of the facilities is amortized over the life of the lease agreement. Concurrent with the purchase of the Company by The Pet Practice, Inc. (see Note 9), the Company purchased all of the property owned by Mack/Inkster Properties Limited Partnership for $700,000. NOTE 4 - SUBORDINATED NOTES: On May 14, 1991, PVH issued subordinated notes with a face value of $1,400,000 and warrants to purchase 250,000 shares of Class A common stock to stockholders of the Company with interest at 11% payable in varying amounts through July 1, 1994. At October 26, 1993, $1,310,000 of the notes were outstanding. From July 1, 1994 through December 31, 1994, the holders of the warrants may purchase up to 250,000 shares of Class A common stock at $2.50 per share or require PVH to redeem each warrant for $3.00. If PVH defaults on principal payments under the subordinated notes, additional warrants may be issued. The Company provides for the estimated cost associated with redemption of the warrants by recording charges to interest expense. Such charges were $452,000 for the year ended January 27, 1993, and $196,000 for the period ended October 26, 1993. Concurrent with the purchase of the Company by The Pet Practice, Inc. (see Note 9), the Company repaid the subordinated debt and related accrued interest and repurchased the warrants for a total of $1,600,000. NOTE 5 - LONG-TERM DEBT: Other long-term debt arrangements consisted of the following at October 26, 1993: Note payable, bank, with monthly payments of $14,919 plus interest at 1% above prime due through October 1, 1994. This loan was repaid concurrent with the transaction described in Note 9 ........................................................ $356,725 Obligations under capitalized leases (Note 3) .................. 8,235 Note payable, bank, with interest at 12.75%, monthly payments of $387 including interest, due through April 30, 1995 ........... 6,970 -------- Total debt (all current) ....................................... $371,930 ======== F-78 PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) NOTE 6 - RELATED PARTY TRANSACTIONS: PVH Property Management Co., a partnership owned by two of the stockholders of PVH, leases office and clinic space to PVH. During the periods ended January 27, 1993 and October 26, 1993, PVH paid $231,600 and $173,700, respectively, in lease payments to PVH Property Management Company. Two of the stockholders of PVH are partners in the Mack/Inkster Properties Limited Partnership (see Note 3). NOTE 7 - INCOME TAXES: No current or deferred provision for federal income taxes has been recorded by the Company for the year ended January 27, 1993 or for the period January 28 to October 26, 1993 due to net operating losses incurred by the Company during these periods. At October 26, 1993, PVH had net operating loss carryforwards of approximately $3,957,000, which may be used to reduce future taxable income and expires beginning in 1997. Their use is limited to future taxable earnings of the Company and, as specified in the Internal Revenue Code, certain ownership changes would result in limitations on the Company's ability to utilize its net operating loss carryforwards. The provision for income taxes differs from the amount of income tax determined by applying statutory tax rates to pretax income primarily due to the net operating losses for which no benefit is recorded. NOTE 8 - COMMON STOCK: Class B common stock is entitled to such votes and dividends that it would be entitled to had it been converted into Class A common stock. Upon liquidation, Class B common stock ranks senior to the rights of Class A common stock. In addition, Class B common stock is convertible, only in its entirety, to Class A common stock on a 100 to 1 basis. NOTE 9 - SUBSEQUENT EVENT: On October 26, 1993, The Pet Practice, Inc., a Delaware corporation, acquired 100% of the stock of the Company. F-79 PETS' RX, INC. -------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands)
ASSETS March 31, December 31, 1996 1995 ----------- ------------ (Unaudited) (Audited) CURRENT ASSETS: Cash and cash equivalents $ 251 $ 752 Other current assets 658 671 ------- ------- Total current assets 909 1,423 PROPERTY AND EQUIPMENT, net 3,993 4,054 INTANGIBLE ASSETS, net 9,309 9,490 NOTES RECEIVABLE 100 100 OTHER ASSETS 270 265 ------- ------- $14,581 $15,332 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,061 $ 1,080 Current portion of long-term obligations 1,167 1,412 Accrued expenses and other current liabilities 1,218 1,358 ------- ------- Total current liabilities 3,446 3,850 ------- ------- LONG-TERM OBLIGATIONS, net of current portion 9,219 9,426 ------- ------- MINORITY INTEREST 269 251 ------- ------- COMMITMENTS AND CONTINGENCIES REDEEMABLE CONVERTIBLE PREFERRED STOCK 2,947 2,947 ------- ------- STOCKHOLDERS' DEFICIT Preferred stock, $0.01 par value 3,395 3,395 Convertible preferred stock (Series A) subscribed 200 -- Common stock, $0.01 par value 63 63 Additional paid-in capital 3,547 3,547 Accumulated deficit (8,505) (8,147) ------- ------- Total stockholders' deficit (1,300) (1,142) ------- ------- $14,581 $15,332 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. F-80 PETS' RX, INC. -------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 -------------------------------------------------- (In thousands) (Unaudited)
1996 1995 -------- ------- REVENUES $4,228 $3,422 ------ ------ COST OF SERVICES: Cost of revenues 803 623 Salaries and wages of clinic operations 1,661 1,359 Other operating expenses of clinics 1,043 950 ------ ------ Gross profit 721 490 ------ ------ GENERAL AND ADMINISTRATIVE 530 499 DEPRECIATION AND AMORTIZATION 307 280 ------ ------ Operating loss (116) (289) INTEREST EXPENSE (229) (258) INTEREST INCOME 12 25 ------ ------ Loss before minority interest in income of subsidiary (333) (522) MINORITY INTEREST IN INCOME OF SUBSIDIARY 25 10 ------ ------ Net loss $ (358) $ (532) ====== ======
The accompanying notes are an integral part of these consolidated financial statements. F-81 PETS' RX, INC. -------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- FOR THE MONTHS ENDED MARCH 31, 1996 AND 1995 -------------------------------------------- (In thousands) (Unaudited)
1996 1995 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(358) $ (532) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 307 280 Gain on sale of land and building -- (18) Minority interest in income of subsidiary in excess of distribution 25 10 Changes in assets and liabilities Other current assets 13 (40) Other assets (5) (52) Accounts payable (20) 196 Accrued expenses and other current liabilities (72) 126 ----- ------ Net cash used in operating activities (110) (30) ----- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (64) 78 Proceeds from sale of land and building -- 600 Payments received under note receivable -- 193 ----- ------ Net cash (used in) provided by investing activities (64) 715 ----- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of convertible preferred stock, preferred stock subscribed, and common stock 200 100 Principal payments under long-term obligations (527) (798) ----- ------ Net cash used in financing activities (327) (698) ----- ------ Net decrease in cash and cash equivalents (501) (13) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 752 2,254 ----- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 251 $2,241 ===== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the year $ 282 $ 243 Non-cash financing activities -- Capital leases -- $ 60
The accompanying notes are an integral part of these consolidated financial statements. F-82 PETS' RX, INC. -------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ MARCH 31, 1996 -------------- 1. GENERAL: ------- 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 March 31, 1996, 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. The Company will require additional capital in 1996 if the merger discussed in Note 3 is not consummated. Principles of Consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiary and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 1996 and 1995 are not necessarily indicative of the results to be expected for the full year. 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. 2. RECLASSIFICATIONS: ----------------- Certain prior year amounts have been reclassified to conform to their 1995 classifications. 3. MERGER AGREEMENT: ---------------- In February, 1996 the Company entered into a merger agreement (the "Agreement")with Veterinary Centers of America, Inc. ("VCA"). Under the terms of the Agreement as amended, which is intended to qualify for pooling-of-interests accounting, stockholders and rights holders, as defined, are to receive shares of VCA common stock, par value $0.001 with a market value on June 14,1996 of approximately $22.4 million. The stockholders of the Company voted to approve the merger on June 14, 1996 and the merger is expected to be consummated on June 18, 1996. 4. SUBSEQUENT EVENT: ---------------- During the second quarter of 1996, the Company received additional working capital through the issuance of notes payable to existing shareholders and to Veterinary Centers of America, Inc. in the amount of $200,000 and $210,000, respectively. F-83 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 F-84 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 F-85 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 ======= =======
F-86 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. F-87 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 preferred stock subscription - - - - 537,500 5 Issuance of Series A convertible preferred stock, net of issuance cost of $238 - - 35,000 3,262 - - Issuance of common stock to directors in conjunction with sale of Series A preferred stock - - - (167) 270,000 3 Subscription of Series A convertible preferred stock - - - - - - Issuance of common stock for exercise and surrender of warrants - - - - 645,000 6 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. F-88 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. F-89 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. F-90 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. F-91 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 ======= =======
F-92 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. F-93 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
F-94
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 F-95 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. F-96 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. F-97 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. F-98 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. F-99 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. F-100 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. F-101 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors and Stockholders of Veterinary Centers of America, Inc.: We have audited the accompanying balance sheet of SOUTHWEST VETERINARY DIAGNOSTICS, INC. (an Arizona corporation) as of December 31, 1995, and the related statements of operations, stockholder's equity 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. 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 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 Southwest Veterinary Diagnostics, Inc. as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP ----------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 22, 1996 F-102 SOUTHWEST VETERINARY DIAGNOSITICS, INC. --------------------------------------- BALANCE SHEET - DECEMBER 31, 1995 --------------------------------- ASSETS ------ CURRENT ASSETS: Cash $ 293,800 Accounts receivable, net of allowance for doubtful accounts of $260,000 998,600 Supplies inventory 109,400 Prepaid expenses 29,900 Note receivable 75,000 ---------- Total current assets 1,506,700 PROPERTY, PLANT AND EQUIPMENT, net 1,393,000 OTHER ASSETS 8,400 ---------- $2,908,100 ==========
The accompanying notes are an integral part of this balance sheet. F-103 SOUTHWEST VETERINARY DIAGNOSTICS, INC. -------------------------------------- BALANCE SHEET - DECEMBER 31, 1995 --------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 108,500 Current portion of long-term debt 146,400 Current portion of bank line of credit 26,700 Accrued payroll 186,500 Accrued expenses 27,600 ---------- Total current liabilities 495,700 LONG-TERM DEBT, less current portion 386,800 BANK LINE OF CREDIT, less current portion 173,300 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $1 par value: Authorized--100,000 shares Issued and outstanding--15,000 shares 15,000 Accumulated earnings 1,837,300 ---------- Total stockholders' equity 1,852,300 ---------- $2,908,100 ==========
The accompanying notes are an integral part of this balance sheet. F-104 SOUTHWEST VETERINARY DIAGNOSTICS, INC. -------------------------------------- STATEMENT OF OPERATIONS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 ------------------------------------ REVENUES $10,604,800 DIRECT COST OF SERVICES 6,094,300 ----------- GROSS PROFIT 4,510,500 OPERATING EXPENSES: Selling, general and administrative expenses 3,363,700 Officers' salaries 500,800 Depreciation and amortization 332,000 ----------- OPERATING INCOME 314,000 OTHER INCOME (EXPENSE): Other income 175,300 Interest expense (88,400) ----------- NET INCOME $ 400,900 ===========
The accompanying notes are an integral part of this financial statement. F-105 SOUTHWEST VETERINARY DIAGNOSTICS, INC. -------------------------------------- STATEMENT OF STOCKHOLDERS' EQUITY --------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 ------------------------------------
Common Stock ------------ Accumulated Shares Amount Earnings ------ ------ ----------- BALANCE, December 31, 1994 15,000 $15,000 $1,465,400 Net income -- -- 400,900 Cash distributions to stockholders -- -- (29,000) ------ ------- ---------- BALANCE, December 31, 1995 15,000 $15,000 $1,837,300 ====== ======= ==========
The accompanying notes are an integral part of this financial statement. F-106 SOUTHWEST VETERINARY DIAGNOSTICS, INC. -------------------------------------- STATEMENT OF CASH FLOWS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 ------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 400,900 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 332,000 Provision for doubtful accounts 221,000 Changes in operating assets and liabilities: Increase in accounts receivable (85,400) Decrease in supplies inventory 9,300 Decrease in prepaid expenses 4,700 Decrease in note receivable 100,000 Decrease in other assets 92,200 Decrease in accounts payable (13,800) Increase in accrued payroll 41,600 Increase in accrued expenses 13,300 Decrease in deferred revenue (175,000) --------- Net cash provided by operating activities 940,800 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (342,300) Proceeds from disposal of fixed assets 4,700 --------- Net cash used in investing activities (337,600) --------- CASH FLOWS FROM FINANCIAL ACTIVITIES: Principal payments on long-term debt and bank line of credit (313,600) Proceeds of long-term debt and bank line of credit 31,800 Principal payments on capital leases (49,700) Cash distributions to stockholders (29,000) --------- Net cash used in financing activities (360,500) --------- NET INCREASE IN CASH 242,700 CASH, beginning of year 51,100 --------- CASH, end of year $ 293,800 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 88,400 =========
The accompanying notes are an integral part of this financial statement. F-107 SOUTHWEST VETERINARY DIAGNOSTICS, INC. -------------------------------------- NOTES TO FINANCIAL STATEMENT ---------------------------- DECEMBER 31, 1995 ----------------- 1. THE COMPANY ----------- Southwest Veterinary Diagnostics, Inc. ("the Company") was incorporated in Arizona in January 1, 1978. The Company operates veterinary medical laboratories in Phoenix, Arizona; Kansas City, Missouri; and Dallas, Texas. These operating facilities serve veterinary clinics throughout 15 states. Of the customer base, 55 percent is attributable to California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ a. Supplies Inventory ------------------ Supplies inventory consists of laboratory reagents and supplies used for test analysis and is stated at the lower of cost or market value using the first-in, first-out method. b. Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets which range from 5 to 40 years. Expenditures for additions and improvements are capitalized, and costs of normal repairs and maintenance are expensed as incurred. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are eliminated and any resulting gain or loss is recognized at the time of disposal. c. Financial Instruments --------------------- The fair value of the Company's financial instruments, including cash and the installment note receivable, approximate their carrying value. F-108 3. PROPERTY, PLANT AND EQUIPMENT ----------------------------- Property, plant and equipment at December 31, 1995 consist of the following: Land $ 325,200 Furniture and equipment 1,879,200 Building improvements 209,500 Transportation equipment 149,200 Capitalized equipment leases 856,300 ---------- 3,419,400 Less--Accumulated depreciation and amortization (2,026,400) ---------- Property, plant and equipment, net $1,393,000 ==========
Accumulated depreciation on equipment held under capital leases amounted to $319,626 at December 31, 1995. 4. BANK LINES OF CREDIT -------------------- The Company has a revolving line of credit providing for borrowings up to $600,000, interest payable monthly at prime, plus 1.5 percent. Unpaid principal and interest are due May, 1996. There was no balance outstanding on the line as of December 31, 1995. The line of credit is collateralized by accounts receivable and inventory and is guaranteed by stockholders. The note contains restrictive covenants limiting fixed asset purchases and requiring that certain financial ratios be maintained. At December 31, 1995, all covenants have been met. The interest rate in effect at December 31, 1995 was 10 percent. The Company has a line of credit providing for borrowings up to $400,000, due in monthly payments at 1.5 percent over prime. Borrowings on the line totaled $200,000 at December 31, 1995. The remaining principal and interest are due April, 2001. The line of credit is collateralized by laboratory equipment and is guaranteed by stockholders. The note contains restrictive covenants limiting fixed asset purchases and requiring that certain financial ratios be maintained. At December 31, 1995, the Company was in compliance with these covenants. The interest rate in effect at December 31, 1995 was 10 percent. F-109 5. LONG TERM DEBT -------------- Long-term debt consists of the following: Note payable, due in monthly installments of approximately $10,900 interest at bank prime rate plus 1.5 percent (currently at 10 percent), collateralized by equipment, receivables and a second deed of trust on a building owned by a related partnership (see Note 9) and guaranteed by the stockholders of the Company, due through September, 1999. $487,500 Note payable, due in monthly installments of approximately $1,000 including interest at 10 percent, maturing December, 1998, collateralized by a vehicle. 31,800 Capital lease obligations, due through 1998 13,900 -------- 533,200 Less--Current portion (146,400) -------- $386,800 ======== The lending agreements contain various restrictive covenants limiting the amount of fixed asset purchases and the requirement to maintain specified financial ratios. As of December 31, 1995 the Company was not in compliance with certain restrictive covenants. The Company obtained a waiver from the bank related to these covenants. At December 31, 1995, long-term debt maturing in the next five years consists of the following: 1996 $146,400 1997 145,200 1998 144,100 1999 97,500 Thereafter - -------- 533,200 ======== 6. EMPLOYEE BENEFIT PLANS ---------------------- Effective October 1, 1991, the Company adopted a qualified 401(k) employee savings and profit sharing plan for the benefit of substantially all employees. Under the plan, employees can defer a portion of their compensation and contribute it to the plan. Matching contributions are made at the sole discretion of the Board of Directors. The plan's trustees are officers of the Company. The Company's policy is to fund profit sharing costs as incurred. Profit sharing expense was $4,800 for the year ended December 31, 1995. F-110 7. COMMITMENTS AND CONTINGENCIES ----------------------------- Leasing Arrangements - -------------------- The Company entered into a lease in September, 1991, for Kansas City, Missouri operating facilities. This lease requires future minimum rentals of approximately $1,460 a month through March, 1996. Rent on this facility was approximately $19,000 for the year ended December 31, 1995. The Company entered into a lease in March, 1993 for Dallas, Texas operating facilities. This lease requires future minimum rentals of approximately $1,700 a month through March, 1998. Rent on this facility was approximately $21,000 for the year ended December 31, 1995. The Company is obligated under operating leases for various equipment and automobiles. These leases require monthly payments ranging from approximately $1,000 to $1,800, expiring November, 1996 through October, 1998. Payments under these leases were approximately $44,000 for the year ended December 31, 1995. The Company leases certain equipment under capital leases with noncancellable terms through 1998. Future minimum payments at December 31, 1995 are as follows: Capital Operating Leases Leases -------- --------- 1996 $ 8,100 $ 88,000 1997 5,000 76,000 1998 2,500 42,000 1999 - - 2000 - - ------- -------- 15,600 $206,000 Less-Amount representing interest (1,700) ======== ------- Present value of net minimum lease payments $13,900 ======= PENDING OR THREATENED LITIGATION - -------------------------------- The Company from time to time is a party to various legal proceedings which are incidental to its business. In the opinion of management, the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial position or results of operations. F-111 8. INCOME TAXES ------------ The Company is taxed as a Subchapter-S corporation under Section 1362 of the Internal Revenue Code and related state statutes. Under this provision, all income is taxed directly to the stockholders of the Company. 9. RELATED PARTY TRANSACTIONS -------------------------- The Company rents, on a month-to-month basis, certain operating facilities and equipment from a partnership in which the officers of the Company are partners. The amount of rent is subject to change based upon fluctuations in the prime interest rate and changes in operating expenses. Rent expense pursuant to this arrangement was approximately $65,000 for the year ended December 31, 1995. In December, 1994 the Company entered into a joint venture with Veterinary Diagnostics Services, Inc. (VDS) to operate a Portland laboratory. The Company obtained a 50 percent interest as one of two general partners in the joint venture for nominal consideration. During 1995 the Company sold a customer list valued at $175,000 to the joint venture. As of December 31, 1995 the balance due on the related note receivable was $75,000. In August 1995, the Company entered into a six month consulting agreement with VDS providing for payment of $10,000 per month. Additionally, in August 1995, the Company sold its 50 percent interest in the joint venture to VDS for nominal consideration. 10. SUBSEQUENT EVENT ---------------- On March 4, 1996 Veterinary Centers of America, Inc. ("VCA"), acquired substantially all of the assets and assumed certain of the liabilities of the Company. Under the terms of the acquisition agreement, liabilities not assumed by VCA were assumed by the former stockholders of the Company. F-112 APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG VETERINARY CENTERS OF AMERICA, INC. GOLDEN MERGER CORPORATION AND THE PET PRACTICE, INC. MARCH 21, 1996 TABLE OF CONTENTS -----------------
PAGE ---- AGREEMENT AND PLAN OF REORGANIZATION........................ 2 RECITALS.................................................... 2 AGREEMENT................................................... 2 1. Definitions............................................ 2 2. The Merger............................................. 7 2.1. Execution, Filing, Effective Time............... 7 2.2. Constituent and Surviving Corporations.......... 7 2.3. Certificate of Incorporation and Bylaws......... 8 2.4. Board of Directors and Officers................. 8 2.5. Conversion of the Company Common Stock.......... 8 2.6. Company Purchase Rights......................... 10 2.7. Closing of Transfer Books....................... 11 2.8. Related Agreement............................... 11 3. Closing Date........................................... 11 4. Representations and Warranties of the Company.......... 12 4.1. Organization and Standing; Articles and By- Laws............................................ 12 4.2. Authorization................................... 12 4.3. No Consents..................................... 13 4.4. Capital Stock................................... 13 4.5. Subsidiaries.................................... 14 4.6. SEC Reports and Financial Statement............. 14 4.7. Absence of Certain Changes or Events............ 15 4.8. Litigation...................................... 16 4.9. Tax Returns..................................... 16 4.10. Properties, Encumbrances........................ 17 4.11. Personal Property............................... 18 4.12. Employee Benefit Plans.......................... 18 4.13. Certain Agreements.............................. 18 4.14. Compliance With Applicable Law.................. 19 4.15. Environmental Compliance Matters................ 19 4.16. No Brokers...................................... 20 4.17. Registration Statement; Proxy Statement/Pros- pectus.......................................... 20 4.18. Information..................................... 21 4.19. Tax Free Merger................................. 21 4.20. Related Party Indebtedness and Obligations...... 21 4.21. No Dissenters Rights............................ 21 4.22. Stockholder Intention to Sell................... 21 5. Representations and Warranties of the Parent........... 21 5.1. Organization and Standing; Articles and By- Laws............................................ 22 5.2. Authorization................................... 22 5.3. No Consents..................................... 22
i 5.4. Capitalization.................................. 23 5.5. Authorization of Parent Common Stock............ 24 5.6. SEC Reports..................................... 24 5.7. Absence of Certain Changes or Events............ 25 5.8. Litigation...................................... 25 5.9. Compliance With Applicable Law.................. 25 5.10. No Brokers...................................... 26 5.11. Registration Statement; Proxy Statement/Prospectus............................ 26 5.12. Information..................................... 26 5.13. Tax Free Merger................................. 26 6. Pre-Merger Covenants of Parent and the Company......... 27 6.1. Conduct of Business by the Company.............. 27 6.2. Conduct of Business by Parent................... 29 6.3. Inspection of Records........................... 30 6.4. Stockholder Approval............................ 30 6.5. Registration Statement; Proxy Statement......... 30 6.6. Agreements by Affiliated Stockholders of the Company......................................... 31 6.7. Expenses........................................ 31 6.8. Reorganization.................................. 31 6.9. Filings; Other Action........................... 31 6.10. Publicity....................................... 32 6.11. Acquisition Proposals........................... 32 6.12. Indemnification................................. 33 7. Conditions to Each Party's Obligation to Effect the Merger................................................. 34 7.1. Stockholder Approval............................ 34 7.2. Hart Scott Act.................................. 34 7.3. No Legal Action................................. 34 7.4. Registration Statement Effective................ 34 7.5. Listing of Additional Shares on NMS............. 34 7.6. Tax Opinion..................................... 34 7.7. Trading Activity................................ 34 8. Additional Conditions to Obligations of the Parent..... 35 8.1. Representations, Covenants, Certificate......... 35 8.2. Permits and Approvals........................... 35 8.3. No Adverse Change............................... 35 8.4. Certain Legal Matters........................... 35 8.5. Certificate..................................... 36 8.6. Opinion of Counsel for the Company.............. 36 8.7. Comfort Letter.................................. 36 8.8. Rule 145 Affiliates............................. 36 8.9. Agreements with Certain Stockholders............ 36 9. Additional Conditions to the Obligations of the Company................................................ 37 9.1. Representations, Covenants, Certificate......... 37
ii 9.2. Certain Legal Matters........................... 37 9.3. Certificate..................................... 37 9.4. Opinion of Counsel for Parent and Sub........... 37 10. Termination............................................ 37 10.1. Termination..................................... 37 10.2. Effect of Termination........................... 38 11. Miscellaneous Provisions............................... 39 11.1. Notices......................................... 39 11.2. Severability.................................... 40 11.3. Exhibits and Schedules.......................... 40 11.4. Governing Law................................... 40 11.5. No Adverse Construction......................... 40 11.6. Counterparts.................................... 40 11.7. Costs and Attorneys' Fees....................... 40 11.8. Successors and Assigns.......................... 40 11.9. Amendment....................................... 40 11.10. Waiver.......................................... 41 11.11. Entire Agreement................................ 41 11.12. Best Efforts.................................... 41 11.13. Survival of Representations and Warranties...... 41
iii AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made and entered into as of March 21, 1996, by and among THE PET PRACTICE, INC., a Delaware corporation (the "Company"), GOLDEN MERGER CORPORATION, a Delaware corporation ("Sub"), and VETERINARY CENTERS OF AMERICA, INC., a Delaware corporation ("Parent"), with respect to the following: R E C I T A L S --------------- A. The Board of Directors of Parent, the Company and Sub each has determined that a business combination among Parent, the Company and Sub is in the best interest of their respective companies and shareholders and presents an opportunity for their respective companies to achieve long-term strategic and financial benefits, and accordingly the parties have agreed to effect the merger provided for herein (the "Merger") upon the terms and subject to the conditions set forth herein. B. For federal income tax purposes, it is intended that the Merger shall qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and for financial accounting purposes shall be accounted for as a purchase. C. Parent, Sub and the Company desire to make certain representations, warranties and agreements in connection with the Merger. D. Parent and the Company jointly desire that Parent acquire all of the issued and outstanding stock of the Company. E. The parties have determined that the most expeditious manner of accomplishing such acquisition would be the merger of the Company with and into Sub (the "Merger"). F. The parties hereto desire to adopt a Plan of Reorganization within the meaning of Section 368(a) of the Code. A G R E E M E N T ----------------- NOW, THEREFORE, in consideration of the foregoing and of the representations, warranties, covenants and agreements contained herein, the parties to this Agreement hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, terms defined in the preamble ----------- and recitals hereto shall have the respective meanings specified therein and the following terms shall have the meanings set forth below: 2 (a) "AFFILIATE" means, when used with reference to a specified Person, any Person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, the specified Person. (b) "AGREEMENT" shall mean this Agreement and Plan of Reorganization. (c) "AVERAGE PRICE" shall mean the average of the closing prices of the Parent Common Stock on the NMS (as reported by the Wall Street Journal, or if not so reported as reported by another authoritative source) over the 20 trading day period ending on (and including) the third trading day immediately preceding the date of the meeting of the Stockholders contemplated in Section 6.4. For purposes of the preceding sentence, a "trading day" means a day on which trading generally takes place on the NMS and on which trading in shares of Parent Common Stock occurred. (d) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (e) "COMPANY" shall mean The Pet Practice, Inc., a Delaware corporation. (f) "COMPANY COMMON STOCK" shall mean the Common Stock, par value $0.01 per share, of the Company. (g) "COMPANY PURCHASE RIGHTS" shall mean each outstanding option, purchase right, subscription or other right or agreement or commitment of any character relating to the issuance of shares of Company Common Stock (including, without limitation, options or rights that may be issued and outstanding under the Company Stock Option Plan or pursuant to any contingent payment provision contained in any agreement pursuant to which the Company acquired any of its Veterinary Hospitals). (h) "COMPANY SECURITIES" shall mean the Company Common Stock and the Company Purchase Rights. (i) "CONTROL" (including as used in the terms "controlling," "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. (j) "DELAWARE LAW" shall mean the General Corporation Law of the State of Delaware. (k) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 3 (l) "EXCHANGE FACTOR" shall be determined by reference to the following formula: (i) if the Average Price is between $25.00 and $30.00 (inclusive), the Exchange Factor shall be determined by dividing $10.00 by the Average Price, (ii) if the Average Price is between $24.00 and $19.00 (inclusive), the Exchange Factor shall be 0.3950 at $24.00 and increased 0.005 for each whole dollar by which the Average Price is less than $24.00, (iii) if the Average Price is $18.50 or less, the Exchange Factor shall be 0.4225, (iv) if the Average Price is equal to or greater than $31.00 and less than $49.00 the Exchange Factor shall be 0.3350 at $31.00 and reduced 0.005 for each whole dollar by which the Average Price is greater than $31.00, (v) if the Average Price is within the ranges described in clause (ii) and (iv) above, but the Average Price is not a whole dollar, then the Exchange Factor shall be determined as that which would have been computed at the nearest whole dollar increased or decreased (as applicable) by an amount equal to 0.005 multiplied by a fraction, the numerator of which shall be the difference between the Average Price and such nearest whole dollar, and the denominator of which shall be $1.00, (vi) if the Average Price is between $19.00 and $18.50 (exclusive) the Exchange Factor shall be .4200 increased by an amount equal to .0025 multiplied by a fraction, the numerator of which is the difference between $19.00 and the Average Price and the denominator of which is $.50, (vii) if the Average Price is between $24.00 and $25.00 (exclusive) the Exchange Factor shall be 0.3950 increased by an amount equal to 0.005 multiplied by a fraction, the numerator of which is the difference between the Average Price and $24.00 and the denominator of which is $1.00, (viii) if the Average Price is between $30.00 and $31.00 (exclusive) the Exchange Factor shall be 0.3333 increased by an amount equal to 0.0017 multiplied by a fraction, the numerator of which is the difference between the Average Price and $30.00 and the denominator of which is $1.00, and (ix) if the Average Price is greater than $49.00 the Exchange Factor shall be determined by dividing $12.005 by the Average Price. An illustration of the application of the foregoing is attached hereto as Exhibit "A." (m) "GAAP" shall mean generally accepted accounting principles. (n) "HART SCOTT ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (o) "MATERIAL ADVERSE EFFECT" means when used in connection with the Company or any of its Subsidiaries, or Parent or any of its Subsidiaries, as the case may be, any condition, change or effect that, individually or when taken together with all other such conditions, changes or effects that existed or occurred prior to the date of determination of the existence or occurrence of the Material Adverse Effect, is or is reasonably likely to be materially adverse to the business, assets (including intangible assets), financial condition or results of operations of the 4 Company and its Subsidiaries or Parent and its Subsidiaries, in each case taken as a whole. (p) "MERGER" shall have the meaning provided in recital B to this Agreement. (q) "NMS" shall mean the NASDAQ National Market System. (r) "PARENT" means Veterinary Centers of America, Inc., a Delaware corporation. (s) "PARENT PURCHASE RIGHTS" shall mean each outstanding option, purchase right, subscription or other right or agreement or commitment of any character relating to the issuance of shares of Parent Common Stock (including, without limitation, options or rights that may be issued and outstanding under any stock option plan or pursuant to any stock guarantee provision contained in any agreement pursuant to which Parent acquired any of its Veterinary Hospitals). (t) "PARENT COMMON STOCK" shall mean the Common Stock, par value $0.001 per share, of Parent. (u) "PERSON" includes an individual, partnership, limited liability company, limited liability partnership, trust, estate, corporation, joint venture, unincorporated association, government bureau or agency or other entity of whatsoever kind or nature. (v) "PRINCIPAL STOCKHOLDERS" shall mean the holder or holders of the Restricted Shares. (w) "RESTRICTED SHARES" shall mean the 3,600,000 shares of Company Common Stock held as of the date hereof by Abbingdon Venture Partners Limited Partnership - II. (x) "SECURITIES ACT" means the Securities Act of 1933, as amended. (y) "SEC" means the Securities and Exchange Commission. (z) "STOCKHOLDERS" shall mean the stockholders of the Company. (aa) "SUB" shall mean Golden Merger Corporation, a Delaware corporation. (ab) "SUB COMMON STOCK" shall mean the Common Stock, par value $0.001 per share, of Sub. (ac) "SUBSIDIARY" of a corporation means (i) any corporation of which equity securities possessing a majority of the 5 ordinary voting power in electing the board of directors are, at the time as of which such determination is being made, owned by such corporation either directly or indirectly through one or more Subsidiaries, and (ii) any Person (other than a corporation) in which such corporation or any Subsidiary, directly or indirectly, has more than a 10% ownership interest or over which it exercises control. (ad) "VETERINARY HOSPITALS" shall mean the veterinary hospitals and clinics owned and operated by the Company or its Subsidiaries or Parent or its Subsidiaries, as the case may be.
Section Defined Term Where Found ------------ ----------- Acquisition Proposal 6.11 AICPA Statement 8.7 Certificate of Merger 2.1 Closing 3 Closing Date 3 Company Financial Statements 4.6 Company Reports 4.6 Constituent Corporations 2.2 Company Disclosure Letter 4 Effective Time 2.1 ERISA Affiliate 4.12 Exchange Agent 2.5.(c) Exchange Fund 2.5.(c) Form S-4 6.5 Hazardous Substances, Hazardous Wastes, Hazardous Materials and Toxic Substances 4.15 Parent Financial Statements 5.6 Parent Reports 5.6 Proxy Statement/Prospectus 6.5 Remedies Exception 4.2 Rule 145 Affiliates 8.8 Surviving Corporation 2.2 Treasury Shares 2.5.(a)
6 2. THE MERGER. ---------- 2.1. EXECUTION, FILING, EFFECTIVE TIME. On the date of the Closing of the Merger referred to in Section 3, and subject to the terms and conditions hereinafter set forth, the Company and Sub agree to cause the Merger to be consummated by executing, delivering and filing with the office of the Delaware Secretary of State a Certificate of Merger (the "Certificate of Merger") in a form approved by the Company and Parent, which approval shall not be unreasonably withheld or delayed, and such other documents as may be required by the provisions of the Delaware Law and as are necessary to cause the Merger to become effective. The Merger shall become effective when such Certificate of Merger and such other necessary documents are so filed with the Secretary of State of the State of Delaware. The time at which the Merger becomes effective is herein referred to as the "Effective Time." 2.2. CONSTITUENT AND SURVIVING CORPORATIONS. The Company and Sub shall be the constituent corporations in the Merger (collectively, the "Constituent Corporations"). At the Effective Time, the Company shall be merged into Sub in accordance with the Delaware Law and Sub shall be the surviving corporation in the Merger (in such capacity, Sub is sometimes hereinafter referred to as the "Surviving Corporation"). At the Effective Time, the identity and separate existence of the Company shall cease. Upon the effectiveness of the Merger, the Surviving Corporation shall possess all of the rights, privileges, immunities, powers, franchises and authority, whether of a public or private nature, and be subject to all restrictions, disabilities and duties, of each of the Constituent Corporations, and all the rights, privileges, immunities, powers, franchises and authority of each of the Constituent Corporations, and all assets and properties of every description, real, personal and mixed, and every interest therein, wherever located, and all debts and other obligations belonging or due to either of the Constituent Corporations on whatever account, as well as stock subscriptions and all other things in action belonging or due to each of the Constituent Corporations, shall be vested in the Surviving Corporation, and all property rights, privileges, immunities, powers, franchises and authority, and all and every other interest, shall be thereafter as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate or interest therein vested in either Constituent Corporation shall not revert or be in any way impaired by reason of the Merger but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and the Surviving Corporation shall be liable for the debts and other obligations of each of the Constituent Corporations, and any claims existing or action or proceeding pending, by or against either of the Constituent Corporations may be prosecuted to judgment with right of appeal, as if the Merger had not taken place. 7 2.3. CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of Incorporation and Bylaws of the Sub in effect immediately prior to the Effective Time shall be in the Certificate of Incorporation and Bylaws of the Surviving Corporation. 2.4. BOARD OF DIRECTORS AND OFFICERS. The directors and officers of Sub in office immediately prior to the Effective Time shall continue as the directors and officers of the Surviving Corporation upon the effectiveness of the Merger. 2.5. CONVERSION OF THE COMPANY COMMON STOCK. (a) Conversion of Company Common Stock. At the Effective ---------------------------------- Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (excluding any treasury shares of the Company Common Stock then owned by the Company or any of its Subsidiaries and any shares of the Company Common Stock then held by Parent or any of its Subsidiaries) shall, by virtue of the Merger and without any action on the part of the Parent, Sub, the Company or the holder thereof, be cancelled and converted into that number of shares of fully paid and nonassessable shares of Parent Common Stock equal to the Exchange Factor. No fractional shares of Parent Common Stock will be issued, but in lieu thereof, any holder of shares of Company Common Stock entitled to receive a fractional share of Parent Common Stock shall be paid cash (rounded to the nearest whole cent) equal to the product of multiplying such fraction by the Average Price. If more than one certificate representing shares of Company Common Stock shall be surrendered at one time for the account of the same stockholder of record, the number of full shares of Parent Common Stock for which certificates shall be delivered shall be computed on the basis of the aggregate number of shares of the Company Common Stock represented by the certificates so surrendered. All shares of Company Common Stock held by the Company at the Effective Time as treasury shares or held by any of the Company's Subsidiaries or by Parent or any of its Subsidiaries (collectively, "Treasury Shares") shall cease to exist and the certificates for such shares shall, as promptly as practicable thereafter, be cancelled and no shares of capital stock of Parent or Sub shall be issued in exchange therefor. (b) Adjustment to the Exchange Factor. The Exchange Factor --------------------------------- shall be adjusted to reflect fully the effect of any stock split, reverse stock split, stock dividend including any dividend or distribution of securities convertible into shares of Parent Common Stock or shares of Company Common Stock), reorganization, recapitalization or other like change in the number of shares of Parent Common Stock or shares of Company Common Stock occurring after the date hereof and prior to the Effective Time; provided, however, that no such ----------------- changes to the capital stock of Parent, the Surviving Corporation or the Company shall be effected except as permitted by this Agreement. 8 (c) Payment for Company Common Stock. Parent shall authorize -------------------------------- one or more persons reasonably acceptable to the Company to act as exchange agents (the "Exchange Agent") hereunder. As of the Effective Time, Parent shall deposit, or cause to be deposited, with the Exchange Agent, for the benefit of the holders of the Company Common Stock, certificates representing the number of whole shares of Parent Common Stock and cash in lieu of fractional shares (such cash and certificates, together with any dividends or distributions thereon, being hereinafter referred to as the "Exchange Fund") into which the shares of the Company Common Stock outstanding at the Effective Time are converted in accordance with Section 2.5.(a) hereof. The Exchange Fund shall include sufficient cash as is reasonably determined by Parent to be necessary to account for additional fractional shares as the result of shares which are held in depositary, nominee or book entry form. (d) Delivery of New Certificates. Promptly after the ---------------------------- Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates representing shares of Company Common Stock (a "Certificate" and collectively the "Certificates") (i) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock and cash in lieu of fractional shares. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate representing that number of whole shares of Parent Common Stock and (y) a check representing the amount of cash in lieu of fractional shares, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive in respect of the Certificate surrendered pursuant to the provisions of this Section 2.5.(d), after giving effect to any required withholding tax, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash included within the Exchange Fund, payable to holders of Certificates. Certificates surrendered for exchange by any Person constituting a Rule 145 Affiliate shall not be exchanged until Parent has received a written agreement from such Person as provided in Section 8.8 of this Agreement. Certificates for Restricted Shares surrendered for exchange by a Principal Stockholder shall not be exchanged until Parent has received a written agreement from such Person as provided in Section 8.9 hereof. If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which a certificate for shares of the Company Common Stock so surrendered is then registered, such surrender shall be accompanied by payment of any applicable transfer taxes and documents required for a valid 9 transfer. From and after the Effective Time, until so surrendered, each Certificate theretofore representing shares of issued and outstanding Company Common Stock shall be deemed for all corporate purposes, except as provided in Section 2.5.(a) with respect to fractional shares and Treasury Shares, and except as set forth below, to evidence the number of whole shares of Parent Common Stock into which such shares of Company Common Stock shall have been converted. Unless and until any such Certificates shall be so surrendered, the holder of such Certificate shall not have any right to receive any cash amounts included in the Exchange Fund. Upon surrender of a Certificate representing the Company Common Stock, the holder of record thereof shall receive a certificate representing the whole shares of Parent Common Stock, cash in lieu of fractional shares to which he shall be entitled, and all dividends and other distributions which shall have been paid or made to holders of record of Parent Common Stock after the Effective Time with respect to such shares of Parent Common Stock, without interest thereon. All such cash amounts unclaimed at the end of one year from the Effective Time shall be released or repaid by the Exchange Agent to Parent, after which the holders of the shares not receiving such payment shall look, subject to applicable escheat or other laws, only to Parent as general creditors for payment thereof. (e) No Liability. None of Parent, the Company, the Exchange ------------ Agent or any other person shall be liable to any former holder of shares of Company Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (f) Lost, Stolen or Destroyed Certificates. In the event any -------------------------------------- Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock, cash in lieu of fractional shares, and unpaid dividends and distributions on shares of Parent Common Stock as provided in Section 2.5.(d), deliverable in respect thereof pursuant to this Agreement. 2.6. COMPANY PURCHASE RIGHTS. Each of the Company Purchase Rights, whether vested or unvested, shall, subject to the terms of any applicable stock option, warrant agreement or other applicable agreement evidencing the same, remain outstanding following the Effective Time. At the Effective Time, such Company Purchase Rights shall, by virtue of the Merger and without any further action on the part of the Company, Parent, Sub or the holder of any Company Purchase Right, be assumed by Parent in such manner that Parent (x) is a corporation "assuming a stock option in 10 a transaction to which Section 424 applied" within the meaning of Section 422A of the Code or (y) to the extent Section 424 of the Code does not apply to any such Company Purchase Rights, would be such a corporation were Section 424 applicable to such option. Each Company Purchase Right assumed by Parent shall be exercisable upon the same terms and conditions as under the applicable stock option, warrant agreement or other applicable agreement evidencing the same, except that (i) each such Company Purchase Right shall be exercisable for that number of shares of Parent Common Stock (to the nearest whole share) into which the number of shares of Company Common Stock subject to such Company Purchase Right immediately prior to the Effective Time would be converted under Section 2.5.(a) of this Agreement, and (ii) the option price per share of Parent Common Stock shall be equal to (x) the per share exercise price of such Company Purchase Right in effect immediately prior to the Effective Time multiplied by the number of shares of Company Common Stock subject to such Company Purchase Right immediately prior to the Effective Time, divided by (y) the number of ---------- shares of Parent Common Stock subject to such Company Purchase Right immediately after the Effective Time. No payment shall be made for fractional interests. In connection with the assumption of the Company Purchase Rights, Parent shall effect such assumption in such manner as not to affect the "incentive" status of those options which are "incentive" stock options within the meaning of the Code at the Effective Time. From and after the date hereof, no additional Company Purchase Rights shall be granted by the Company and no "vesting" or exercise schedule of Company Purchase Rights shall be modified or accelerated (other than pursuant to the express terms of such Company Purchase Right) and no exercise price of any Company Purchase Right shall be modified without the prior written consent of Parent. 2.7. CLOSING OF TRANSFER BOOKS. At and after the Effective Time, transfers of the shares of Company Common Stock outstanding immediately prior to the Effective Time shall not be made on the stock transfer books of the Company. 2.8. RELATED AGREEMENT. Each of the Principal Stockholders have executed and delivered to the Parent a separate agreement pursuant to which they (i) agree to vote the shares of Company Common Stock held by them in favor of this Agreement and the Merger at the Stockholders Meeting called for that purpose and have granted a proxy to Parent to do the same in their place and stead, and (ii) agree not to sell, transfer, hypothecate or otherwise dispose of any of their shares of Company Common Stock or Company Purchase Rights held by them as of the date hereof until the earlier to occur of termination of this Agreement or the Effective Time, except as expressly provided for therein. 3. CLOSING DATE. The Closing of the Merger (the "Closing") shall, unless ------------ another date or place is agreed to in writing by the parties, take place at the offices of Troop Meisinger Steuber & Pasich, 10940 Wilshire Boulevard, Los Angeles, California 90024 11 (except for the filing of the Certificate of Merger, which shall take place in the office of the Secretary of State of the State of Delaware) on the second business day following the satisfaction or waiver of all conditions precedent to the Merger, including those set forth in Sections 7, 8 and 9 of this Agreement, but in no event later than 60 days after the Form S-4 becomes effective. The date of the Closing is referred to in this Agreement as the "Closing Date." 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in ---------------------------------------------- the disclosure letter delivered at or prior to the execution of this Agreement by the Company, which shall refer to the relevant Sections of this Agreement (the "Company Disclosure Letter"), the Company represents and warrants to and agrees with Parent and Sub as follows: 4.1. ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company is qualified, licensed or domesticated as a foreign corporation and is in good standing in all jurisdictions where the character of its properties owned or held under lease or the nature of its activities make such qualification necessary, except where the failure to be so qualified, licensed or domesticated would not have a Material Adverse Effect on the Company. The Company has all requisite power and authority and all requisite licenses, permits and franchises necessary to own, lease and operate its properties and assets and to carry on its business in the manner and in the locations as presently conducted, except where the failure to do so would not have a Material Adverse Effect on the Company. Copies of the Certificate of Incorporation (as certified by the Delaware Secretary of State) and Bylaws of the Company have been delivered to Parent and are accurate and complete as of the date hereof. 4.2. AUTHORIZATION. The Company has the requisite corporate power and authority to enter into and carry out the terms and conditions of this Agreement and all the transactions contemplated hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Company's Board of Directors and, other than the Stockholder approval required pursuant to Section 6.4 hereof, all corporate proceedings have been taken and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance by the Company of this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligations of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally from time to time in effect and except that equitable remedies may not in all cases be available (regardless of whether enforceability is considered in a proceeding at law or in equity) (collectively, the 12 "Remedies Exception"). The execution, delivery and performance of this Agreement by the Company will not conflict with or constitute a breach, violation or default under the Company's Certificate of Incorporation or By- Laws, any statute, law or administrative regulation, or under any judgment, decree, order, writ, governmental permit or license, any material contract, agreement, lease, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound, which breach, violation or default would have a Material Adverse Effect on the Company. 4.3. NO CONSENTS. No consent, authorization, order or approval of, or filing with or registration with, any governmental authority, commission, board or other regulatory body of the United States or any state or political subdivision thereof, or any other Person, is required to be made or obtained by the Company for or in connection with the execution and delivery by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby, the absence of which would have a Material Adverse Effect on the Company, other than the filing of the Certificate of Merger with the Delaware Secretary of State and filings made pursuant to the Hart Scott Act. 4.4. CAPITAL STOCK. The authorized capital stock of the Company consists of 20,000,000 shares of Company Common Stock, par value $0.01 per share, and 1,000,000 shares of Preferred Stock, $0.01 par value per share. As of the date hereof, (i) there are 8,595,544 shares of Company Common Stock issued and outstanding, all of which are duly authorized, validly issued, fully paid and non-assessable and were not issued in violation of any preemptive rights or any Federal or State securities laws, (ii) no shares of Company Common Stock are held by Subsidiaries of the Company, and (iii) 237,564 shares of Company Common Stock are reserved for future issuance under outstanding Company Purchase Rights (assuming that the financial criteria for the achievement of contingent payment provisions in agreements pursuant to which the Company acquired its Veterinary Hospitals were to be met, but not exceeded). As of the date hereof, there are no shares of Company Preferred Stock issued and outstanding. As of the date hereof, there are (i) no options, warrants, calls, subscriptions, convertible securities or other rights, (including preemptive rights), agreements, understandings, arrangements or commitments of any character obligating the Company now or at any time in the future to issue or sell any of its capital stock or other equity interests of the Company or any of its Subsidiaries, (ii) there are no obligations, contingent or otherwise, of the Company or any of its Subsidiaries, to repurchase, redeem or otherwise acquire any shares of capital stock or other equity interests of the Company or any of its Subsidiaries or to provide funds or to make any investment (in the form of a loan, capital contribution or otherwise) in any Subsidiary or another entity, other than guarantees of bank obligations of Subsidiaries entered into in the ordinary course of business, (iii) there are no outstanding bonds, 13 debentures, notes or other obligations of the Company the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the Company shareholders on any matter, (iv) there are no obligations, contingent or otherwise, guaranteeing the value of any of the shares of the Common Stock of the Company or any of its Subsidiaries either now or at any time in the future, and (v) there are no voting trusts, proxies or other agreements or understandings to which the Company is a party or is bound with respect to the voting of any capital stock or other equity interests of the Company or any of its Subsidiaries. 4.5. SUBSIDIARIES. The Company Disclosure Letter sets forth a true and correct list of each Subsidiary of the Company as of the date hereof. All of the outstanding capital stock of each such Subsidiary is owned entirely by the Company or by a Subsidiary of the Company, as the case may be, as of the date hereof, free and clear of all liens, charges, pledges, security interests or other encumbrances, except for restrictions on transfer imposed by applicable securities laws. All such shares of capital stock have been duly authorized and validly issued and are fully paid and nonassessable. There are no agreements, understandings or undertakings governing the rights and duties of the Company or any Subsidiary of the Company as a stockholder of any Subsidiary, including, without limitation, any agreement, arrangement or understanding under which the Company is or may become obligated, directly or indirectly, to acquire or dispose of any equity interest in, make any capital contribution or extend credit to, or act as guarantor, surety or indemnitor for any liability of any Subsidiary. Each such Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, has the corporate power and authority to carry on its business as it is now being conducted and is duly qualified to do business and is in good standing in all jurisdictions where the failure to be so qualified would have a Material Adverse Effect on the Company. Other than its Subsidiaries, the Company has no interest in any corporation, joint venture, partnerships or other business enterprise. 4.6. SEC REPORTS AND FINANCIAL STATEMENT. The Company has filed with the SEC all forms, reports, registration statements, proxy statements and other documents (collectively, the "Company Reports") required to be filed by the Company under the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder (collectively, the "Securities Laws"), except failures to file which, individually or collectively, do not have a Material Adverse Effect on the Company. The Company has heretofore furnished Parent with true and complete copies of all Company Reports filed as of the date hereof. As of their respective dates, or, in the case of registration statements, as of their effective dates, all of the Company Reports, including all exhibits and schedules thereto and all documents incorporated by reference therein, (i) complied as to form in all material respects with the 14 requirements of the Securities Laws applicable thereto, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements, in light of the circumstances under which they were made, not misleading. The Company has filed with the SEC all documents and agreements which were required to be filed as exhibits to the Company Reports, except failures to file, if any, which, individually or collectively, do not have a Material Adverse Effect on the Company. The audited consolidated financial statements and unaudited interim consolidated financial statements of the Company included or incorporated by reference in the Company Reports (collectively, the "Company Financial Statements") have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of the Company as of and at the dates thereof and the results of operations and cash flows for the periods then ended, subject in the case of the unaudited interim financial statements, to normal, recurring year-end adjustments and any other adjustments described therein, which were not and are not expected to be material in amount or effect. Except as set forth or reflected in the Company Financial Statement at December 28, 1994, or as set forth in the unaudited balance sheets included in the Company Reports since that date, neither the Company nor any of its Subsidiaries, has any liabilities or obligations of any kind or nature (whether accrued, absolute, contingent or otherwise) which would be required to be reflected or reserved against in any balance sheet of the Company or any of its Subsidiaries, or in the notes thereto, prepared in accordance with GAAP consistently applied, except liabilities arising since September 27, 1995 either (i) in the ordinary course of business; or (ii) which, individually or collectively, would not have a Material Adverse Effect on the Company. 4.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Company Reports filed with the SEC prior to the date hereof, since December 28, 1994, the Company and its Subsidiaries has conducted its business in all material respects in the ordinary and usual course consistent with past practice, and there has not been (a) any event or occurrence which could result in a Material Adverse Effect on the Company, (b) any material change in accounting methods, principles and practices by the Company and its Subsidiaries (except for any such changes required by reason of a concurrent change in GAAP or to conform a Subsidiary's accounting methods, principles or practices to those of the Company), (c) any damage, destruction or loss, whether covered by insurance or not, having a Material Adverse Effect on the Company, (d) any entry by the Company or any of its Subsidiaries into any commitment or transaction material to the Company which is not in the ordinary course of business consistent with past practice, (e) any declaration, payment or setting aside for payment of any dividends, or (f) any grant to any officer or director of any increase in compensation (other than periodic salary increases not in excess of 10% made in the ordinary course 15 of business consistent with past practice or increases resulting from job promotions or expansions of employment responsibilities), or any loan to any officer or director, or any adoption, amendment in any material respect or termination of any bonus, profit sharing, stock option, employee stock ownership, pension, retirement, deferred compensation, employment or consulting or other plan, agreement or arrangement for the benefit of employees of the Company. 4.8. LITIGATION. The Company has disclosed in the Company Disclosure Letter all information in its possession or custody or under its control with respect to litigation pending as of the date hereof. Except as set forth in the Company Disclosure Letter, the Company has no litigation pending as of the date hereof. To the best of the Company's knowledge, the ultimate liability for damages arising from such litigation (based upon assumptions that the Company believes in good faith to be reasonable under the circumstances) is either adequately reserved against in the Company Financial Statement at December 28, 1994 or in the unaudited balance sheets included in the Company Reports since that date or will not have a Material Adverse Effect on the Company. Except as set forth in the Company Disclosure Letter, there are no actions, suits or proceedings of any nature pending, or, to the knowledge of the Company, threatened, against or by the Company or any of its properties, assets or business, nor is the Company or any of its properties, assets or business, subject to any order, judgment, ruling, or decree of any competent authority, which would have, or is reasonably like to have, a Material Adverse Effect on the Company. The Company has not received notice of violation of any applicable statute, regulation, code, ordinance, rule, order, judgment, decree or requirement relating to its operations or its owned or leased properties and to the Company's knowledge, no such violation exists, in each case, other than a violation which would not have a Material Adverse Effect on the Company. 4.9. TAX RETURNS. The Company and each of its Subsidiaries (i) has accurately prepared and duly and timely filed all federal and state and all other material income, property, sales and use and other applicable tax reports and returns ("Tax Returns") required to be filed (subject to any extensions applicable to any such filing) except where the failure to do so would not have a Material Adverse Effect on the Company, and all such returns are true and complete in all material respects, (ii) has paid all Taxes shown to be due and payable on such Tax Returns or which have become due and payable pursuant to any assessment, deficiency notice, 30-day letter, or other notice received by it, and (iii) has properly accrued all Taxes for such periods subsequent to the periods covered by the Tax Returns, except for any Taxes which would not have a Material Adverse Effect on the Company. The Tax Returns of the Company and each of its Subsidiaries have not been examined by the appropriate taxing authority. Neither the Company nor any of its Subsidiaries has 16 executed or filed with the Internal Revenue Service ("IRS") or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other Taxes. Neither the Company nor any of its Subsidiaries is a party to any pending action or proceeding by any governmental authority for assessment or collection of Taxes, and to the knowledge of the Company, no claim for assessment or collection of Taxes has been asserted against it. True, correct and complete copies of all Tax Returns filed by the Company and each of its Subsidiaries and all communications relating thereto have been delivered to Parent or made available to the representatives of Parent. All Taxes which the Company is required to withhold or collect, including without limitation, sales and use taxes, have been duly withheld or collected and, to the extent required, have been paid over to the proper governmental authorities or are held in separate bank accounts for such purposes, except where the failure to do so would not have a Material Adverse Effect on the Company. For purposes hereof, the term, "Taxes" shall mean and include all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, property, sales, withholding, social security, occupation, use, service, license, payroll, franchise, transfer and recording taxes, fees and charges imposed by the United States, or any state, local or foreign government or subdivision or agency thereof, whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed on or with respect to any such taxes, charges, fees, levies or other assessments. 4.10. PROPERTIES, ENCUMBRANCES. The Company and its Subsidiaries have good and marketable title in fee simple to, or a valid leasehold interest in, each of the real properties reflected on the Company Financial Statements or which have been acquired after the date thereof or used by them as of the date hereof (collectively, the "Company Properties"), in each case, free and clear of all liens, mortgages or deeds of trust, claims against title, security interests or other encumbrances on title ("Liens") or any rights of way, written agreements, laws, ordinances or regulations affecting the use or occupancy of such properties, or any reservations of an interest in title ("Restrictions") except (a) Liens and Restrictions included in the Company Disclosure Letter, (b) the rights of the landlords under applicable leases, and (c) Liens and Restrictions which do not have a Material Adverse Effect on the Company. All rental payments due under any lease pursuant to which the Company uses any Company Property has been paid and neither the Company nor any of its Subsidiaries is in default, and to the knowledge of the Company, the landlord under the lease is not in default, and no condition or event exists which with the giving of notice or the passage of time, or both, would constitute a material default by any party under any such leases other than any such non- payment or default which could not have a Material Adverse Effect on the Company. 17 4.11. PERSONAL PROPERTY. The Company and its Subsidiaries own good and marketable title to or a valid right to use all items of personal property owned or used by them which are material to their business, free and clear of all Liens other than those which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 4.12. EMPLOYEE BENEFIT PLANS. The Company Disclosure Letter sets forth a list of all plans and other arrangements involving direct or indirect compensation or benefits to officers, directors or consultants or providing employee benefits to employees of the Company or its Subsidiaries, including, without limitation, all "employee benefit plans" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar fringe or employee benefit plans, and all employment or executive compensation agreements (collectively, the "Company Plans"). All Company Plans comply with and are and have been operated in material compliance with each applicable provision of ERISA, the Code, other federal statutes, state law (including, without limitation, state insurance law) and the regulations and rules promulgated pursuant thereto or in connection therewith, except for any such failure to comply which would not have a Material Adverse Effect on the Company. No Company Plan is covered by Title IV of ERISA or Section 412 of the Code. Neither the Company, any of its Subsidiaries, nor any affiliate of the Company as determined under Section 414(b), (c), (m) or (o) of the Code ("ERISA Affiliate") has failed to make any contributions or to pay any amounts due and owing as required by the terms of any Company Plan, which failure would have a Material Adverse Effect on the Company. True and complete copies of each Company Plan have been made available to Parent or its representatives. Except as required by Section 4980B of the Code, neither the Company, any of its Subsidiaries nor any ERISA Affiliate has promised any former employee or other individual not employed by the Company, any of its Subsidiaries or any ERISA Affiliate, medical or other benefit coverage, and neither the Company, any of its Subsidiaries nor any ERISA Affiliate maintains or contributes to any plan or arrangement providing medical benefits, life insurance or other welfare benefits to former employees, their spouses or dependents or any other individual not employed by the Company, any of its Subsidiaries or any ERISA Affiliate except to the extent required by applicable law. 4.13. CERTAIN AGREEMENTS. Except as set forth in the Company Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to any oral or written (i) material agreement (including, without limitation, any employment, management, severance or consulting contract) with any current or former officer, director, or holder of more than 10% of the outstanding shares of the Company Common Stock or with any entity 18 in which any of the foregoing is a more than 10% equity owner, officer, director, employee or consultant, (ii) any agreement the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company or any of its Subsidiaries of the nature contemplated by this Agreement, (iii) agreement or plan, including any stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement or (iv) agreement involving the acquisition of any interest or investment in a veterinary hospital or any other business. 4.14. COMPLIANCE WITH APPLICABLE LAW. The businesses of the Company and its Subsidiaries are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a Material Adverse Effect on the Company. Neither the Company nor any Company Subsidiary is a party to or subject to any judgment, decree, or order entered in any suit or proceeding brought by any governmental agency or by any other person, enjoining the Company or any Company Subsidiary with respect to any business practice, the acquisition of any property, or the conduct of business in any area. 4.15. ENVIRONMENTAL COMPLIANCE MATTERS. The businesses of the Company and its Subsidiaries as conducted in the past were not and as currently being conducted are not in violation of any applicable law, ordinance, rule, prohibition or regulation relating to air, water or noise pollution, or the production, storage, labeling or disposition of wastes or hazardous or toxic substances, or the health, safety or environmental conditions on, beneath or about any of the properties owned, used or leased by the Company or any of its Subsidiaries or relating to the business of the Company or any of its Subsidiaries (such laws, ordinances, rules, prohibitions and regulations being herein referred to as "Environmental Laws"), except for any such violation which would not have a Material Adverse Effect on the Company. The Company and its Subsidiaries have timely filed all material reports, obtained all material approvals and permits and generated and maintained all material data, documentation and records required under any applicable Environmental Laws, except where the failure to do so would not have a Material Adverse Effect on the Company. Neither the Company, its Subsidiaries nor, to the knowledge of the Company or its Subsidiaries, any other Person has placed, stored, buried, spilled or released, used, generated, manufactured, refined, processed, treated, dumped or disposed of any materials produced by, or resulting from, any business, commercial or industrial activities, operations or processes, including without limitation 19 any materials which are "Hazardous Wastes", "Hazardous Substances", "Hazardous Materials", "Pollutants", "Toxic Substances", "Solid Wastes" or "Contaminants" (as such terms are defined in any applicable Environmental Law, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act), on, beneath or about, or transported any such materials to or from, any of the properties owned, used or leased by the Company or its Subsidiaries in each case other than in material compliance with applicable Environmental Laws and in the ordinary course of the Company's or its Subsidiaries' business or where the failure to comply would not have a Material Adverse Effect on the Company. Neither the Company nor its Subsidiaries has received any notice from any governmental agency or private or public entity advising it that it is or may be responsible, or potentially responsible, for costs with respect to a release, a threatened release or clean up of materials located in any property owned by the Company or its Subsidiaries or produced by, or resulting from, any business, commercial or industrial activities, operations or processes of the Company or its Subsidiaries, including without limitation, materials which are Hazardous Wastes, Hazardous Substances, Hazardous Materials, Pollutants, Toxic Substances, Solid Wastes or Contaminants. 4.16. NO BROKERS. Other than with respect to the services of Smith Barney Inc., the Company's financial advisor, (the arrangements with which have been disclosed in writing to Parent), neither the Company nor any Company Subsidiary has entered into any contract, arrangement or understanding with any Person or firm which may result in the obligation of the Company, the Surviving Corporation or the Parent to pay any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiation, execution or performance of this Agreement and the Company is not aware of any claim for any such payment. 4.17. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. None of the information supplied by the Company for inclusion or incorporation by reference in (a) the Form S-4, or (b) the Proxy Statement/Prospectus will, in the case of the Form S-4, at the time it becomes effective and at the time of the respective meetings of the Company's and Parent's stockholders to vote on this Agreement and the transactions contemplated hereby, and in the case of the Proxy Statement/Prospectus, at the time of the mailing thereof to the stockholders of the Company and Parent and at the time of the stockholders meetings, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 20 4.18. INFORMATION. All written information provided to Parent, Sub or their respective agents by or on behalf of the Company or any of its representatives (including, without limitation, each representation and warranty of the Company set forth in this Agreement) is, and the Company covenants that any such information provided hereafter shall be, true and correct in all material respects and does not, or shall not, omit any material fact required to be included therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.19. TAX FREE MERGER. At the Effective Time, the Surviving Corporation will acquire at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the Company prior to the Merger. For purposes of this representation, amounts used by the Company to pay reorganization expenses and all redemptions, distributions and payments, in cash or property, made by the Company in connection with the Merger shall be included as assets of the Company prior to the Merger. 4.20. RELATED PARTY INDEBTEDNESS AND OBLIGATIONS. Any and all indebtedness from any current or former officer or director of the Company or shareholder of 10% or more of Company Common Stock and any affiliate thereof, other than indebtedness incurred in connection with the acquisition of any Veterinary Hospital, has been repaid in full, and all contractual obligations, other than those incurred in connection with the acquisition of any Veterinary Hospital, to all such persons other than those expressly provided for herein and other than as set forth in the Company Disclosure Letter have been terminated without payment of any severance or termination fee. 4.21. NO DISSENTERS RIGHTS. Pursuant to Section 262(b)(i) of the Delaware Law, there are no dissenters rights available to the Company Stockholders. 4.22. STOCKHOLDER INTENTION TO SELL. To the knowledge of the Company, no stockholder of the Company has a present plan or intention to sell, exchange, or otherwise dispose of the shares of Parent Common Stock such stockholder will receive in connection with the Merger. 5. REPRESENTATIONS AND WARRANTIES OF THE PARENT. Except as set forth in -------------------------------------------- the disclosure letter delivered at or prior to the execution of this Agreement by the Parent, which shall refer to the relevant Sections of this Agreement (the "Parent Disclosure Letter"), the Parent and Sub jointly and severally represent, warrant, covenant and agree with the Company as follows: 21 5.1. ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Parent is qualified, licensed or domesticated as a foreign corporation and is in good standing in all jurisdictions where the character of its properties owned or held under lease or the nature of its activities make such qualification necessary, except where the failure to be so qualified, licensed or domesticated would not have a Material Adverse Effect on Parent. Sub has not conducted any business prior to the date hereof and has no material assets and liabilities other than those incident to its formation. The Parent has all requisite power and authority and all requisite licenses, permits and franchises necessary to own, lease and operate its properties and assets and to carry on its business in the manner and in the locations as presently conducted, except where the failure to do so would not have a Material Adverse Effect on Parent. Copies of the Certificate of Incorporation (as certified by the Delaware Secretary of State) and Bylaws of each of Parent and Sub have been delivered to the Company and are accurate and complete as of the date hereof. 5.2. AUTHORIZATION. Each of the Parent and Sub has the requisite corporate power and authority to enter into and carry out the terms and conditions of this Agreement and all the transactions contemplated hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by Parent's and Sub's Boards of Directors and, other than the stockholder approval required pursuant to Section 6.4 hereof, all corporate proceedings have been taken and no other corporate proceedings on the part of Parent or Sub are necessary to authorize the execution, delivery and performance by Parent and Sub of this Agreement. This Agreement has been duly executed and delivered by each of Parent and Sub and constitutes the legal, valid and binding obligations of Parent and Sub, enforceable against each in accordance with its terms, subject to the Remedies Exception. The execution, delivery and performance of this Agreement by the Parent and Sub will not conflict with or constitute a breach, violation or default under the Parent's or Sub's Certificate of Incorporation or By-Laws, any statute, law or administrative regulation, or under any judgment, decree, order, writ, governmental permit or license, any material contract, agreement, lease, indenture or instrument to which the Parent or Sub or any of the Subsidiaries of Parent is a party or by which the Parent or any of the Subsidiaries of Parent is bound, which breach, violation or default would have a Material Adverse Effect on the Parent. 5.3. NO CONSENTS. No consent, authorization, order or approval of, or filing with or registration with, any governmental authority, commission, board or other regulatory body of the United States or any state or political subdivision thereof, or any other Person, is required to be made or obtained by Parent or Sub for or in connection with the execution and delivery by Parent and Sub of 22 this Agreement and the consummation by Parent and Sub of the transactions contemplated hereby, the absence of which would have a Material Adverse Effect on Parent, other than the filing of the Certificate of Merger with the Delaware Secretary of State, filings made pursuant to the Hart Scott Act, compliance with the Securities Laws and compliance with any applicable state securities or "blue sky" laws. 5.4. CAPITALIZATION. The authorized capital stock of Parent consists of 30,000,000 shares of Parent Common Stock, par value $0.001 per share, and 1,000,000 shares of Preferred Stock, $0.001 par value per share. As of the date hereof, (i) there are 12,496,666 shares of Parent Common Stock issued and outstanding, all of which are duly authorized, validly issued, fully paid and non-assessable and were not issued in violation of any preemptive rights or any Federal or State securities laws, (ii) there are 583,333 shares of Parent Preferred Stock issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and were not issued in violation of any preemptive rights or any Federal or State securities laws, (iii) no shares of Parent Common Stock are held by Subsidiaries of the Parent, (iv) 3,483,932 shares of Parent Common Stock are reserved for future issuance under outstanding Parent Purchase Rights, and (v) 970,000 shares of Parent Common Stock (subject to adjustment) are reserved for future issuance in connection with the acquisition of a Veterinary Hospital. As of the date hereof, there are (i) no options, warrants, calls, subscriptions, convertible securities or other rights, (including preemptive rights), agreements, understandings, arrangements or commitments of any character obligating the Parent now or at any time in the future to issue or sell any of its capital stock or other equity interests of the Parent or any of its Subsidiaries, (ii) there are no obligations, contingent or otherwise, of the Parent or any of its Subsidiaries, to repurchase, redeem or otherwise acquire any shares of capital stock or other equity interests of the Parent or any of its Subsidiaries or to provide funds or to make any investment (in the form of a loan, capital contribution or otherwise) in any Subsidiary or another entity, other than guarantees of bank obligations of Subsidiaries entered into in the ordinary course of business, (iii) there are no outstanding bonds, debentures, notes or other obligations of Parent the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the Parent shareholders on any matter, (iii) there are no obligations, contingent or otherwise, guaranteeing the value of any of the shares of the Common Stock of the Parent or any of its Subsidiaries either now or at any time in the future, and (iv) there are no voting trusts, proxies or other agreements or understandings to which the Parent is a party or is bound with respect to the voting of any capital stock or other equity interests of the Parent or any of its Subsidiaries. 23 5.5. AUTHORIZATION OF PARENT COMMON STOCK. The issuance of shares of Parent Common Stock at the Closing will have been duly authorized by all necessary corporate action prior to the Effective Time and, when issued as contemplated by this Agreement, all such shares of Parent Common Stock will be validly issued, fully paid and non-assessable. 5.6. SEC REPORTS. The Parent has filed with the SEC all forms, reports, registration statements, proxy statements and other documents (collectively, the "Parent Reports") required to be filed by the Parent under the Securities Laws, except failures to file which, individually or collectively, do not have a Material Adverse Effect on Parent. The Parent has heretofore furnished the Company with true and complete copies of all Parent Reports filed as of the date hereof. As of their respective dates, or, in the case of registration statements, as of their effective dates, all of the Parent Reports, including all exhibits and schedules thereto and all documents incorporated by reference therein, (i) complied as to form in all material respects with the requirements of the Securities Laws applicable thereto, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Parent has filed with the SEC all documents and agreements which were required to be filed as exhibits to the Parent Reports, except failures to file, if any, which, individually or collectively, do not have a Material Adverse Effect on Parent. The audited consolidated financial statements and unaudited interim consolidated financial statements of the Parent included or incorporated by reference in the Parent Reports (collectively, the "Parent Financial Statements") have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of the Parent as of and at the dates thereof and the results of operations and cash flows for the periods then ended, subject in the case of the unaudited interim financial statements, to normal, recurring year-end adjustments and any other adjustments described therein, which were not and are not expected to be material in amount or effect. Except as set forth or reflected in the Parent Financial Statement at December 31, 1995, or as set forth in the unaudited balance sheets included in the Parent Reports since that date, neither the Parent nor any of its Subsidiaries, has any liabilities or obligations of any kind or nature (whether accrued, absolute, contingent or otherwise) which would be required to be reflected or reserved against in any balance sheet of the Parent or any of its Subsidiaries, or in the notes thereto, prepared in accordance with GAAP consistently applied, except liabilities since December 31, 1995 either (i) in the ordinary course of business or (ii) which, individually or collectively, would not have a Material Adverse Effect on Parent. 24 5.7. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Parent Reports filed with the SEC prior to the date hereof, since December 31, 1995, the Parent and its Subsidiaries have conducted their business in all material respects in the ordinary and usual course consistent with past practice, and there has not been (a) any event or occurrence which could result in a Material Adverse Effect on Parent, (b) any material change in accounting methods, principles and practices by the Parent and its Subsidiaries (except for any such changes required by reason of a concurrent change in GAAP or to conform a Subsidiary's accounting methods, principles or practices to those of Parent), (c) any damage, destruction or loss, whether covered by insurance or not, having a Material Adverse Effect on the Parent, (d) any entry by the Parent or any of its Subsidiaries into any commitment or transaction material to the Parent which is not in the ordinary course of business consistent with past practice, or (e) any declaration, payment or setting aside for payment of any dividends. 5.8. LITIGATION. The Parent has disclosed in the Parent Disclosure Letter all information in its possession or custody or under its control with respect to litigation pending as of the date hereof. Except as set forth in the Parent Disclosure Letter, the Parent has no litigation pending as of the date hereof. To the best of the Parent's knowledge, the ultimate liability for damages arising from such litigation (based upon assumptions that the Parent believes in good faith to be reasonable under the circumstances) is either adequately reserved against in the Parent Financial Statement at December 31, 1995 or in the unaudited balance sheets included in the Parent Reports since that date or will not have a Material Adverse Effect on the Parent. Except as set forth in the Parent Disclosure Letter, there are no actions, suits or proceedings of any nature pending, or, to the knowledge of the Parent, threatened, against or by the Parent or any of its properties, assets or business, nor is the Parent or any of its properties, assets or business, subject to any order, judgment, ruling, or decree of any competent authority, which would have, or is reasonably likely to have, a Material Adverse Effect on Parent. The Parent has not received notice of violation of any applicable statute, regulation, code, ordinance, rule, order, judgment, decree or requirement relating to its operations or its owned or leased properties and to the Parent's knowledge, no such violation exists, in each case, other than a violation which would not have a Material Adverse Effect on the Parent. 5.9. COMPLIANCE WITH APPLICABLE LAW. The businesses of the Parent and its Subsidiaries are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a Material Adverse Effect on the Parent. Neither the Parent nor any Parent Subsidiary is a party to or subject to any judgment, decree, or order entered in any suit or proceeding brought by any governmental agency or by any other person, enjoining the Parent or 25 any Parent Subsidiary with respect to any business practice, the acquisition of any property, or the conduct of business in any area. 5.10. NO BROKERS. Other than with respect to the services of NatWest Securities, Limited, the Parent's financial advisor, (the arrangements with which have been disclosed in writing to the Company), neither the Parent nor any Subsidiary has entered into any contract, arrangement or understanding with any Person or firm which may result in the obligation of the Parent, the Surviving Corporation or the Company to pay any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiation, execution or performance of this Agreement and the Parent is not aware of any claim for any such payment. 5.11. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPEC-TUS. None of the information supplied by the Parent for inclusion or incorporation by reference in (a) the Form S-4, or (b) the Proxy Statement/Prospectus will, in the case of the Form S-4, at the time it becomes effective and at the time of the respective meetings of the Company's and the Parent's stockholders to vote on this Agreement and the transactions contemplated hereby, and in the case of the Proxy Statement/Prospectus, at the time of the mailing thereof to the stockholders of the Company and Parent and at the time of such stockholders meetings, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.12. INFORMATION. All written information provided to Company or its agents by or on behalf of the Parent or any of its representatives (including, without limitation, each representation and warranty of the Parent set forth in this Agreement) is, and the Parent covenants that any such information provided hereafter shall be, true and correct in all material respects and does not, or shall not, omit any material fact required to be included therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.13. TAX FREE MERGER. (a) At the Effective Time, by reason of the Merger, the Surviving Corporation will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets, held by the Company immediately prior to the Merger. For purposes of this representation, amounts used by the Company to pay reorganization expenses and all redemptions, distributions, and payments, in cash or property, made by the Company to its stockholders in connection with the Merger shall be included as assets of the Company prior to the Merger. 26 (b) Prior to the Merger, Parent will be in control of Sub within the meaning of Section 368(c) of the Code. (c) Parent has no plan or intention as part of the plan of the Merger to cause the Surviving Corporation to issue after the Effective Time additional shares of stock that would result in Parent losing control of the Surviving Corporation within the meaning of Section 368(c) of the Code or any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the Surviving Corporation that, if exercised or converted, would affect Parent's acquisition or retention of control of the Surviving Corporation, as defined in Section 368(c) of the Code. (d) Parent has no plan or intention to reacquire any of its Parent Common Stock issued in the Merger. (e) Parent has no plan or intention to liquidate the Surviving Corporation, to merge the Surviving Corporation with or into another corporation or to sell or otherwise dispose of the Surviving Corporation stock except for transfers of stock to a corporation controlled by Parent. (f) Following the Merger, the Surviving Corporation will continue the Company's historic business or use a significant portion of its historic business assets in a business. (g) Following the Effective Time, Parent shall use its best efforts, and shall cause the Surviving Corporation to use its best efforts, to conduct its business and the Surviving Corporation's business in a manner which would not jeopardize the characterization of the Merger as a reorganization within the meaning of Section 368(a)(2)(D) of the Code. 6. PRE-MERGER COVENANTS OF PARENT AND THE COMPANY. Each of Parent and ---------------------------------------------- the Company covenants and agrees with the other that: 6.1. CONDUCT OF BUSINESS BY THE COMPANY. During the period from the date of this Agreement until the earlier to occur of the termination of this Agreement or the Effective Time, except as contemplated by this Agreement, unless the Parent has consented in writing thereto, the Company (i) shall, and shall cause each of its Subsidiaries to, conduct its operations only in, and the Company and its Subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice, and (ii) shall use its reasonable commercial efforts, and shall cause each of its Subsidiaries to use its reasonable commercial efforts, to preserve intact its respective business organizations and goodwill, keep available the services of its respective officers and employees and maintain satisfactory relationships with those persons having business relationships with it, and (iii) shall confer on a regular basis with one or more representatives of the Parent to report operational matters of 27 materiality and any proposals to engage in any material transactions. By way of amplification and not limitation, and except as noted above, neither the Company nor any of its Subsidiaries shall, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly, do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change its Certificate of Incorporation or Bylaws; (b) split, combine, reclassify or amend the terms of any of its capital stock; (c) declare, set aside or pay any dividend or distribution payable in cash, stock or property or any combination thereof with respect to shares of its capital stock; (d) except pursuant to Company Purchase Rights outstanding on the date hereof, authorize, issue, sell, pledge, encumber or agree to authorize, issue, sell, pledge or encumber any additional shares of its capital stock of any class or any other securities in respect of, in lieu of or in substitution of Company Common Stock outstanding as of the date hereof or any options, warrants, conversion rights or other rights to acquire capital stock of the Company or any of its Subsidiaries; (e) redeem or otherwise acquire any of its outstanding equity securities or any outstanding options or rights to purchase any such equity securities or make any commitment to take such action; (f) accelerate, amend or change (or permit any acceleration, amendment or change of) the period of exercisability of any Company Purchase Right or authorize cash payments in exchange for any Company Purchase Right (other than pursuant to the express terms of such Company Purchase Right); (g) sell, pledge, dispose of or encumber any material assets of the Company or any of its Subsidiaries, except in the ordinary course of business consistent with past practice; (h) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or any other business organization or division thereof; (i) incur any indebtedness for borrowed money, or assume, guarantee or otherwise as an accommodation become responsible for, the obligations of any other person or entity (in the case of any such indebtedness, Parent's consent shall not be unreasonably withheld or delayed); 28 (j) authorize any capital expenditures or purchase of fixed assets for the Company and its Subsidiaries which are in the aggregate more than $500,000; (k) increase the compensation or benefits payable or to become payable to its officers or employees, except in amounts consistent with past practices; or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of the Company or any of its Subsidiaries; or establish any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or consulting or other plan, agreement, trust, fund, plan, policy or arrangement for the benefit of any current or former directors, officers or employees; (l) take any action to change accounting policies or procedures; (m) make any material tax election inconsistent with past practices or settle or compromise any material federal, state, local or foreign tax liability; (n) pay, discharge or satisfy any material claims, liabilities or obligations other than in the ordinary course of business and consistent with past practices; (o) take or agree to take, any action which would cause a material breach of any of the representations or warranties of the Company contained in this Agreement or prevent the Company from performing or cause the Company not to perform its covenants hereunder in any material respect; or (p) submit any matters to the shareholders of the Company for a vote prior to the Closing other than the Merger. 6.2. CONDUCT OF BUSINESS BY PARENT. During the period from the date of this Agreement until the earlier to occur of the termination of this Agreement or the Effective Time, except as contemplated by this Agreement, unless the Company has consented in writing thereto, which consent shall not be unreasonably withheld, Parent (i) shall, and shall cause each of its Subsidiaries to, conduct its operations only in, and Parent and its Subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice, (ii) shall use its reasonable commercial efforts, and shall cause each of its Subsidiaries to use its reasonable commercial efforts, to preserve intact its respective business organizations and goodwill, keep available the services of its respective officers and employees and maintain satisfactory relationships with those persons having business relationships with it, and (iii) shall not amend any of the material terms or provisions of Parent's securities, except for any such amendments which affect equally all shares of Parent 29 Common Stock. Notwithstanding the foregoing, nothing contained in this Section 6.2 shall serve to preclude Parent from effecting (i) any and all acquisitions which have been or are approved by its Board of Directors or (ii) any debt or equity financing which has been or is approved by its Board of Directors. 6.3. INSPECTION OF RECORDS. From the date hereof to the earlier to occur of the termination of this Agreement and the Effective Time, each of the Company and Parent shall allow the duly authorized and appropriate officers, attorneys, accountants and other representatives of the other access at all reasonable times to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to, the business and affairs of the Company and Parent and their respective Subsidiaries. Parent and the Company acknowledge that they are parties to that certain Confidentiality Agreement, dated February 5, 1996 (the "Confidentiality Agreement") the terms and conditions of which shall survive the execution of this Agreement and shall continue to be binding on the parties with respect to the inspections referred to in this Section 6.3 of this Agreement. 6.4. STOCKHOLDER APPROVAL. Each of the Company and Parent will take all necessary or appropriate action under the Exchange Act, Delaware Law and their respective Certificates of Incorporation and Bylaws to call a meeting of its stockholders, to be held at the earliest practicable date, to consider and vote on a proposal to approve this Agreement, the Merger and the transactions contemplated hereby and thereby, will submit the same to its stockholders with a recommendation for approval by the Board of Directors of the Company or Parent, as the case may be, and will solicit the approval thereof by such stockholders by mailing or delivering to each of the stockholders a Proxy Statement/Prospectus as provided for below. 6.5. REGISTRATION STATEMENT; PROXY STATEMENT. Parent and the Company shall cooperate and promptly prepare, and Parent shall file with the SEC as soon as practicable, a Registration Statement on Form S-4 ("Form S-4") under the Securities Act, with respect to the Parent Common Stock issuable in the Merger, a portion of which shall serve as the proxy statement with respect to the meetings of stockholders of the Company and Parent (the "Proxy Statement/Prospectus"). The respective parties will cause the Proxy Statement/Prospectus and the Form S-4 to comply as to form in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations thereunder. If at any time prior to the stockholders' meetings referred to in Section 6.4 of this Agreement, any event should occur relating to Parent or the Company which should be set forth in an amendment of, or a supplement to, the Form S-4, the affected party will inform the other and the Company and Parent shall promptly prepare, file and mail such amendment or supplement; provided, no such amendment or supplement shall be filed or mailed 30 until approved by Parent and the Company and their respective counsel. Parent shall use all reasonable efforts, and the Company will cooperate with Parent, to have the Form S-4 declared effective by the SEC as promptly as practicable. Parent shall use its best efforts to obtain, prior to the effective date of the Form S-4 all necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement and will pay all expenses incident thereto. 6.6. AGREEMENTS BY AFFILIATED STOCKHOLDERS OF THE COMPANY. The Company shall use all reasonable efforts to deliver or cause to be delivered to Parent, at least 20 days prior to the Closing Date, from each of the Rule 145 Affiliates of the Company, an Affiliate Letter in a form reasonably acceptable to the Company to the effect that such person will not offer to sell, sell or otherwise dispose of any shares of the Parent Common Stock issued in the Merger except pursuant to an effective registration statement or in compliance with Rule 145, as amended from time to time, or in a transaction which, in the opinion of legal counsel reasonably satisfactory to Parent, is exempt from the registration requirements of the Securities Act. Parent shall be entitled to place legends as specified in such Rule 145 Affiliate Letters on the certificate evidencing any Parent Common Stock to be received by such Rule 145 Affiliates pursuant to the terms of this Agreement, and to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Stock, consistent with the terms of such Affiliate Letters. 6.7. EXPENSES. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses except as expressly provided herein and except that (a) the filing fee in connection with the Hart Scott Act filing (if applicable), (b) the filing fee in connection with the filing of the Form S-4 or Proxy Statement/Prospectus with the SEC and (c) the expenses incurred in connection with printing and mailing the Form S-4 and the Proxy Statement/Prospectus, shall be shared equally by the Company and Parent. 6.8. REORGANIZATION. From and after the date hereof and until the Effective Time, neither Parent nor the Company nor any of their respective Subsidiaries or other Affiliates shall (i) knowingly take any action, or knowingly fail to take any action, that would jeopardize qualification of the Merger as a reorganization with the meaning of Section 368(a) of the Code; or (ii) enter into any contract, agreement, commitment or arrangement with respect to the foregoing. 6.9. FILINGS; OTHER ACTION. Subject to the terms and conditions herein provided, the Company and Parent shall (a) promptly make their respective filing and thereafter make any other required submissions under the Hart Scott Act with respect to the Merger; (b) use all reasonable efforts to cooperate with one 31 another in (i) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from states and foreign jurisdictions in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and (ii) timely making all such filings and timely seeking all such consents, approvals, permits or authorizations; and (c) use all reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and directors of Parent and the Company shall take all such necessary action. 6.10. PUBLICITY. The initial press release relating to this Agreement shall be a joint press release in a form mutually agreeable to Parent and the Company and the Parent and the Company shall, subject to their respective legal obligations of public companies, use reasonable efforts to agree upon the text of any other press release before issuing any such press release or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any federal or state governmental or regulatory agency or with any national securities exchange with respect thereto. 6.11. ACQUISITION PROPOSALS. Prior to the Effective Time, the Company agrees (a) that neither it nor any of its Subsidiaries shall, and it shall direct and use its best efforts to cause its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its Stockholders) with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or any of its Subsidiaries (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing and will take the necessary steps to inform the individuals or entities referred to above of the obligations undertaken in this Section 6.11; and (c) that it will notify Parent immediately if any such inquiries or proposals are received by, any 32 such information is received from, or any such negotiations or discussions are sought to be initiated or continued with, it; provided, however, that nothing -------- ------- contained in this Section 6.11 shall prohibit the Board of Directors of the Company from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited bona fide proposal to acquire the Company pursuant to a merger, consolidation, share exchange, purchase of a substantial portion of the assets, business combination or other similar transaction, if, and only to the extent that (A) the Board of Directors determines in good faith that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders imposed by law, (B) the Board of Directors has received a legal opinion from Haythe & Curley that such action is required for the Board of Directors to comply with its fiduciary duties to stockholders imposed by law, (C) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, the Company provides written notice to Parent to the effect that it is furnishing information to, or entering into discussions or negotiations with, such person or entity, and (D) subject to any confidentiality agreement with such person or entity (which such party determined in good faith was required to be executed in order for the Board of Directors to comply with its fiduciary duties to stockholders imposed by law), the Company keeps Parent informed of the status (not the terms) of any such discussions or negotiations; and (ii) to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Nothing in this Section 6.11 shall (x) permit any party to terminate this Agreement (except as specifically provided in Section 6.11 hereof), (y) permit any party to enter into any agreement with respect to an Acquisition Proposal during the term of this Agreement (it being agreed that during the term of this Agreement, no party shall enter into any agreement with any person that provides for, or in any way facilitates, an Acquisition Proposal (other than a confidentiality agreement in customary form)), or (z) affect any other obligation of any party under this Agreement. If, following any Acquisition Proposal, the Company subsequently effects any merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or any of its Subsidiaries, or this Agreement is thereafter terminated, the Company shall pay Parent an amount equal to $3.5 million. 6.12. INDEMNIFICATION. From and after the Effective Time, Parent shall cause the Surviving Corporation to, and the Surviving Corporation shall, include as part of its Certificate of Incorporation and Bylaws provisions relating to the indemnification of all current and former directors, officers, employees and agents of the Company which are substantially similar to the provisions contained in the Company's Certificate of Incorporation and Bylaws. Such provisions shall not be amended, repealed or otherwise modified after the Effective Time in any manner that would 33 adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of the Company in respect to actions or omissions occurring at or prior to the Effective Time (including, without limitation, actions or omissions which occur in connection with the transactions contemplated by this Agreement), unless such modification is required by law. 7. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The ---------------------------------------------------------- respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: 7.1. STOCKHOLDER APPROVAL. This Agreement shall have been approved and adopted by the requisite vote or written consent of the stockholders of Parent and the Company. 7.2. HART SCOTT ACT. The waiting period (and any extension thereof), if any, applicable to the consummation of the Merger under the Hart Scott Act shall have expired or have been terminated. 7.3. NO LEGAL ACTION. No preliminary or permanent injunction or other order, decree or ruling issued by any court of competent jurisdiction, or by any governmental, administrative or regulatory agency or commission, in the United States preventing the consummation of the Merger shall be in effect. 7.4. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement on Form S-4 shall have become effective and shall not be subject to a "stop order," and no action, suit, proceeding or investigation by the SEC to suspend the effectiveness thereof shall have been initiated and be continuing, or shall have been threatened and be unresolved. 7.5. LISTING OF ADDITIONAL SHARES ON NMS. The shares of Parent Common Stock issued in connection with the Merger shall have been approved for listing on NMS. 7.6. TAX OPINION. The Company and Parent shall have each received an opinion from their respective counsel, dated the Effective Date, to the effect that the Merger will be treated for Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, and that the Company will be a party to that reorganization within the meaning of Section 368(b) of the Code. 7.7. TRADING ACTIVITY. There shall not have occurred and be continuing at any time within 30 days prior to the proposed Effective Date (i) any suspension in trading on Nasdaq, any fixing of minimum or maximum prices for trading, or maximum ranges for prices for securities on Nasdaq by the NASD or by the SEC or any other governmental authority having jurisdiction, (ii) the 34 declaration of a banking moratorium by federal or California authorities, (iii) any suspension of payments in respect of banks in the United States, (iv) an outbreak or major escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States, (v) any limitation, whether or not mandatory, by any governmental authority on, or any event which might affect the extension of, credit by banks or other financial institutions, or (vi) in the case of any of the foregoing existing on the date hereof a material acceleration or worsening thereof. 8. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE PARENT. All obligations -------------------------------------------------- of Parent under this Agreement are subject to the fulfillment at or prior to the Closing of the following additional conditions, any of which may be waived in writing in whole or in part by Parent: 8.1. REPRESENTATIONS, COVENANTS, CERTIFICATE. The Company shall have performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Effective Time, and the representations and warranties of the Company herein contained shall be true in all material respects as of the date of this Agreement and the Effective Time. 8.2. PERMITS AND APPROVALS. All material filings, registrations, covenants, permits, authorizations and regulatory approvals of governmental authorities necessary for the consummation of the Merger shall have been duly obtained or made and shall be in full force and effect. 8.3. NO ADVERSE CHANGE. There shall not have occurred any change in the financial condition, business or operations of the Company and its subsidiaries that would have or would be reasonably likely to have a Material Adverse Effect on the Company. 8.4. CERTAIN LEGAL MATTERS. There shall not have been any statute, rule, regulation or order promulgated, enacted, entered, enforced or deemed applicable to the Merger by any United States federal or state government or governmental authority, nor shall there be in effect an order or judgment entered by any United States federal or state court, which (i) would make the consummation of the Merger illegal or would materially delay the Effective Time, (ii) would require the divestiture by Parent, the Company or any of their respective Subsidiaries of any of the shares of Company Common Stock or of a material portion of the business, assets, or property of either Parent or any of its Subsidiaries, or of the Company or any of its Subsidiaries, or impose any material limitation on the ability of any of them to conduct their respective businesses and own their respective assets or property, or (iii) impose any limitations on the ability of 35 Parent, directly or indirectly, to control in any material respect the business or operations of the Company, or any of its Subsidiaries. 8.5. CERTIFICATE. Parent shall have received a certificate of the Company dated the Effective Time, signed by a senior officer of the Company, certifying that (i) all representations and warranties of the Company were true and correct in all material respects when made and are true and correct in all material respects on the Effective Time as if made on the Effective Time, and (ii) the Company has performed and complied in all material respects with all covenants and agreements required in this Agreement to be performed or complied with by it on or prior to the Effective Time. 8.6. OPINION OF COUNSEL FOR THE COMPANY. Parent shall have received from Messrs. Haythe & Curley, counsel for the Company herein, an opinion, dated the Effective Time, in form and substance customary in transactions of the type contemplated by this Agreement. 8.7. COMFORT LETTER. Parent shall have received a "comfort" letter from Price Waterhouse LLP, independent public accountants for the Company, of the kind contemplated by the Statement of Auditing Standards with respect to Letters to Underwriters promulgated by the American Institute of Certified Public Accountants (the "AICPA Statement"), dated the Effective Time, in form and substance reasonably satisfactory to Parent in connection with the procedures undertaken by it with respect to the financial statements and other financial information of the Company and its Subsidiaries contained in the Proxy Statement/Prospectus and Form S-4 and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. 8.8. RULE 145 AFFILIATES. Parent shall have received from each "affiliate" of the Company, as such term is defined and used in SEC Rule 145 ("Rule 145 Affiliates"), a written undertaking signed by such Rule 145 Affiliate contemplated by Section 6.6 hereof. 8.9. AGREEMENTS WITH CERTAIN STOCKHOLDERS. Prior to the Closing Date, Parent shall have received an agreement in a form reasonably satisfactory to it executed by the Principal Stockholders to the effect that each such Person shall not sell, transfer or otherwise dispose of the shares of Parent Common Stock received in the Merger with respect to the Restricted Shares for a period ending on April 30, 1997; provided, that, 33% of such shares of Parent Common Stock issued to each Principal Stockholder shall be free of such restriction on November 1, 1996 and the remaining shares shall be free of such restriction on May 1, 1997, and (ii) each such Person shall grant a proxy to Parent to vote such shares of Parent Common Stock for those Persons from time to time 36 nominated for election by the Board of Directors (which proxy shall terminate upon transfer of such shares to the public). 9. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. All ------------------------------------------------------- obligations of the Company under this Agreement are subject to the fulfillment at or prior to the Closing of the following additional conditions, any of which may be waived in writing, in whole or in part, by the Company: 9.1. REPRESENTATIONS, COVENANTS, CERTIFICATE. Parent and Sub shall have performed in all material respects their respective agreements contained in this Agreement required to be performed on or prior to the Effective Time, and the representations and warranties of Parent and Sub herein contained shall be true and correct in all material respects as of the date of this Agreement and the Effective Time with the same effect as though made at the Effective Time. 9.2. CERTAIN LEGAL MATTERS. There shall not have been any statute, rule, regulation or order promulgated, enacted, entered, enforced or deemed applicable to the Merger by any United States federal or state government or governmental authority, nor shall there be in effect an order or judgment entered by any United States federal or state court, which would make the consummation of the Merger illegal or would delay the Effective Time beyond the period set forth in Section 10.1.(d). 9.3. CERTIFICATE. The Company shall have received a certificate of Parent dated the Effective Time, signed by a senior officer of Parent, certifying that (i) all representations and warranties of Parent were true and correct in all material respects when made and are true and correct in all material respects on the Effective Time as if made on the Effective Time, and (ii) Parent has performed and complied in all material respects with all covenants and agreements required in this Agreement to be performed or complied with by it on or prior to the Effective Time. 9.4. OPINION OF COUNSEL FOR PARENT AND SUB. The Company shall have received from Messrs. Troop Meisinger Steuber & Pasich, LLP, counsel for Parent and Sub, an opinion dated the Effective Time, in form and substance as is customary in transactions of the type contemplated by this Agreement. 10. TERMINATION. ----------- 10.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, notwithstanding the approval thereof by the stockholders of Company or Parent: (a) By the Parent, if any material condition to the obligations of Parent set forth in Section 7 or 8 is not substantially satisfied at the time or times contemplated thereby and such condition is not waived by Parent or, by the Company, if 37 any material condition to the obligations of the Company set forth in Section 7 or 9 is not substantially satisfied at the time or times contemplated thereby and such condition is not waived by the Company. Each party's right to terminate under this Section 10.1.(a) shall relate only to conditions to that party's obligations; (b) By the Company, upon a breach of any representation, warranty, covenant or agreement on the part of Parent or Sub set forth in this Agreement such that the conditions to the obligations of the Company set forth herein would not be satisfied; provided, however, if such breach is curable prior to September 1, 1996 by Parent or Sub through the exercise of reasonable efforts, then so long as Parent or Sub, as the case may be, is exercising such reasonable efforts, the Company may not terminate this Agreement pursuant to this Section; (c) By the Parent, upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement such that the conditions to the obligations of Parent set forth herein would not be satisfied; provided, however, if such breach is curable prior to September 1, 1996 by the Company through the exercise of reasonable efforts, then so long as the Company is exercising such reasonable efforts, Parent may not terminate this Agreement pursuant to this Section; (d) By either Parent or the Company if the Merger shall not have been consummated on or before September 1, 1996; (e) By either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administra-tive agency or commission shall have issued a non-appealable final order, degree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; (f) By either Parent or the Company if, at either of their respective stockholders' meetings, the requisite vote of the stockholders of the Company or Parent, respectively, is not obtained; (g) By either Parent or the Company if the Average Price is equal to or less than $18.50; or (h) By mutual written consent of the Company and Parent authorized by their respective Boards of Directors. 10.2. EFFECT OF TERMINATION. If this Agreement is terminated pursuant to Section 10.1, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that (a) the agreements contained in Section 6.7 and the last sentence of Section 6.3 shall survive the termination hereof and (b) if termination of this Agreement shall be judicially 38 determined to have been caused by willful breach of this Agreement, then, in addition to other remedies at law or equity for breach of this Agreement, the party so found to have willfully breached this Agreement shall indemnify the other parties for their respective costs, fees and expenses of their counsel, accountants and other experts and advisors as well as fees and expenses incident to negotiation, preparation and execution of this Agreement and related documentation and their stockholders' meetings and consents. 11. MISCELLANEOUS PROVISIONS. ------------------------ 11.1. NOTICES. All notices, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered in person, on the date actually given, (ii) by United States mail, certified or registered, with return receipt requested, on the date which is two business days after the date of mailing, or (iii) if sent by telex or facsimile transmission, with a copy mailed on the same day in the manner provided in (ii) above, on the date transmitted provided receipt is confirmed by telephone: (a) if to the Parent to: Veterinary Centers of America, Inc. 3420 Ocean Park Boulevard Santa Monica, California 90405 Attention: Robert L. Antin Telecopy No.: (310) 392-7464 With copies to: Troop Meisinger Steuber & Pasich, LLP 10940 Wilshire Boulevard Suite 800 Los Angeles, California 90024 Attention: C.N. Franklin Reddick III, Esq. Telecopy No.: (310) 443-8512 (b) if to the Company to: The Pet Practice, Inc. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Attention: Peter J. Cohen Telecopy No.: (610) 992-0492 With copies to: Haythe & Curley 237 Park Avenue New York, New York 10017 Attention: Andrew J. Beck, Esq. Telecopy No.: (212) 682-0200 or at such other address as may have been furnished by such Person in writing to the other parties. 39 11.2. SEVERABILITY. Should any Section or any part of a Section within this Agreement be rendered void, invalid or unenforceable by any court of law for any reason, such invalidity or unenforceability shall not void or render invalid or unenforceable any other Section or part of a Section in this Agreement. 11.3. EXHIBITS AND SCHEDULES. Each Exhibit and Schedule delivered pursuant to the terms of this Agreement and each document, instrument and certificate delivered by the parties in connection with the transactions contemplated hereby constitutes an integral part of this Agreement. 11.4. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED BOTH AS TO VALIDITY AND PERFORMANCE AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF. 11.5. NO ADVERSE CONSTRUCTION. The rule that a contract is to be construed against the party drafting the contract is hereby waived, and shall have no applicability in construing this Agreement or any provisions hereof. 11.6. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11.7. COSTS AND ATTORNEYS' FEES. In the event that any action, suit, or other proceeding is instituted concerning or arising out of this Agreement, the prevailing party shall recover all of such party's costs, and reasonable attorneys' fees incurred in each and every such action, suit, or other proceeding, including any and all appeals or petitions therefrom. 11.8. SUCCESSORS AND ASSIGNS. All rights, covenants and agreements of the parties contained in this Agreement shall, except as otherwise provided herein, be binding upon and inure to the benefit of their respective successors and assigns. 11.9. AMENDMENT. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors at any time before or after approval hereof by the Stockholders, but after any such approval, no amendment shall be made which changes the Exchange Factor, or which is otherwise not permitted by the Delaware Law, without the further approval of the Stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 40 11.10. WAIVER. At any time prior to the Effective Time, any party hereto, by action taken by its Board of Directors, at any time before or after approval hereof by the Stockholders of the Company, may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto shall be valid if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. 11.11. ENTIRE AGREEMENT. This Agreement, the attached Exhibits and Schedules, the other schedules referred to in this Agreement and the Confidentiality Agreement contain the entire understanding of the parties and there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof unless expressly referred to herein. 11.12. BEST EFFORTS. Subject to the terms and conditions of this Agreement, each party will use its best efforts to take, or cause to be taken, all actions and do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. 11.13. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time, except Sections 2 and 6.12 41 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. VETERINARY CENTERS OF AMERICA, INC. A DELAWARE CORPORATION By:______________________________ Name: Title: THE PET PRACTICE, INC. A DELAWARE CORPORATION By:______________________________ Name: Title: GOLDEN MERGER CORPORATION A DELAWARE CORPORATION By:______________________________ Name: Title: 42 PROJECT MILKBONE Golden Stock Price $ 18.50 $ 19.00 $ 20.00 $ 21.00 $ 22.00 $ 23.00 $ 24.00 Lab Stock Price $ 7.816 $ 7.980 $ 8.300 $ 8.610 $ 8.910 $ 9.200 $ 9.480 Exchange Ratio 0.4225 0.4200 0.4150 0.4100 0.4050 0.4000 0.3950 Lab Shares 8.6 8.6 8.6 8.6 8.6 8.6 8.6 Golden Shares Issued 3.63 3.61 3.57 3.53 3.48 3.44 3.40 Transaction Value $ 67.2 $ 68.6 $ 71.4 $ 74.0 $ 76.6 $ 79.1 $ 81.5 Golden Stock Price $ 25.00 $ 26.00 $ 27.00 $ 28.00 $ 29.00 $ 30.00 Lab Stock Price $10.000 $10.000 $10.000 $10.000 $10.000 $10.000 Exchange Ratio 0.4000 0.3846 0.3704 0.3571 0.3448 0.3333 Lab Shares 8.6 8.6 8.6 8.6 8.6 8.6 Golden Shares Issued 3.44 3.31 3.19 3.07 2.97 2.87 Transaction Value $ 86.0 $ 86.0 $ 86.0 $ 86.0 $ 86.0 $ 86.0 Golden Stock Price $ 31.00 $ 32.00 $ 33.00 $ 34.00 $ 35.00 Lab Stock Price $10.385 $10.560 $10.725 $10.880 $11.025 Exchange Ratio 0.3350 0.3300 0.3250 0.3200 0.3150 Lab Shares 8.6 8.6 8.6 8.6 8.6 Golden Shares Issued 2.86 2.84 2.80 2.75 2.71 Transaction Value $ 89.3 $ 90.8 $ 92.2 $ 93.6 $ 94.8
- ---------------------------- (i) Mutual out at a Golden price per share of $18.50 (ii) Below Golden price per share of $18.50, the exchange ratio is fixed at 0.4225. (iii) Between price points the exchange ratio will be interpolated proportionately. (iv) Over Golden price per share of $49.00, the exchange ratio is equal to $12.005 and the Average Price. 43 APPENDIX B [LETTERHEAD OF NATWEST MARKETS] March 21, 1996 Board of Directors Veterinary Centers of America, Inc. 3420 Ocean Park Boulevard, Suite 1000 Santa Monica, CA 90405 Gentlemen: You have requested our opinion as to the fairness, to Veterinary Centers of America, Inc. (the "Company"), from a financial point of view, of the consideration to be paid by the Company pursuant to the Agreement and Plan of Merger among the Company, Golden Merger Corporation, a wholly-owned subsidiary of the Company (the "Subsidiary"), and The Pet Practice, Inc. ("Pet Practice"), dated as of March 21, 1996 (the "Merger Agreement"), pursuant to which Pet Practice is to be merged into the Subsidiary. The terms and conditions of the foregoing transaction (the "Merger") are more fully set forth in the Merger Agreement. In arriving at our opinion, we have: (1) reviewed the Merger Agreement; (2) reviewed historical financial and operating data of the Company and Pet Practice; (3) reviewed financial and operating forecasts with respect to Pet Practice provided to us by management representatives of the Company; (4) considered public information of selected comparable companies, and compared Pet Practice, from a financial point of view, with such companies; (5) considered the terms, to the extent publicly available, of selected transactions comparable to the Merger and compared the consideration to be paid by the Company with the consideration involved in such transactions; (6) reviewed market price data and trading activities for Pet Practice common stock; and (7) conducted such other financial studies, analyses and investigations as we deemed appropriate. We also held discussions with management representatives and representatives of the independent accountants of the Company and Pet Practice concerning the business and prospects of Pet Practice and the strategic and operating benefits anticipated by the Company to be derived from the Merger. We were not engaged to independently verify the accuracy or completeness of any information which, we reviewed in arriving at our opinion. We relied upon the accuracy and completeness of all such information, without independent verification. With respect to the financial and operating forecasts provided to us, we assumed, with your approval, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of the Company as to the future financial and operating performance of Pet Practice, consistent with historical data. We also assumed, with your approval, that a reasonable likelihood exists that the strategic and operating benefits anticipated by the Company to be derived from the Merger will be realized. We were not engaged to conduct a physical inspection of any properties or make an independent valuation or appraisal of any assets or liabilities of Pet Practice and we were not furnished with any such valuations or appraisals. We were not engaged to review any legal, accounting or tax aspects of the Merger. Our opinion herein is based on our assessment of economic, market, regulatory and other conditions as they exist and can be evaluated on the date of this letter. Our opinion herein is provided solely for your use in your evaluation of the Merger and is not intended to confer rights or remedies upon any stockholders of the Company or any other persons. National Westminster Bank Plc, New York Branch ("NatWest Markets"), and its affiliates, as part of their investment banking services, are regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. NatWest Markets will receive a fee for rendering this opinion. In the ordinary course of business, our affiliates actively trade the securities of the Company and Pet Practice for their own account and the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. We may provide investment banking and financial advisory services to the Company in the future. It is understood that except as required by law, this letter may not be quoted or referred to in any filing, report, document, release or other communication, whether written or oral, made, prepared, issued or transmitted by the Company without our prior written consent, which will not be unreasonably withheld. On the basis of and subject to the matters set forth herein, we are of the opinion that, as of the date hereof, the consideration to be paid by the Company pursuant to the Merger Agreement is fair to the Company, from a financial point of view. Very truly yours, /s/ National Westminster Bank Plc National Westminster Bank Plc New York Branch APPENDIX C [LETTERHEAD OF SMITH BARNEY] March 21, 1996 The Board of Directors The Pet Practice, Inc. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to the holders of the common stock of The Pet Practice, Inc. ("PPI") of the consideration to be received by such holders pursuant to the terms and subject to the conditions set forth in the Agreement and Plan of Reorganization, dated as of March 21, 1996 (the "Agreement"), by and among PPI, Veterinary Centers of America, Inc. ("VCAI") and Golden Merger Sub, a wholly owned subsidiary of VCAI ("Sub"). As more fully described in the Agreement, (i) PPI will be merged with and into Sub (the "Merger") and (ii) each outstanding share of the common stock, par value $0.01 per share, of PPI (the "PPI Common Stock") will be converted into the right to receive that number of shares of the common stock, par value $0.001 per share, of VCAI (the "VCAI Common Stock") equal to the Exchange Ratio, as described below. As described in the Agreement, the Exchange Ratio will be determined as follows: (i) if the average of the closing prices of VCAI Common Stock on the NASDAQ National Market over the 20 trading day period ending on (and including) the third trading day immediately preceding the date of PPI's stockholders' meeting in respect of the Merger (the "Average Price") is between $25.00 and $30.00 (inclusive), the Exchange Ratio will be determined by dividing $10.00 by the Average Price, (ii) if the Average Price is between $24.00 and $19.00 (inclusive), the Exchange Ratio will be 0.3950 at $24.00 and increased 0.005 for each whole dollar by which the Average Price is less than $24.00, (iii) if the Average Price is $18.50 or less, the Exchange Ratio will be 0.4225, (iv) if the Average Price is equal to or greater than $31.00 and less than $49.00, the Exchange Ratio will be 0.3350 at $31.00 and reduced 0.005 for each whole dollar by which the Average Price is greater than $31.00, (v) if the Average Price is within the ranges described in clause (ii) and (iv) above, but the Average Price is not a whole dollar, then the Exchange Ratio will be determined as that which would have been computed at the nearest whole dollar increased or decreased (as applicable) by an amount equal to 0.005 multiplied by a fraction, the numerator of which will be the difference between the Average Price and such nearest whole dollar, and the denominator of which will be $1.00, (vi) if the Average Price is between $19.00 and $18.50 (exclusive), the Exchange Ratio will be 0.4200 increased by an amount equal to 0.0025 multiplied by a fraction, the numerator of which is the difference between $19.00 and the Average Price and the denominator of which is $0.50, (vii) if the Average Price is between $24.00 and $25.00 (exclusive), the Exchange Ratio will be 0.3950 increased by an amount equal to 0.005 multiplied by a fraction, the numerator of which is the difference between the Average Price and $24.00 and the denominator of which is $1.00, (viii) if the Average Price is between $30.00 and $31.00 (exclusive), the Exchange Ratio will be 0.3333 increased by an amount equal to 0.0017 multiplied by a fraction, the numerator of which is the difference between the Average Price and $30.00 and the denominator of which is $1.00, and (ix) if the Average Price is greater than $49.00, the Exchange Ratio will be determined by dividing $12.005 by the Average Price. The Board of Directors The Pet Practice, Inc. March 21, 1996 Page 2 In arriving at our opinion, we reviewed the Agreement and held discussions with certain senior officers, directors and other representatives and advisors of PPI and certain senior officers and other representatives and advisors of VCAI concerning the businesses, operations and prospects of PPI and VCAI. We examined certain publicly available business and financial information relating to PPI and VCAI as well as certain financial forecasts and other data for PPI and VCAI which were provided to us or otherwise discussed with the respective managements of PPI and VCAI, including information relating to certain strategic implications and operational benefits anticipated to result from the Merger. We reviewed the financial terms of the Merger as set forth in the Agreement in relation to, among other things: current and historical market prices and trading volumes of PPI Common Stock and VCAI Common Stock; the respective companies' historical and projected earnings and operating data; and the capitalization and financial condition of PPI and VCAI. We also considered, to the extent publicly available, the financial terms of certain other similar transactions recently effected which we considered relevant in evaluating the Merger and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered relevant in evaluating those of PPI and VCAI. We also evaluated the potential pro forma financial impact of the Merger on VCAI. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion. In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information and data furnished to or otherwise reviewed by or discussed with us, we have been advised by the managements of PPI and VCAI that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the respective managements of PPI and VCAI as to the future financial performance of PPI and VCAI and the strategic implications and operational benefits anticipated to result from the Merger. We have assumed, with your consent, that the Merger will be treated as a tax-free reorganization for federal income tax purposes. Our opinion, as set forth herein, relates to the relative values of PPI and VCAI. We are not expressing any opinion as to what the value of the VCAI Common Stock actually will be when issued to PPI stockholders pursuant to the Merger or the price at which the VCAI Common Stock will trade subsequent to the Merger. We have not made or been provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of PPI or VCAI nor have we made any physical inspection of the properties or assets of PPI or VCAI. We were not asked to consider, and our opinion does not address, the relative merits of the Merger as compared to any alternative business strategies that might exist for PPI or the effect of any other transaction in which PPI might engage. Our opinion is necessarily based upon information available to us, and financial, stock market and other conditions and circumstances existing and disclosed to us, as of the date hereof. Smith Barney has been engaged to render financial advisory services to PPI in connection with the Merger and will receive a fee for our services, a significant portion of which is contingent upon the consummation of the Merger. We will also receive a fee upon the delivery of this opinion. In the ordinary course of our business, we and our affiliates may actively trade or hold the securities of PPI and VCAI for our own account or for the account of our customers and, accordingly, may at any time hold a long or short position in such securities. We have in the past provided certain investment banking services to PPI unrelated to the proposed Merger, for which services we have received The Board of Directors The Pet Practice, Inc. March 21, 1996 Page 3 compensation. In addition, Smith Barney and its affiliates (including Travelers Group Inc. and its affiliates) may maintain relationships with PPI, VCAI and their respective affiliates. Our advisory services and the opinion expressed herein are provided for the information of the Board of Directors of PPI in its evaluation of the proposed Merger, and our opinion is not intended to be and does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed Merger. Our opinion may not be published or otherwise used or referred to, nor shall any public reference to Smith Barney be made, without our prior written consent. Based upon and subject to the foregoing, our experience as investment bankers, our work as described above and other factors we deemed relevant, we are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from a financial point of view, to the holders of PPI Common Stock. Very truly yours, /s/SMITH BARNEY INC. - -------------------- SMITH BARNEY INC. APPENDIX D VETERINARY CENTERS OF AMERICA, INC. 1996 STOCK INCENTIVE PLAN ARTICLE 1 GENERAL PURPOSE OF PLAN The name of this plan is the Veterinary Centers of America, Inc. 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 Disinterested Person 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. "Disinterested Person" shall have the meaning set forth in Rule 16b- 3(c)(2)(i) under the Exchange Act, or any successor definition adopted by the SEC. "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. "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-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. 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. "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 $.001 per share, of the Company. 2 "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 Committee. The Plan shall be administered by the Committee. SECTION 3.2 Powers in General. The Committee 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 Committee 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. SECTION 3.4 Decisions Final. All decisions made by the Committee 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 3 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 shall be 1,500,000 shares. SECTION 4.2 Unexercised Stock Options; Reacquired Shares. To the extent that any Stock Options expire or are otherwise terminated without being exercised, the shares of Stock underlying such Stock Options (and shares related thereto) shall again be available for issuances in connection with future Stock Options under the Plan. If and to the extent that the Company receives 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 will not increase the number of shares available for issuance under the Plan. ARTICLE 5 ELIGIBILITY Outside Directors who are designated as Eligible Persons by the Board of Directors, Outside Directors who are not so designated as Eligible Persons (but only to the extent provided by Article 7 hereof), 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 officers and 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. 4 (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 $________; provided, however, that if the aggregate Fair Market Value of such shares exceeds $________, then the incremental portion in excess of $________ 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 Committee 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 Committee, in 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 Committee, 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 Committee 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 Committee, 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 Committee. 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 SECTION 7.1 Mandatory Grants to Outside Directors. Notwithstanding any other provision of this Plan, the grant of Stock Options to Outside Directors shall be subject to the following limitations of this Article 7. (a) Upon the initial election or appointment of an Outside Director, the Committee shall grant to such member, at the first meeting of the Committee following the date of such election or appointment, a ten year Non-Statutory Stock Option to purchase 10,000 shares of Stock. (b) The Committee shall grant to each Outside Director, effective as of each annual meeting of the Company's stockholders at the conclusion of which the Outside Director still serves as a Director of the Company, a ten year Non- Statutory Stock Option to purchase 5,000 shares of Stock. (c) All Stock Options granted to Outside Directors under this Article 7 shall be exercisable at an Exercise Price equal to 100% of the Fair Market Value of a share of Stock on the Date of Grant. 5 (d) All Stock Options granted to Outside Directors under this Article 7 will vest or become exercisable as follows: 33% of the Stock Options (rounded up to the nearest whole share) shall vest on the first anniversary of the Date of Grant of the Stock Options, and 33% of the Stock Options (rounded up to the nearest whole share) shall vest on the second anniversary of the Date of Grant of the Stock Options, and the remaining Stock Options shall vest on the third anniversary of the Date of Grant of the Stock Options. (e) Unless otherwise provided in the Plan, all provisions regarding the terms of Non-Statutory Stock Options, other than those pertaining to the Date of Grant, the number of shares covered by such grant, term and Exercise Price shall be applicable to the Stock Options granted to Outside Directors under this Article 7. SECTION 7.2 Prohibition of Other Grants to Outside Directors. Notwithstanding any other provisions in this Plan, the mandatory grants described in this Article 7 shall constitute the only grants under the Plan permitted to be made to Outside Directors unless such persons are designated Eligible Persons by the Board of Directors. SECTION 7.3 Prohibition Against Certain Amendments. Notwithstanding any other provisions of this Plan, the provisions of this Article 7 shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. 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 Committee 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 Committee 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 Committee may provide, in the alternative, that each Stock Option granted under the Plan shall 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). 6 (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 Committee 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 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 Committee, 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 7 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 (c) materially modify the requirements for eligibility under the Plan. The Committee 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, no Participant shall be granted Stock Options with respect to _______ shares of Stock. (b) No View to Distribute. The Committee 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 Committee 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 Committee 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. 8 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 Committee 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 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 Committee 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. (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 Committee as provided in Subsection (iii) below, the Election once made will be irrevocable. (iii) No Election is valid unless the Committee consents to the Election; the Committee 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 Committee 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; 9 (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 Committee consents to an Election of a Withholding Right: (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 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 Committee 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 Committee 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 Committee 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 Committee, 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 Committee shall determine; and (iii) bear interest, if any, at such rate as the Committee 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 Committee; provided, however, that the term of the loan, including extensions, shall not exceed 10 years. Unless the Committee determines otherwise, when a loan shall have been made, shares of Stock 10 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, 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. Each Stock Option Agreement shall provide that the Stock Options granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and the Stock Options may be exercised, during the lifetime of the Stock Option holder, only by the Stock Option holder or by his or her guardian or legal representative. 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 Committee may require. SECTION 10.8 Recapitalizations. Each Stock Option Agreement and Stock Purchase Agreement shall contain provisions required to reflect the provisions of Article 8. SECTION 10.9 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 10.10 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 Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. SECTION 10.11 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 Committee may deem advisable. ARTICLE 11 EFFECTIVE DATE OF PLAN The Plan shall become effective on ___________, 1996, subject to approval by the Company's stockholders, which approval must be obtained within one year from the date the Plan is adopted by the Board. ARTICLE 12 TERM OF PLAN No Stock Options shall be granted pursuant to the Plan on or after _____________ but Stock Options therefore granted may extend beyond that date. 11 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. 12 APPENDIX E VETERINARY CENTERS OF AMERICA, INC. 1996 EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE OF PLAN. The purpose of this 1996 Employee Stock Purchase Plan (the "Plan") is to encourage a sense of proprietorship on the part of employees of Veterinary Centers of America, Inc., a Delaware corporation (the "Company"), and its Subsidiary Corporations (as defined below) by assisting them in making regular purchases of shares of stock of the Company, and thus to benefit the Company by increasing such employees' interest in the growth of the Company and subsidiary corporations and in such entities' financial success. Participation in the Plan is entirely voluntary, and the Company makes no recommendation to its employees as to whether they should participate. 2. DEFINITIONS. 2.1 "Base Earnings" shall mean the Employee's regular salary rate before deductions required by law and deductions authorized by the Employee. In the case of Employees primarily compensated on a commission basis, Base Earnings may include an amount of commission earnings not to exceed $__________ per month. Base Earnings do not include: pay for overtime, extended workweek schedules or any other form of extra compensation; payments by the Company or Subsidiary Corporations, as applicable, for social security, worker's compensation, unemployment compensation, any disability payments or other payments required by statute; or contributions by the Company or Subsidiary Corporations, as applicable, for insurance, annuity or other employee benefit plans. 2.2 "Board" shall mean the Board of Directors of the Company. 2.3 "Broker" shall mean the financial institution designated to act as the Broker under the Plan pursuant to Paragraph 17 hereof. 2.4 "Brokerage Account" shall mean an account established on behalf of each Participant pursuant to Paragraph 9.1 hereof. 2.5 "Committee" shall mean a Stock Purchase Committee appointed by the Board. 2.6 "Common Stock" shall mean the Common Stock, par value $0.001 per share, of the Company. 2.7 "Company" shall mean Veterinary Centers of America, Inc., a Delaware corporation, or any successor. 2.8 "Company Account" shall mean the account established in the name of the Company pursuant to Paragraph 7.2 hereof. 2.9 "Employee" shall mean any person who is currently employed by the Company or one of its Subsidiary Corporations for at least 20 hours per week and has been so employed continuously during the preceding 90 days (provided that the Board or the Committee may in its discretion waive such 90-day requirement), excluding non-Employees and persons on leave of absence. An Employee may also be referred to herein as a "Participant". 2.10 "Enrollment Form" shall mean the Employee Stock Purchase Plan Enrollment Form. 2.11 "Interested Party" shall mean the persons described in Paragraph 16 hereof. 2.12 "Plan" shall mean this Employee Stock Purchase Plan. 2.13 "Subsidiary Corporation" shall mean a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or a Subsidiary Corporation, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary Corporation. 3. ADMINISTRATION. The Plan shall be administered by the Board or, in the discretion of the Board, by the Committee which shall consist of not less than two persons to be appointed by, and to serve at the pleasure of, the Board. No member of the Board shall be eligible to participate in the Plan. An aggregate of 250,000 shares of Common Stock shall be subject to the Plan, provided that such number shall be automatically adjusted to reflect any stock split, reverse stock split, stock dividend, recapitalization, merger, consolidation, combination, reclassification or similar corporate change. The Board or the Committee shall have full authority to construe, interpret, apply and administer the Plan and to establish and amend such rules and procedures as it deems necessary or appropriate from time to time for the proper administration of the Plan. In addition, the Board or the Committee may engage or hire such persons to provide administrative, recordkeeping and other similar services in connection with its administration of the Plan, as it may deem necessary or appropriate from time to time. The members of the Board and the Committee and the officers of the Company shall be entitled to rely upon all certificates and reports made by such persons, and upon all opinions given by any legal counsel or investment adviser selected or approved by the Board or the Committee. The members of the Board and the Committee and the officers of the Company shall be fully protected in respect of any action taken or to be taken by them in good faith in reliance upon any such certificates, reports, opinions or other advice of any such person, and all actions so taken shall be conclusive upon each of them and upon all Participants. The Company shall indemnify each member of the Board and the Committee and any other officer or employee of the Company who is designated to carry out any responsibilities under the Plan for any liability arising out of or connected with his or her duties hereunder, except such liability as may arise from such person's gross negligence or willful misconduct. 4. ELIGIBILITY. Any Employee as defined in Paragraph 2.9 shall be eligible to participate in the Plan. Any Employee participating in the Plan who, after the commencement of a particular Offering Period, as defined in Paragraph 5, shall for any reason fail to meet the standards of eligibility, shall be considered to have withdrawn from the Plan, effective as of the date upon which the Participant shall have become ineligible. Any reference in the Plan to withdrawal by a Participant from the Plan shall include ineligibility as described in this Paragraph 4. 5. OFFERING PERIODS. Shares shall be offered pursuant to this Plan in consecutive periods ("Offering Periods") of three months duration each, commencing on the effective date of the Plan pursuant to Paragraph 22 and continuing thereafter until terminated in accordance with Paragraph 15. The Board shall have the power to change the duration of Offering Periods if such change is announced at least 10 days prior to the scheduled beginning of the first Offering Period to be affected. 6. PARTICIPATION. All Employees of the Company, other than directors and Executive Officers (as defined below) are eligible to participate in the Plan. Participation in the Plan is optional. An eligible Employee may apply to participate in the Plan by submitting to the Company's payroll office an Enrollment Form authorizing a payroll deduction and purchase of shares. The Enrollment Form shall be on a form provided by the Company and may be submitted to the Company at any time. Participation shall not be effective until the Enrollment Form is reviewed and accepted by the Company by written notice to the Employee. Once the Enrollment Form has been reviewed and accepted by the Company, participation in the Plan shall commence immediately. Executive Officers include the chief executive officer, chief operating officer, president, chief financial officer, executive vice president, or senior vice president of the Company or a Subsidiary Corporation. 7. PAYROLL DEDUCTIONS. 7.1 Election. At the time a Participant submits an Enrollment Form, the Participant shall elect to have payroll deductions made on each payday during the Offering Period at a whole percentage from 5% to 15% of the Base Earning which the Participant is to receive on such payday. In the case of Participants primarily compensated on a commission basis, a Participant can elect to have payroll deductions made on each payday during 2 the Offering Period at a whole percentage from 5% to 15% on the commission portion of said Participant's Base Earnings, not to exceed $__________ per quarter. 7.2 Holding of Funds. All payroll deductions authorized by each Participant shall be held in an interest-bearing account with a broker or financial institution designated by the Board of Directors in the name of the Veterinary Centers of America, Inc. Employee Stock Purchase Plan (the "Company Account") until used to purchase Common Stock and shall not be used for any other purpose. The Company shall maintain records reflecting the amount in the Company Account for each Participant. Interest accruing on the payroll deductions credited to the Company Account shall be used to defray costs associated with administering the Plan and will not be available to purchase shares of Common Stock under Paragraph 9. All withholding taxes in connection with a Participant's payroll deduction shall be deducted from the remainder of the Base Earnings paid to the Participant and not from the amount to be placed in the Company Account. A Participant may not make any additional payments into the Company Account except as provided in Paragraph 18. All amounts in the Company Account derived from payroll deductions shall be referred to as the "Participant Contribution." 7.3 Changes in Election. Participation in the Plan will continue until the Participant withdraws from the Plan, is no longer eligible to participate, or the Plan is terminated. Such participation shall be on the basis of the payroll deduction election submitted by such Employee to the Company and then currently in effect. Each such election shall remain in effect until the effective date of any change in the amount of payroll deduction as requested by the Participant and accepted by the Company. To be effective in any Offering Period, a change in the amount of payroll deduction must be requested in writing and submitted to the Company. A Participant may change his withholding percentage at any time during an Offering Period but only one time during any one Offering Period. If a Participant's Base Earnings change during an Offering Period, the amount of the payroll deduction will be changed to the figure reflecting the Participant's previously elected deduction percentage applied to his or her new Base Earnings (but will not in any event be in excess of 15% of the Participant's Base Earnings). 8. CONTRIBUTION BY THE COMPANY OR A SUBSIDIARY. The Company or a subsidiary shall make matching contributions (the "Matching Contribution") as follows: 8.1 Officers and Directors Not Participants. An "Executive Officer" shall mean a chief executive officer, chief operating officer, president, chief financial officer, executive vice president, or senior vice president of the Company or a Subsidiary Corporation and shall be determined as of the end of an Offering Period. 8.2 All Participants. For each Participant in the Plan who remains an Employee of the Company or a Subsidiary Corporation for at least one year after the termination of a particular Offering Period, the Company or Subsidiary Corporation shall make upon the first anniversary of the date of termination of such Offering Period a Matching Contribution up to one-fifth of the amount contributed on behalf of such Participant during such one year earlier Offering Period, as determined in the discretion of the Committee and subject to Paragraph 8.3. Withholding taxes as and when required in connection with such Matching Contribution shall be withheld based upon the person's existing withholding percentages or as otherwise required by law from the Participants's Base Earnings. 8.3 Fractional Share Calculations. Fractional shares shall not be issued regarding the Matching Contribution. If the above calculation results in an incremental share calculation which is .5, or greater, an additional whole share shall be issued. If the above calculation results in an incremental share calculation which is less than .5, no share shall be issued regarding such fraction. 8.4 Timing of Withholding. The Company shall withhold taxes in two subsequent pay periods or as otherwise required by law. 9. PURCHASE OF SHARES REGARDING PARTICIPANT'S CONTRIBUTION. 3 9.1 Brokerage Account. Following the acceptance by the Company of a Participant's Enrollment Form, the Company shall direct the Broker to open and maintain an account (the "Brokerage Account") in the name of such Participant and to purchase shares of Common Stock on behalf of such Participant as permitted under this Plan. 9.2 Delivery of Funds to Broker from Company. The Company, from time to time during an Offering Period, shall deliver to the Broker an amount equal to the total of all Participant Contributions together with a list of the amount of such Contributions from each Participant. 9.3 Broker's Purchase of Shares. From time to time, the Broker, as agent for the Participants, shall purchase as many full shares or fractional shares of Common Stock as such Contributions will permit. The shares to be purchased shall be purchased at the then current fair market value and may, at the election of the Company, be either treasury shares, shares authorized but unissued, or shares purchased on the open market. The amount of Common Stock purchased by the Broker pursuant to this Paragraph 9.3 shall be allocated to the respective Brokerage Account of each Participant on the basis of the average cost of the Common Stock so purchased, in proportion to the amount allocable to each Participant. At the end of each Offering Period under the Plan, each Participant shall acquire full ownership of all full shares and fractional shares of Common Stock purchased for his Brokerage Account. Unless otherwise requested by the Participant, all such full shares and fractional shares so purchased shall be registered in the name of the Broker and will remain so registered until delivery is requested in accordance with Paragraph 9.5. 9.4 Fees and Commissions. The Company shall pay the Broker's administrative charges for opening and maintaining the Brokerage Accounts for active Participants and the brokerage commissions on purchases made for such Brokerage Accounts which are attributable to Participant Contributions and Matching Contributions under the Plan. Such Brokerage Accounts may be utilized for other transactions as described in Paragraph 9.5 below, but any fees, commissions or other charges by the Broker in connection with such other transactions shall, in certain circumstances described in Paragraph 9.5 be payable directly to the Broker by the Participant. 9.5 Participant Accounts with Broker. Each Participant's Brokerage Account shall be credited with all cash dividends paid with respect to full shares and fractional shares of Common Stock purchased pursuant to Paragraphs 9.3 and 10 unless such shares are registered in the Participant's name. Unless otherwise instructed by the Participant, dividends on such Common Stock shall automatically be reinvested in Common Stock as soon as practicable following receipt of such dividends by the Broker. Applicable fees and brokerage commissions on the reinvestment of such dividends will be payable by the Participant. Any stock dividends or stock splits which are made with respect to shares of Common Stock purchased pursuant to Paragraphs 9.3 and 10 shall be credited to the Participant's Brokerage Account without charge. Any Participant may request that a certificate for any or all of the full shares of Common Stock credited to his Brokerage Account be delivered to him at any time, provided, however, the Participant shall be charged by the Broker for any fees applicable to such requests. A Participant may request the Broker at any time to sell any or all of the full shares or fractional shares of Common Stock credited to his Brokerage Account. Unless otherwise instructed by the Participant, upon such sale, the Broker will mail to the Participant a check for the proceeds, less any applicable fees and brokerage commissions and any transfer taxes, registration fees or other normal charges which shall be payable by the Participant. Except as provided in Paragraph 13, a request by the Participant to the Broker to sell shares of Common Stock or for delivery of certificates shall not affect an Employee's status as a Participant. A Participant who has a Brokerage Account with the Broker may purchase additional shares of Common Stock of the Company for his Brokerage Account at any time by separate purchases arranged through the Broker. When any such purchases are made the Participant will be charged by the Broker for any and all fees and brokerage commissions applicable to such transactions. In addition, any subsequent transactions with respect to such shares acquired including, but not limited to, purchases, sales, reinvestment or dividends, requests for certificates and crediting of stock dividends or stock splits, shall be at the expense of the Participant and the Broker shall charge the Participant directly for any and all fees and brokerage commissions applicable to such transactions. 4 10. ISSUANCE OF SHARES REGARDING MATCHING CONTRIBUTION. Subject to Paragraph 15, on the first anniversary of the date of termination of an Offering Period, each Participant's direct employer shall make the Matching Contribution for each qualified Participant in an amount described in Paragraph 8 by delivering to the Broker an amount equal to the total funds necessary to make the Matching Contributions described in Paragraph 8 together with a list of the number of shares allocable to the Brokerage Account of each Participant. As soon as practicable thereafter, the Broker shall purchase the number of shares of Common Stock required in order to make the Matching Contributions. The shares to be purchased shall be purchased at the then current fair market value and may, at the election of the Company, be either treasury shares, shares authorized but unissued, or shares purchased on the open market. At the time of such purchases, each Participant shall immediately acquire full ownership of all full shares of Common Stock purchased. Unless otherwise requested by the Participant, all such shares so purchased shall be registered in the name of the Broker and will remain so registered until delivery is requested in accordance with Paragraph 9.5. 11. VOTING AND SHARES. All voting rights with respect to the full shares of Common Stock held in the Brokerage Account of each Participant may be exercised by each Participant, and the Broker shall exercise such voting rights in accordance with the Participant's signed proxy instruction duly delivered to the Broker. Fractional shares cannot be voted. 12. STATEMENT OF ACCOUNT. As soon as practicable after the end of each Offering Period, the Broker shall deliver to each Participant a statement regarding all activity in his or her Brokerage Account, including his or her participation in the Plan for such Offering Period. Such statement will show the number of shares acquired or sold, the price per share, the transaction date, stock splits, dividends paid, dividends reinvested and the total number of shares held in the Brokerage Account. The Broker shall also deliver to each Participant as promptly as practicable, by mail or otherwise, all notices or meetings, proxy statements and other material distributed by the Company to its stockholders, including the Company's annual report to its stockholders containing audited financial statements. 13. WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan, effective as of the end of any Offering Period, by giving written notice to the Company not later than the 15th day prior to the end of such Offering Period. Upon any such withdrawal, the Participant shall be entitled to receive as promptly as possible from the Company all the Participant's payroll deductions credited to the Company Account in his or her name during the applicable Offering Period, but shall not be entitled to the benefit of any Matching Contributions. In the event a Participant withdraws from the Plan pursuant to this Paragraph 13, the Company shall notify the Broker as soon as practicable and the Broker shall maintain or close the Participant's Brokerage Account in accordance with the procedures set forth in Paragraph 16. A Participant who withdraws from the Plan may not reenter the Plan except by execution and delivery of a new Enrollment Form and payroll deduction election, and his or her participation shall be effective upon acceptance of the Enrollment Form by the Company by written notice to the Employee not sooner than 30 days after receipt of the Enrollment Form, provided that the Company may in its discretion accept an Enrollment Form prior to the expiration of such 30 days. 14. TERMINATION OF EMPLOYEE. In the event of the termination of a Participant's employment with the Company or a Subsidiary Corporation for any reason during an Offering Period, including but not limited to the death of a Participant, participation in the Plan shall terminate as well as any rights to Matching Contributions. The Participant or the personal representative of the Participant shall be entitled to receive an amount of cash determined in the same manner and payable at the same time as if the Participant had withdrawn from the Plan by giving notice of withdrawal effective as of the date such termination occurs. Notwithstanding the foregoing, termination of employment by one employer for the purpose of being re-employed immediately by the Company or one of its Subsidiary Corporations shall not be considered termination under this Paragraph 14. Any reference in this Plan to withdrawal by a Participant from the Plan shall include termination as described in this Paragraph 14. In the event of the termination of a Participant's employment pursuant to this Paragraph 14, the Company shall notify the Broker as soon as practicable and the Broker shall maintain or close the Participant's Brokerage Account in accordance with the procedures set forth in Paragraph 16. 5 15. AMENDMENT AND TERMINATION OF PLAN. This Plan may be amended or terminated by the Board at any time and such amendment or termination shall be communicated in writing to all Participants as soon as practicable after the date of such Board action. If the Plan is terminated, each Participant shall be entitled to receive as promptly as possible from the Company all payroll deductions attributable to him or her which have not been used to purchase Common Stock pursuant to Paragraph 9, together with the accrued interest on the Participant's funds held in the Company Account (collectively, the "Account Balance"), but he or she shall not be entitled to the benefit of any Matching Contributions with respect to such deductions or interest or otherwise for any past or present Offering Periods. In any event, the Plan shall terminate 20 years from the date the Plan is adopted or the date the Plan is approved by the stockholders, whichever is earlier. In the event that the Company terminates the Plan pursuant to this Paragraph 15, the Broker shall maintain or close the Participant's Brokerage Accounts in accordance with the procedures set forth in Paragraph 16. Notwithstanding any other provision to the contrary, any provision of this Plan may be amended by the Board or the Committee as required to obtain necessary approvals of governmental agencies if such change does not materially alter the rights and interests of stockholders of the Company. If there are any changes in the capitalization of the Company, such as through mergers, consolidations, reorganizations, recapitalizations, stock splits or stock dividends, appropriate adjustments will be made by the Company in the number of shares of its Common Stock subject to purchase under the Plan. 16. DISPOSITION OF BROKERAGE ACCOUNT FOLLOWING WITHDRAWAL, DEATH, TERMINATION OF EMPLOYMENT OR TERMINATION OF PLAN. As soon as practicable following the notification of the withdrawal of a Participant from the Plan, the notification of the termination of a Participant's employment with the Company or a Subsidiary Corporation (which includes the death of the Participant) or of the notification that the Plan is terminated pursuant to Paragraph 15 hereof, the Broker shall notify the former Participant, or in the event of his death, his designated beneficiary, if any, or if no designated beneficiary the estate of the deceased Participant (collectively, an "Interested Party"), regarding the disposition of the former Participant's or deceased Participant's Brokerage Account. As soon as practicable following receipt of the notification set forth in the preceding sentence, the Interested Party may request the Broker to dispose of the former Participant's or deceased Participant's Brokerage Account, at the Interested Party's expense, by any one of the following means: (a) The Interested Party may request the Broker to maintain the former Participant's or deceased Participant's Brokerage Account for the benefit of the Interested Party or any other person. The Interested Party shall be charged by the Broker for all maintenance fees and any and all other fees in connection with the Brokerage Account; (b) The Interested Party may request the Broker to sell all of the full shares and fractional shares of Common Stock, if any, held in the former Participant's or deceased Participant's Brokerage Account. Upon such sale, the Broker will mail to the Interested Party a check for the proceeds, less any applicable fees and brokerage commissions and any transfer taxes, registration fees or other charges which shall be payable by the Interested Party; or (c) The Interested Party may request the Broker to provide a certificate for all of the full shares of Common Stock, if any, together with a check in an amount equal to the proceeds of the sale of any fractional shares of Common Stock held in the former Participant's or deceased Participant's Brokerage Account, less any applicable fees and brokerage commissions and any transfer taxes, registration fees or other charges which are payable by the Interested Party. Maintenance of the former Participant's or deceased Participant's Brokerage Account pursuant to this Paragraph 16 shall confer no rights under the Plan. 17. BROKER. The Company may administer the Plan without the use of a Broker or may appoint a Broker. Any Broker appointed by the Company shall be vested with all the powers, rights, duties and immunities described herein. The relationship between the Broker and the Participant will be the normal relationship of a broker and its client, and the Company assumes no responsibility in this respect. 6 18. INITIAL CONTRIBUTION. Any Participant who files an Enrollment Form prior to the first Offering Period may elect to make an initial contribution ("Initial Contribution") to be allocated to him or her in the Company Account, by check payable to the Company, in any amount up to 5% of his or her Base Earnings for the period between ________________ and the commencement of the first Offering Period. The amount of the Initial Contribution shall be matched as provided in Paragraph 8, and withholding taxes in connection with such Matching Contribution shall be deducted in the same manner as provided in Paragraph 8. 18.1 Lump Sum Contribution. The Board and/or the Committee may from time to time in its discretion allow any Participant in the Plan to make a lump sum contribution ("Lump Sum Contribution") to be credited to him or her in the Company account, by check payable to the Company, in any amount up to 15% of his or her Base Earnings, including commissions as set forth in Paragraph 7.1, for a period prescribed by the Board and/or the Committee. The amount of the Lump Sum Contribution shall be matched as provided in Paragraph 8, and withholding taxes in connection with such Matching Contribution shall be deducted in the same manner as provided in Paragraph 8. 19. CONDITIONS TO ISSUANCE OF SHARES. Shares shall not be issued under the Plan unless issuance and delivery of such shares pursuant to the Plan shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, the securities laws of the state in which any Employee resides, NASD requirements and the requirements of any stock exchange upon which the Common Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. By execution of the Enrollment form, the Participant covenants and agrees that all shares are being purchased only for investment and without any present intention to sell or distribute such shares. 20. NOTICE. 20.1 To Company or Subsidiaries. Any notice hereunder to the Company or to its Subsidiary Corporations shall be in writing and such notice shall be deemed made only when delivered or three days after being mailed by certified mail return receipt requested to the Company's principal office at 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405 or to such other address as the Company may designate by notice to the Participants. 20.2 To Participant. Any notice to a Participant hereunder shall be in writing and any such communication and any delivery to a Participant shall be deemed made if mailed or delivered to the Participant at such address as the Participant may have on file with the Company. 21. MISCELLANEOUS. 21.1 No Limitation on Termination of Employment. Nothing in the Plan shall in any manner be construed to limit in any way the right of the Company or any of its Subsidiary Corporations to terminate an Employee's employment at any time, without regard to the effect of such termination on any right such Employee would otherwise have under the Plan, or give any right to an Employee to remain employed by the Company in any particular position or at any particular rate of remuneration. 21.2 Liability. The Company, its Subsidiary Corporations, any member of the Board or Committee and any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, shall have no liability to any party for any action taken or not taken in good faith under the Plan, or based on or arising out of a determination of any questions under the Plan or an interpretation, administration or application of the Plan made in good faith. 21.3 Captions. The captions of the paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 7 21.4 Assignment. Any rights of Employees hereunder shall be nonforfeitable, and no Account Balance or contribution made by any employer may revert or inure to the benefit of the Company or any Subsidiary Corporation, provided that no Participant shall be entitled to sell, assign, pledge or hypothecate any right or interest in his or her Account Balance. 21.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE IN AND TO BE PERFORMED WITHIN THAT STATE. 21.6 Severability. In case any provision of this Plan shall be held illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 21.7 Successors. The provisions of this Plan shall bind and inure to the Benefit of the Company and its successors and assigns. The term "successors" as used herein shall include any corporate or other business entity which shall by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. 22. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon the first day of the month after which the Board approves the Plan, subject to ratification by the stockholders of the Company, and all necessary approvals of governmental agencies have been received. 8 APPENDIX F EXCHANGE RATES
VCAI PETS EXCHANGE RATIO ------ ----------- -------------- 12.000 5.070 0.4225 12.250 5.176 0.4225 12.500 5.281 0.4225 12.750 5.387 0.4225 13.000 5.493 0.4225 13.250 5.598 0.4225 13.500 5.704 0.4225 13.750 5.809 0.4225 14.000 5.915 0.4225 14.250 6.021 0.4225 14.500 6.126 0.4225 14.750 6.232 0.4225 15.000 6.338 0.4225 15.250 6.443 0.4225 15.500 6.549 0.4225 15.750 6.654 0.4225 16.000 6.760 0.4225 16.250 6.866 0.4225 16.500 6.971 0.4225 16.750 7.077 0.4225 17.000 7.183 0.4225 17.250 7.288 0.4225 17.500 7.394 0.4225 17.750 7.499 0.4225 18.000 7.605 0.4225 18.250 7.711 0.4225 18.500 7.816 0.4225 18.750 7.898 0.4213 19.000 7.980 0.4200 19.250 8.061 0.4188 19.500 8.141 0.4175 19.750 8.221 0.4163 20.000 8.300 0.4150 20.250 8.378 0.4138 20.500 8.456 0.4125 20.750 8.533 0.4113 21.000 8.610 0.4100 21.250 8.686 0.4088 21.500 8.761 0.4075 21.750 8.836 0.4063 22.000 8.910 0.4050 22.250 8.983 0.4038 22.500 9.056 0.4025 22.750 9.128 0.4013 23.000 9.200 0.4000 23.250 9.271 0.3988 23.500 9.341 0.3975 23.750 9.411 0.3963
VCAI PETS EXCHANGE RATIO ------ ----------- -------------- 24.000 9.480 0.3950 24.250 9.609 0.3963 24.500 9.739 0.3975 24.750 9.869 0.3988 25.000 10.000 0.4000 25.250 10.000 0.3960 25.750 10.000 0.3883 26.000 10.000 0.3846 26.250 10.000 0.3810 26.500 10.000 0.3774 26.750 10.000 0.3738 27.000 10.000 0.3704 27.250 10.000 0.3670 27.500 10.000 0.3636 27.750 10.000 0.3604 28.000 10.000 0.3571 28.250 10.000 0.3540 28.500 10.000 0.3509 28.750 10.000 0.3478 29.000 10.000 0.3448 29.250 10.000 0.3419 29.500 10.000 0.3390 29.750 10.000 0.3361 30.000 10.000 0.3333 30.250 10.096 0.3338 30.500 10.192 0.3342 30.750 10.288 0.3346 31.000 10.385 0.3350 31.250 10.430 0.3338 31.500 10.474 0.3325 31.750 10.517 0.3313 32.000 10.560 0.3300 32.250 10.602 0.3288 32.500 10.644 0.3275 32.750 10.685 0.3263 33.000 10.725 0.3250 33.250 10.765 0.3238 33.500 10.804 0.3225 33.750 10.842 0.3213 34.000 10.880 0.3200 34.250 10.917 0.3188 34.500 10.954 0.3175 34.750 10.990 0.3163 35.000 11.025 0.3150 35.250 11.060 0.3138 35.500 11.094 0.3125 35.750 11.127 0.3113 36.000 11.160 0.3100 36.250 11.192 0.3088 36.500 11.224 0.3075 36.750 11.255 0.3063 37.000 11.285 0.3050
2
VCAI PETS EXCHANGE RATIO ------ ----------- -------------- 37.250 11.315 0.3038 37.500 11.344 0.3025 37.750 11.372 0.3013 38.000 11.400 0.3000 38.250 11.427 0.2988 38.500 11.454 0.2975 38.750 11.480 0.2936 39.000 11.505 0.2950 39.250 11.530 0.2938 39.500 11.554 0.2925 39.750 11.577 0.2913 40.000 11.600 0.2900 40.250 11.622 0.2888 40.500 11.644 0.2875 40.750 11.665 0.2863 41.000 11.685 0.2850 41.250 11.705 0.2838 41.500 11.724 0.2825 41.750 11.742 0.2813 42.000 11.760 0.2880 42.250 11.777 0.2788 42.500 11.794 0.2775 42.750 11.810 0.2763 43.000 11.825 0.2750 43.250 11.840 0.2738 43.500 11.854 0.2725 43.750 11.867 0.2713 44.000 11.880 0.2700 44.250 11.892 0.2688 44.500 11.904 0.2675 44.750 11.915 0.2663 45.000 11.925 0.2650 45.250 11.935 0.2638 45.500 11.944 0.2625 45.750 11.952 0.2613 46.000 11.960 0.2600 46.250 11.967 0.2588 46.500 11.974 0.2575 46.750 11.980 0.2563 47.000 11.985 0.2550 47.250 11.900 0.2538 47.500 11.994 0.2525 47.750 11.997 0.2513 48.000 12.000 0.2500 48.250 12.002 0.2488 48.500 12.004 0.2475 48.750 12.005 0.2463 49.000 12.005 0.2450 49.250 12.005 0.2438 49.500 12.005 0.2425 49.750 12.005 0.2413 50.000 12.005 0.2401
3
VCAI PETS EXCHANGE RATIO ------ ----------- -------------- 50.250 12.005 0.2389 50.500 12.005 0.2377 50.750 12.005 0.2366 51.000 12.005 0.2354 51.250 12.005 0.2342 51.500 12.005 0.2331 51.750 12.005 0.2320 52.000 12.005 0.2309 52.250 12.005 0.2298 52.500 12.005 0.2287 57.750 12.005 0.2276 53.000 12.005 0.2265 53.250 12.005 0.2254 53.500 12.005 0.2244 53.750 12.005 0.2233 54.000 12.005 0.2223 54.250 12.005 0.2213 54.500 12.005 0.2203 54.750 12.005 0.2193 55.000 12.005 0.2183 55.250 12.005 0.2173 55.500 12.005 0.2163 55.750 12.005 0.2153 56.000 12.005 0.2144 56.250 12.005 0.2134 56.500 12.005 0.2125 56.750 12.005 0.2115 57.000 12.005 0.2106 57.250 12.005 0.2097 57.500 12.005 0.2088 57.750 12.005 0.2079 58.000 12.005 0.2070 58.250 12.005 0.2061 58.500 12.005 0.2052 58.750 12.005 0.2043 59.000 12.005 0.2035 59.250 12.005 0.2026 59.500 12.005 0.2018 59.750 12.005 0.2009 60.000 12.005 0.2001
4 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article Nine of the Registrant's Certificate of Incorporation and Article Five of its Bylaws provide for the indemnification by the Registrant of each director, officer and employee of the Registrant to the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended. Section 145 of the Delaware General Corporation Law provides in relevant part that a corporation may indemnify 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 (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at 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 such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person 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 such person's conduct was unlawful. In addition, Section 145 provides that a corporation may 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 such person is or was a director, officer, employee or agent of the corporation, or is or was serving at 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) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall 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 Delaware Court of Chancery or the court in which such 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 Delaware Court of Chancery or such other court shall deem proper. Delaware law further provides that nothing in the above-described provisions shall be deemed exclusive of any other rights to indemnification or advancement of expenses to which any person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Article Nine of the Company's Certificate of Incorporation provides that a director of the Registrant shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director. Section 102(b)(7) of the Delaware General Corporation Law provides that a provision so limiting the personal liability of a director shall not eliminate or limit the liability of a director for, among other things: breach of the duty of loyalty; acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; unlawful payment of dividends; and transactions from which the director derived an improper personal benefit. The Registrant has entered into separate but identical indemnity agreements (the "Indemnity Agreements") with each director of the Registrant and certain officers of the Registrant (the "Indemnitees"). Pursuant to the terms and conditions of the Indemnity Agreements, the Registrant indemnified each Indemnitee against any amounts which he or she becomes legally obligated to pay in connection with any claim against him or her based upon any action or inaction which he or she may commit, omit or suffer while acting in his or her capacity as a director and/or officer of the Registrant or its subsidiaries, provided, however, that Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action, had no reasonable cause to believe Indemnitee's conduct was unlawful. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: A list of exhibits filed with this Registration Statement on Form S-4 is set forth in the Exhibit Index, and is incorporated herein by reference. II-1 ITEM 22. UNDERTAKINGS. (1) The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The Registrant undertakes that every prospectus (i) that is filed pursuant to Paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each post-effective amendment 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. Insofar as indemnification for liabilities arising under the Securities Act of 1933 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 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 or controlling persons 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 controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-2 (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-4 and has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Monica, and State of California on the 24th day of June, 1996. VETERINARY CENTERS OF AMERICA, INC. By: /s/ Robert L. Antin ---------------------------------------- Robert L. Antin, Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Antin and Tomas W. Fuller or any one of them, his attorney-in-fact and agent, with full power of substitution, for him in any and all capacities, to sign any amendments to this Registration Statement on Form S-4, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or their substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-4 has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Robert L. Antin President, Chief Executive Officer - --------------------- and Chairman of the Board June 24, 1996 Robert L. Antin (Principal Executive Officer and --- Director) /s/ Arthur J. Antin Senior Vice President, Chief - --------------------- Operating Officer, Secretary and June 24, 1996 Arthur J. Antin Director --- /s/ Neil Tauber Senior Vice President, Treasurer June 24, 1996 - --------------------- and Director --- Neil Tauber II-4 /s/ Tomas W. Fuller Vice President, Chief Financial June 24, 1996 - --------------------- Officer and Assistant Secretary --- Tomas W. Fuller /s/ Deborah W. Moore Vice President, Controller June 24, 1996 - --------------------- (Principal Accounting Officer) --- Deborah W. Moore Director June , 1996 - --------------------- --- John Heil /s/ John Chickering Director June 24, 1996 - --------------------- --- John Chickering /s/ Richard Gillespie Director June 24, 1996 - --------------------- --- Richard Gillespie II-5 EXHIBIT INDEX
Item Exhibit Page - ----- ------- ---- 2.1 Agreement and Plan of Reorganization dated March 21, 1996 by and among Veterinary Centers of America, Inc., Golden Merger Corporation and the Pet Practice, Inc. (attached as Appendix A to the Joint Proxy Statement/Prospectus included in this Registration Statement) 2.2 Agreement and Plan of Reorganization dated February 27, 1996, as amended on April 11, 1996, May 23, 1996 and June 7, 1996 by and among Veterinary Centers of America, Inc., PRI Merger Company, Pets' Rx, Inc. and the Principal Stockholder. 2.3 Irrevocable Proxy dated March 21, 1996 by and between Abbingdon Ventures Partners Limited Partnership-II and Veterinary Centers of America, Inc. 3.1 Certificate of Incorporation of Registrant, as amended to date (1) 3.2 Bylaws of Registrant, as currently in effect (2) 4.1 Specimen certificate evidencing Common Stock of Registrant (3) 4.2 Form of Warrant Agreement (3) 4.3 Indenture dated as of April 17, 1996 between Veterinary Centers of America, Inc. and the Chase Manhattan Bank, N.A. 5.1 Opinion of Troop Meisinger Steuber & Pasich, LLP 10.1 1987 Stock Option Plan of the Company and form of Stock Option Agreement used therewith, as amended (1) 10.2 Form of Indemnification Agreement between the Company and its Directors (2) 10.3 Employment Agreement, dated January 1, 1994, by and between Robert L. Antin and the Company, as amended (5) 10.4 Employment Agreement, dated January 1, 1994, by and between Arthur J. Antin and the Company, as amended (5) 10.5 Employment Agreement, dated January 1, 1994, by and between Neil Tauber and the Company, as amended (5) 10.6 Lease and Sublease Agreement, dated September 1, 1992, by and among GSK Associates, Gebhart/Sevedge Properties and West Los Angeles Veterinary Medical Group, Inc. (1)
Item Exhibit Page - ----- ------- ---- 10.7 Stock Purchase Agreement, dated as of December 9, 1992, between Heinz Pet Products Company, a division of Star-Kist Foods, Inc. and Veterinary Centers of America, Inc. (1) 10.8 Partnership Agreement, dated January 1, 1993, of Specialty Pet Products Partners (1) 10.9 Stock Option Agreement, dated March 2, 1989, by and between the Company and Robert L. Antin (2) 10.10 Stock Option Agreement, dated March 2, 1989, by and between the Company and Arthur J. Antin (2) 10.11 Stock Option Agreement, dated March 2, 1989, by and between the Company and Neil Tauber (2) 10.12 Revolving Line of Credit Agreement, dated December 19, 1995 for $3,100,000, by and between First Professional Bank and Veterinary Centers of America, Inc. (11) 10.13 1993 Incentive Stock Plan of the Company and form of Stock Option Agreement used therewith (5) 10.14 Asset Purchase Agreement, dated March 4, 1994 by and among VCA Professional Animal Laboratory, Inc. and Dennis Moore, D.V.M., Paul Greenlee, D.V.M., Andrew Loar, D.V.M. and Lon Rich, D.V.M. (4) 10.15 Agreement of Purchase and Sale, dated March 9, 1994 by and among Veterinary Centers of America and NAWOC Partnership (5) 10.16 Partnership agreement dated as of March 4, 1994 by and between Dr. Lon Rich, D.V.M., and VCA Professional Animal Laboratory, Inc. (4) 10.17 Asset Purchase Agreement dated as of November 1, between VCA Cenvet, Inc., and Cenvet Inc., a New York corporation and its stockholders, Robert Wilkins, B.V. Se and Steven R. Gilbertson, D.V.M. (6) 10.18 Management Consulting Agreement by and between VCA Cenvet, Inc. and R&B Management, Inc., a New York corporation, and Robert Wilkins, its President. (6) 10.19 Pathology Consulting Agreement by and between VCA Cenvet, Inc. and R&B Management, Inc., a New York corporation, and Robert Wilkins, its President. (6) 10.20 Management Consulting Agreement by and between VCA Cenvet,. Inc. and SRG Consulting, Inc., a New York corporation, and Steven Gilbertson, its President (6)
Item Exhibit Page - ----- ------- ---- 10.21 Pathology Consulting Agreement by and between VCA Cenvet, Inc. and SRG Consulting Inc., a New York corporation, and Steven Gilbertson, its President (6) 10.22 Lease of premises located at 32-50 57th Street, Woodside, New York by and between VCA Cenvet, Inc., and RJW Associates, a New york general partnership (6) 10.23 Security Agreement by and among VCA Cenvet, Inc., R&B Management, Inc., and SRG Consulting, Inc. (6) 10.24 Noncompetition Agreement by and between VCA Cenvet, Inc., and Robert Wilkins (6) 10.25 Noncompetition Agreement by and between VCA Cenvet, Inc., and Steven Gilbertson (6) 10.26 Letter Agreement entered into by and between VCA Cenvet, Inc., and Robert Wilkins (6) 10.27 Letter Agreement entered into by and between VCA Cenvet, Inc., and Steven Gilbertson (6) 10.28 Stock Purchase Agreement, dated as of January 11, 1995, by and between Star-Kist Foods, Inc. and Veterinary Centers of America, Inc. (7) 10.29 Registration Rights Agreement, dated as of January 11, 1995, by and between Star-Kist Foods, Inc. and Veterinary Centers of America, Inc. (7) 10.30 Shareholders Agreement, dated as of January 11, 1995, by and between Star-Kist Food, Inc., Robert L. Antin and Arthur J. Antin (7) 10.31 First Amendment to Partnership Agreement, dated as of January 11, 1995 by and between HPP Specialty Pet Products Inc. and VCA Specialty Pet Products, Inc. (7) 10.32 Operating Agreement for Vet Research Laboratories, L.L.C. dated as of March 20, 1995 between Veterinary Centers of America, Inc., VCA Cenvet, Inc., and Vet Research, Inc. a Delaware corporation and its stockholders, Robert H. Schneider and Bruce Schneider (8) 10.33 VRI Option Agreement entered into as of March 20, 1995 by and between VCA Cenvet, Inc. and Vet Research Inc. (8) 10.34 VCA Option Agreement entered into as of March 20, 1995 by and between Veterinary Center of America, Inc., VCA Cenvet, Inc. and Vet Research Inc. (8) 10.35 Warrant Agreement entered into as of March 20, 1995 by and between Veterinary Centers of America, Inc. and Robert H. Schneider (8)
Item Exhibit Page - ----- ------- ---- 10.36 Warrant Agreement entered into as of March 20, 1995 by and between Veterinary Centers of America, and Bruce T. Schneider (8) 10.37 Asset Purchase Agreement, dated February 8, 1996, by and among VCA Professional Animal Laboratory, Inc., Veterinary Centers of America, Inc., Southwest Veterinary Diagnostics, Inc., and its stockholders, Robert Bartsch and Merge Westhoff (9) 10.38 Lease Agreement dated June 7, 1996 between Barclay-Curci Investment Company and Veterinary Centers of America, Inc. 11.1 Computation of Per Share Earnings (12) 21.1 Subsidiaries of Registrant 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Troop Meisinger Steuber & Pasich (included in its opinion filed as Exhibit 5.1 hereto) 24.1 Power of Attorney (included as part of the signature page to the Registration Statement) 99.1 Consent of National Westminster Bank PLC, New York Branch 99.2 Consent of Smith Barney Inc. - -------------------------
(1) Incorporated by reference from Registrant's Report on Form 10-K, filed on March 31, 1993. (2) Incorporated by reference from Registrant's Registration Statement on Form S-1, File No. 33-40095. (3) Incorporated by reference from Registrant's Registration Statement on Form S-1, File No. 33-42504. (4) Incorporated by reference from Registrant's Report on Form 8-K filed on March 22, 1994. (5) Incorporated by reference from Registrant's Report on Form 10-KSB, for the year ended December 31, 1993. (6) Incorporated by reference from Registrant's Report on Form 8-K, filed on January 14, 1995. (7) Incorporated by reference from Registrant's Report on Form 10-KSB, filed on March 14, 1995. (8) Incorporated by reference from Registrant's Report on Form 8-K, filed on March 26, 1995. (9) Incorporated by reference from Registrant's Report on Form 8-K, filed on March 15, 1996. (10) Incorporated by reference from Registrant's Report on Form 8-K, filed on March 25, 1996. (11) Incorporated by reference from Registrant's Report on Form 10-K, filed March 25, 1996. (12) Incorporated by reference from Registrant's Report on Form 10-Q, filed May 15, 1996. EX-2.2 2 PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG VETERINARY CENTERS OF AMERICA, INC., PRI MERGER COMPANY, PETS RX, INC. AND THE PRINCIPAL STOCKHOLDERS FEBRUARY 27, 1996 TABLE OF CONTENTS
PAGE AGREEMENT AND PLAN OF REORGANIZATION.................................................. 1 R E C I T A L S....................................................................... 1 A G R E E M E N T..................................................................... 1 ARTICLE 1. Definitions............................................................. 1 ARTICLE 2. The Merger.............................................................. 7 2.1 The Merger.............................................................. 7 2.2 Effect of the Merger.................................................... 7 2.3 Filings................................................................. 7 2.4 Charter Documents, By-Laws and Directors................................ 8 2.5 Conversion of Company Common Stock and Company Preferred Stock................................................. 8 2.6 Escrow of Merger Consideration.......................................... 9 2.7 Delivery of Certificates................................................ 9 2.8 Purchase Rights......................................................... 9 2.9 Closing of Transfer Books............................................... 10 2.10 Dissenting Stockholders................................................. 10 2.11 Dissenter Payment....................................................... 11 2.12 Lost Certificates....................................................... 11 ARTICLE 3. The Closing............................................................. 11 ARTICLE 4. Representations and Warranties of the Company........................... 11 4.1 Organization and Standing; Charter Documents and By-Laws................ 12 4.2 Authorization........................................................... 12 4.3 Capital Stock........................................................... 13 4.4 Subsidiaries and Affiliates and Other Names............................. 13 4.5 No Consents............................................................. 13 4.6 Financial Statements.................................................... 14 4.7 Liabilities............................................................. 14 4.8 Absence of Certain Changes or Events.................................... 14 4.9 Real Property........................................................... 16 4.10 Tangible Personal Property.............................................. 16 4.11 Condition of Facilities................................................. 16 4.12 Contracts............................................................... 17 4.13 Employee Benefits....................................................... 18 4.14 Company and its Subsidiary Employees.................................... 19 4.15 Tax Audits and Payment of Taxes......................................... 20 4.16 Payments to Company Employees........................................... 22 4.17 Litigation.............................................................. 22 4.18 Insurance............................................................... 23
i 4.19 Accounts Receivable..................................................... 23 4.20 Loans and Advances...................................................... 23 4.21 Severance and Employment Agreements..................................... 23 4.22 Compliance With Applicable Law.......................................... 23 4.23 Permits................................................................. 24 4.24 Environmental Compliance Matters........................................ 24 4.25 No Change of Control Provision.......................................... 25 4.26 Brokers................................................................. 25 4.27 Company Confidentiality Agreement....................................... 25 4.28 Conversion Terms........................................................ 25 4.29 Information............................................................. 25 4.30 Knowledge............................................................... 26 ARTICLE 4A. Representations and Warranties of the Principal Stockholders............ 26 ARTICLE 5. Representations and Warranties of the Parent and MergerCo............... 27 5.1 Organization and Standing; Charter Documents and By-Laws................ 27 5.2 Authorization........................................................... 27 5.3 Validity of Merger Shares............................................... 28 5.4 SEC Reports............................................................. 28 5.5 No Consents............................................................. 28 5.6 Compliance With Applicable Law.......................................... 29 5.7 No Brokers.............................................................. 29 5.8 Information............................................................. 29 5.9 Registration Statement.................................................. 29 ARTICLE 6. Pre-Merger Covenants of the Parent, the Company, the Principal Stockholders and MergerCo................................. 30 6.1 Conduct of Business of the Company...................................... 30 6.2 Inspection of Records................................................... 31 6.3 Stockholder Approval.................................................... 31 6.4 Principal Stockholder Approval.......................................... 31 6.5 Parent Board Approval................................................... 32 6.6 Rule 145 Affiliates..................................................... 32 6.7 Reorganization.......................................................... 32 6.8 Filings; Other Action................................................... 32 6.9 Publicity............................................................... 33 6.10 Acquisition Proposals................................................... 33 6.11 Disclosure Schedule..................................................... 33 6.12 Exhibits and Schedules.................................................. 34 6.13 No Transfer of Company Securities....................................... 34 6.14 Merger Tax Matters...................................................... 34 6.15 Exemption or Registration of Merger Shares.............................. 34 ARTICLE 7. Conditions Precedent to Merger Obligation of the Company............................................................. 34 7.1 Opinion of Counsel for the Parent and MergerCo.......................... 34
ii 7.2 Compliance by the Parent; Representations and Warranties Correct................................................................. 34 7.3 Governmental and Regulatory Consents.................................... 35 7.4 Consents................................................................ 35 7.5 Blue Sky Requirements................................................... 35 7.6 Exemption or Registration of Merger Shares.............................. 35 7.7 Litigation.............................................................. 35 7.8 No Material Adverse Changes............................................. 36 7.9 Tax Opinion............................................................. 36 7.10 Escrow of Merger Consideration.......................................... 36 7.11 Investment Letter....................................................... 36 ARTICLE 8. Conditions Precedent to Merger Obligation of the Parent and MergerCo.............................................. 36 8.1 Opinion of Counsel for the Company...................................... 36 8.2 Compliance by the Company and the Principal Stockholders; Representations and Warranties Correct.................................. 37 8.3 Estoppel Certificates and Non-Disturbance Agreements.................... 37 8.4 Due Diligence........................................................... 37 8.5 Hart Scott Act Filing................................................... 37 8.6 Consents................................................................ 38 8.7 Non-Competition Agreements.............................................. 38 8.8 Blue Sky Requirements................................................... 38 8.9 Accounting Treatment.................................................... 38 8.10 Escrow of Merger Consideration.......................................... 38 8.11 Company Stockholders Approval........................................... 38 8.12 Parent Board of Director Approval....................................... 39 8.13 Resignation of Company Officers and Directors........................... 39 8.14 Company Certificate Regarding Company Securities........................ 39 8.15 Company Affiliate's Letters............................................. 39 8.16 Continued Employment of Key Managers.................................... 39 8.17 Investment Letter....................................................... 39 8.18 No Adverse Changes...................................................... 40 ARTICLE 9. Post-Closing Covenants.................................................. 40 9.1 Indemnification......................................................... 40 9.2 Registration Statement Filing........................................... 44 9.3 Listing of Additional Shares on NASDAQ.................................. 46 9.4 Company Failure to Close................................................ 46 ARTICLE 10. Termination............................................................. 47 10.1 Material Breach......................................................... 47 10.2 Consummation of Merger.................................................. 47 10.3 Due Diligence........................................................... 47 10.4 Mutual Consent.......................................................... 47 10.5 Effect of Termination................................................... 47 ARTICLE 11. Choice of Law; Arbitration.............................................. 48
iii ARTICLE 12. Miscellaneous Provisions................................................ 49 12.1 Notices................................................................. 49 12.2 Severability............................................................ 50 12.3 Exhibits and Schedules.................................................. 50 12.4 Headings................................................................ 50 12.5 No Adverse Construction................................................. 50 12.6 Counterparts............................................................ 50 12.7 Costs and Attorneys' Fees............................................... 50 12.8 Successors and Assigns.................................................. 50 12.9 Amendment............................................................... 50 12.10 Waiver.................................................................. 51 12.11 Entire Agreement........................................................ 51 12.12 Disclosure Schedule..................................................... 51 12.13 Obligations of the Parent............................................... 51 LIST OF EXHIBITS...................................................................... 54 LIST OF SCHEDULES..................................................................... 55
iv AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made and entered into as of February 27, 1996, by and among the persons identified on Schedule A hereto (each individually, a "Principal Stockholder" and - ---------- collectively, the "Principal Stockholders"), Veterinary Centers of America, Inc., a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation ("MergerCo") and Pets Rx, Inc., a Delaware corporation (the "Company"). R E C I T A L S - - - - - - - - A. The Company and Parent jointly desire that Parent acquire all of the issued and outstanding stock of the Company. B. The parties have determined that the most expeditious manner of accomplishing such acquisition would be the merger of MergerCo with and into the Company (the "Merger"). C. The parties hereto desire to adopt a Plan of Reorganization within the meaning of Sections 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing premises, and mutual covenants and agreements hereinafter set forth, the parties to this Agreement hereby agree as follows: ARTICLE ------- DEFINITIONS. ----------- As used in this Agreement, terms defined in the preamble and recitals hereto shall have the respective meanings specified therein and the following terms shall have the meanings set forth below: 1.1 "ADJUSTMENT AMOUNT" shall mean the sum of (i) the ------ amount by which (A) the out-of-pocket expenses actually incurred by the Company in connection with the negotiation, execution and closing of this Agreement (including the audit of the Company's 1995 financial statements), paid or payable to accountants, lawyers, investment bankers and other professionals engaged with respect to the Merger, plus (B) 50% of all fees paid in connection with any filing made by the Company or the Parent under the Hart Scott Act, plus (C) any tax liabilities of the Company as of the Closing to the extent that such amounts are not reflected on the November 30, 1995 balance sheet of the Company, in the aggregate exceed $300,000; plus (ii) the settlement amount to be paid or payable with respect to the settlement of that certain action known as Barrett v. Pets' Rx, Inc. to the extent such amount exceeds $200,000; plus (iii) any cash amounts paid or payable under the employment agreement with Barry Matthews as a result of a "change of control" of the Company or as a result of the termination or modification of such agreement (the "Employee Costs"), but only to the extent that such Employee Costs exceed $150,000. 1.2 "ADJUSTMENT SHARES" shall mean that number of shares computed by dividing the Adjustment Amount by the Parent Per Share Value. 1.3 "AFFILIATE" means, when used with reference to a specified Person, any Person that directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with, the specified Person. For purposes of the preceding sentence, the term "control" means the power, direct and indirect, to direct or cause the direction of the management and policies of a Person through voting securities, contract or otherwise. 1.4 "AGREEMENT" shall mean this Agreement and Plan of Reorganization. 1.5 "ANCILLARY AGREEMENTS" shall mean the Certificate of Merger and the Escrow Agreement. 1.6 "CLASS A PREFERRED STOCK" shall mean the series of Convertible Preferred Stock, par value $0.01 per share, of the Company originally issued in 1994. 1.7 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.8 "COMPANY" shall mean Pets Rx, Inc., a Delaware corporation. 1.9 "COMPANY COMMON STOCK" shall mean the Common Stock, par value $0.01 per share, of the Company. 1.10 "COMPANY OPTION SHARES" shall mean (i) with respect to warrants, options, and all other rights to purchase Company Common Stock, those shares of Company Common Stock issuable upon exercise of such warrants, options and other rights, and (ii) with respect to warrants, options, and all other rights to purchase Company Preferred Stock, those shares of Company Common Stock issuable upon the conversion of the Company Preferred Stock issuable upon exercise of such warrants, options and other rights in each case as previously granted or committed to be granted by the Company. 1.11 "COMPANY PREFERRED STOCK" shall mean the Class A Preferred Stock, the Convertible Preferred Stock and any other preferred stock of the Company. 1.12 "COMPANY PURCHASE RIGHTS" shall mean each outstanding right to purchase Company Option Shares. 1.13 "COMPANY SECURITIES" shall mean the Company Common Stock, Class A Preferred Stock, Convertible Preferred Stock, any other outstanding Company Preferred Stock and Company Purchase Rights. 1.14 "COMPANY SECURITYHOLDERS" means the holders of the Company Securities. 1.15 "CONVERTIBLE PREFERRED STOCK" shall mean the series of Convertible Preferred Stock, par value $0.01 per share, of the Company originally issued in 1991. 1.16 "DELAWARE LAW" shall mean the General Corporation Law of the State of Delaware. 1.17 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 1.18 "EXCHANGE FACTOR" shall be determined by multiplying the Merger Shares by a fraction, (i) the numerator of which is one and (ii) the denominator of which is the sum of (A) the number of outstanding shares of Company Common Stock immediately prior to the Effective Time and (B) the number of shares of Company Common Stock issuable upon conversion of the outstanding Class A Preferred Stock immediately prior to the Effective Time and (C) the number of shares of Company Common Stock issuable upon conversion of the outstanding Convertible Preferred Stock immediately prior to the Effective Time, and (D) the number of shares of Company Common Stock issuable upon conversion of any other class of Company Preferred Stock outstanding immediately prior to the Effective Time. 1.19 "GAAP" shall mean generally accepted accounting principles. 1.20 "HART SCOTT ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 1.21 "MATERIAL ADVERSE EFFECT" means (i) with respect to the Company and its Subsidiaries, an effect which is materially adverse to the business, properties, assets, revenues, operations, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, (ii) with respect to the Parent and its Subsidiaries, an effect which is materially adverse to the business, properties, assets, revenues, operations, financial condition or results of operations of the Parent and its Subsidiaries, taken as a whole, (iii) with respect to any Veterinary Hospital, an effect which is materially adverse to the business or operations of such Veterinary Hospital. 3 1.22 "MERGER SHARES" shall mean 970,000 shares of Parent Common Stock minus the Reduction Shares, which Merger Shares are to be exchanged for the Company Common Stock and the Company Preferred Stock pursuant to this Agreement. 1.23 "MERGERCO SECURITIES" shall mean all of the issued and outstanding capital stock of MergerCo. 1.24 "PARENT" shall mean Veterinary Centers of America, Inc., a Delaware corporation. 1.25 "PARENT COMMON STOCK" shall mean the Common Stock, par value $0.001 per share, of the Parent. 1.26 "PERSON" includes an individual, partnership, limited liability company, limited liability partnership, trust, estate, corporation, joint venture, unincorporated association, government bureau or agency or other entity of whatsoever kind or nature. 1.27 "POOLING RULES" shall mean the rules existing under GAAP and the rules, regulations and pronouncements of the SEC, the compliance with which is required for the treatment of the Merger as a pooling of interests. 1.28 "PRINCIPAL STOCKHOLDERS" shall mean those holders of Company Securities listed on Schedule A attached hereto. 1.29 "REDUCTION SHARES" means the sum of (i) that number of shares of Parent Common Stock to which the Dissenters would be entitled as a result of the Merger but for their being Dissenters, plus (ii) the number of ---- "Dilutive Shares" underlying In-the-Money Company Purchase Rights and In-the- Money Convertible Debt (each as defined below) outstanding immediately prior to the Effective Time, plus (iii) the number of Adjustment Shares. The number of ---- "Dilutive Shares" at the Effective Time shall be the sum of (A) the number of Company Option Shares issuable upon exercise of In-the-Money Company Purchase Rights and the number of shares of Company Common Stock issuable upon conversion of In-the-Money Convertible Debt outstanding immediately prior to the Effective Time, minus (B) the result of dividing (x) the aggregate dollar amounts which would be payable by the holders of In-the-Money Purchase Rights upon the exercise thereof plus the aggregate debt of the Company retired as a result of ---- the conversion of the In-the-Money Convertible Debt, by (y) the Per Share Merger Price, and multiplying the sum of (A) above minus (B) above by the Exchange Factor. In-the-Money Company Purchase Rights shall mean those Company Purchase Rights outstanding immediately prior to the Effective Time which have an effective exercise price per share of Company Common Stock which is less than the Per Share Merger Price. In-the-Money Convertible Debt means any debt instrument of the Company outstanding immediately prior to the Effective Time which by its terms is convertible into Company Common Stock at an effective conversion price per share of Company Common Stock which is less than the Per Share 4 Merger Price. The Per Share Merger Price shall be determined by dividing (A) 970,000 multiplied by the Parent Per Share Value, by (B) the sum of (A) the number of outstanding shares of Company Common Stock immediately prior to the Effective Time and (B) the number of shares of Company Common Stock issuable upon conversion of the outstanding Class A Preferred Stock immediately prior to the Effective Time and (C) the number of shares of Company Common Stock issuable upon conversion of the outstanding Convertible Preferred Stock immediately prior to the Effective Time, and (D) the number of shares of Company Common Stock issuable upon conversion of any other class of Company Preferred Stock outstanding immediately prior to the Effective Time and (E) that number of shares of Company Common Stock issuable upon exercise or conversion of outstanding In-The-Money Company Purchase Rights and outstanding In-The-Money Convertible Debt. The effective exercise price or conversion price of any Company Purchase Right or Company Convertible Debt which is exercisable for or convertible into Company Preferred Stock shall be determined after giving effect to the conversion of such Company Preferred Stock into Company Common Stock. 1.30 "SECURITIES ACT" means the Securities Act of 1933, as amended. 1.31 "SEC" means the Securities and Exchange Commission. 1.32 "STOCKHOLDER ANCILLARY AGREEMENTS" shall mean the Affiliate Letters, the Investment Letters and the Non-Competition Agreements. 1.33 "STOCK PLAN" shall mean the Pets Rx, Inc. employee stock option plan(s) identified in Schedule 1.33. 1.34 "SUBSIDIARY" of the Company means any Person of which equity securities possessing more than a 10% ownership interest are, at the time as of which such determination is being made, owned by the Company or its Subsidiaries either directly or indirectly through one or more Subsidiaries. 1.35 "VETERINARY HOSPITALS" shall mean the veterinary hospitals and clinics owned and operated by the Company or its Subsidiaries. 1.36 The following terms are defined in the following sections of this Agreement: 5
DEFINED TERM WHERE FOUND - ------------ ----------- Acquisition Proposal Section 6.10 Affiliate Letter Section 6.6 Audited Financial Statements Section 4.6 CERCLA Section 4.24 Certificates Section 2.7 Certificate of Merger Section 2.3 Claims Section 4A.2 Closing Article 3 Closing Date Article 3 Company Organizational Documents Section 4.1 Constituent Corporations Section 2.1 Damages Section 9.1.1 Delaware Secretary of State Section 2.3 Dilutive Shares Section 1.29 Disclosure Schedule Article 4 Dissenter Section 2.10 Effective Time Section 2.3 Environmental Laws Section 4.24 Escrow Shares Section 9.1.7 Hazardous Substances, Hazardous Wastes, Hazardous Materials, Pollutants, Solid Wastes, Contaminants and Toxic Substances Section 4.24 Indemnified Party Section 9.1.1 Indemnifying Party Section 9.1.1 Interim Financial Statements Section 4.6 Investment Letter Section 7.11 In-the-Money Company Purchase Rights Section 1.29 In-the-Money Convertible Debt Section 1.29 Liabilities Section 4.7 Material Contracts Section 4.12 Merger Section 2.1 Non-Competition Agreement Section 8.7 Parent Per Share Value Section 2.5.3 Permits Section 4.23 Per Share Merger Price Section 1.29 Registration Statement Section 9.2.1 Remedies Exception Section 4.2 Rule 145 Affiliates Section 6.6 Standard Form Confidentiality Agreement Section 4.27 Surviving Corporation Section 2.1 Third Party Claim Section 9.1.1
6 ARTICLE 2. ---------- THE MERGER. ---------- 2.1 THE MERGER. On the terms and subject to the conditions set forth in this Agreement, at the Effective Time, in accordance with this Agreement and the Delaware Law, MergerCo shall merge with and into the Company (the "Merger"), the separate existence of MergerCo shall cease and the Company shall continue as the surviving corporation. The Company, in its capacity as the entity surviving the Merger, is sometimes referred to herein as the "Surviving --------- Corporation" and MergerCo and the Company are sometimes referred to collectively - ----------- herein as the "Constituent Corporations." ------------------------ 2.2 EFFECT OF THE MERGER. At the Effective Time, the identity and separate existence of MergerCo shall cease and the Surviving Corporation shall succeed, without other transfer, to all of the rights, privileges, immunities, powers, franchises and authority, whether of a public or private nature, and be subject to all restrictions, disabilities and duties, of each of the Constituent Corporations, and all the rights, privileges, immunities, powers, franchises and authority of each of the Constituent Corporations, and all assets and properties of every description, real, personal and mixed, and every interest therein, wherever located, and all debts, liabilities and other obligations belonging or due to either of the Constituent Corporations on whatever account, as well as stock subscriptions and all other things in action belonging or due to each of the Constituent Corporations, shall be vested in the Surviving Corporation, and all property rights, privileges, immunities, powers, franchises and authority, and all and every other interest, shall be thereafter as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate or interest therein vested in either Constituent Corporation shall not revert or be in any way impaired by reason of the Merger but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and the Surviving Corporation shall be liable for the debts, liabilities and other obligations of each of the Constituent Corporations, and any claims existing or action or proceeding pending, by or against either the Constituent Corporations may be prosecuted to judgment with right of appeal, as if the Merger had not taken place. 2.3 FILINGS. On the Closing Date, MergerCo and the Company shall cause the Merger to be consummated by executing, delivering and filing a Certificate of Merger with the Secretary of State of the State of Delaware (the "Delaware Secretary of State"). The "Certificate of Merger" shall be substantially in the form attached hereto as Exhibit 2.3. The Parties shall on ----------- the Closing Date file such other documents with the Delaware Secretary of State as may be required by the provisions of the Delaware Law and as are necessary to cause the Merger to become effective. The Merger shall become effective when the Certificate of Merger and such other necessary documents are so filed with the Delaware Secretary of State or at such 7 other time thereafter as provided in the Certificate of Merger. The time at which the Merger becomes effective is herein referred to as the "Effective Time." 2.4 CHARTER DOCUMENTS, BY-LAWS AND DIRECTORS. 2.4.1 From and after the Effective Time, the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation, and shall thereafter continue in effect until amended as provided therein and in accordance with the Delaware Law. 2.4.2 The present by-laws of the Company shall be and remain the by-laws of the Surviving Corporation until the same shall be altered, amended or repealed in accordance with the Delaware Law. 2.4.3 At the Effective Time, each of the members of the Board of Directors of the Company and its Subsidiaries shall resign and, concurrently with such resignation, persons designated by the Parent shall be appointed the directors and officers of the Surviving Corporation, and the Surviving Corporation's Subsidiaries, to serve in accordance with the by-laws of the Surviving Corporation, in the case of each such director or officer, until his successor is duly elected or appointed and qualified or until his earlier death, resignation or removal in accordance with the by-laws of the Surviving Corporation. 2.5 CONVERSION OF COMPANY COMMON STOCK AND COMPANY PREFERRED STOCK. At the Effective Time, by virtue of the Merger and without any further action on the part of the Company, the Company Securityholders, MergerCo, or Parent each issued and outstanding share of Company Common Stock and Company Preferred Stock shall be cancelled and converted into the right to receive the following: 2.5.1 each share of Company Common Stock outstanding immediately prior to the Effective Time (except any share of Company Common Stock held by a Dissenter immediately prior to the Effective Time) shall entitle the holder thereof to that number of validly issued, fully paid and non- assessable Merger Shares (including any fractional share) as is equal to the number one multiplied by the Exchange Factor; 2.5.2 each share of Company Preferred Stock outstanding immediately prior to the Effective Time (except any share of Company Preferred Stock held by a Dissenter immediately prior to the Effective Time) shall entitle the holder thereof to that number of validly issued, fully paid and non- assessable Merger Shares (including any fractional share) as is equal to the number of shares of Company Common Stock into which such share of Company Preferred Stock is convertible immediately prior to the Effective Time multiplied by the Exchange Factor; 8 2.5.3 no fractional shares of Parent Common Stock will be issued, but in lieu thereof, any Company Securityholder who would otherwise be issued a fractional share of Parent Common Stock after aggregating all of the Merger Shares otherwise issuable to him in the Merger, shall be paid cash equal to the value of such fractional share, based on the average per share closing sales price of the Parent Common Stock as reported by the National Association of Securities Dealers, Inc. National Market System (the "NMS") for the five trading days ending two days prior to the Closing Date (the "Parent Per Share Value"); 2.5.4 each share of Company Common Stock and Company Preferred Stock held by a Dissenter immediately prior to the Effective Time shall entitle the holder thereof to receive the cash consideration determined and payable in accordance with Section 262 of the Delaware Law, except as otherwise agreed by the Company, Parent and the Dissenter; and 2.6 ESCROW OF MERGER CONSIDERATION. Notwithstanding the provisions of this Article 2, the Parent shall place in escrow pursuant to the terms of Section 8.10 hereof and the Escrow Instrument in effect pursuant thereto that number of Merger Shares equal to 10% of the total Merger Shares. 2.7 DELIVERY OF CERTIFICATES. On or before the tenth day after the Closing Date, the Parent shall make available, and each holder of Company Securities other than the Dissenters shall be entitled to receive, upon surrender to the Parent or its representatives of any certificate or certificates evidencing such Company Securities (the "Certificates") for cancellation, the aggregate Merger Shares into which such Company Securities have been converted in the Merger, and, upon such surrender of each Certificate and delivery by the Company of the aggregate number of Merger Shares in exchange therefor, such Certificates shall forthwith be cancelled. Until so surrendered, each Certificate shall be deemed for all corporate purposes to evidence only the right to receive upon such surrender the aggregate number of Merger Shares into which the Company Securities represented thereby shall have been converted. 2.8 PURCHASE RIGHTS. Each of the Company Purchase Rights shall, subject to the terms of any applicable stock option or warrant agreement, remain outstanding following the Effective Time. At the Effective Time, such Company Purchase Rights shall, by virtue of the Merger and without any further action on the part of the Company, MergerCo, Parent or the holder of any Company Purchase Right, be assumed by the Parent in such manner that the Parent (x) is a corporation "assuming a stock option in a transaction to which Section 424 applied" within the meaning of Section 422 of the Code or (y) to the extent Section 424 of the Code does not apply to any such Company Purchase Rights, would be such a corporation were Section 424 applicable to such option. Each Company Purchase Right assumed by the Parent shall be exercisable upon the same terms and conditions as under the applicable stock option or warrant agreement, except that (i) each such Company Purchase Right shall be exercisable for that number of shares of Parent Common Stock (to the nearest whole share) into which the Company Option Shares subject to such Company Purchase Right immediately prior to the 9 Effective Time would be converted under Section 2.5.1 or 2.5.2 of this Agreement, and (ii) the option price per share of Parent Common Stock shall be equal to (x) the per share exercise price of such Company Purchase Right in effect immediately prior to the Effective Time multiplied by the number of Company Option Shares subject to such Company Purchase Right immediately prior to the Effective Time, divided by (y) the number of shares of Parent Common Stock subject to such Company Purchase Right immediately after the Effective Time. No payment shall be made for fractional interests. In connection with the assumption of the Company Purchase Rights, the Parent shall effect such assumption in such manner as not to affect the "incentive" status of those options which are "incentive" stock options within the meaning of the Code at the Effective Time. From and after the date hereof, no additional Company Purchase Rights shall be granted by the Company and no "vesting" or exercise schedule of any Company Purchase Rights shall be modified or accelerated (other than pursuant to the express terms of such Company Purchase Right) and no exercise price of any Company Purchase Right shall be modified. 2.9 CLOSING OF TRANSFER BOOKS. At and after the Effective Time, transfers of the shares of Company Common Stock and Company Preferred Stock outstanding immediately prior to the Effective Time shall not be made on the stock transfer books of the Company. 2.10 DISSENTING STOCKHOLDERS. All issued and outstanding shares of Company Common Stock and Company Preferred Stock held by holders of record as of the date fixed for determination of stockholders entitled to notice of and to vote at the meeting of the Company Stockholders who shall have neither voted in favor of the Merger nor consented thereto in writing and shall have delivered (and then been entitled to deliver) to the Company a written demand for appraisal of their shares of Company Common Stock and/or Company Preferred Stock within the time and in the manner provided in Section 262 of the Delaware Law (individually, a "Dissenter," and collectively, the "Dissenters") shall not be converted into Parent Common Stock, but shall be entitled to receive such consideration as shall be provided in Section 262 in accordance with the terms and subject to the conditions set forth in said Section 262, except that each share of Company Common Stock and Company Preferred Stock issued and outstanding immediately prior to the Effective Time and held by a Dissenter who shall thereafter withdraw his demand for appraisal of his shares of Company Common Stock and/or Company Preferred Stock with the Surviving Corporation's consent or lose his right to such payment as provided in Section 262 shall be deemed converted, as of the Effective Time, into fully paid and nonassessable shares of Parent Common Stock, in which event such stockholder shall no longer be a Dissenter. The Company shall deliver to the Parent (i) on the first business day following the meeting of Company Securityholders (or the twenty first (21st) day following notice of written consent), a list of all holders of Company Common Stock and Company Preferred Stock who have filed written demands for payment of their shares of Company Common Stock and/or Company Preferred Stock by the date of such meeting in accordance with said Section 262, and (ii) from time to time, as the Parent shall reasonably request, other relevant information with respect to such objections and demands. The Company shall afford 10 to the Parent the opportunity to participate in all negotiations and proceedings with respect to any such demands and shall not, prior to the Effective Time, except with the prior written consent of the Parent, voluntarily make any payment with respect to, settle or offer or agree to settle, any such demands for payment. 2.11 DISSENTER PAYMENT. Each Dissenter who becomes entitled, pursuant to the provisions of Section 262 of the Delaware Law, to payment for the shares of Company Common Stock and/or Company Preferred Stock held by such Dissenter shall receive the payment therefor provided under Section 262 from the Surviving Corporation (less amounts to be placed in escrow pursuant to Section 8.10 hereof), but only up to the amount of such payment as shall have been agreed upon or finally determined pursuant to Section 262, and such shares shall thereupon be cancelled. 2.12 LOST CERTIFICATES. Notwithstanding the provisions of Section 2.7, in the event any certificate representing Company Securities has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and an agreement to indemnify the Parent against any claim that may be made against it with respect to such certificate, the Parent will issue in exchange for such lost, stolen or destroyed certificate the aggregate number of Merger Shares into which such Company Securities would have been converted and any fractional payment due in connection therewith pursuant to Section 2.5. ARTICLE 3. ---------- THE CLOSING. ----------- The Closing of the Merger (the "Closing") shall, unless another date or place is agreed to in writing by the parties, take place at the offices of Latham & Watkins, 505 Montgomery Street, San Francisco, California 94111 (except for the filing of the Certificate of Merger, which shall take place in the office of the Delaware Secretary of State) on the second business day following the satisfaction or waiver of all conditions precedent to the Merger or such other time as shall be mutually agreed to by the Company and Parent. The date of the Closing is referred to in this Agreement as the "Closing Date." ARTICLE 4. ---------- REPRESENTATIONS AND WARRANTIES OF THE COMPANY --------------------------------------------- The Company represents and warrants to and agrees with the Parent and MergerCo as set forth below. All representations and warranties of the Company are made subject to the exceptions with respect thereto which are noted in the Schedule to be delivered by the Company 11 to MergerCo and the Parent pursuant to Section 6.11 and identified as the "Disclosure Schedule." The representations and warranties set forth below shall ------------------- be effective as of the date that the final draft of the Disclosure Schedule is delivered to MergerCo and Parent pursuant to Section 6. 11, as certified in a writing executed by Parent and the Company. 4.1 ORGANIZATION AND STANDING; CHARTER DOCUMENTS AND BY-LAWS. Each of the Company and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of the Company and the Subsidiaries is qualified, licensed or domesticated as a foreign corporation and is in good standing in all jurisdictions where the character of its properties owned or held under lease or the nature of the business conducted by it make such qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect. Each of the Company and the Subsidiaries has the requisite corporate power and corporate authority to own, lease and operate its properties and assets and to carry on its business in the manner and in the locations as presently conducted. The state of incorporation of the Company and the Subsidiaries and each foreign jurisdiction in which any of them are qualified are set forth in Section 4.1 of the Disclosure Schedule. True and correct copies of the charter documents and by-laws of each of the Company and the Subsidiaries (the "Company Organizational Documents") have been delivered to Parent. 4.2 AUTHORIZATION. Subject to the stockholder approval required by Section 6.3, the Company has the corporate power and authority to enter into this Agreement and each of the Ancillary Agreements and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Company's Board of Directors and, other than the stockholder approval required pursuant to Section 6.3 hereof, all corporate proceedings have been taken and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance by the Company of this Agreement and each of the Ancillary Agreements. The execution, delivery and performance of this Agreement and each of the Ancillary Agreements by the Company will not conflict with or constitute a breach, violation or default under the Company Organizational Documents, any statute, law or administrative regulation, or under any judgment, decree, order, writ, governmental permit or license, any Material Contract or any other agreement, lease, indenture or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries is bound, which breach, violation or default would have a Material Adverse Effect on the Company and its Subsidiaries. This Agreement and each of the Ancillary Agreements have been duly executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally and except that equitable remedies may not in all cases be available (regardless of whether enforceability is considered in a proceeding at law or in equity) (collectively, the "Remedies Exception"). ------------------ 12 4.3 CAPITAL STOCK. The authorized capital stock of the Company and a listing of all Company Securities which are currently outstanding is set forth on Schedule 4.3. All of the issued and outstanding Company Securities have been ------------ duly authorized, validly issued, fully paid and are non-assessable and were not issued in violation of any preemptive rights or any Federal or state securities laws. Except with respect to the Convertible Preferred Stock, the Principal Stockholders collectively own a majority of the issued and outstanding stock of each class of Company Securities on a fully diluted basis. Section 4.3 of the Disclosure Schedule lists the names of each of the Company Securityholders and the class and number of Company Securities held by each such Company Securityholder. All Company Purchase Rights were granted by the Company at option or exercise prices not less than the fair market value of the Company Option Shares subject thereto as of the time of grant as determined in good faith by the Board of Directors of the Company. Other than as set forth in Section 4.3 of the Disclosure Schedule, there are no other authorized, issued or outstanding shares of the capital stock of the Company or any options, warrants, convertible securities or other rights (including stock appreciation rights), subscription rights (including preemptive rights), calls, agreements, understandings, arrangements or commitments obligating the Company now or at any time in the future to issue shares of its capital stock. 4.4 SUBSIDIARIES AND AFFILIATES AND OTHER NAMES. The Company does not have any Subsidiaries or own any equity interest or other securities or ownership interest in any entity other than as set forth in Section 4.4 of the Disclosure Schedule. All of the outstanding capital stock of each such Subsidiary is owned entirely by the Company or by a Subsidiary, as the case may be, as of the date hereof, free and clear of all Claims. All such shares of capital stock have been duly authorized and validly issued and are fully paid and nonassessable. None of such Subsidiaries has any outstanding subscriptions, options, warrants, rights or other agreements or commitments obligating it to issue or sell any shares of its capital stock, or any other equity interest, or any securities or obligations convertible into or exchangeable for any shares of capital stock of, or any other equity interest in, such Subsidiary. There are no agreements, understandings or undertakings governing the rights and duties of the Company or any Subsidiary as a shareholder of any Subsidiary, including, without limitation, any agreement arrangement or understanding under which the Company or any Subsidiary is or may become obligated, directly or indirectly, to acquire or dispose of any equity interest in, make any capital contribution or extend credit to, or act as guarantor, surety or indemnitor for any liability of any Subsidiary. The Company (including any entity merged into or consolidated with the Company or a predecessor to the Company's business) has not been known as or used any name for itself or any of its operations other than the name Pets Rx, Inc. 4.5 NO CONSENTS. No consent, authorization, order or approval of, or filing with or registration with, any governmental authority, commission, board or other regulatory body of the United States or any state or political subdivision thereof, or any other Person, is required to be made or obtained by the Company for or in connection with the execution and delivery by the Company and the Principal Stockholders of this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements and the consummation by the Company 13 and the Principal Stockholders of the transactions contemplated hereby and thereby, the absence of which would have a Material Adverse Effect on the Company or on the operations of any individual Veterinary Hospital other than the filing of the Certificate of Merger with the Delaware Secretary of State and filings made pursuant to the Hart Scott Act. 4.6 FINANCIAL STATEMENTS. The books, accounts and records of the Company and its Subsidiaries are, and have been, maintained in the Company's or its Subsidiaries' usual, regular and ordinary manner, in accordance with GAAP, consistently applied. The Company heretofore delivered to the Parent copies of consolidated financial statements of the Company and its Subsidiaries (the "Audited Financial Statements") consisting of consolidated balance sheets as of December 30, 1994 and 1993 and consolidated statements of earnings, stockholders' equity and cash flows for each of the Company's three fiscal years in the period ended December 30, 1994, together with appended notes which are an integral part thereof, all of which have been audited and certified by Price Waterhouse LLP, certified public accountants. The Company heretofore delivered to the Parent copies of consolidated unaudited financial statements of the Company and its Subsidiaries (the "Interim Financial Statements") consisting of a balance sheet, statements of earnings, stockholders' equity and cash flows for the eleven (11) month period ending November 30, 1995. All of the Audited Financial Statements and the Interim Financial Statements, including any appended notes which are an integral part of such statements, have been prepared in conformity with GAAP applied on a consistent basis throughout the periods covered thereby, each balance sheet therein presents fairly the consolidated financial position of the Company and its Subsidiaries as at its respective date and each statement of earnings, stockholders' equity and cash flows presents fairly the consolidated results of operations, stockholders' equity and cash flows, respectively, of the Company and its Subsidiaries for the period covered thereby subject in the case of the Interim Financial Statements to normal recurring year-end adjustments and any other adjustments described therein and the lack of footnotes which would be required by GAAP were such financial statements audited. 4.7 LIABILITIES. The Company and its Subsidiaries do not have any obligations or liabilities (direct or indirect, matured or unmatured, absolute, accrued, contingent or otherwise) whether or not required by GAAP to be reflected or reserved against on a balance sheet ("Liabilities") other than (a) Liabilities provided for or reserved against in the Audited Financial Statements or Interim Financial Statements, or (b) Liabilities incurred in the ordinary course of business consistent with past practice since the date of the Interim Financial Statements. None of the Liabilities described above relates to or has arisen out of a breach of contract, breach of warranty, tort or infringement by or against the Company or any of its Subsidiaries or any claim or lawsuit involving the Company or any of its Subsidiaries. 4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the Interim Financial Statements, each of the Company and its Subsidiaries has conducted its business only in the ordinary and usual course consistent with past practice or as required for the consummation of the transactions contemplated by this Agreement, and there has not been: 14 4.8.1 any Material Adverse Effect on the Company and the Subsidiaries; 4.8.2 any change in accounting methods, principles and practices employed by the Company and its Subsidiaries; 4.8.3 any casualty, damage, destruction or loss, or interruption of use of any asset or property (whether covered by insurance or not) in excess of $25,000 individually or in the aggregate; 4.8.4 any declaration, payment or setting aside for payment of any dividends or other distribution on the Company Securities or purchase, exchange or redemption of any of the Company Securities; 4.8.5 any grant to any officer or director of any increase in compensation in an amount in excess of $10,000 individually or $50,000 in the aggregate; 4.8.6 any sale, assignment, lease, exchange, transfer or other disposition of any of its assets or property, except for sales of inventory and cash applied in the payment of the Company's Liabilities, in each case in the usual and ordinary course of business in accordance with the Company's past practices; 4.8.7 any write off of any material asset as unusable or obsolete or for any other reason; 4.8.8 any material change in the conduct or nature of any aspect of the business of the Company or its Subsidiaries; 4.8.9 any capital expenditures in an amount which exceeds $50,000 in the aggregate; 4.8.10 any discharge of any Liability except in the usual and ordinary course of business in accordance with past practices, or prepayment of any Liability which, in the aggregate, exceed $50,000; 4.8.11 any borrowing of any money other than in the ordinary course of business consistent with past custom and practice or issuance or sale of any bonds, debentures, notes or other corporate securities of any class, including without limitation, those evidencing borrowed money, or prepayment or acceleration of any payments under any of the foregoing, or otherwise making of any payments in respect thereof other than in accordance with regularly scheduled payments; 15 4.8.12 any hiring or termination of any employee who has an annual salary in excess of $30,000; 4.8.13 any payments or distributions to employees, officers or directors of the Company or any of its Subsidiaries except such amounts as constitute currently effective compensation for services rendered, or reimbursement for reasonable, ordinary and necessary out-of-pocket business expenses; 4.8.14 any payment or incurrence of any management or consulting fees, or engagement of any consultants; 4.8.15 any issuance or sale of any securities of any class; or 4.8.16 without limitation by the enumeration of any of the foregoing, the entry into any material transactions other than in the usual and ordinary course of business in accordance with past practices (the foregoing representation and warranty shall not be deemed to be breached by virtue of the entry by the Company or the Principal Stockholders into this Agreement or their consummation of the transactions contemplated hereby). 4.9 REAL PROPERTY. Neither the Company nor any of its Subsidiaries owns any real property. All real property which the Company and its Subsidiaries hold under any lease is identified in Section 4.9 of the Disclosure Schedule. Such leases are in full force and effect, none of the leases has been modified or amended, no waiver, indulgence or postponement of the obligations of the Company and its Subsidiaries thereunder has been granted by any lessor and there exists no violation thereof or event of default thereunder or event, occurrence, condition or act by the Company or its Subsidiaries, or to the knowledge of the Company and its Subsidiaries by any lessor, which, with the giving of notice or the lapse of time, would become a default under the terms and provisions of such leases. Neither the Company nor any of its Subsidiaries has subleased or agreed to sublease to anyone any real property owned or leased by it and has not assigned or agreed to assign to anyone other than Parent any such lease. 4.10 TANGIBLE PERSONAL PROPERTY. The Company and its Subsidiaries have good and marketable title to or a valid right to use all of its tangible personal property, free and clear of any and all Claims other than any Claim or Claims which alone or in the aggregate would have a Material Adverse Effect on the Company and its Subsidiaries. No unreleased mortgage, trust deed, chattel mortgage, security agreement, financing statement or other instrument encumbering any of the Company and its Subsidiaries assets has been recorded, filed, executed or delivered. 4.11 CONDITION OF FACILITIES. The buildings, facilities, fixtures, tenant improvements, machinery, equipment and other tangible property of the Company and its Subsidiaries are in reasonable operating condition subject to ordinary wear and tear. 16 4.12 CONTRACTS. Section 4.12 of the Disclosure Schedule contains a true and complete list of all Material Contracts to which the Company or any of its Subsidiaries is a party, by which any of them are bound, or with respect to which any of them is the issuer, beneficiary or recipient. All such Material Contracts are in full force and binding on the parties thereto and no default has occurred thereunder by the Company or any Subsidiary and, to the knowledge of the Company and the Subsidiaries, no default has occurred thereunder by any other contracting party in each case which has given, or with the lapse of time or giving of notice, or both, would give any party the right to terminate such agreement or would result in the acceleration of any liability or monetary obligation or the imposition of any penalty, fine or forfeiture thereunder. No event, occurrence or condition exists which, with the lapse of time, the giving of notice, or both, would become a default by the Company or any Subsidiary under any Material Contract or, to the knowledge of the Company and the Subsidiaries and any other contracting party. For purposes of this Agreement, "Material Contracts" shall mean any oral or written: (a) employment, management, consulting and other contracts or agreements with any current or former officer, director, employee or consultant or with any entity in which any of the foregoing is an owner, officer, director, employee or consultant, except for any such agreements which are terminable at will, (b) contracts, agreements, understandings or commitments for the purchase or sale of any materials, products, services or supplies (i) calling for a purchase price or payment by the Company or any Subsidiary in any one year of more than $25,000 (or $50,000 in the aggregate, in the case of any related series of contracts or other commitments) or (ii) which are not one-time purchase orders and cannot be cancelled or terminated by the Company or its Subsidiaries, as applicable, without liability, premium or penalty on one month's or less notice, (c) leases, conditional sales contracts, licenses and other agreements under which the Company or its Subsidiaries uses any tangible personal property (including without limitation all computer and peripheral and other related equipment and devices) to which any Principal Stockholder or officer or director of the Company is a party or with respect to which there are remaining payment obligations which exceed $10,000 in the aggregate, (d) contracts or arrangements with customers or suppliers for the sharing of fees, the rebating of charges or other similar arrangements, (e) contracts, commitments or options relating to either (i) the acquisition by the Company or its Subsidiaries of any operating business or substantially all of the assets of a third party or (ii) the purchase or disposition of any tangible or intangible assets of the Company or its Subsidiaries other than in the ordinary and usual course of business, (f) contracts containing covenants or restrictions limiting in any way the freedom of the Company or its Subsidiaries to compete in any line of business or with any person or entity in any geographical area or for any period of time, (g) contracts or arrangements requiring the payment to any person of an override or similar commission or royalty or fee, (h) guarantees, performance bid or completion bonds, or other contracts of suretyship or indemnification, (i) trade secret, confidentiality or similar agreements, (j) joint venture, operating, shareholder and partnership agreements and (k) loan agreements, (l) notes, (m) security agreements, mortgages, debentures, indentures, factoring agreements or letters of credit, (n) sales representative, distribution, franchise, advertising and similar agreements, (o) license agreements and (p) service agreements affecting the Company's assets where the service 17 charge is in excess of $50,000 in the aggregate or is not terminable on 30 days or less notice with a payment of no more than $5,000. 4.13 EMPLOYEE BENEFITS. The following representations, warranties and agreements relate to employee benefits: 4.13.1 Neither the Company, any of its Subsidiaries, nor any affiliate of the Company as determined under Section 414(b), (c), (m) or (o) of the Code ("ERISA Affiliate") maintains, administers or contributes to, or has maintained, administered or contributed to, nor do the employees of the Company, its Subsidiaries or any ERISA Affiliate receive or expect to receive as a condition of employment, benefits pursuant to any: employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) ("Plan"); or bonus, deferred compensation, stock purchase, stock option, stock appreciation, severance plan, salary continuation, vacation, holiday, sick leave, fringe benefit, personnel policy, tool allowance, safety equipment allowance, incentive, insurance, welfare or similar plan, program, policy or arrangement ("Benefit Plan") which could result in the Mergerco or the Company having any liabilities, whether direct or indirect, other than those Plans and Benefit Plans described in the Disclosure Schedule. 4.13.2 All Plans and Benefit Plans comply with and are and have been operated in material compliance with each applicable provision of ERISA, the Code (other federal statutes, state law (including, without limitation, state insurance law) and the regulations and rules promulgated pursuant thereto or in connection therewith. Each Plan which is a group health plan (within the meaning of Section 5000(b)(1) of the Code) complies with and has been maintained and operated in accordance with each of the requirements of section 162(k) of the Code as in effect for years beginning prior to 1989, Section 4980B of the Code for years beginning after December 31, 1988 and Part 6 of Subtitle B of Title I of ERISA. 4.13.3 Neither the Company, any of its Subsidiaries, nor any ERISA Affiliate has failed to make any contributions or to pay any amounts due and owing as required by the terms of any Plan, Benefit Plan, or ERISA or any other law applicable to any Plan or Benefit Plan. 4.13.4 True and complete copies of each Plan and Benefit Plan, all written communications to employees regarding any Plan and Benefit Plan and each plan, agreement, instrument and commitment referred to herein and any related contracts, insurance policies or other agreements or documentation necessary or appropriate for the customary operation, amendment, modification or termination of any Plan or Benefit Plan, have been made available to the Parent and MergerCo, including a description of the material terms of any unwritten Plan or Benefit Plan. All of the foregoing are legally valid, binding, in full force and effect, and there are no defaults thereunder. With respect to each Plan and Benefit Plan, Section 4.13.4 of the Disclosure Schedule sets forth the name and address of the administrator and the policy number and insurer under all insurance policies. 18 4.13.5 Neither the Company, any of its Subsidiaries, nor any ERISA Affiliate maintains, administers or contributes to or has maintained, administered or contributed to within the six (6) preceding full calendar years any Plan subject to Title IV of ERISA or Section 412 of the Code or Part 3 of Title I(B) of ERISA. 4.13.6 All contributions, payments and premiums, reimbursements, expenses and accruals with respect to all Plans and Benefit Plans for all periods prior to or as of the Closing Date have been funded in a funding vehicle separate from the assets of the Company and its Subsidiaries or accrued on the Audited Financial Statements and the Interim Financial Statements. 4.13.7 Except as required by Section 4980B of the Code, neither the Company, any of its Subsidiaries nor any ERISA Affiliate has promised any former employee or other individual not employed by the Company, any of its Subsidiaries or any ERISA Affiliate, medical or other benefit coverage, and neither the Company, any of its Subsidiaries nor any ERISA Affiliate maintains or contributes to any plan or arrangement providing medical benefits, life insurance or other welfare benefits to former employees, their spouses or dependents or any other individual not employed by the Company, any of its Subsidiaries or any ERISA Affiliate except to the extent required by applicable law. 4.14 COMPANY AND ITS SUBSIDIARY EMPLOYEES. With respect to employees of the Company and its Subsidiaries: 4.14.1 the Company and its Subsidiaries are and have been in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such laws respecting employment discrimination, occupational safety and health, immigration status, and unfair labor practices; there are no pending or, to the knowledge of the Company and the Subsidiaries, threatened unfair labor practice charges or employee grievance charges; 4.14.2 there is no request for union representation, labor strike, dispute, slowdown or stoppage pending or, to the knowledge of the Company and the Subsidiaries, threatened against or directly affecting the Company or any of its Subsidiaries. 4.14.3 no grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending and no claims therefor exist before any governmental agency; 4.14.4 the employment of the Company's and any of its Subsidiaries' employees is terminable at will without cost to the Company or its Subsidiaries except for payments required under the Plans and the Benefit Plans and payment of accrued salaries or wages and vacation pay; 19 4.14.5 there is no collective bargaining agreement which is binding on the Company or any of its Subsidiaries or other written or oral agreement with respect to collective bargaining with any union or group of employees; 4.14.6 neither the Company nor any of its Subsidiaries has experienced any material work stoppage in the last thirty-six (36) months; 4.14.7 neither the Company nor any of its Subsidiaries is delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to the Closing Date or amounts required to be reimbursed to such employees; 4.14.8 no employee or former employee has any right to be rehired by the Company or any of its Subsidiaries prior to the Company's or its Subsidiaries' hiring a Person not previously employed by the Company or any of its Subsidiaries; 4.14.9 Section 4.14.9 of the Disclosure Schedule contains a true and complete list of all employees who are employed by the Company and each of its Subsidiaries as of December 31, 1995, and such list correctly reflects their salaries, wages, other compensation (other than benefits under the Plans and the Benefit Plans), dates of employment and positions. Neither the Company nor any of its Subsidiaries have taken any actions which were calculated to dissuade, or had the effect of dissuading, any present employees, representatives or agents of the Company from commencing an association with the Parent or MergerCo after the Closing Date. Neither the Company nor any of its Subsidiaries have any knowledge of any intention of a "Significant Employee" (as herein defined) that such Significant Employee has terminated or intends to terminate his or her employment with the Company or any of its Subsidiaries. As used herein "Significant Employee" means the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President, any Vice President, or any Manger of the Company or any of its Subsidiaries or any veterinarian employed by the Company. 4.15 TAX AUDITS AND PAYMENT OF TAXES. The following representations, warranties and agreements are made with respect to tax matters: 4.15.1 As used in this Agreement, the following terms shall have the following meanings: (A) "Taxes" shall mean all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, estimated, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto; and (B) "Returns" shall mean all returns, declarations, reports, statements and other documents required to be filed in respect of Taxes, including Returns for estimated Taxes. All citations to the Code, or to the Treasury 20 Regulations promulgated thereunder, shall include any amendments or any substitute or successor provisions thereto. 4.15.2 There have been properly completed and filed on a timely basis (including extensions) and in correct form all material Returns required to be filed by the Company and its Subsidiaries on or before the Closing Date. As of the Closing Date, the foregoing Returns correctly reflected the facts regarding the income, business, assets, operations, activities, status or other matters of the Company and its Subsidiaries or any other information required to be shown thereon. An extension of time within which to file any Return which has not been filed has not been requested or granted. 4.15.3 With respect to all amounts in respect of Taxes imposed upon the Company and its Subsidiaries, or for which the Company and its Subsidiaries is or could be liable, whether to taxing authorities (as, for example, under law) or to other Persons (as, for example, under tax allocation agreements), with respect to all taxable periods or portions of periods ending on or prior to the Closing Date, and all amounts required to be paid by the Company and its Subsidiaries, including all estimated Taxes, to taxing authorities or others, whether or not shown on any Return, on or before the date hereof have been paid in full. 4.15.4 No issues have been raised (and are currently pending) by any taxing authority in connection with any of the Returns. No waivers of statutes of limitation with respect to the Returns have been given by or requested from the Company or any of its Subsidiaries. Section 4.15.4 of the Disclosure Schedule sets forth (A) the taxable years of the Company and its Subsidiaries as to which the respective statutes of limitations with respect to Taxes have not expired, and (B) with respect to such taxable years, sets forth those years for which examinations have been completed, those years for which examinations are presently being conducted, those years for which examinations have not been initiated, and those years for which required Returns have not yet been filed. All deficiencies asserted or assessments made as a result of any examinations have been fully paid, or are fully reflected as a liability in the Audited Financial Statements and the Interim Financial Statements, or are being contested and an adequate reserve therefor has been established and is fully reflected as a liability in the Audited Financial Statements and the Interim Financial Statements. 4.15.5 To the knowledge of the Company and the Subsidiaries, no claim has ever been made by an authority in a jurisdiction where the Company or its Subsidiaries does not file Returns that the Company or its Subsidiaries is or may be subject to taxation by that jurisdiction. The Company and each of its Subsidiaries has withheld and paid all Taxes or other amounts required to have been withheld and paid in connection with amounts paid or owing to any employee. 4.15.6 The unpaid Taxes of the Company and its Subsidiaries for all periods ending on or prior to December 31, 1995 do not exceed the reserve therefor (excluding any reserve for deferred Taxes established to reflect timing differences between book and tax 21 income) set forth or included in the Closing Balance Sheet (a copy of which balance sheets are attached to Section 4.15.6 of the Disclosure Schedule). 4.16 PAYMENTS TO COMPANY EMPLOYEES. Section 4.16 of the Disclosure Schedule describes each: 4.16.1 business relationship (excluding employee compensation paid in the ordinary course of business consistent with past practices and other ordinary incidents of employment existing on the date of this Agreement) between (i) the Company or any of its Subsidiaries, and (ii) any present or former officer, director, stockholder or Affiliate of the Company or any of its Subsidiaries, any present or former known spouse, sibling, ancestor or descendant of any of the aforementioned persons or any trust or other similar entity for the benefit of any of the forgoing persons (all such persons and trusts encompassed by this clause (ii) being sometimes referred to collectively herein as the "Related Parties" and individually as a "Related Party"); 4.16.2 transaction (excluding employee compensation paid in the ordinary course of business consistent with past practices and other ordinary incidents of employment) occurring since November 30, 1995 between the Company or any Subsidiary and any Related Party; and 4.16.3 amount owing by or to any of the Related Parties, respectively, to or from the Company or a Subsidiary as of the date of this Agreement. No property or interest in any property which relates to and is or will be necessary or useful in the present or currently contemplated future operation or the business of the Company or of a Subsidiary is presently owned by or leased or licensed by or to any Related Party. On or prior to the Closing Date, all amounts due and owing to the Company or a Subsidiary by any of the Related Parties shall be paid in full. No Related Party has any interest, directly or indirectly, in any business, corporate or otherwise, which is in competition with the business of the Company or a Subsidiary. 4.17 LITIGATION. There is no litigation or proceeding pending before any Court or administrative agency or, to the knowledge of the Company or the Subsidiaries, threatened, in law or in equity, and there are no proceedings or governmental investigations pending or, to the knowledge of the Company or the Subsidiaries, threatened against the Company or the Subsidiaries, or any of their respective officers or directors, with respect to or affecting the properties, assets or operations of the Company or any of the Subsidiaries, or related to the consummation of the transactions contemplated hereby. To the knowledge of the Company or the Subsidiaries, there are no facts which, if known by a potential claimant or governmental authority, would be likely to give rise to a claim or proceedings which, if asserted or conducted with results unfavorable to the Company or any of the Subsidiaries, would have a Material Adverse Effect on the Company or any of its Subsidiaries or on the consummation of the transactions contemplated hereby. Neither the Company nor any of the Subsidiaries is 22 a party to, or bound by, any decree, order or arbitration award (or agreement entered into in any administrative, judicial or arbitration proceeding with any governmental authority) with respect to or affecting its properties, assets or operations. 4.18 INSURANCE. Section 4.18 of the Disclosure Schedule sets forth a true and correct list of all policies of insurance, including the types and coverage amounts thereof, owned by the Company or any of the Subsidiaries or in which the Company or any of the Subsidiaries is named as an insured party or beneficiary. True and correct copies of all such policies have been delivered to the Parent. All such policies are in full force and effect and neither the Company nor any of the Subsidiaries has received any notice of cancellation of any such insurance policies. In the 12 month period ending on the date hereof, neither the Company nor any of the Subsidiaries has been refused any insurance, nor has its coverage been limited, by any insurance carrier to which it has applied for insurance or with which it has carried insurance. Neither the Company nor any of the Subsidiaries has borrowed any money or otherwise received any loans against any such policies. In the 12 month period ending on the date hereof, neither the Company nor any of the Subsidiaries has (i) made any accident, loss or other claims in excess of $5,000 under any of the insurance policies or (ii) been notified of any material premium increase with respect to any of the insurance policies. 4.19 ACCOUNTS RECEIVABLE. The accounts receivable reflected in the Interim Financial Statements, and all accounts receivable arising since November 30, 1995, represent bona fide claims of the Company or its Subsidiaries against debtors for sales, services performed or other charges arising on or before the date hereof and all the goods delivered and services performed which gave rise to said accounts were delivered or performed in accordance with the applicable orders, contracts or customer requirements. To the knowledge of the Company and the Subsidiaries, accounts receivable are subject to no defenses, counterclaims or rights of set-off. 4.20 LOANS AND ADVANCES. There are no outstanding loans or advances by the Company or the Subsidiaries to any employees, former employees, officers, directors, securityholders, consultants or agents of the Company or the Subsidiaries, nor are there any outstanding loans or advances by any such persons to or for the benefit of the Company or the Subsidiaries. 4.21 SEVERANCE AND EMPLOYMENT AGREEMENTS. Neither the Company nor any of the Subsidiaries is a party to any agreement, and has no policy, providing for severance or termination payments to, any officer, director, consultant or employee. 4.22 COMPLIANCE WITH APPLICABLE LAW. The businesses of the Company and its Subsidiaries are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a Material Adverse Effect on the Company and its Subsidiaries. Neither the Company nor its Subsidiaries is a party to or subject 23 to any judgment, decree, or order entered in any suit or proceeding brought by any governmental agency or by any other Person, enjoining the Company or its Subsidiaries with respect to any business practice, the acquisition of any property, or the conduct of business in any area. 4.23 PERMITS. A true and correct copy of every material license, permit, registration and governmental approval, agreement and consent applied for, pending by, issued or given to the Company or its Subsidiaries, and every agreement with governmental authorities (federal, state or local) entered into by the Company or its Subsidiaries, which is in effect or has been applied for or is pending, exclusive of Environmental Permits (the "Permits"), has previously been furnished to the Parent or MergerCo. Such Permits constitute all licenses, permits, registrations, approvals and agreements and consents which are required in order for the Company and its Subsidiaries to conduct its business as presently conducted other than any license, permit, registration, approval agreement or consent which the failure to obtain would not have a Material Adverse Effect on the Company or on the operations of any of the Veterinary Laboratories. 4.24 ENVIRONMENTAL COMPLIANCE MATTERS. The business of the Company and its Subsidiaries as conducted in the past did not and as currently being conducted is not in material violation of any applicable law, ordinance, rule, prohibition or regulation relating to air, water or noise pollution, or the production, storage, labeling or disposition of wastes or hazardous or toxic substances, or the health, safety or environmental conditions on, beneath or about any of the properties owned, used or leased by the Company or any of its Subsidiaries or relating to the business of the Company or any of its Subsidiaries (such laws, ordinances, rules, prohibitions and regulations being herein referred to as "Environmental Laws"). The Company and its Subsidiaries have timely filed all material reports, obtained all material approvals and permits and generated and maintained all material data, documentation and records required under any applicable Environmental Laws. Neither the Company, its Subsidiaries nor, to the knowledge of the Company or its Subsidiaries, any other Person has placed, stored, buried, spilled or released, used, generated, manufactured, refined, processed, treated, dumped or disposed of any materials produced by, or resulting from, any business, commercial or industrial activities, operations or processes, including without limitation any materials which are "Hazardous Wastes", "Hazardous Substances", "Hazardous Materials", "Pollutants", "Toxic Substances", "Solid Wastes" or "Contaminants" (as such terms are defined in any applicable Environmental Law, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as-amended ("CERCLA"), the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act), on, beneath or about, or transported any such materials to or from, any of the properties owned, used or leased by the Company or the Subsidiaries in each case other than in material compliance with applicable Environmental Laws and in the ordinary course of the Company's or its Subsidiaries' business. Neither the Company nor its Subsidiaries has received any notice from any governmental agency or private or public entity advising it that it is or may be responsible, or potentially responsible, for costs with respect to a release, a threatened release 24 or clean up of materials located in any property owned by the Company or its Subsidiaries or produced by, or resulting from, any business, commercial or industrial activities, operations or processes of the Company or its Subsidiaries, including without limitation, materials which are Hazardous Wastes, Hazardous Substances, Hazardous Materials, Pollutants, Toxic Substances, Solid Wastes or Contaminants. 4.25 NO CHANGE OF CONTROL PROVISION. Neither the Company nor any Subsidiary is a party or subject to any agreement, contract or other obligation which would require the making of any payment, other than payments as contemplated by this Agreement, to any employee of the Company or to any other Person as a result of the consummation of the transactions contemplated herein. 4.26 BROKERS. Neither the Company, its Subsidiaries nor any Principal Stockholders dealt with any Person who is or may be entitled to a broker's commission, finder's fee, investment banker's fee or similar payment for arranging the transactions contemplated hereby or introducing the parties to each other. 4.27 COMPANY CONFIDENTIALITY AGREEMENT. Attached as Exhibit 4.27 is ------------ the Company's standard form of Confidentiality Agreement (the "Standard Form Confidentiality Agreement") for employees of the Company and its Subsidiaries. Except as set forth in Section 4.27 of the Disclosure Schedule, all employees of the Company and its Subsidiaries have executed and agreed to, and there is currently in effect with respect to all employees of the Company and its Subsidiaries, the Standard Form Confidentiality Agreement with the Company and its Subsidiaries, without any schedules, addenda, modifications or amendments to the Standard Form Confidentiality Agreement (each such Standard Form Confidentiality Agreement, with any schedules, addenda, modifications and amendments thereto set forth in Section 4.27 of the Disclosure Schedule being hereinafter referred to as a "Company Confidentiality Agreement"). 4.28 CONVERSION TERMS. The allocation of Merger Shares among the Company Securityholders, as determined pursuant to the provisions contained in Article 2 hereof, is in accordance with this Agreement, the Company Organizational Documents and all plans, agreements and other instruments and documents, including without limitation the Stock Plan and all stock option agreements entered into and stock option commitments made pursuant thereto, relating to the Company Option Rights (the "Company Purchase Rights Documents"). 4.29 INFORMATION. All written information provided to the Parent or its agents by or on behalf of the Company, its Subsidiaries or any of their respective representatives (including, without limitation, each representation and warranty of the Company set forth in this Agreement) is, and the Company covenants that any such information provided hereafter shall be, true and correct in all material respects and does not, or shall not, omit any material fact required to be included therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that no -------- ------- 25 representation or warranty is made by the Company as to any financial forecasts or projections previously furnished to the Parent or its agents by the Company or its representatives, except that such financial forecast or projection has been prepared in good faith based on assumptions that are believed by the Company to have been reasonable at the time or times made; and provided further that no party shall be deemed to be in breach of this Section 4.29, if (x) any misstatement or omission is corrected by other written information provided to Parent or its agents, or (y) any misstatement or omission is not material in light of all of the information contained in this Agreement, the Exhibits and Schedules attached hereto and all other written information supplied to Parent or its agents, taken as a whole. 4.30 KNOWLEDGE. For purposes of the representations and warranties contained in Sections 4.1 through 4.29 above, references to the knowledge of the Company or the Subsidiaries or words of similar effect shall mean the items, facts, circumstances and matters within the actual knowledge of any of the officers or directors of the Company and its Subsidiaries, a list of whom are set forth in Section 4.30 of the Disclosure Schedule. ARTICLE 4A. ----------- REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL STOCKHOLDERS ------------------------------------------------------------ Each Principal Stockholder severally, but not jointly, represents and warrants to and agrees with the Parent and MergerCo as set forth below. All representations and warranties of each Principal Stockholder are made subject to the exceptions with respect thereto which are noted in the Disclosure Schedule. The representations and warranties set forth below shall be effective as of the date that the final draft of the Disclosure Schedule is delivered to MergerCo and Parent pursuant to Section 6.1.1, as certified in a writing executed by Parent and each Principal Stockholder. 4A.1 Such Principal Stockholder has the power and authority to enter into this Agreement and each of the Stockholder Ancillary Agreements and to carry out their respective obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and each of the Stockholder Ancillary Agreements by such Principal Stockholder will not conflict with or constitute a breach, violation or default under any statute, law or administrative regulation, or under any judgment, decree, order, writ, governmental permit or license, any Material Contract or any other agreement, lease, indenture or instrument to which such Principal Stockholder is a party or by which such Principal Stockholder is bound, which breach, violation or default would have a Material Adverse Effect on the Company and its Subsidiaries. 4A.2 All Company Securities owned by such Principal Stockholder are owned by such Principal Stockholder free and clear of any lien, option, security interest, pledge or other encumbrance, proxy, voting trust, voting agreement, judgment, charge, escrow, right of 26 first refusal or first offer, indenture, claim or transfer restriction, whether arising by agreement or operation of law ("Claims"). 4A.3 Such Principal Stockholder does not own, directly or indirectly, any equity interest or other securities or ownership interest in any entity involved in a business related to or competitive in any way with the businesses of the Company, MergerCo or the Parent. 4A.4 Such Principal Stockholder has not taken any actions which were calculated to dissuaded or had the effect of dissuading, any present employees, representatives or agents of the Company from commencing an association with the Parent or MergerCo after the Closing Date. 4A.5 Such Principal Stockholder has reviewed the representations and warranties made by the Company in Sections 4.1 through 4.29, inclusive and, to the actual knowledge of such Principal Stockholder, the representations and warranties contained in Sections 4.1 through 4.29, inclusive are true and accurate in all material respects. ARTICLE 5. ---------- REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGERCO. --------------------------------------------------------- The Parent and MergerCo, represent, warrant, covenant and agree with the Company and the Company Stockholders as follows: 5.1 ORGANIZATION AND STANDING; CHARTER DOCUMENTS AND BY-LAWS. Each of the Parent and MergerCo is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of the Parent and MergerCo is qualified, licensed or domesticated as a foreign corporation and is in good standing in all jurisdictions where the character of its properties owned or held under lease or the nature of its activities make such qualification necessary, except where the failure to so qualify will not have a Material Adverse Effect. Each of the Parent and MergerCo has full corporate power and authority necessary to own, lease and operate its properties and assets and to carry on its business in the manner and in the locations as presently conducted. 5.2 AUTHORIZATION. The Parent and MergerCo have the requisite corporate power and authority to enter into and carry out the terms and conditions of this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements to which they are a party and to carry out their obligations hereunder and thereunder. When the execution and delivery of this Agreement and each of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby are duly and validly authorized by the Parent's and MergerCo's Board of Directors, all corporate proceedings will have been taken and no other corporate proceedings on the part of the Parent or MergerCo are necessary to authorize the execution, 27 delivery and performance by the Parent and MergerCo of this Agreement and each of the Ancillary Agreements. The execution, delivery and performance of this Agreement, each of the Ancillary Agreements and the Stockholder Ancillary Agreements by Parent and MergerCo will not conflict with or constitute a breach, violation or default under their respective charter documents and bylaws, any statute, law or administrative regulation, or under any judgment, decree, order, writ, governmental permit or license, and Material Contract or any other agreement, lease, indenture or instrument to which Parent, any of its Subsidiaries or MergerCo is bound, which breach, violation or default would have a Material Adverse Effect on Parent, its Subsidiaries and MergerCo. This Agreement, each of the Ancillary Agreements and the Stockholder Ancillary Agreements have been duly executed and delivered by the Parent and MergerCo and constitute the legal, valid and binding obligations of the Parent and MergerCo, enforceable against the Parent and MergerCo in accordance with their respective terms, subject to the Remedies Exception. 5.3 VALIDITY OF MERGER SHARES. Upon delivery of the certificates for the Merger Shares pursuant to the terms of this Agreement, due countersignature of the certificates by Parent's transfer agent and delivery to the Company Securityholders receiving Merger Shares pursuant to this Agreement, the Merger Shares to be issued by the Company represented thereby will be duly authorized and validly issued, fully paid and nonassessable. 5.4 SEC REPORTS. The Parent has heretofore furnished to the Company a true and complete copy of its Registration Statement on Form S-3, declared effective by the SEC on November 8, 1995, its Annual Reports on Form 10-K for each of the fiscal years ended December 31, 1993 and 1994 and its Quarterly Reports on Form 10-Q for each of the fiscal quarters ended March 31, 1995, June 30, 1995 and September 30, 1995, as filed with the SEC. Parent has not filed prior to the date hereof, any definitive reports or statements with the SEC since November 8, 1995 other than pursuant to Item 5 of Form 8-K and since November 8, 1995 there does not exist any circumstance, nor has any event occurred, which has had a Material Adverse Effect on the Parent and its Subsidiaries. As of their respective dates, such reports and statements complied as to form in all material respects with the requirements applicable thereto and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited financial statements and unaudited interim financial statements of the Parent included or incorporated by reference in such reports have been prepared in accordance with GAAP applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the consolidated assets, liabilities and financial position of the Parent as at the dates thereof and the consolidated results of operations and changes in financial position for the periods then ended, subject in the case of the unaudited interim financial statements, to normal, recurring year-end adjustments and any other adjustments described therein. 5.5 NO CONSENTS. No consent, authorization, order or approval of, or filing with or registration with, any governmental authority, commission, board or other regulatory 28 body of the United States or any state or political subdivision thereof, or any other Person, is required to be made or obtained by Parent or MergerCo for or the execution and delivery by Parent and MergerCo, of this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements and the consummation by Parent and MergerCo of the transactions contemplated hereby and thereby other than filings under the Securities Act, the Exchange Act, state blue sky laws, the Hart Scott Act and the filing of the Certificate of Merger with the Delaware Secretary of State. 5.6 COMPLIANCE WITH APPLICABLE LAW. The businesses of Parent, its Subsidiaries and MergerCo are not being conducted in violation of any applicable law, ordinance, regulation, decree or order of any governmental entity, except for violations which either singly or in the aggregate do not and are not expected to have a Material Adverse Effect on Parent, its Subsidiaries and MergerCo. Neither Parent, its Subsidiaries nor MergerCo is a party to or subject to any judgment, decree, or order entered in any suit or proceeding brought by any governmental agency or by any other Person, enjoining Parent, its Subsidiaries or MergerCo with respect to any business practice, the acquisition of any property, or the conduct of business in any area. 5.7 NO BROKERS. Neither the Parent nor MergerCo dealt with any Person who is or may be entitled to a broker's commission, finder's fee, investment banker's fee or similar payment for arranging the transactions contemplated hereby or introducing the parties to each other. 5.8 INFORMATION. All written information provided to the Company or its agents by or on behalf of the Parent or any of its representatives (including, without limitation, each representation and warranty of the Parent set forth in this Agreement) is, and the Parent covenants that any such information provided hereafter shall be, true and correct in all material respects and does not, or shall not, omit any material fact required to be included therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, -------- ------- that no representation or warranty is made by the Parent as to any financial forecasts or projections previously furnished to the Company by the Parent, except that such financial forecast or projection has been prepared in good faith based on assumptions that are believed by the Parent to have been reasonable at the time or times made; and provided further that no party shall be deemed to be in breach of this Section 5.8 if (x) any misstatement or omission is corrected by other written information provided to the Company, or (y) any misstatement or omission is not material in light of all of the information contained in this Agreement, the Exhibits and Schedules attached hereto and all other written information supplied to the Company, taken as a whole. 5.9 REGISTRATION STATEMENT. The Form S-3, at the time it becomes effective under the Securities Act, will comply as to form in all material respects with the requirements of the Securities Act, and will not contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary in order to make the 29 statements therein not false or misleading provided, however, that this provision shall not apply to any statement or omission made in reliance upon and in conformity with information furnished to the Parent by the Company in writing for inclusion in the Registration Statement (including for this purpose all information regarding the Company contained in the Registration Statement, to which the Company has given its written approval as regards such Company information (the "Company Information Written Approval")). ARTICLE 6. ---------- PRE-MERGER COVENANTS OF THE PARENT, THE COMPANY, ------------------------------------------------ THE PRINCIPAL STOCKHOLDERS AND MERGERCO. --------------------------------------- Each of the Parent, the Company, the Principal Stockholders and MergerCo covenant and agree with the others that: 6.1 CONDUCT OF BUSINESS OF THE COMPANY. Prior to the Effective Time, except as contemplated by this Agreement, unless the other party has consented in writing thereto, the Company (i) shall, and shall cause its Subsidiaries to conduct its and their respective operations according to its ordinary and usual course of business, (ii) shall use its reasonable efforts, and shall cause each of its Subsidiaries to use its reasonable efforts, to preserve intact its respective business organizations and goodwill, keep available the services of its respective officers and employees and maintain satisfactory relationships with those persons having business relationships with it, (iii) shall not propose, adopt, or authorize any amendment to the Company Organizational Documents except as provided for in this Agreement, (iv) shall promptly notify the Parent of any emergency or other material change in the Company's business, properties, assets or liabilities or in the operation of its properties and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) or the breach in any material respect of any representation or warranty contained herein, (v) shall use commercially reasonable efforts to avoid actions which to the Company's knowledge would prevent treatment of the Merger on a pooling of interests basis, (vi) shall not (A) except pursuant to the exercise of Company Purchase Rights existing on the date hereof and disclosed in this Agreement or expressly permitted to be issued after the date hereof by the terms of this Agreement, authorize, issue, sell, pledge, encumber or agree to authorize, issue, sell, pledge or encumber any additional shares of its capital stock of any class or any other securities in respect of, in lieu of or in substitution of common stock outstanding as of the date hereof, (B) effect any stock split, combination, recapitalization or otherwise change its capitalization as it existed on the date hereof, (C) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any shares of its capital stock of any class or any other securities in respect of, in lieu of or in substitution of common stock outstanding as of the date hereof, (D) redeem or otherwise acquire any of its outstanding equity securities or any outstanding options or rights to purchase any such equity securities or make any commitment to take such action, or, (E) declare, set aside or pay any dividend or 30 distribution payable in cash, stock or property with respect to shares of its common stock or other securities, (vii) shall not knowingly authorize, recommend, or propose, or announce an intention to propose, any transaction, or enter into any agreement or arrangement with any other party, that could have a Material Adverse Effect on it, (viii) shall not and shall not authorize any Subsidiary to, (A) acquire any assets, other than in the ordinary course of business consistent with past practice, (B) dispose of or encumber any assets other than in the ordinary course of business consistent with past practice or relinquish, forfeit or waive any right under any agreement, license, lease, deed or other instrument that is material to its business or operations as presently conducted or proposed to be conducted, or (C) incur any indebtedness for borrowed money, or assume, guarantee or otherwise as an accommodation become responsible for, the obligations of any other Person, or enter into any other transaction other than in the ordinary course of business consistent with past practice, (ix) shall not adopt, or amend to increase materially compensation or benefits payable under, any collective bargaining, bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or consulting or other plan, agreement, trust, fund or arrangement for the benefit of employees except for normal increases consistent with past practice and the payment of cash bonuses to officers pursuant to and consistent with existing plans or programs, (x) shall not enter into any transaction involving an obligation in excess of $25,000, except for obligations in connection with this Agreement and transactions disclosed in the Disclosure Schedule, and (xi) shall not enter into any agreement, document or instrument which would constitute a Material Contract hereunder. 6.2 INSPECTION OF RECORDS. From the date hereof to the Effective Time, the Company shall allow the duly authorized and appropriate officers, attorneys, accountants and other representatives of Parent access at all reasonable times and upon reasonable notice to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to, the business and affairs of the Company and its Subsidiaries. Any information obtained by Parent through such officers, attorneys, accountants and other representatives shall be subject to the confidentiality agreement between the Company and Parent previously entered into. 6.3 STOCKHOLDER APPROVAL. The Company shall take all necessary or appropriate action under Delaware Law and the Company Organizational Documents to call a meeting of its stockholders (or to take such action by written consent), to be held at the earliest practicable date, and the Company shall use commercially reasonable efforts to cause such meeting or vote by written consent to occur on or prior to March 31, 1996 to consider and vote on a proposal to approve this Agreement, the Merger and the transactions contemplated hereby and thereby. 6.4 PRINCIPAL STOCKHOLDER APPROVAL. Each Principal Stockholder covenants and agrees (i) to vote at the meeting of Company Stockholders or by written consent, as the case may be, to approve this Agreement, the Merger and the transactions contemplated hereby, (ii) that such Principal Stockholder will not exercise, and hereby waives, his dissenters 31 rights under Section 262 of the Delaware Law with respect to any of his Company Securities, and (iii) such Principal Stockholder will execute the Investment Letter referred to in Section 7.11 hereof in a form reasonably acceptable to the Company, each Principal Stockholder and Parent. 6.5 PARENT BOARD APPROVAL. Parent shall take all necessary or appropriate action under Delaware Law and its Certificate of Incorporation and Bylaws to call a meeting of its Board of Directors (or to take such action by unanimous written consent) within fourteen (14) days after the date hereof, to consider and vote on the terms of the Merger and the execution of this Agreement. If Parent's Board of Directors does not approve the terms of this Agreement and the execution hereof within such fourteen day period then the Company shall have the right to immediately terminate this Agreement without any further obligation hereunder. It is expressly understood and agreed that the Board of Directors of Parent shall have no obligation to consider the authorization of the Closing under this Agreement until the fourth business day following the delivery by the Company to the Parent of the audited financial statements of the Company for the period ended December 31, 1995. 6.6 RULE 145 AFFILIATES. Prior to the Effective Time, the Company shall deliver to Parent a letter identifying all persons who were, in the Company's reasonable judgment, at the record date for its stockholders meeting (or the record date for receipt of a written consent) to approve this Agreement and the Merger, "affiliates" of the Company for purposes of Rule 145 under the Securities Act. Each of the Principal Stockholders who are such "affiliates" will deliver to Parent on or prior to the Effective Time a written agreement (the "Affiliate Letter") substantially in the form attached as Exhibit 6.6 and ----------- in connection therewith each Principal Stockholder agrees that, prior to the consummation of the Merger, such Principal Stockholder will not transfer in any way any of the Company Securities held by such Principal Stockholder or any interest therein. 6.7 REORGANIZATION. From and after the date hereof and until the Effective Time, neither the Parent, the Company, MergerCo nor any of their respective Subsidiaries or other Affiliates shall knowingly take any action, or knowingly fail to take any action, that would jeopardize qualification of the Merger as a reorganization with the meaning of Section 368(a) of the Code. Following the Effective Time, the Parent shall use its best efforts to conduct its business, in a manner that would not jeopardize the characterization of the Merger as a reorganization within the meaning of Section 368(a) of the Code. 6.8 FILINGS; OTHER ACTION. Subject to the terms and conditions herein provided, the Parent, the Company and MergerCo shall: (a) promptly make their respective filing and thereafter make any other required submissions under the Hart Scott Act (if required) with respect to the Merger; (b) use all reasonable efforts to cooperate with one another in (i) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and (ii) timely making all such filings and 32 timely seeking all such consents, approvals, permits or authorizations; and (c) use all reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and directors of the Parent and the Principal Stockholders shall take all such necessary action. 6.9 PUBLICITY. Parent, the Company and MergerCo shall, subject to the Parent's legal obligations applicable to public companies, issue the press release attached hereto as Exhibit 6.9, which press release has been mutually ----------- agreed to by Parent, the Company and MergerCo. 6.10 ACQUISITION PROPOSALS. Prior to the Effective Time, the Company agrees and each of the Principal Stockholders severally, and not jointly, agree (a) that neither the Company nor any of its Subsidiaries nor any of the Principal Stockholders shall, and it shall direct and use its best efforts to cause its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it) not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its stockholders) with respect to a merger, acquisition, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, the Company or any of its Subsidiaries (any such proposal or offer being hereinafter referred to as a "Acquisition Proposal") or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing and will take the necessary steps to inform the individuals or entities referred to above of the obligations undertaken in this Section 6.10; and (c) that it will notify the Parent and MergerCo immediately if any such inquiries or proposals are received by, any such information is received from, or any such negotiations or discussions are sought to be initiated or continued with, it. 6.11 DISCLOSURE SCHEDULE. The Disclosure Schedule is not attached to this Agreement at the time (the "Sign Date") this Agreement is signed by the Company, the Principal Stockholders, Parent and MergerCo (collectively, the "Signing Parties"). The failure to attach the Disclosure Schedule at the Sign Date does not affect the binding obligations of the parties under this Agreement. It is the obligation of the Company to deliver the Disclosure Schedule to Parent to be attached to this Agreement within twenty-one (21) days of the Sign Date. The representations and warranties set forth in Articles 4 and 4A shall be effective as of the date that the final draft of the Disclosure Schedule is delivered to MergerCo and Parent pursuant to this Section 6.11, as certified in a writing executed by Parent, the Company and each Principal Stockholder. In the event the Company or any Principal Stockholder fails to deliver their 33 respective sections of the Disclosure Schedule within the time period set forth in this Section, then the representations and warranties set forth in Article 4 and 4A, respectively, shall be deemed complete and accurate and not subject to any conditions or exceptions not stated in Article 4 and 4A. 6.12 EXHIBITS AND SCHEDULES. Exhibits 2.3, 6.5, 7.1, 8.1, 7.10 and 8.7 and Schedules 1.33 and 4.3 are not attached to this Agreement at the Sign Date. The failure to attach Exhibits 2.3, 6.5, 7.1, 8.1, 7.10 and 8.7 and Schedules 1.33 and 4.3 at the Sign Date does not affect the binding obligations of the parties under this Agreement. The Company, the Principal Stockholders, Parent and MergerCo agree to cooperate with one another and negotiate in good faith with the object of mutually agreeing to the form of such Exhibits and Schedules within twenty-one (21) days of the Sign Date. 6.13 NO TRANSFER OF COMPANY SECURITIES. The Principal Stockholders agree that, prior to the consummation of the Merger, they will not transfer in any way any of the Company Securities held by them or any interest therein. 6.14 MERGER TAX MATTERS. The parties hereto agree that neither Parent, MergerCo, nor any of their respective subsidiaries, nor their officers, directors, agents, or representatives have made any representation or warranty with respect to the tax consequences of the Merger for the Company Securityholders. Notwithstanding the foregoing, Parent and MergerCo acknowledge that the Company's legal counsel may require certain certificates as to factual matters from the Parent and MergerCo in order to deliver the tax opinion described in Section 7.9 and each of Parent and MergerCo hereby agrees to deliver any such certificate reasonably requested by such counsel but only to the extent the matters to be certified to are true and accurate to the knowledge of Parent and MergerCo. 6.15 EXEMPTION OR REGISTRATION OF MERGER SHARES. The Parent covenants and agrees that it will take any and all necessary actions to perfect any available exemption under the federal securities laws or, if none is available, use its best efforts to cause the issuance of the Merger Shares to be registered under the Securities Act in each case prior to the Effective Time. ARTICLE 7. ---------- CONDITIONS PRECEDENT TO MERGER OBLIGATION OF -------------------------------------------- THE COMPANY AND EACH OF THE PRINCIPAL STOCKHOLDERS. -------------------------------------------------- The obligation of the Company and the Principal Stockholders to consummate the Merger and to execute and deliver the Ancillary Documents and the Stockholder Ancillary Documents 34 is, at the option of the Company and the Principal Stockholders, subject to satisfaction and fulfillment of the following conditions: 7.1 OPINION OF COUNSEL FOR THE PARENT AND MERGERCO. The Company Securityholders shall have received an opinion of Troop Meisinger Steuber & Pasich, LLP, counsel for the Parent and MergerCo, dated the Effective Date, in form and substance reasonably satisfactory to the Company and its counsel, containing the opinions set forth in Exhibit 71. ----------- 7.2 COMPLIANCE BY THE PARENT; REPRESENTATIONS AND WARRANTIES CORRECT. All of the terms and conditions of this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements to be complied with and performed by the Parent and MergerCo at or before the Effective Time shall have been complied with and performed in all material respects, and the representations and warranties made by the Parent and Mergerco in this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements shall be correct in all material respects at and as of the Effective Time with the same force and effect as though such representations and warranties had been made at and as of the Effective Time, except for changes contemplated or permitted in this Agreement and the Ancillary Agreements and changes in the ordinary and usual course of the Parent's business. The Parent and MergerCo shall have delivered to the Company a certificate, dated the Closing Date and signed on behalf of the Parent and MergerCo by one or more of its executive officers, certifying to the satisfaction and fulfillment of these conditions. 7.3 GOVERNMENTAL AND REGULATORY CONSENTS. (i) The waiting period applicable to the consummation of the Merger under the Hart Scott Act shall have expired or been terminated and, (ii) all filings required to be made prior to the Effective Time by Parent, MergerCo or the Company with, and all consents, approvals, orders, registrations and authorizations required to be obtained prior to the Effective Time by Parent, MergerCo or the Company from governmental and regulatory authorities in connection with the execution and delivery of this Agreement by Parent, MergerCo or the Company and the consummation of the transactions contemplated hereby by Parent, MergerCo and the Company shall have been made or obtained (as the case may be), except where the failure to have obtained or made such consent, filing, authorization, order, approval or registration would not have a Material Adverse Effect on Parent, MergerCo or the Company. 7.4 CONSENTS. The Parent and MergerCo shall have obtained all consents, permits and approvals required, in the reasonable opinion of counsel for the Company, as a condition to the lawful consummation of the Merger and of the transactions contemplated in this Agreement, or as necessary to avoid a breach of or default under any material agreement to which the Company, its Subsidiaries, MergerCo, any of the Principal Stockholders or the Parent is a party. 35 7.5 BLUE SKY REQUIREMENTS. All permits, licenses, consents and approvals necessary under any state securities laws for the issuance of the Merger Shares shall have been issued or given, and no such permit, license, consent or approval shall have been revoked, cancelled, terminated, suspended or made the subject of any "stop order" or proceeding therefor. 7.6 EXEMPTION OR REGISTRATION OF MERGER SHARES. At or prior to the Effective Time, the issuance of the Merger Shares will be registered under the Securities Act or the issuance of the Merger Shares will be exempt therefrom. 7.7 LITIGATION. No court or governmental or regulatory authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) (collectively, an "Order") which is in effect and makes illegal or prohibits consummation of the transactions contemplated by this Agreement; provided that the Company shall have used reasonable efforts to obtain the removal of any Order. 7.8 NO MATERIAL ADVERSE CHANGES. There does not exist any circumstance and has not occurred any event which has had or could have a Material Adverse Effect on the Parent and its Subsidiaries. 7.9 TAX OPINION. The Company shall have received the opinion of Latham & Watkins, counsel to the Company, dated the Effective Date, to the effect that the merger will be treated for Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, and that the Company will be a party to that reorganization within the meaning of Section 368(b) of the Code. 7.10 ESCROW OF MERGER CONSIDERATION. At or prior to the Effective Time, Parent shall have executed and delivered an escrow instrument in the form of the Escrow Instrument attached as Exhibit 7.10 and shall have taken such ------------ other action as is necessary so that 10% of the Merger Shares is or may be placed in escrow pursuant to the Escrow Instrument. The Escrow Agent under the Escrow Instrument shall be such person as is selected by the Parent and approved by the Company, which approval shall not be unreasonably withheld. The Merger Shares placed in Escrow, subject to any claims asserted by the Parent under the Escrow Instructions, shall be released from Escrow on the first anniversary of the Closing Date pursuant to the terms of the Escrow Instrument. 7.11 INVESTMENT LETTER. Prior to the Closing Date, Parent and the Company shall have received an investment letter (the "Investment Letter") from all Company Securityholders receiving Merger Shares pursuant to this Agreement which contains standard investment representations and warranties relating to the private placement exemption, an acknowledgement of the provisions of the Escrow Instrument and the last sentence of Section 9.2.1 hereof, and a release of any claim for breach of fiduciary duty or otherwise against the 36 Company or any officer or director thereof (including the Company's officers and directors prior to the Effective Time). ARTICLE 8. ---------- CONDITIONS PRECEDENT TO MERGER OBLIGATION ----------------------------------------- OF THE PARENT AND MERGERCO. -------------------------- The obligation of the Parent and MergerCo to consummate the Merger and to execute and deliver the Ancillary Documents and the Stockholder Ancillary Documents is, at the option of the Parent and MergerCo, subject to satisfaction and fulfillment of the following conditions: 8.1 OPINION OF COUNSEL FOR THE COMPANY. The Parent shall have received an opinion of Latham & Watkins, counsel for the Company, dated the Effective Date, in form and substance reasonably satisfactory to the Parent and its counsel containing the opinions set forth in Exhibit 8.1. ----------- 8.2 COMPLIANCE BY THE COMPANY AND THE PRINCIPAL STOCKHOLDERS; REPRESENTATIONS AND WARRANTIES CORRECT. All of the terms and conditions of this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements to be complied with and performed by the Company and each of the Principal Stockholders at or before the Effective Time shall have been complied with and performed in all material respects, and the representations and warranties made by the Company and each of the Principal Stockholders in this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements shall be correct in all material respects at and as of the Effective Time with the same force and effect as though such representations and warranties had been made at and as of the Effective Time, except for changes contemplated or permitted in this Agreement, the Ancillary Agreements and the Stockholder Ancillary Agreements and changes in the ordinary and usual course of the Company's and its Subsidiaries' businesses. The Company and each Principal Stockholder shall have delivered to the Parent and MergerCo a certificate, dated the Closing Date and signed on behalf of the Company by its chief executive officer and its chief financial officer, certifying to the satisfaction and fulfillment of these conditions. 8.3 ESTOPPEL CERTIFICATES AND NON-DISTURBANCE AGREEMENTS. On or prior to the Effective Date, the following shall have been received by the Parent: (a) written confirmations, in form and substance reasonably satisfactory to the Parent, from the landlords of the Company's leased real properties whose consent to the Merger is required under the applicable lease or from landlords who are reasonably identified by Parent confirming that the leases relating to such properties have been duly executed, witnessed and acknowledged by the landlords, that the leases remain in full force and effect, that all obligations, rentals and other payments owed by or accruing from the Company under the leases are satisfied and current, that no events of default have occurred that remain uncured, that the leases have not been amended 37 or modified, or, if they have been amended or modified, the date of each amendment or modification, and that the properties subject to the leases are not subject to any mortgages or deeds of trust or, if they are subject to one or more mortgages or deeds of trust, the name of the holder of each such mortgage or deed of trust and the date, title and original mortgagee or beneficiary of each such mortgage or deed of trust and (b) non-disturbance agreements, in form and substance reasonably satisfactory to the Parent, from the mortgagees of the real properties which are the subject of such leases. 8.4 DUE DILIGENCE. Parent shall have completed and approved to its sole satisfaction customary business and legal due diligence with respect to the Company, its Subsidiaries and their respective businesses; provided, however, if -------- ------- Parent does not deliver written notice to the Company of the failure of this condition on or prior to that date which is four business days following delivery to Parent of the Company's audited financial statements for the year ended December 31, 1995, this condition shall be deemed to be satisfied. 8.5 HART SCOTT ACT FILING. Prior to the Effective Time, the waiting period in connection with the Hart Scott Act filing shall have expired. 8.6 CONSENTS. The Company, MergerCo, the Principal Stockholders and the Parent shall have obtained all consents, permits and approvals required, in the reasonable opinion of counsel for the Parent, as a condition to the lawful consummation of the Merger and of the transactions contemplated in this Agreement, or as necessary to avoid a breach of or default under any material agreement to which the Company, its Subsidiaries, MergerCo, or the Parent is a party. 8.7 NON-COMPETITION AGREEMENTS. At or before the Effective Time, all of the Principal Stockholders (such Principal Stockholders hereby agreeing to do so) shall each have executed and delivered to the Parent a Non-Competition Agreement (the "Non-Competition Agreement") in the form of Non-Competition Agreement attached as Exhibit 8.7 (in this regard, the "Restricted Period" and ----------- the "Restricted Territory" with respect to each such Principal Stockholder shall be the period and territory, respectively, set forth in Section 8.7 of the Disclosure Schedule). 8.8 BLUE SKY REQUIREMENTS. All permits, licenses, consents and approvals necessary under any state securities laws for the issuance of the Merger Shares shall have been issued or given, and no such permit, license, consent or approval shall have been revoked, cancelled, terminated, suspended or made the subject of any "stop order" or proceeding therefor. 8.9 ACCOUNTING TREATMENT. The Parent shall have received a letter, dated the Effective Date, from Arthur Andersen LLP, the Parent's independent certified public accountants, which shall be satisfactory to the Parent, stating without qualification the accounting for the business combination contemplated in this Agreement and the Ancillary Agreements as a "pooling of interests" and will be in accordance with generally accepted accounting principles 38 and the applicable pronouncements and interpretations thereof of the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board (FASB) and the SEC in effect on the Effective Date ("Pooling Accounting Treatment"). 8.10 ESCROW OF MERGER CONSIDERATION. At or prior to the Effective Time, the Company shall have executed and delivered an escrow instrument on behalf of the Company Stockholders in the form of the Escrow Instrument attached as Exhibit 7.10 and shall have taken such other action as is necessary so that ------------ 10% of the Merger Shares is or may be placed in escrow pursuant to the Escrow Instrument. The Escrow Agent under the Escrow Instrument shall be such person as is selected by the Parent and approved by the Company, which approval shall not be unreasonably withheld. The Merger Shares placed in Escrow, subject to any claims asserted by the Parent under the Escrow Instructions, shall be released from Escrow on the first anniversary of the Closing Date. Parent acknowledges that it shall be solely responsible for the fees of the Escrow Agent incurred in connection with the Escrow. 8.11 COMPANY STOCKHOLDERS APPROVAL. Prior to the Effective Time, the Company Securityholders shall have approved the Merger in accordance with the Delaware Law. Additionally, no Company Securityholders, other than Dissenters who would be entitled to receive in the Merger in the aggregate less than 5% of the Merger Shares in exchange for all of their Company Securities if they were not Dissenters, shall have validly exercised their appraisal rights under Section 262 of the Delaware Law. 8.12 PARENT BOARD OF DIRECTOR APPROVAL. Prior to the Effective Time, Parent's Board of Directors shall have approved the Merger in accordance with Delaware Law. 8.13 RESIGNATION OF COMPANY OFFICERS AND DIRECTORS. Prior to the Effective Time, each of the members of the Board of Directors of the Company and its Subsidiaries shall have executed letters of resignation. 8.14 COMPANY CERTIFICATE REGARDING COMPANY SECURITIES. The Parent shall have received from the Company an executed certificate certifying to the Parent (a) the aggregate number of outstanding Company Common Shares, (b) the aggregate number of Company Common Shares with respect to which appraisal rights have been validly exercised under Section 262 of the Delaware Law along with the identification of the Company Securityholders who have so exercised such appraisal rights and a representation as to whether or not each such Company Securityholder qualifies as a Dissenter and (c) the aggregate number of outstanding Company Preferred Shares, all immediately prior to the Effective Time. 8.15 COMPANY AFFILIATE'S LETTERS. All of the Company Affiliates (any Principal Stockholders who are Company Affiliates hereby agreeing to do so) shall have executed and delivered to the Parent the Company Affiliate's Letter. 39 8.16 CONTINUED EMPLOYMENT OF KEY MANAGERS. Prior to the Effective Time, each of Rick Watson and Barry Watson shall have (x) terminated their respective employment agreements with the Company for the sole consideration of 20,000 and 10,000 shares of Parent Common Stock, respectively, and (y) provided a general release to the Company of any other claim they might have against the Company or its Subsidiaries arising out of their employment with the Company and (z) agreed to remain in the employ of the Surviving Corporation for a minimum of twelve months following the Closing. By execution of this Agreement, each of Rick Watson and Parent hereby agree to the foregoing and each agrees to negotiate in good faith to reach agreement on the form and substance of the Agreements necessary to implement the foregoing. 8.17 INVESTMENT LETTER. Prior to the Closing Date, Parent and the Company shall have received Investment Letters from all Company Securityholders receiving Merger Shares pursuant to this Agreement which contains standard investment representations and warranties relating to the private placement exemption, an acknowledgement of the provisions of the Escrow Instrument and the last sentence of Section 9.2.1 hereof, and a release of any claim for breach of fiduciary duty or otherwise against the Company or any officer or director thereof (including the Company's officers and directors prior to the Effective Time). 8.18 NO ADVERSE CHANGES. There does not exist any circumstance and has not occurred any event which has had a Material Adverse Effect on the Company or its Subsidiaries. ARTICLE 9. ---------- POST-CLOSING COVENANTS ---------------------- 9.1 INDEMNIFICATION. 9.1.1 GENERAL. From and after the Effective Time, the parties shall indemnify each other as provided in this Section 9.1. As used in this Agreement, (a) the term "Damages" shall mean all liabilities, demands, claims, actions or causes of action, regulatory, legislative or judicial proceedings or investigations, assessments, levies, losses, fines, penalties, damages, costs and expenses, including without limitation reasonable attorneys', accountants', investigators', and experts' fees and expenses, sustained or incurred in connection with the defense or investigation of any claim; (b) the term "Indemnified Party" shall mean a party who is entitled to indemnification from a party hereto pursuant to this Section 9.1; (c) the term "Indemnifying Party" shall mean a party hereto who is required to provide indemnification under this Article 9 to another party; and (d) the term "Third Party Claim" shall mean any claim, action, suit, proceeding, investigation or like matter which is asserted or threatened by a party other than the parties hereto, their successors and permitted assigns, against any Indemnified Party or to which any Indemnified Party is subject. 40 9.1.2 THE COMPANY INDEMNIFICATION OBLIGATIONS; ESCROW INSTRUMENT. The Company shall indemnify, save and keep the Parent, MergerCo, its officers, directors, employees, partners and stockholders (each a "Parent Indemnitee" and collectively, the "Parent Indemnitees") harmless against and from all Damages sustained or incurred by any Parent Indemnitee, as a result of or arising out of or by virtue of: (a) any inaccuracy in or breach of any representation and warranty made by the Company to the Parent or MergerCo herein or in any of the Ancillary Agreements delivered to the Parent or MergerCo in connection herewith; and (b) the breach by the Company of, or failure of the Company to comply with, any of the covenants or obligations under this Agreement or any of the Ancillary Agreements to be performed by the Company (including, without limitation, their obligations under this Section 9.1). The Company and Parent shall enter into the Escrow Instrument as of the date of the Closing and deposit the Escrow Shares therein for the purpose of securing the indemnity obligations of the Company under this Section 9.1.2. 9.1.3 EACH PRINCIPAL STOCKHOLDER'S INDEMNIFICATION OBLIGATIONS. Each Principal Stockholder shall indemnify severally, and not jointly, and save and keep the Parent Indemnitees harmless against and from all Damages sustained or incurred by any Parent Indemnitee, as a result of or arising out of or by virtue of: (a) any inaccuracy in or breach of any representation and warranty made by such Principal Stockholder to the Parent or MergerCo pursuant to Article 4A or in any Stockholder Ancillary Agreement delivered to the Parent or MergerCo in connection herewith; and (b) the breach by such Principal Stockholder of, or failure of such Principal Stockholder to comply with, any of the covenants or obligations under this Agreement or of the Stockholder Ancillary Agreements to be performed by such Principal Stockholder (including, without limitation, such Principal Stockholder's obligations under this Section 9.1). 9.1.4 THE PARENT INDEMNIFICATION OBLIGATIONS TO THE COMPANY SECURITYHOLDERS. The Parent shall indemnify, save and keep the Company Securityholders and their heirs, successors and permitted assigns (individually a "Company Indemnitee" and collectively, the "Company Indemnitees") harmless against and from all Damages sustained or incurred by any Company Indemnitee as a result of or arising out of or by virtue of: (a) any inaccuracy in or breach of any representation and warranty made by the Parent or MergerCo to the Company Securityholders herein or in any 41 Ancillary Agreements or Stockholder Ancillary Agreements delivered to the Company Securityholders in connection herewith; (b) any breach by the Parent or MergerCo of, or failure by the Parent or MergerCo to comply with, any of the covenants or obligations under this Agreement or any of the Ancillary Agreements to be performed by the Parent or MergerCo (including without limitation its obligations under this Section 9.1); or (c) the operation of the business of the Company or any of its Subsidiaries from and after the Effective Time but only to the extent such Damages are not proximately caused by any of the events described in Sections 9.1.2 or (b) or Sections 9.1.3 or (b). 9.1.5 LIMITATION ON INDEMNIFICATION OBLIGATIONS. (a) The Company's, each Principal Stockholder's and the Parent's obligations pursuant to Sections 9.1.2, 9.1.3 and 9.1.4, respectively, are subject to the following limitations: (i) No Indemnified Party shall be entitled to recover under this Section 9.1 other than with respect to the Special Provisions unless a claim has been asserted by written notice, setting forth the basis for such claim (a "Notice of Loss"), delivered to the Indemnifying Party on or prior to the date (the "Applicable Date") as is the earlier to occur of (i) the date of issuance of the first independent audit report of Parent which includes any period ending after the Effective Time or (ii) the first anniversary of the Closing Date. The Special Provisions shall mean the provisions of Section 4A.1, 4A.2, 6.15, 9.1.5 and 9.2. (ii) Notwithstanding anything to the contrary herein contained, the Company Securityholders shall not be obligated hereunder with respect to any Damages other than with respect to the Special Provisions to the extent that such Damages exceed the value of the Escrow Shares. The Company Securityholders shall have no right of contribution against the Company or against Parent or any of their respective Subsidiaries by reason or arising from any claim asserted by an Indemnified Party under Section 9.1.2. (iii) the Parent Indemnitees shall not be entitled to recover for any Damages other than with respect to the Special Provisions until such time as the Damages claimed by all Parent Indemnitees in the aggregate exceed $150,000, at which time all claims for Damages of any one or more Parent Indemnitees for indemnification may be asserted, including claims for Damages included in the initial $150,000. (b) Notwithstanding anything to the contrary herein contained, the limitations contained in Section 9.1.5 shall not apply to any claim for Damages to the extent it arises out of fraud or intentional misrepresentation. 42 9.1.6 RELEASE. As a condition to the Merger, each Company Stockholder and each officer and director of the Company and its Subsidiaries shall deliver to Parent, MergerCo and the Company effective as of the Closing Time, a general release in a form reasonably satisfactory to Parent of the Company and its Subsidiaries from all claims which such Principal Stockholder, officer or director have against the Company or any Subsidiary on any account other than rights specifically granted under this Agreement, which general release shall be included in the Investment Letter. 9.1.7 ESCROW SHARES. If the Escrow Instrument is in effect at the time of an assertion of indemnification is made by the Parent Indemnitees, the obligations of the Company and the Principal Stockholders hereunder with respect to the Damages (other than with respect to the Special Provisions) shall first be satisfied by the distribution to the Parent Indemnitee of Escrow Shares held pursuant to the Escrow Instrument. After there are no Escrow Shares (or other assets) held pursuant to the Escrow Instrument, the Company and the Principal Stockholders shall be obligated to satisfy their obligations by the payment of cash to the Parent Indemnitees. 9.1.8 THIRD PARTY CLAIMS OTHER THAN TAXES. Forthwith following the receipt of notice of a Third Party Claim (other than a Third Party Claim with respect to Taxes), the party receiving the notice of the Third Party Claim shall (i) notify the other party of its existence setting forth with reasonable specificity the facts and circumstances of which such party has received notice and (ii) if the party giving such notice is an Indemnified Party, specifying the basis hereunder upon which the Indemnified Party's claim for indemnification is asserted. The Indemnified Party shall, upon reasonable notice, tender the defense of a Third Party Claim to the Indemnifying Party. If: (a) the defense of a Third Party Claim so tendered is accepted without qualification (or reservation of rights) by the Indemnifying Party within thirty (30) days thereafter such tender; or (b) within thirty (30) days after the date on which written notice of a Third Party Claim has been given pursuant to this Section 9.1.8, the Indemnifying Party shall acknowledge in writing to the Indemnified Party and without qualification (or reservation of rights) its indemnification obligations as provided in this Section 9.1.8; (c) the defense of a Third Party Claim is accepted by the Indemnifying Parties pursuant to Section 9.1.8(a) or (b) above, then, except as hereinafter provided, the Indemnified Party shall not, and the Indemnifying Party shall, have the right to contest, defend, litigate or settle such Third Party Claim. The Indemnified Party shall have the right to be represented by counsel at its own expense in any such contest, defense, litigation or settlement conducted by the Indemnifying Party provided that the Indemnified Party shall be entitled to reimbursement therefor if the Indemnifying Party shall lose its right to contest, defend, litigate and settle the Third Party Claim as herein provided. The Indemnifying Party 43 shall lose its right to defend and settle the Third Party Claim if it shall fail to diligently contest the Third Party Claim. So long as the Indemnifying Party has not lost its right and/or obligation to contest, defend, litigate and settle as herein provided, the Indemnifying Party shall have the exclusive right to contest, defend and litigate the Third Party Claim and shall have the exclusive right, in its discretion exercised in good faith, and upon the advice of counsel, to settle any such matter, either before or after the initiation of litigation, at such time and upon such terms as it deems fair and reasonable, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle shall be given to the Indemnified Party. All expenses (including without limitation attorneys' fees) incurred by the Indemnifying Party in connection with the foregoing shall be paid by the Indemnifying Party. Notwithstanding the foregoing, in connection with any settlement negotiated by an Indemnifying Party, no Indemnified Party shall be required by an Indemnifying Party to (x) enter into any settlement that does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the Indemnified Party of a release from all liability in respect of such claim or litigation, (y) enter into any settlement that attributes by its terms liability to the Indemnified Party or (z) consent to the entry of any judgment that does not include as a term thereof a full dismissal of the litigation or proceeding with prejudice. No failure by an Indemnifying Party to acknowledge in writing its indemnification obligations under this Section 9.1.8 shall relieve it of such obligations to the extent they exist. If an Indemnified Party is entitled to indemnification against a Third Party Claim, and the Indemnifying Party fails to accept a tender of, or assume, the defense of a Third Party Claim pursuant to this Section 9.1.8 or if, in accordance with the foregoing, the Indemnifying Party shall lose its right to contest, defend, litigate and settle such a Third Party Claim, the Indemnified Party shall have the right, without prejudice to its right of indemnification hereunder, in its discretion exercised in good faith and upon the advice of counsel to contest, defend and litigate such Third Party Claim, and may settle such Third Party Claim, either before or after the initiation of litigation, at such time and upon such terms as the Indemnified Party deems fair and reasonable, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle is given to the Indemnifying Party. If, pursuant to this Section 9.1.8, the Indemnified Party so contests, defends, litigates or settles a Third Party Claim, for which it is entitled to indemnification hereunder as hereinabove provided, the Indemnified Party shall be reimbursed by the Indemnifying Party for the reasonable attorneys' fees and other expenses of defending, contesting, litigating and/or settling the Third Party Claim which are incurred from time to time, forthwith following the presentation to the Indemnifying Party of itemized bills for said attorneys' fees and other expenses. 9.1.9 CLAIMS INVOLVING TAXES. In the case of any proposed or actual assessment of Tax liabilities for which a Parent Indemnitee is entitled to indemnification from the Company as provided herein, Parent shall give notice to the Company Securityholders, and shall contest such proposed or actual assessment in the manner reasonably directed by the Company Securityholders (in consultation with the Parent) through the administrative review or appeal procedures available under the relevant Tax laws and regulations. The Company Securityholders shall bear all costs and expenses relating to any action requested by the Company Securityholders to be taken by Parent under this Section 9.1.9. If the pursuit of such 44 administrative remedies by the Parent is unsuccessful, Parent shall be entitled to indemnification for the Tax (and any penalties and interest) pursuant to Section 9.1 hereof; provided however, that if within ten (10) days of receipt -------- ------- from the Parent of notice of its intention to do so, the Company Securityholders shall notify the Parent of their desire to contest the proposed or assessed Tax deficiency in the courts, they shall be entitled to do so at their expense provided the Company Securityholders pay the deficiency and any penalties and interest if required in order to seek judicial relief. The Parent shall cooperate with the Company for such purposes but shall be entitled to reimbursement for any out-of-pocket expenses incurred by the Parent in doing so. For purposes of this Section 9.1.9, the Company Securityholders shall select a Company Securityholder representative to act on their behalf who shall serve as a liaison between Parent and the Company Securityholders with respect to all matters arising under or related to this Section 9.1.9. 9.1.10 COOPERATION. Subject to the provisions of Section 9.1.8, the Indemnified Party shall have the right, at its own expense, to participate in the defense of any Third Party Claim, and if said right is exercised, the parties shall cooperate in the investigation and defense of said Third Party Claim. 9.1.11 SUBROGATION. The Indemnifying Party shall not be entitled to require that any action be brought against any other Person before action is brought against it hereunder by the Indemnified Party and shall not be subrogated to any right of action until it has paid in full or successfully settled or defended against the Third Party Claim for which indemnification is sought. 9.1.12 INDEMNIFICATION NET OF BENEFITS. The amount of any recovery by an Indemnified Party pursuant to this Section 9.1 shall be net of any insurance benefits actually received by such Indemnified Party (but not to the extent such benefits are repaid through retrospective premium adjustments or otherwise) or any foreign federal, state and/or local tax benefits actually received by such Indemnified Party as a result of the state of facts which entitled the Indemnified Party to recover from the Indemnifying Party pursuant to this Section 9.1. Notwithstanding the foregoing, any increase or decrease in the basis of any assets or stock of the Parent or any of its Subsidiaries shall not be considered to give rise to a tax benefit for purposes of this Section 9.1.12. 9.2 REGISTRATION STATEMENT FILING. 9.2.1 As promptly as reasonably practicable following the Closing, Parent shall file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Registration Statement") on any appropriate form under the Securities Act of 1933, as amended (the "Securities Act") with respect to the offering and sale or other disposition of the Merger Shares to be issued in the Merger. Parent agrees to use all reasonable efforts to cause the Registration Statement to become effective as soon as reasonably practicable following its filing. The Principal Stockholders agree to cooperate with and provide assistance to Parent 45 in connection with the registration and sale of the Merger Shares. Notwithstanding the foregoing, the Company and the Principal Stockholders acknowledge and agree that Parent shall have no obligation to name in the Registration Statement any Company Securityholder as a selling stockholder at the time of the original filing; provided, that, Parent files a post-effective amendment or amendments which become effective on or prior to the second anniversary of the Closing Date including (as of such date) all Company Securityholders as selling stockholders and thus allowing each Company Securityholder an opportunity to effect sales of Merger Shares pursuant to the Registration Statement at least as of such time. 9.2.2 Parent agrees that, subject to the provisions of the last sentence of Section 9.2.1, it will (i) prepare and file with the Commission, any amendments or supplements to the Registration Statement or prospectus which is a part thereof which may be necessary to keep the Registration Statement effective and to comply with the provisions of the Securities Act with respect to the offer of the Merger Shares covered by the Registration Statement for a period of three (3) years from the effective date of the Registration Statement; (ii) prepare and promptly file with the Commission and promptly notify the Company Securityholders of the filing of such amendment or supplement to the Registration Statement or prospectus as may be necessary to correct any statement therein or omission therefrom if, at any time when a prospectus relating to the Merger Shares is required to be delivered under the Securities Act, any event with respect to Parent shall have occurred as a result of which any prospectus would include an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading; (iii) in case the Company Securityholders are required to deliver a prospectus, prepare promptly such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act; (iv) advise the Company Securityholders promptly after Parent shall receive notice or obtain knowledge of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or amendment thereto or of the initiation or threatening of any proceedings for that purpose, and promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (v) use its best efforts to qualify the Merger Shares for sale under the securities or "blue Sky" laws of such states within the United States as the Securityholders may reasonably designate; and (vi) furnish to the Company Securityholders, as soon as available, copies of the Registration Statement and each preliminary and final prospectus, or supplement or amendment required to be prepared with respect thereto, all in such quantities as they may from time to time reasonably request. 9.2.3 Parent shall pay all expenses (the "Registration Expenses") incurred by Parent incident to the registration of the Merger Shares under this Section 9.2, including, without limitation, all registration and filing fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for Parent and of its independent public accountants, premiums and other costs of policies of insurance purchased by 46 Parent at its option against liabilities arising out of the public offering of such Merger Shares. With respect to sales of Merger Shares, the Company Securityholders shall pay all underwriting discounts and commissions and fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Merger Shares, the fees and disbursements of counsel retained by the Company Securityholders and transfer taxes, if any. 9.2.4 Parent agrees to indemnify and hold harmless, to the full extent permitted by law, each Company Securityholder, its officers, directors and employees and each person who controls such Company Securityholder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of a material fact contained in the Registration Statement or prospectus or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Parent by such Company Securityholder expressly for use therein. Promptly after receipt by a Company Securityholder under this Section 9.2.4 of notice of the commencement of any action (including any governmental action), such Company Securityholder will, if a claim in respect thereof is to be made against the Parent under this Section 9.2.4, notify Parent in writing of the commencement thereof and Parent shall have the right to participate in, and, to the extent Parent so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that a Company Securityholder shall have the right to retain its own counsel, with the fees and expenses to be paid by Parent, if representation of such Company Securityholder by the counsel retained by Parent would be inappropriate due to actual or potential differing interests between such Company Securityholder and any other party represented by such counsel in such proceeding. The failure to notify Parent within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve Parent of any liability to the Company Securityholder under this Section 9.2.4 but the omission so to notify Parent will not relieve it of any liability that it may have to any Company Securityholder otherwise than under this Section 9.2.4. 9.3 LISTING OF ADDITIONAL SHARES ON NASDAQ. As promptly as reasonably practicable following the Closing, the Parent shall prepare and submit to the National Association of Securities Dealers an Additional Listing Application and all other documents and fees necessary to cause the Merger Shares to be listed on the NMS. 9.4 COMPANY FAILURE TO CLOSE. In the event this Agreement is terminated pursuant to Article 10 as a result of the failure of any condition set forth in Section 8.1.1 and the Company or the Company Securityholders enter into an agreement to effect a sale of substantially all of the assets, or a majority of the voting securities of the Company (collectively, the "Proposed Transaction"), within six months from the date of termination under Article 10 hereof to a party who had or on whose behalf there had been discussions relating to a Proposed Transaction made with the Company, a Principal Stockholder or their agents or representatives regarding the Proposed Transaction during the period from November 1, 1995 and ending on 47 the date of the meeting, or written consent set forth in Section 6.3 hereof, the Company shall pay to Parent all costs incurred by Parent (not to exceed $250,000) in connection with the negotiation, execution and consummation of this Agreement plus an additional $250,000. ARTICLE 10. ----------- TERMINATION. ----------- This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: 10.1 MATERIAL BREACH. By a non-breaching party, in the event of a material breach of any representation, warranty, condition or agreement contained in this Agreement that is not cured within 30 days of the time that written notice of such breach is received by such other party from the party giving notice; 10.2 CONSUMMATION OF MERGER. If the Merger shall not have been consummated on or before May 31, 1996; provided, in the case of a termination pursuant to this Section 1.0.2, the terminating party shall not have materially breached its obligations hereunder in any manner that shall have contributed to the failure to consummate the Merger by such date. 10.3 DUE DILIGENCE. In the event that the Parent's due diligence investigation of the Company and its Subsidiaries conducted between the date hereof and the Closing Date, related to all aspects of the business of the Company and its Subsidiaries, is not completed to the satisfaction of Parent in its sole discretion, the Parent may elect to the terminate this Agreement by giving written notice of termination to the Company within seven (7) days of the conclusion of such due diligence investigation. 10.4 MUTUAL CONSENT. By mutual written consent of the Parent and the Company authorized by their respective Boards of Directors. 10.5 EFFECT OF TERMINATION. In the event of termination of this Agreement and abandonment of the Merger pursuant to this Article 1.0, no party hereto (or any of its Affiliates) shall have any liability or further obligation to any other party to this Agreement, except that if termination of this Agreement shall be judicially determined to have been caused by willful breach of this Agreement, then, in addition to other remedies at law or equity for breach of this Agreement, the party so found to have willfully breached this Agreement shall indemnify the other parties for their respective costs, fees and expenses of their counsel, accountants and other experts and advisors as well as fees and expenses incident to negotiation, preparation and execution of this Agreement and related documentation and their stockholders' meetings and consents. 48 ARTICLE 11. ----------- CHOICE OF LAW; ARBITRATION -------------------------- The internal laws of the State of California, United States of America, applicable to contracts entered into and wholly to be performed in California by California residents, without reference to any principles concerning conflicts of law, shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder; provided, however, that this Section and the parties' rights under this Section shall be governed by and construed in accordance with the Federal Arbitration Act, 9 U.S.C. (S) 1 et. sec. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by the following procedures: Either party may send the other written notice identifying the matter in dispute and involving the procedures of this Section. Within fourteen (14) days after such written notice is given, one or more principals of each party shall meet at a mutually agreeable location in San Francisco, California, for the purpose of determining whether they can resolve the dispute themselves by written agreement, and, if not, whether they can agree upon a third-party impartial arbitrator (the "Arbitrator") to whom to submit the matter in dispute for final and binding arbitration. If the parties fail to resolve the dispute by written agreement or to agree on the Arbitrator within a twenty-one (21) day period, either party may make written application to the Judicial Arbitration and Mediation Services ("JAMS"), San Francisco, California for the appointment of a single Arbitrator to resolve the dispute by arbitration and at the request of JAMS, the parties shall meet with JAMS at its offices or confer with JAMS by telephone within ten (10) calendar days of such request to discuss the dispute and the qualifications and experience which each party respectively believes the Arbitrator should have; provided, however, the selection of the Arbitrator shall be the exclusive decision of JAMS and shall be made within thirty (30) days of the written application to JAMS. Within 30 days of the selection of the Arbitrator, the parties shall meet in San Francisco, California with such Arbitrator at a place and time designated by the Arbitrator after consultation with the parties and present their respective positions on the dispute. Each party shall have no longer than one day to present its position, the entire proceeding before the Arbitrator shall be on no more than three consecutive days, and the award shall be made in writing no more than 30 days following the end of the proceeding. Such award shall be a final and binding determination of the dispute and shall be fully enforceable as an arbitration award in any court having jurisdiction and venue over the parties. The prevailing party (as determined by the Arbitrator) shall in addition be awarded by the Arbitrator such party's own attorneys' fees and expenses in connection with such proceeding. The non-prevailing party (as determined by the Arbitrator,) shall pay the Arbitrator's fees and expenses. 49 ARTICLE 12. ----------- MISCELLANEOUS PROVISIONS. ------------------------ 12.1 NOTICES. All notices, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered in person, on the date actually given, (ii) by United States mail, certified or registered, with return receipt requested, on the date which is two business days after the date of mailing, or (iii) if sent by telex or facsimile transmission, with a copy mailed on the same day in the manner provided in (i) above, on the date transmitted provided receipt is confirmed: 12.1.1 if to the Parent or MergerCo to: Veterinary Centers of America, Inc. 3420 Ocean Park Boulevard, Suite 1000 Santa Monica, California 90405 Attention: Chief Financial Officer Telecopy No.: (310) 392-7464 With copies to: Troop Meisinger Steuber & Pasich, LLP 10940 Wilshire Boulevard, Suite 800 Los Angeles, California 90024 Attention: C.N. Franklin Reddick III, Esq. Telecopy No.: (310) 443-8512 12.1.2 if to the Company to: Pets Rx, Inc. 333 West Santa Clara Street #716 San Jose, California 95113 Attention: President With copies to: Latham & Watkins 505 Montgomery Street, Suite 1900 San Francisco, CA 94111 Attention: Christopher L. Kaufman Telecopy: (415) 395-8095 50 12.1.3 if to the Principal Stockholders, to their respective addresses set forth in Schedule A hereto, or at such other address as may have been furnished by such Person in writing to the other parties. 12.2 SEVERABILITY. Should any Section or any part of a Section within this Agreement be rendered void, invalid or unenforceable by any court of law for any reason, such invalidity or unenforceability shall not void or render invalid or unenforceable any other Section or part of a Section in this Agreement. 12.3 EXHIBITS AND SCHEDULES. Each Exhibit and Schedule delivered pursuant to the terms of this Agreement, each document, instrument and certificate delivered by the parties in connection with the transactions contemplated hereby and each Ancillary Agreement constitutes an integral part of this Agreement. 12.4 HEADINGS. Section headings and subheadings used in this Agreement are for convenience only and shall not affect the meaning or construction of this Agreement. 12.5 NO ADVERSE CONSTRUCTION. The rule that a contract is to be construed against the party drafting the contract is hereby waived, and shall have no applicability in construing this Agreement, any other document delivered at the Closing or any provisions hereof or thereof. 12.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 12.7 COSTS AND ATTORNEYS' FEES. In the event that any action, suit, or other proceeding is instituted concerning or arising out of this Agreement, any of the Ancillary Agreements or any of the Stockholder Ancillary Agreements, the prevailing party shall recover all of such party's costs, and reasonable attorneys' fees incurred in each and every such action, suit, or other proceeding, including any and all appeals or petitions therefrom. 12.8 SUCCESSORS AND ASSIGNS. All rights, covenants and agreements of the parties contained in this Agreement shall, except as otherwise provided herein, be binding upon and inure to the benefit of their respective successors and assigns. 12.9 AMENDMENT. This Agreement may be amended at any time by the mutual written agreement of the Parent, the Company and MergerCo, but no amendment shall be made which materially changes the rights, obligations or liabilities of any Principal Stockholder hereunder without his written agreement thereto. 51 12.10 WAIVER. At any time prior to the Effective Time, the Parent, the Company and MergerCo may: 12.10.1 Extend the time for the performance of any of the obligations or other acts of the parties hereto. 12.10.2 Waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto. 12.10.3 Waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of the Parent, the Company or MergerCo to any such extension or waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such party, and no such agreement which materially changes the rights, obligations or liabilities of any Principal Stockholder hereunder shall be binding upon him without his written agreement thereto. 12.11 ENTIRE AGREEMENT. This Agreement, the attached Exhibits and Schedules, the other schedules referred to in this Agreement, and the Ancillary Agreements contain the entire understanding of the parties and, other than the Confidentiality Letter, there are no further or other agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof unless expressly referred to herein. Nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto any rights or remedies under or by way of this Agreement; provided, however, that the Indemnified Parties shall be entitled to the - -------- ------- benefits of Article 9. 12.12 DISCLOSURE SCHEDULE. Matters reflected on the Disclosure Schedule are not necessarily limited to matters required by this Agreement to be reflected on the Disclosure Schedule. Such additional matters are set forth for informational purposes only and do not necessarily include other matters of a similar nature. Matters disclosed by the Company and the Company Stockholders pursuant to any particular section of or schedule to this Agreement (or any section of the Disclosure Schedule) shall be deemed to be disclosed with respect to all sections of this Agreement (and all sections of the Disclosure Schedule) to the extent this Agreement requires such disclosure. Capitalized terms used in the Disclosure Schedule not otherwise defined therein shall have the respective meanings assigned to such terms in this Agreement. 12.13 OBLIGATIONS OF THE PARENT. Whenever this Agreement requires MergerCo to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause MergerCo to take such action. 52 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. VETERINARY CENTERS OF AMERICA, INC., A DELAWARE CORPORATION By: ___________________________________________ Name: Robert L. Antin Title: Chief Executive Officer PRI MERGER COMPANY, A DELAWARE CORPORATION By: ___________________________________________ Name: Robert L. Antin Title: Chief Executive Officer PETS RX, INC., A DELAWARE CORPORATION By: _____________________________________________ Name: Title: TRILON DOMINION PARTNERS, LLC By: _____________________________________________ Name: Title: HYPROM, S.A. A SWISS CORPORATION By: _____________________________________________ Name: Title: __________________________________________________ Richard Watson, individually and as Custodian for Andrew Watson __________________________________________________ Nancy P. Watson __________________________________________________ John W. Hunter LIST OF EXHIBITS Exhibit No. Exhibit Name - ----------- ------------ 2.3(b) Certificate of Merger 4.29 Form of Confidentiality Agreement 6.6 Form of Affiliate Letter 7.1 Opinion of Troop Meisinger Steuber & Pasich, LLP 8.1 Opinion of Latham & Watkins 8.7 Form of Non-Competition Agreement 7.11 Escrow Agreement 55 LIST OF SCHEDULES Schedule Identification - -------- -------------- A Principal Stockholders 8.15 Key Company Managers 56 SCHEDULE A PRINCIPAL STOCKHOLDERS Trilon Dominion Partners, LLC Hyprom, S.A. a Swiss corporation Richard Watson, individually and as Custodian for Andrew Watson Nancy P. Watson John W. Hunter 57 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION Amendment No. 1 to Agreement and Plan of Reorganization (the "Amendment No. 1") dated this April 11, 1996, by and among the Principal Stockholders, Veterinary Centers of America, Inc., a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation ("MergerCo") and Pets Rx, Inc., a Delaware corporation (the "Company"). R E C I T A L S --------------- A. Parent, MergerCo and the Company have entered into that certain Agreement and Plan of Reorganization (the "Merger Agreement") dated February 27, 1996 pursuant to which MergerCo shall merge with and into the Company (the "Merger"), the separate existence of MergerCo shall cease and the Company shall continue as the surviving corporation. Terms used herein without definition shall have the meanings given those terms in the Merger Agreement. B. Pursuant to Section 1.22 of the Merger Agreement, Merger Shares means 970,000 shares of Parent Common Stock minus the Reduction Shares. C. Pursuant to Section 5.2 of the Merger Agreement, Parent represents and warrants that when the execution and delivery of the Merger Agreement and each of the Ancillary Agreements and the consummation of the transactions contemplated by the Merger Agreement and the Ancillary Agreements are duly and validly authorized by Parent's and MergerCo's Board of Directors, all corporate proceedings will have been taken and no other corporate proceedings on the part of Parent or MergerCo will be necessary to authorize the execution, delivery and performance by Parent and MergerCo of the Merger Agreement and each of the Ancillary Agreements. D. Pursuant to Section 6.5 of the Merger Agreement, Parent shall take all necessary or appropriate action to call a meeting of its Board of Directors within fourteen days after the execution of the Merger Agreement to consider and vote on the terms of the Merger and the execution of the Merger Agreement. Based on subsequent discussions among the parties, Parent's obligations under Section 6.5 were extended until April 5, 1996. E. Pursuant to Section 6.11, the Company shall deliver to Parent the Disclosure Schedules by March 19, 1996. Based on subsequent discussions among the parties, the Company's obligation to deliver the Disclosure Schedules under Section 6.11 was extended until April 5, 1996. F. Pursuant to Section 8.4 of the Merger Agreement, Parent shall have completed and approved to its sole satisfaction customary business and legal due diligence with respect to the Company, its Subsidiaries and their respective businesses and, in the event the diligence is not satisfactory to Parent, Parent must deliver notice thereof to the Company within four (4) business days following receipt of the Company's audited financial statements for the year ended December 31, 1995. G. The parties desire to modify the terms of Sections 1.22, 5.2, 6.5, 6.11 and 8.4 and such other terms of the Merger Agreement as set forth below. A G R E E M E N T ----------------- NOW THEREFORE, in consideration of the foregoing premises and mutual covenants herein provided, the parties agree as follows: 1. Section 1.22 of the Merger Agreement is hereby amended to read in its entirety as follows: "MERGER SHARES" shall mean 850,000 shares of Parent Common Stock minus the Reduction Shares, which Merger Shares are to be exchanged for the Company Common Stock and the Company Preferred Stock pursuant to this Agreement. Notwithstanding the foregoing, in the event the average closing sale prices of the Parent Common Stock on the Nasdaq National Market (as reported by the Wall Street Journal, or if not so reported as reported by another authoritative source) over the five (5) trading day period ending on (and including) one day prior to the Closing Date (the "Average Price") is between $21.169 and $18.55 (inclusive), the Merger Shares shall be determined by dividing $17,993,500 by the Average Price less the Reduction Shares. If the Average Price is less than $18.55, the Merger Shares shall equal 970,000 shares of Parent Common Stock less the Reduction Shares. 2. The second sentence of Section 5.2 of the Merger Agreement is hereby amended to read in its entirety as follows: "The execution and delivery of this Agreement and each of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by Parent's and MergerCo's Board of Directors all corporate proceedings have been taken and no other corporate proceedings on the part of Parent or MergerCo are necessary to authorize the execution, delivery and performance by Parent and MergerCo of this Agreement and each of the Ancillary Agreements." 2 3. Parent has delivered notice of the satisfaction of its obligation set forth in Section 6.5 of the Merger Agreement. This Paragraph 3 shall supersede the obligations contained in Section 6.5 of the Merger Agreement and shall satisfy the condition to closing set forth in Section 8.12 of the Merger Agreement. 4. The Company has delivered the Disclosure Schedules in satisfaction of its obligation set forth in Section 6.11 of the Merger Agreement. The representations and warranties set forth in Articles 4 and 4A of the Merger Agreement shall be effective as of April 11, 1996. The parties agree that the Company's obligation to deliver the Disclosure Schedules under Section 6.11 of the Merger Agreement was extended to April 11, 1996. 5. Parent has completed its business and legal due diligence and such diligence is satisfactory to Parent. This Paragraph 5 shall satisfy the condition to closing set forth in Section 8.4 of the Merger Agreement. 6. The parties further agree that their respective filings under the Hart Scott Act shall be made as of April 12, 1996. 7. Except as amended by this Amendment No. 1, the Agreement and Plan of Reorganization will continue unmodified and in full force and effect. 8. This Amendment No. 1 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. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to Agreement and Plan of Reorganization to be duly executed as of the day and year first above written. VETERINARY CENTERS OF AMERICA, INC., A DELAWARE CORPORATION By: ----------------------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary PRI MERGER COMPANY, A DELAWARE CORPORATION By: ----------------------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary 4 PETS RX, INC., A DELAWARE CORPORATION By: ----------------------------------------------- Name: Title: TRILON DOMINION PARTNERS, LLC By: ----------------------------------------------- Name: Title: HYPROM, S.A. A SWISS CORPORATION By: ----------------------------------------------- Name: Title: ---------------------------------------------------- Richard Watson, individually and as Custodian for Andrew Watson ---------------------------------------------------- Nancy P. Watson ---------------------------------------------------- John W. Hunter AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF REORGANIZATION This Amendment No. 2 to that certain Agreement and Plan of Reorganization (the "Amendment No. 2") is dated this May 23, 1996, by and among Veterinary Centers of America, Inc., a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation ("MergerCo"), Pets' Rx, Inc., a Delaware corporation (the "Company") and the persons identified on Schedule A hereto (each, a "Principal ---------- Stockholder" and collectively, the "Principal Stockholders"). R E C I T A L S --------------- A. Parent, MergerCo, the Company and the persons identified on Schedule A ---------- thereto have entered into that certain Agreement and Plan of Reorganization dated February 27, 1996, as amended by that certain Amendment No. 1 to Agreement and Plan of Reorganization dated April 11, 1996 (as amended, the "Merger Agreement"), pursuant to which MergerCo shall merge with and into the Company (the "Merger"), the separate existence of MergerCo shall cease and the Company shall continue as the surviving corporation. Terms used herein without definition shall have the meanings given those terms in the Merger Agreement. B. Pursuant to Section 6.3 of the Merger Agreement, the Company has agreed to use commercially reasonable efforts to cause a meeting of its stockholders (or written consent of its stockholders) to occur on or prior to March 31, 1996 to consider and vote on a proposal to approve the Merger Agreement, the Merger and the transactions contemplated thereby. The parties to the Merger Agreement wish to modify the terms of Section 6.3 of the Merger Agreement to state that the Company shall use commercially reasonable efforts to cause such meeting of its stockholders (or such written consent of its stockholders) to occur on or prior to June 17, 1996. C. Pursuant to Section 10.2 of the Merger Agreement, the Merger Agreement may be terminated and the Merger may be abandoned if the Merger shall not have been consummated on or before May 31, 1996 (the "Expiration Date"), provided that the terminating party shall not have materially breached its obligations under the Merger Agreement in any manner that shall have contributed to the failure to consummate the Merger by such date. The parties to the Merger Agreement wish to modify the terms of Section 10.2 of the Merger Agreement to extend the Expiration Date to June 20, 1996. A G R E E M E N T ----------------- NOW THEREFORE, in consideration of the foregoing premises and mutual covenants herein provided, the parties agree as follows: 1 1. Section 6.3 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "6.3 STOCKHOLDER APPROVAL. The Company shall take all necessary or appropriate action under Delaware Law and the Company Organizational Documents to call a meeting of its stockholders (or to take such action by written consent), to be held at the earliest practicable date, and the Company shall use commercially reasonable efforts to cause such meeting or vote by written consent to occur on or prior to June 14, 1996 to consider and vote on a proposal to approve this Agreement, the Merger and the transactions contemplated hereby and thereby." 2. Section 10.2 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "10.2 CONSUMMATION OF MERGER. If the Merger shall not have been consummated on or before June 20, 1996; provided, in the case of a termination pursuant to this Section 10.2, the terminating party shall not have materially breached its obligations hereunder in any manner that shall have contributed to the failure to consummate the Merger by such date." 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to Agreement and Plan of Reorganization to be duly executed as of the day and year first above written. Veterinary Centers of America, Inc., a Delaware corporation By: /s/ Tomas W. Fuller ------------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary PRI Merger Company, a Delaware corporation By: /s/ Tomas W. Fuller ------------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary Pets' Rx, Inc., a Delaware corporation By: /s/ Richard E. Watson ------------------------------------- Name: Richard E. Watson Title: President 3 Trilon Dominion Partners, LLC By: /s/ William J. Hopke ------------------------ Name: William J. Hopke Title: C.O.O. Ilyprom, S.A. a Swiss corporation By: /s/ C. Dinner ------------------------- Name: C. Dinner Title: President /s/ Richard Watson ------------------------------ Richard Watson, individually and as Custodian for Andrew Watson /s/ Nancy P. Watson ------------------------------ Nancy P. Watson /s/ John W. Hunter ------------------------------ John W. Hunter 4 SCHEDULE A PRINCIPAL STOCKHOLDERS Trilon Dominion Partners, LLC Hyprom, S.A., A Swiss corporation Richard Watson, individually and as Custodian for Andrew Watson Nancy P. Watson John W. Hunter AMENDMENT NO. 3 TO AGREEMENT AND PLAN OF REORGANIZATION This Amendment No. 3 to that certain Agreement and Plan of Reorganization (the "Amendment No. 3") is dated this June 7, 1996, by and among Veterinary Centers of America, Inc. a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation ("MergerCo"), Pets' Rx. Inc., a Delaware corporation (the "Company"), and the persons identified on Schedule A hereto (each, a "Principal ---------- Stockholder" and collectively, the "Principal Stockholders"). R E C I T A L S - - - - - - - - A. Parent, MergerCo, the Company and the persons identified on Schedule A thereto have entered into that certain Agreement and Plan of Reorganization, dated February 27, 1996, as amended by Amendment No. 1 to Agreement and Plan of Reorganization dated April 11, 1996 and by Amendment No. 2 to Agreement and Plan of Reorganization dated May 23, 1996 (as amended, the "Merger Agreement"), pursuant to which MergerCo shall merge with and into the Company (the "Merger"), the separate existence of MergerCo shall cease and the Company shall continue as the surviving corporation. Terms used herein without definition shall have the meanings given those terms in the Merger Agreement. B. Section 9.2.1 of the Merger Agreement sets forth certain terms and provisions governing the obligations of Parent to file with the Securities and Exchange Commission a registration statement on any appropriate form under the Securities Act of 1933, as amended, with respect to the offering and sale or other disposition of the Merger Shares to be issued in the Merger. The parties to the Merger Agreement desire to amend certain provisions thereof relating to the obligations of Parent to file certain post-effective amendments including certain Company Securityholders as selling stockholders and thus allowing such Company Securityholders an opportunity to effect sales of Merger Shares pursuant to the Registration Statement, all as more fully provided herein. A G R E E M E N T - - - - - - - - - NOW THEREFORE, in consideration of the foregoing premises and mutual covenants herein provided, the parties agree as follows: 1. Section 9.2.1 of the Merger Agreement is hereby amended and restated to read in its entirety as follows: "SECTION 9.2.1 As promptly as reasonably practicable following the Closing, Parent shall file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Registration Statement") on any appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the offering and sale or other disposition of the Merger Shares to be issued in the Merger. Parent agrees to use all reasonable efforts to cause the Registration Statement to become effective as soon as reasonably practicable following its filing. The Principal Stockholders agree to cooperate with and provide assistance to Parent in connection with the registration and sale of the Merger Shares. Notwithstanding the foregoing, the Company and the Principal Stockholders acknowledge and agree that (a) Parent shall have no obligation to name in the Registration Statement any Principal Stockholder as a selling stockholder at the time of the original filing; provided, that, Parent files a post-effective amendment or amendments or, if necessary, a separate registration statement, and uses all reasonable efforts to cause such post effective amendments or separate registration statement to become effective on or prior to the second anniversary of the Closing Date including (as of such date) all Principal Stockholders as selling stockholders and thus allowing each Principal Stockholder an opportunity to effect sale of Merger Shares after such second anniversary and (b) with respect to all Company Securityholders other than Principal Stockholders (the "Minority Securityholders"), Parent shall have no obligation to name in the Registration Statement any Minority Securityholder as a selling stockholder at the time of the original filing; provided, that: (i) Parent files a post-effective amendment or amendments to the Registration Statement or, if necessary, a separate registration statement, and uses all reasonable efforts to cause such post effective amendments or separate registration statement to become effective on or prior to January 30, 1997 including (as of such date) all Minority Securityholders as selling stockholders so as to allow each Minority Securityholder an opportunity to effect sales of 33.33% of those Merger Shares received by such Minority Securityholder and not placed in escrow pursuant to the terms of the Merger Agreement and the Escrow Instrument; (ii) Parent files a post-effective amendment or amendments to the Registration Statement or, if necessary, a separate registration statement, and uses all reasonable efforts to cause such post effective amendments or separate registration statement to become effective on or prior to April 30, 1997 including (as of such date) all Minority Securityholders as selling stockholders so as to allow each Minority Securityholder an opportunity to effect sales of an additional 33.33% of those Merger Shares (not otherwise included in the post-effective amendment referred to in clause (i) above) received by such Minority Securityholder and not placed in escrow pursuant to the terms of the Merger Agreement and the Escrow Instrument; and (iii) Parent files a post-effective amendment or amendments to the Registration Statement or, if necessary, a separate registration statement, and uses all reasonable efforts to cause such post effective amendments or separate registration statement to become effective on or prior to July 30, 1997 including (as of such date) all Minority 2 Securityholders as selling stockholders so as to allow each Minority Securityholder an opportunity to effect sales of all of the remaining Merger Shares received by such Minority Securityholder including, without limitation, those Merger Shares placed in escrow pursuant to the terms of the Merger Agreement and the Escrow Instrument." 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to Agreement and Plan of Reorganization to be duly executed as of the day and year first above written. Veterinary Centers of America, Inc., a Delaware corporation By: /s/ Tomas W. Fuller ----------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary PRI Merger Company, a Delaware corporation By: /s/ Tomas W. Fuller ----------------------------------- Name: Tomas W. Fuller Title: Chief Financial Officer, Vice President and Assistant Secretary Pets' Rx, Inc., a Delaware corporation By: /s/ Richard E. Watson ----------------------------------- Name: Richard E. Watson Title: President Trilon Dominion Partners, LLC By: /s/ William J. Hopke ----------------------------------- Name: William J. Hopke Title: C.O.O. Hyprom, S.A. a Swiss corporation By: /s/ C. Dinner ----------------------------------- Name: C. Dinner Title: President /s/ Richard Watson ---------------------------------------- Richard Watson, individually and as Custodian for Andrew Watson /s/ Nancy P. Watson ---------------------------------------- Nancy P. Watson /s/ John W. Hunter ---------------------------------------- John W. Hunter SCHEDULE A PRINCIPAL STOCKHOLDERS Trilon Dominion Partners, LLC Hyprom, S.A., a Swiss corporation Richard Watson, individually and as Custodian for Andrew Watson Nancy P. Watson John W. Hunter EX-2.3 3 IRREVOCABLE PROXY EXHIBIT 2.3 I R R E V O C A B L E P R O X Y THIS PROXY is made and entered into, as of the date indicated on the signature page hereof, by and between Abbingdon Venture Partners Limited Partnership-II, holder (the "Holder") of shares of Common Stock of The Pet Practice, Inc., a Delaware corporation (the "Company") and Veterinary Centers of America, Inc., a Delaware corporation ("Parent"). With respect to the proposed Merger of the Company into Golden Merger Corporation, a Delaware corporation, pursuant to that certain Agreement and Plan of Reorganization, dated as of March 21, 1996 (the "Purchase Agreement"), the Holder agrees as follows: 1. a. The Holder hereby appoints Robert L. Antin and Tomas W. Fuller, their successors or any other designee of Parent, the sole and exclusive and true and lawful proxy, agent and attorney-in-fact of the Holder, with full power of substitution and resubstitution, to vote or to execute and deliver written consents or otherwise act with respect to the 3,600,000 shares of Common Stock of the Company held by the Holder on the date hereof (the "Restricted Shares"), as fully, to the same extent and with the same effect as the Holder might or could do under any applicable laws or regulations governing the rights and powers of stockholders of a Delaware corporation, but only in connection with the approval of the Purchase Agreement and such other matters as may be necessary to effectuate the transactions contemplated under the Purchase Agreement (the "Proxy"); b. The Holder shall execute such additional documents and take such additional actions as Parent may reasonably request to effectuate or further secure and protect the rights of Parent under this Proxy; c. Parent and the Holder intend that this Proxy is coupled with an interest in the Restricted Shares and in the Company, and, as a result, this Proxy shall be irrevocable until the date this Proxy terminates as provided in Section 6 hereof, whereupon it shall automatically lapse; and d. The Holder hereby revokes any other proxy or proxies to act and vote on behalf of any and all of the Restricted Shares and hereby ratifies and confirms all acts and votes that the Proxy specified herein may lawfully perform by virtue of this authorization. 2. The Holder agrees that, from and after the date hereof, and until this Proxy shall terminate in accordance with Section 6 hereof, it shall not sell, transfer, assign, pledge, hypothecate or otherwise dispose of all or any part of the Restricted Shares, except Holder may distribute the Restricted Shares to a general or limited partner of Holder provided, prior to such distribution, such partner executed an irrevocable proxy in form and substance identical to this Irrevocable Proxy (except that such irrevocable proxy shall only relate to Restricted Shares and shall not relate to, or make any representation or warranty regarding, any other shares of Common Stock of the Company) and delivers the same to Parent. 3. The Holder represents and warrants that it beneficially and of record owns the Restricted Shares (which shares constitute all the shares of Common Stock of the Company in which Holder has a beneficial interest) and has full right, power and authority to vote such Restricted Shares and to grant this Proxy with respect to such Restricted Shares pursuant hereto, and owns such Restricted Shares free and clear of any liens, claims, encumbrances or rights or interests of others. 4. The Holder represents and warrants that it shall, promptly following the execution of this Proxy, take action to cause the stock certificates representing the Restricted Shares to be endorsed with a legend, in form and substance reasonably satisfactory to Parent, adequately referencing this Proxy, including the grant to Parent of this Proxy and the transfer limitations in Section 2 hereof. 5. The Holder agrees not to take any action in respect of the Holder's ownership interest in the Restricted Shares including, without limitation, the solicitation of proxies from other stockholders of the Company or voting of the Restricted Shares, which may impede, or adversely affect the likelihood of, the consummation of the transactions contemplated under the Purchase Agreement. 6. This Proxy shall terminate and this Proxy shall be revoked (i) only with the written consent of Parent; or (ii) on the first to occur of (a) the Closing (as defined in the Purchase Agreement); or (b) the termination of the Purchase Agreement. 7. The Holder acknowledges that Parent's rights hereunder are unique and that it will not have adequate remedies at law for the Holder's failure to perform its obligations hereunder. Accordingly, it is agreed that Parent shall have the right to specific performance and equitable injunctive relief for the enforcement of such obligations in addition to all other available remedies at law or in equity. 8. The Holder agrees, at or prior to the Effective Time of the Merger, to execute and deliver to Parent a written agreement in accordance with Section 8.9 of the Purchase Agreement. 2 9. THIS PROXY SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE. 3 IN WITNESS WHEREOF, this Proxy has been duly executed by or on behalf of each party as of this 21st day of March, 1996. ATTEST: VETERINARY CENTERS OF AMERICA, INC. _________________________ ___________________________________ By: Robert L. Antin Its: Chief Executive Officer WITNESS: ABBINGTON VENTURE PARTNERS LIMITED PARTNERSHIP-II _________________________ ___________________________________ By: Its: 4 EX-4.3 4 INDENTURE ---------------------- VETERINARY CENTERS OF AMERICA, INC., Issuer, and THE CHASE MANHATTAN BANK, N.A., Trustee --------------- INDENTURE --------------- U.S. $84,385,000 5 1/4% Convertible Subordinated Debentures due 2006 Dated as of April 17, 1996 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1. Definitions........................................................ 1 SECTION 1.2. Incorporation by Reference of TIA.................................. 8 SECTION 1.3. Rules of Construction.............................................. 8 ARTICLE II THE SECURITIES SECTION 2.1. Form and Dating.................................................... 9 SECTION 2.2. Execution and Authentication....................................... 10 SECTION 2.3. Registrar and Paying Agent......................................... 11 SECTION 2.4. Paying Agent to Hold Asset in Trust................................ 12 SECTION 2.5. Securityholder Lists............................................... 12 SECTION 2.6. Transfer and Exchange; Restrictions on Transfer.................... 12 SECTION 2.7. Exchange........................................................... 18 SECTION 2.8. Replacement Securities............................................. 19 SECTION 2.9. Outstanding Securities............................................. 20 SECTION 2.10. Treasury Securities................................................ 20 SECTION 2.11. Temporary Securities............................................... 20 SECTION 2.12. Cancellation....................................................... 21 SECTION 2.13. Payment............................................................ 21 SECTION 2.14. Defaulted Interest................................................. 22 SECTION 2.15. Computation of Interest............................................ 23 ARTICLE III REDEMPTION SECTION 3.1. Right of Redemption................................................ 23 SECTION 3.2. Effect of Notice of Redemption..................................... 25 SECTION 3.3. Deposit of Redemption Price........................................ 25 SECTION 3.4. Securities Redeemed in Part........................................ 25 ARTICLE IV COVENANTS SECTION 4.1. Payment of Securities.............................................. 26 SECTION 4.2. Maintenance of Office or Agency.................................... 26 SECTION 4.3. Corporate Existence................................................ 27 SECTION 4.4. Payment of Taxes and Other Claims.................................. 27 SECTION 4.5. Maintenance of Properties and Insurance............................ 27 SECTION 4.6. Compliance Certificate; Notice of Default.......................... 28 SECTION 4.7. Reports............................................................ 28 SECTION 4.8. Limitation on Status as Investment Company......................... 29 SECTION 4.9. Waiver of Stay, Extension or Usury Laws............................ 29 SECTION 4.10. Rule 144A Information Requirement.................................. 29
-i- ARTICLE V SUCCESSOR CORPORATION SECTION 5.1. Limitation on Merger, Sale or Consolidation............................................. 29 SECTION 5.2. Successor Corporation Substituted....................................................... 30 ARTICLE VI EVENTS OF DEFAULT AND REMEDIES SECTION 6.1. Events of Default........................................................................ 30 SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment.................................. 31 SECTION 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee.......................... 32 SECTION 6.4. Trustee May File Proofs of Claim......................................................... 33 SECTION 6.5. Trustee May Enforce Claims Without Possession of Securities.............................. 33 SECTION 6.6. Priorities............................................................................... 34 SECTION 6.7. Limitation on Suits...................................................................... 34 SECTION 6.8. Unconditional Right of Holders to Receive Principal, Premium, Interest And Additional Amounts................................................................... 34 SECTION 6.9. Rights and Remedies Cumulative........................................................... 35 SECTION 6.10. Delay or Omission Not Waiver............................................................. 35 SECTION 6.11. Control by Holders....................................................................... 35 SECTION 6.12. Waiver of Past Default................................................................... 35 SECTION 6.13. Undertaking for Costs.................................................................... 35 SECTION 6.14. Restoration of Rights and Remedies....................................................... 36 SECTION 6.15. Enforcement of Rights of Conversion by Holders........................................... 36 ARTICLE VII TRUSTEE SECTION 7.1. Duties of Trustee....................................................................... 36 SECTION 7.2. Rights of Trustee....................................................................... 37 SECTION 7.3. Individual Rights of Trustee............................................................ 38 SECTION 7.4. Trustee's Disclaimer.................................................................... 38 SECTION 7.5. Notice of Default....................................................................... 38 SECTION 7.6. Reports by Trustee to Holders........................................................... 38 SECTION 7.7. Compensation and Indemnity.............................................................. 39 SECTION 7.8. Replacement of Trustee.................................................................. 39 SECTION 7.9. Successor Trustee by Merger, Etc........................................................ 40 SECTION 7.10. Eligibility; Disqualification........................................................... 40 SECTION 7.11. Preferential Collection of Claims Against Company....................................... 40 ARTICLE VIII SATISFACTION AND DISCHARGE SECTION 8.1. Satisfaction and Discharge of Indenture................................................. 41 SECTION 8.2. Repayment to the Company................................................................ 41 ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.1. Supplemental Indentures Without Consent of Holders...................................... 41
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Page SECTION 9.2. Amendments, Supplemental Indentures and Waivers with Consent of Holders............................................................................. 42 SECTION 9.3. Compliance with TIA................................................................. 43 SECTION 9.4. Revocation and Effect of Consents................................................... 43 SECTION 9.5. Notation on or Exchange of Securities............................................... 43 SECTION 9.6. Trustee to Sign Amendments, Etc..................................................... 43 ARTICLE X MEETINGS SECTION 10.1. Meetings and Votes of Holders....................................................... 44 SECTION 10.2. Action by Holders................................................................... 46 ARTICLE XI AGENTS SECTION 11.1. Offices, Resignation, Successors, Etc. of Agents; Paying, Conversion and Transfer Agencies................................................................... 46 ARTICLE XII SUBORDINATION SECTION 12.1. Securities Subordinated to Senior Indebtedness...................................... 47 SECTION 12.2. No Payment on Securities in Certain Circumstances................................... 47 SECTION 12.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization.......................................... 49 SECTION 12.4. Securityholders to Be Subrogated to Rights of Holders of Senior Indebtedness........ 49 SECTION 12.5. Obligations of the Company Unconditional............................................ 50 SECTION 12.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice............. 50 SECTION 12.7. Application by Trustee of Assets Deposited with It.................................. 51 SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior Indebtedness SECTION 12.9. Securityholders Authorize Trustee to Effectuate Subordination of Securities.......................................................................... 51 SECTION 12.10. Right of Trustee to Hold Senior Indebtedness........................................ 52 SECTION 12.11. Article XII Not to Prevent Events of Default........................................ 52 SECTION 12.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness...................... 52 ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.1. Conversion Privilege................................................................ 52 SECTION 13.2. Exercise of Conversion Privilege.................................................... 52 SECTION 13.3. Fractional Interests................................................................ 54 SECTION 13.4. Adjustment of Conversion Price...................................................... 54 SECTION 13.5. Notice of Certain Events............................................................ 54 SECTION 13.6. Continuation of Conversion Privilege in Case of Reclassification, Change, Merger, Consolidation or Sale of Assets
-iii- Page SECTION 13.7. Taxes on Conversion........................................................ 56 SECTION 13.8. Company to Provide Stock................................................... 56 SECTION 13.9. Disclaimer of Responsibility for Certain Matters........................... 56 SECTION 13.10. Return of Funds Deposited for Redemption of Converted Securities........... 57 ARTICLE XIV MISCELLANEOUS SECTION 14.1. TIA Controls............................................................... 57 SECTION 14.2. Notices.................................................................... 57 SECTION 14.3. Communications by Holders with Other Holders............................... 58 SECTION 14.4. Certificate and Opinion as to Conditions Precedent......................... 58 SECTION 14.5. Statements Required in Certificate or Opinion.............................. 58 SECTION 14.6. Rules by Trustee, Paying Agent, Registrar.................................. 58 SECTION 14.7. Legal Holidays............................................................. 59 SECTION 14.8. Taxes...................................................................... 59 SECTION 14.9. Governing Law.............................................................. 59 SECTION 14.10. Agent for Service of Process............................................... 59 SECTION 14.11. No Adverse Interpretation of Other Agreements.............................. 60 SECTION 14.12. No Recourse Against Others................................................. 60 SECTION 14.13. Successors................................................................. 60 SECTION 14.14. Duplicate Originals........................................................ 60 SECTION 14.15. Severability............................................................... 60 SECTION 14.16. Table of Contents, Headings, Etc........................................... 60 SECTION 14.17. Qualification of Indenture................................................. 61 SECTION 14.18. Registration Rights........................................................ 61
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Page EXHIBITS Exhibit A - Form of Security............................................. A-1 Exhibit B - Form of Regulation S Global Security......................... B-1
-v- INDENTURE, dated as of April 17, 1996, between VETERINARY CENTERS OF AMERICA, INC., a Delaware corporation (the "Company"), and THE CHASE MANHATTAN BANK, N.A., as Trustee. Each party hereto agrees as follows for the benefit of each other party and for the equal and ratable benefit of the Holders of the Company's 5 1/4% Convertible Subordinated Debentures due 2006 and the Coupons: ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1 Definitions. "Acceleration Notice" shall have the meaning specified in Section 6.2. "Accredited Investor Securities" shall have the meaning specified in Section 2.1(b). "Additional Amounts" shall have the meaning specified in Section 2 of the form of Registered Security and Bearer Security attached hereto as Exhibit A. "Affiliate" means (i) any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company, (ii) any spouse, immediate family member, or other relative who has the same principal residence of any person described in clause (i) above, and (iii) any trust in which any person described in clause (i) or (ii) above has a beneficial interest. For purposes of this definition, the term "control" means the power to direct the management and policies of a person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise. "Agent" shall have the meaning set forth in Section 2.3. "Authorized Newspaper" means a leading newspaper, in an official language of the country of publication or in the English language, customarily published on each Business Day whether or not published on Saturdays, Sundays or holidays, and of general circulation in the place in connection with which the term is used or in the financial community of such place. If by reason of the temporary or permanent suspension of publication of any newspaper or by reason of any other cause it shall be impossible to make publication of such notice in an Authorized Newspaper as herein provided, then such publication or other notice in lieu thereof as shall be made by the Trustee shall constitute sufficient publication of such notice, if such publication or other notice shall, so far as may be possible, approximate the terms and conditions of the publication in lieu of which it is given. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal, state or foreign law for the relief of debtors. "Bearer Securities" shall have the meaning set forth in Section 2.1(c). "Board of Directors" means, with respect to any person, the Board of Directors of such person or any committee of the Board of Directors of such person authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such person. "Board Resolution" means, with respect to any person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such person to have been duly adopted by the Board of Directors or any authorized committee thereof and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means, with respect to any act to be performed hereunder or under the Securities, each Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which banking institutions in the place where such act is to occur are authorized or obligated by applicable law, regulation or executive order to close. "Capitalized Lease Obligation" means rental obligations under a lease that are required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligations shall be the capitalized amount of such obligations, as determined in accordance with GAAP. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase (other than convertible or exchangeable Indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Cash" means such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "Cedel" means Cedel Bank, societe anonyme. "Change of Control" means (i) any merger or consolidation of the Company with or into any person or any sale, transfer or other conveyance, whether direct or indirect, of all or substantially all of the assets of the Company, on a consolidated basis, in one transaction or a series of related transactions, if, immediately after giving effect to such transaction, any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors, managers, or trustees, as applicable, of the transferee or surviving entity, (ii) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is or becomes the "beneficial owner," directly or indirectly, of more than 50% of the total voting power in the aggregate normally entitled to vote in the election of directors of the Company, or (iii) during any period of 12 consecutive months after the Closing Date, individuals who at the beginning of any such 12-month period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved), cease for any reason to constitute a majority of the Board of Directors of the Company then in office. For purposes of this definition, (i) the terms "person" and "group" shall have the meanings used for purposes of Rules 13d-3 and 13d-5 of the Exchange Act as in effect on the Closing Date, whether or not applicable; and (ii) the term "beneficial owner" shall have the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as in effect on the Closing Date, where or not applicable, except that a "person" shall not be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the occurrence of certain events. "Change of Control Notice Date" shall have the meaning specified in Section 3.1. "Closing Date" means April 17, 1996, or such other time on the same or such other date, not later than 5:00 p.m., London time, on the fifth Business Day in London thereafter, as the Manager and the Company may agree. "Closing Price" means for any day the last reported sales price of the Common Stock, regular way, or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices for the Common Stock, regular way, in either case on the New York Stock Exchange, -2- Inc. or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price quoted on the Nasdaq National Market, or if not so quoted, as determined by the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission. "Common Depositary" means The Chase Manhattan Bank, N.A. (London Office), as depositary for Cedel and the Euroclear Operator. "Common Stock" means the Company's common stock, par value $0.001 per share, or as such stock may be reconstituted from time to time. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to the Indenture, and thereafter means such successor. "Conversion Agent" means The Chase Manhattan Bank, N.A., in its capacity as Conversion Agent pursuant to its appointment as such under Section 2.3, and its successor or successors as such conversion agent qualified and appointed in accordance with Section 11.1. "Conversion Price" shall have the meaning specified in Section 13.1. "Conversion Shares" shall have the meaning specified in Section 13.1. "Coupon" means any interest coupon appertaining to any security. "Current Market Price" means, on any date, the average of the Closing Prices for the 15 consecutive Trading Days during which the principal trading market for the Common Stock is open commencing 25 Trading Days before the day in question. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event or condition that is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" shall have the meaning specified in Section 2.14. "Depositary" means, with respect to the Securities issuable or issued in whole or in part in global form, the person specified in Section 2.3 as the Depositary with respect to the Securities, until a successor shall have been appointed and become such pursuant to the applicable provision of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "DTC" means The Depository Trust Company. "Euroclear Operator" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Event of Default" shall have the meaning specified in Section 6.1. -3- "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "Exchange Date" shall have the meaning specified in Section 2.7(d). "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 ("FASB") or in such other statements by such other entity as approved by a significant segment of the accounting profession which are in effect in the United States; provided, however, that for purposes of determining compliance with covenants in the Indenture, "GAAP" means such generally accepted accounting principles which are in effect as of the Closing Date. "Holder" or "Securityholder" means, with respect to a Registered Security, the person in whose name a Registered Security is registered on the Registrar's books and, with respect to a Bearer Security, the bearer of such Bearer Security and, with respect to a Coupon, the bearer thereof. "Holder Redemption Date" means a date not less than 30 nor more than 60 days after a Change of Control Notice Date (except as otherwise required by law). "Indebtedness" of any person means, without duplication, (a) all liabilities and obligations, contingent or otherwise, of any such person, (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 such as would constitute trade payables to trade creditors in the ordinary course of business that are not more than 90 days past their original due date, (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement obligation of such person with respect to any letter of credit; (b) all net obligations of such person under Interest Swap and Hedging Obligations; (c) all liabilities of others of the kind described in the preceding clause (a) or (b) that such person has guaranteed or that is otherwise its legal liability and all obligations to purchase, redeem or acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions, refinancings, refunding (whether direct or indirect) of any liability of the kind described in any of the preceding clauses (a), (b) or (c), or this clause (d), whether or not between or among the same parties. "Indenture" means this Indenture, as amended or supplemented from time to time in accordance with the terms hereof. "Interest Payment Date" means the stated due date of an installment of interest on the Securities. "Interest Record Date" means an Interest Record Date specified in the Securities whether or not such Interest Record Date is a Business Day. "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. -4- "Junior Securities" of any Person means any Capital Stock and any Indebtedness of such Person that is (i) subordinated in right of payment to the Securities and has no scheduled installment of principal due, by redemption, sinking fund payment or otherwise, on or prior to the Stated Maturity of the Securities and (ii) subordinated in right of payment to all Senior Indebtedness at least to the same extent as the Securities. "Lien" means any mortgage, lien, pledge, charge, security interest or other encumbrance of any kind, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement and any lease deemed to constitute a security interest and any option or other agreement to give any security interest). "London Office" shall have the meaning specified in Section 2.3. "Manager" means NatWest Securities Limited. "Notice of Default" shall have the meaning specified in Section 6.1(d). "Obligations" means any principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Senior Indebtedness. "Officer" means, with respect to the Company, the Chief Executive Officer, the President, any Executive Vice President, Senior Vice President or Vice President, the Chief Financial Officer, the Treasurer, the Controller, or the Secretary of the Company. "Officers' Certificate" means, with respect to the Company, a certificate signed by one or more Officers or one or more Officers and an Assistant Secretary of the Company and otherwise complying with the requirements of Sections 14.4 and 14.5, if applicable. "Opinion of Counsel" means a written opinion from legal counsel (who, unless otherwise specified, may be an employee of the Company) who is reasonably acceptable to the Trustee and which complies with the requirements of Sections 14.4 and 14.5, if applicable. "Paying Agent" means The Chase Manhattan Bank, N.A., in its capacity as Paying Agent pursuant to its appointment as such under Section 2.3, and its successor or successors as such paying agent qualified and appointed in accordance with Section 11.1, and any additional Paying Agents appointed by the Company as described in Section 2.3. "Payment Blockage Period" means the period ending 179 days after the Payment Notice is delivered as set forth in Section 12.2(b). "Payment Default" shall have the meaning specified in Section 12.2. "Payment Notice" shall have the meaning specified in Section 12.2. "Person" or "person" means any corporation, individual, limited liability company, joint stock company, joint venture, partnership, unincorporated association, governmental regulatory entity, country, state or political subdivision thereof, trust, municipality or other entity. "Principal" of any Indebtedness means the principal of such Indebtedness plus, without duplication, any applicable premium on such Indebtedness. -5- "Principal Corporate Trust Office" shall have the meaning specified in Section 2.3. "Property" means any right or interest in or to property or assets of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "QIBs" shall have the meaning specified in Section 2.1(b). "Redemption Date," when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to Article III of the Indenture and Section 3 in the form of Security. "Redemption Price," when used with respect to any Security to be redeemed, means the redemption price for such redemption pursuant to Section 3 in the form of Security, which shall include, without duplication, in each case, accrued and unpaid interest and Additional Amounts, if any, to and including the Redemption Date. "Registered Accredited Investor Securities" shall have the meaning specified in Section 2.1(e). "Registered Regulation S Securities" shall have the meaning specified in Section 2.1(c). "Registered Securities" shall have the meaning specified in Section 2.1(c). "Registrar" shall have the meaning specified in Section 2.3. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of April 17, 1996, by and between the Company and the Manager, as such agreement may be amended, modified or supplemented from time to time in accordance with the terms thereof. "Regulation S Global Security" shall have the meaning specified in Section 2.1(c). "Resale Restriction Termination Date" shall have the meaning specified in Section 2.6(i). "Restricted Common Stock" shall have the meaning specified in Section 13.6(b). "Restricted Security" shall have the meaning specified in Section 2.1(f). "Rule 144A Global Security" shall have the meaning specified in Section 2.1(d). "Rule 144A Securities" shall have the meaning specified in Section 2.1(b). "Securities" means, collectively, the 5 1/4% Convertible Subordinated Debentures due 2006, as supplemented from time to time in accordance with the terms hereof, issued under this Indenture and "Security" means any of the Securities. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Securities Custodian" means the Trustee, as custodian with respect to the Securities in global form, or any successor entity thereto. "Security Register" shall have the meaning specified in Section 2.3. -6- "Senior Indebtedness" of the Company means any principal, premium, if any, and interest or other monetary obligation, whether outstanding on the date of this Indenture or hereafter incurred or created, on (i) any Indebtedness of the Company (other than the Securities and Indebtedness ranking pari passu with or subordinate to the Securities pursuant to the terms of the instrument creating or evidencing such Indebtedness, but including guarantees given by the Company), and (ii) any and all deferrals, renewals, extensions, refundings, refinancings (whether direct or indirect) of any such Indebtedness. Notwithstanding the foregoing, in no event shall Senior Indebtedness include (a) Indebtedness of the Company owed or owing to any subsidiary of the Company or any officer, director or employee of the Company or any subsidiary thereof or (b) any liability for taxes owed or owing by the Company. "Significant Subsidiary" shall have the meaning assigned to that term under Regulation S-X promulgated by the Commission, as in effect on the date of this Indenture. "Stated Maturity" when used with respect to any Security, means May 1, 2006. "Subscription Agreement" means that certain Subscription Agreement, dated April 3, 1996, by and between the Company and the Manager, as such agreement may be amended, modified or supplemented from time to time in accordance with the terms thereof. "Subsidiary" with respect to any person, means (i) a corporation a majority of whose Capital Stock with voting power normally entitled to vote in the election of directors is at the time, directly or indirectly, owned by such person, by such person and one or more Subsidiaries of such person or by one or more Subsidiaries of such person, (ii) a partnership in which such person or a Subsidiary of such person is, at the time, a general partner, or (iii) any other person (other than a corporation) in which such person, one or more Subsidiaries of such person, or such person and one or more Subsidiaries of such person, directly or indirectly, at the date of determination thereof has at least majority ownership interest. "TIA" means the Trust Indenture Act of 1939, as amended. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the New York Stock Exchange (or, if the Common Stock is not listed or admitted to trading thereon, on the principal national securities exchange on which the Common Stock is listed or admitted to trading). "Transfer Agent" shall have the meaning specified in Section 4.2(b). "Transfer Notice" means the certification set forth on the reverse of each Security. "Trustee" means the party named as such in this Indenture until a successor replaces it in accordance with the provisions of this Indenture and thereafter means such successor. "Trust Officer" means any officer within the corporate trust administration (or any successor group) of the Trustee or any other officer of the Trustee customarily performing functions similar to those performed by the Persons who at that time shall be such officers, and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom such trust matter is referred because of such person's knowledge of and familiarity with the particular subject. "U.S. Government Obligations" means direct noncallable obligations of, or noncallable obligations guaranteed by, the United States of America for the payment of which obligation or guarantee the full faith and credit of the United States of America is pledged. SECTION 1.2 Incorporation by Reference of TIA. -7- Whenever this Indenture refers to a provision of the TIA, such provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities. "indenture securityholder" means a Holder or a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any other obligor on the Securities. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule and not otherwise defined herein have the meanings assigned to them thereby. SECTION 1.3 Rules of Construction . Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; (6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (7) including shall be deemed to mean "including, without limitation,"; and (8) references to Sections or Articles refer to such Section or Article in this Indenture, unless stated otherwise. -8- ARTICLE II THE SECURITIES SECTION 2.1 Form and Dating. (a) The Company has, by the Subscription Agreement, agreed to issue and sell to the Manager U.S. $84,385,000 aggregate principal amount of its 5 1/4% Convertible Subordinated Debentures due 2006. (b) Pursuant to the Subscription Agreement, the Manager may resell the Securities to (i) persons who are not "U.S. Persons" (as such term is defined in Regulation S promulgated by the Commission pursuant to the Securities Act) in transactions that meet the requirements of Regulation S, (ii) "qualified institutional buyers" (as such term is defined in Rule 144A promulgated by the Commission pursuant to the Securities Act and hereinafter referred to as "QIBs") in reliance on Rule 144A (the Securities that are resold by the Manager pursuant to Rule 144A being hereinafter referred to as the "Rule 144A Securities"), and (iii) institutional "accredited investors" (within the meaning of Rule 501(a)(1),(2),(3) or (7) promulgated by the Commission pursuant to the Securities Act) (the Securities that are resold by the Manager to institutional "accredited investors" being hereinafter referred to as the "Accredited Investor Securities"). (c) The Securities will initially be issued in the form of a temporary global debenture in bearer form without coupons or conversion rights in the aggregate principal amount of the entire issue of Securities less the aggregate principal amount of the Rule 144A Securities and Accredited Investor Securities concurrently issued, substantially in the form of Exhibit B hereto (the "Regulation S Global Security"). As hereinafter provided, the Regulation S Global Security may subsequently be exchanged for Securities in printed definitive form either as (i) bearer Securities ("Bearer Securities") in denominations of U.S.$1,000 and U.S.$10,000 and with interest Coupons attached thereto, representing the semi-annual interest payable thereon, or (ii) fully registered Securities ("Registered Regulation S Securities") in denominations of U.S.$1,000 and integral multiples thereof, without interest Coupons attached thereto. Bearer Securities shall be substantially in the form of Exhibit A hereto, including the Coupons set forth therein but excluding the bracketed legends, the bracketed schedule and the information appearing therein that relates to the Registered Securities only. Registered Regulation S Securities shall be substantially in the form of Exhibit A hereto excluding the bracketed legends. The Securities which are not Bearer Securities or the Regulation S Global Security are hereinafter collectively referred to as the "Registered Securities." (d) The Rule 144A Securities will initially be issued in the form of a global security in the aggregate principal amount of the Rule 144A Securities, which security shall be in substantially the form of Exhibit A hereto, including the bracketed legends relating to clearance and settlement through The Depository Trust Company and restrictions on transfer imposed under the Securities Act and including the bracketed schedule but excluding the Coupons, and is hereinafter referred to as the "Rule 144A Global Security." (e) The Accredited Investor Securities will initially be issued in fully registered form in denominations of U.S.$1,000 and integral multiples thereof, which Securities shall be in substantially the form of Exhibit A hereto, excluding the bracketed legend relating to clearance and settlement through The Depository Trust Company and excluding the bracketed legend relating to restrictions on transfer imposed under the Securities Act, the Coupons and the bracketed schedule, and are hereinafter collectively referred to as "Registered Accredited Investor Securities." (f) During the period beginning on the Closing Date and ending on the date which is three years after the Closing Date (or such shorter period as shall be permitted as a result of an amendment to the rules under the Securities Act in respect thereof), all Rule 144A Securities and all Accredited Investor -9- Securities, and all Securities issued upon registration of transfer of or in exchange for such Securities, shall be "Restricted Securities" and shall be subject to the restrictions on transfer in Section 2.6 hereof; provided, however, that the term "Restricted Securities" shall not include (i) Registered Securities which are issued upon transfer of or in exchange for either Bearer Securities or Registered Regulation S Securities or (ii) Registered Securities as to which such restrictions on transfer have been terminated in accordance with Section 2.6(i) hereof. All Restricted Securities shall bear the legend required by Section 2.6(h) hereof. (g) The Registered Securities, the Bearer Securities and the Regulation S Global Security shall contain such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may, consistent herewith, be determined by the officer of the Company executing such Securities, as evidenced by his execution of such Securities. (h) The Company in issuing the Securities shall use CUSIP numbers, and the Trustee may use such CUSIP numbers in any notice of redemption with respect to the Securities. The Company shall obtain one CUSIP number for the Rule 144A Securities and one for the Registered Securities that are not Restricted Securities. In addition, the Company shall obtain an ISIN number and a Common Code for the Regulation S Global Security, the Bearer Securities and the Registered Regulation S Securities. (i) In compliance with United States tax laws and regulations, Bearer Securities may not be offered or sold during the 40-day period beginning on the Closing Date, or at any time if part of a Manager's unsold allotment, to a person who is within the United States or to a United States person other than (a) foreign branches of United States financial institutions if such institutions agree in writing to comply with the requirements of Section 165(j)(3)(A),(B), or (C) of the Code, and the regulations thereunder, (b) United States offices of exempt distributors, or (c) United States offices of international organizations or foreign central banks. United States tax laws and regulations also require that Bearer Securities not be delivered within the United States. (j) The Securities and the Trustee's certificate of authentication, in respect thereof, shall be substantially in the forms included in Exhibits A and B hereto, as applicable. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall approve the forms of the Securities and any notation, legend or endorsement on them. Any such notations, legends or endorsements not contained in the forms of Debentures attached as Exhibits A and B hereto shall be delivered in writing to the Trustee. Each Security shall be dated the date of its authentication, except that Bearer Securities shall be dated April 17, 1996. (k) The terms and provisions contained in the forms of Securities shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. SECTION 2.2 Execution and Authentication. An authorized Officer of the Company shall sign each Security and each Coupon for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Securities and may be in facsimile form. If an Officer whose signature is on a Security or a related Coupon was an Officer at the time of such execution but no longer holds that office at the time the Trustee authenticates the Security, the Security and such Coupon shall be valid nevertheless and the Company shall nevertheless be bound by the terms of the Securities, the Coupons and this Indenture. -10- A Security and the related Coupons shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security but such signature shall be conclusive evidence that the Security has been authenticated pursuant to the terms of this Indenture. The Trustee shall authenticate the Securities for original issue in the aggregate principal amount of up to U.S. $84,385,000 upon a written order of the Company in the form of an Officers' Certificate. The Officers' Certificate shall specify the amount of Securities to be authenticated and the date on which the Securities are to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed U.S. $84,385,000, except as otherwise provided herein. Upon the written order of the Company in the form of an Officers' Certificate, the Trustee shall authenticate Securities in substitution of Securities originally issued to reflect any name change of the Company. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless otherwise provided in the appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Company, any Affiliate of the Company, or any of their respective Subsidiaries. SECTION 2.3 Registrar and Paying Agent. The Company hereby appoints The Chase Manhattan Bank, N.A., at present having its principal corporate trust office at 4 Chase MetroTech Center, Third Floor, Brooklyn, New York 11245 (together with such other offices as the Trustee may designate for such purposes, the "Principal Corporate Trust Office"), as its Trustee in respect of the Securities upon the terms and subject to the conditions herein set forth (The Chase Manhattan Bank, N.A. and its successor or successors as such Trustee qualified and appointed in accordance with Section 7.8 hereof are herein called the "Trustee"). The Trustee shall have the powers and authority granted to and conferred upon it herein and in the Securities, and such further powers and authority, acceptable to it, to act on behalf of the Company as the Company may hereafter grant to or confer upon it in writing. The Company hereby appoints the Principal Corporate Trust Office of The Chase Manhattan Bank, N.A. in the City of New York and the London office of The Chase Manhattan Bank, N.A. located at Woolgate House, Coleman Street, London EC2P 2HD, England (together with such other offices as the Trustee may designate for such purposes, the "London Office"), as its Paying Agent in respect of the Securities upon the terms and subject to the conditions herein set forth. The Paying Agent shall have the powers and authority granted to and conferred upon it herein and in the Securities, and such further powers and authority, acceptable to it, to act on behalf of the Company as the Company may hereafter grant to or confer upon it in writing. The Company may appoint one or more additional Paying Agents from time to time and may authorize the Paying Agent to cooperate with one or more additional Paying Agents. As used herein, "paying agencies" shall mean paying agencies maintained by the Company as provided in Section 4.2 hereof. The Company hereby appoints the Principal Corporate Trust Office of The Chase Manhattan Bank, N.A. in the City of New York and the London Office of The Chase Manhattan Bank, N.A. (together with such other offices as the Trustee may designate for such purposes) as its Conversion Agent in respect of the Securities upon the terms and subject to the conditions herein set forth, and the Registrar, the Paying Agent, the Conversion Agent, the Transfer Agents (as defined in Section 4.2 hereof) and the Trustee are sometimes herein referred to severally as an "Agent" and, collectively, as the "Agents"). The Conversion Agent shall have the powers and authority granted to and conferred upon it herein and in the Securities, and such further powers and authority, acceptable to it, to act on behalf of the Company as the Company may -11- hereafter grant to or confer upon it in writing. As used herein, "conversion agencies" shall mean conversion agencies maintained by the Company as provided in Section 4.2 hereof. The Company shall cause to be kept at the Principal Corporate Trust Office of the Trustee a register (the register maintained in such office being herein referred to as the "Security Register") in which, subject to such reasonable regulations as the Trustee may prescribe, the Company shall provide for the registration of Registered Securities and of transfers of Registered Securities. The Trustee is hereby appointed Registrar ("Registrar") for the purpose of registering Registered Securities and transfers of Registered Securities as herein provided. The Company may have one or more co-Registrars. The Company shall enter into an appropriate written agency agreement with any Agent not a party to this Indenture, which agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall promptly notify the Trustee in writing of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. The Company initially appoints The Depository Trust Company to act as Depositary with respect to the Rule 144A Global Securities. The Company initially appoints the Trustee to act as Securities Custodian with respect to the Rule 144A Global Securities. SECTION 2.5 Paying Agent to Hold Asset in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that each Paying Agent shall hold in trust for the benefit of Holders or the Trustee all assets held by the Paying Agent for the payment of principal of, premium, if any, interest on or Additional Amounts with respect to, the Securities (whether such assets have been distributed to it by the Company or any other obligor on the Securities), and shall notify the Trustee in writing of any Default in making any such payment. The Company at any time may require a Paying Agent to distribute all assets held by it to the Trustee and account for any assets disbursed and the Trustee may at any time during the continuance of any Payment Default, upon written request to a Paying Agent, require such Paying Agent to distribute all assets held by it to the Trustee and to account for any assets distributed. Upon distribution to the Trustee of all assets that shall have been delivered by the Company to the Paying Agent, the Paying Agent (if other than the Company or an Affiliate of the Company) shall have no further liability for such assets. SECTION 2.5 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of Registered Securities. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before the Interest Record Date preceding each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee reasonably may require of the names and addresses of Holders of Registered Securities. SECTION 2.6 Transfer and Exchange; Restrictions on Transfer. (a) Upon surrender for registration of transfer of any Registered Security at any office or agency designated for such purpose by the Company pursuant to Section 4.2 hereof, the Company shall execute, and the Trustee shall authenticate, register and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture; provided, however, that, with respect to any Registered Security that is a Restricted Security, the Trustee shall not -12- register the transfer of such Security unless the conditions in Section 2.6(b) hereof shall have been satisfied. The Holder of each Restricted Security, by such Holder's acceptance thereof, agrees to be bound by the transfer restrictions set forth herein and in the legend on such Restricted Security. (b) Whenever any Restricted Security is presented or surrendered for registration of transfer or exchange for a Registered Security registered in a name other than that of the Holder, no registration of transfer or exchange shall be made unless: (i) The registered holder presenting such Restricted Security for transfer shall have certified to the Trustee in writing that such registered holder is transferring such Restricted Security to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder (or a successor provision); (ii) The registered holder presenting such Restricted Security for transfer shall have certified to the Trustee in writing that the registered holder is transferring such Restricted Security outside the United States in a transaction meeting the requirements of Rule 904 of Regulation S under the Securities Act; (iii) (A) The registered holder presenting such Restricted Security for transfer shall have certified to the Trustee in writing that such registered holder is transferring such Restricted Security to an institutional "accredited investor" (within the meaning of Rule 501(a)(1),(2),(3) or (7) under the Securities Act) in a transaction not involving any general solicitation or general advertising; and (B) a broker or dealer registered under Section 15 of the Exchange Act shall have certified to the Trustee in writing that: (x) each person who will become a beneficial owner of the Restricted Security upon transfer is an institutional "accredited investor" (as such term is defined in Rule 501(a)(1),(2),(3) or (7) under the Securities Act); (y) no general solicitation or general advertising was made or used by such broker or dealer in connection with the offer and sale of such Restricted Security to such person(s); and (z) such institutional accredited investor has been informed that the Securities have not been registered under the Securities Act and are subject to the restrictions on transfer set forth in the Securities and this Indenture; (iv) The registered holder presenting such Restricted Security for transfer shall have certified to the Trustee in writing that the registered holder is transferring the Registered Security to the Company; or (v) The registered holder presenting such Restricted Security for transfer shall have delivered an opinion of counsel acceptable in form and substance to the Company, that the transfer is being made pursuant to another available exemption from, or a transaction not otherwise subject to, the registration requirements of the Securities Act. For purposes of this Section 2.6(b), any such certification to the Trustee in writing shall be in the form of the Transfer Notice set forth on the reverse of such Security. In the case of a transfer pursuant to the foregoing clauses (ii), (iii) or (v) above, the Company may require that the registered holder deliver an opinion of counsel, certifications or other information acceptable to it in form and substance. (c) Bearer Securities may, at the option of the holder thereof, be exchanged for an equal aggregate principal amount of Registered Regulation S Securities in denominations of $1,000 and integral multiples thereof without Coupons and/or Bearer Securities of authorized denominations, upon surrender of the Bearer Securities to be exchanged at any office or agency outside the United States designated for such purpose by the Company pursuant to Section 4.2 hereof, with all unmatured Coupons and all matured Coupons -13- in default thereto appertaining. If such Holder is unable to produce any such unmatured Coupon or Coupons or matured Coupon or Coupons in default, such exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing Coupon or Coupons or the surrender of such missing Coupon or Coupons may be waived by the Company if there be furnished to it and the Trustee such security or indemnity as it may require to save it, the Trustee, the Paying Agent and any paying agency harmless. If thereafter the Holder of such Security shall surrender to any paying agency any such missing Coupon or Coupons in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment from the Company; provided, however, that, except as otherwise provided in the form of Bearer Security set forth in Exhibit A hereto, interest represented by Coupons shall be payable only upon presentation and surrender of those Coupons outside of the United States, its territories and its possessions. Bearer Securities and Coupons are transferable upon delivery. (d) Registered Securities may, at the option of the holder thereof, be exchange for Registered Securities of any other authorized denominations and of a like aggregate principal amount, upon surrender of the Registered Securities to be exchanged at any office or agency designated for such purpose by the Company pursuant to Section 4.2 hereof. Registered Securities shall not be exchangeable for Bearer Securities. Whenever any Registered Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Registered Securities which the holder making the exchange is entitled to receive. If the Registered Security so surrendered for exchange is a Registered Accredited Investor Security and the Holder thereof requests in writing that such Registered Accredited Investor Security be exchanged for an interest in the Rule 144A Global Security, such Registered Accredited Investor Security will be exchangeable into an equal aggregate principal amount of beneficial interests in the Rule 144A Global Security; provided, however, that, if such Registered Accredited Investor Security is a Restricted Security, such exchange may only be made if such Holder certifies to the Trustee in writing that such Holder is a QIB by completing the Transfer Notice on the reverse of such Security. Upon any exchange as provided in the immediately preceding sentence, the Trustee shall cancel such Registered Accredited Investor Security and cause, or direct any custodian for the Rule 144A Global Security to cause, in accordance with the standing instructions and procedures existing between the Depositary and any such custodian, the aggregate principal amount of Securities represented by the Rule 144A Global Security to be increased accordingly. If no Rule 144A Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate a new Rule 144A Global Security in the appropriate principal amount. (e) Any person having a beneficial interest in a Rule 144A Global Security may upon request exchange such beneficial interest for a Registered Security only as provided in this paragraph. Upon receipt by the Company and the Trustee of (i) written instructions (or such other form of instructions as is customary) on behalf of any person having a beneficial interest in a Rule 144A Global Security and (ii) in the case of a Restricted Security, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the person designated as being the beneficial owner, a certification to that effect from such person; or (B) if such beneficial interest is being transferred to a person other than the person designated as being the beneficial owner, a certificate from such person that the provisions of Section 2.6(b) hereof have been satisfied; in which case the Trustee or any custodian for the Rule 144A Global Security, at the direction of the Trustee shall, in accordance with the standing instructions and procedures existing between the Depositary and such custodian, cause the aggregate principal amount of the Rule 144A Global Security to be reduced accordingly and, following such reduction, the Company shall execute and the Trustee shall authenticate and deliver to the transferee a Registered Security in the appropriate principal amount and, if such Registered -14- Security is a Restricted Security, including the appropriate legend. Registered Securities issued in exchange for a beneficial interest in the Rule 144A Global Security pursuant to this paragraph shall be registered in such names and in such authorized denominations as the Trustee shall be instructed in writing. The Trustee shall deliver such Registered Securities to the persons in whose names such Securities are so registered. (f) Notwithstanding any other provision of this Indenture (other than the provisions set forth in Section 2.6(e) hereof), the Rule 144A Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (g) If at any time earlier (i) the Depositary for the Rule 144A Global Security notifies the Company and the Company notifies the Trustee in writing that the Depositary is unwilling or unable to continue as Depositary for the Rule 144A Global Security and a successor Depositary for the Rule 144A Global Security is not appointed by the Company within 90 days after delivery of such notice, or (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Registered Securities under this Indenture, then the Company shall execute, and the Trustee shall authenticate and deliver, Registered Securities in an aggregate principal amount equal to the principal amount of the Rule 144A Global Security in exchange for such Rule 144A Global Security (registered in the names and denominations specified by the Depositary). (h) Each certificate evidencing Restricted Securities shall bear a legend in substantially the following form: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. EACH PURCHASER OF THIS SECURITY 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 THIS SECURITY, BY ITS ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES AND AGREES FOR THE BENEFIT OF THE COMPANY THAT: (I) IT HAS ACQUIRED A "RESTRICTED" SECURITY WHICH HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS SHALL BE PERMITTED AS A RESULT OF AN AMENDMENT TO THE RULES UNDER THE SECURITIES ACT IN RESPECT THEREOF) AFTER THE LATER OF THE DATE OF ORIGINAL ISSUANCE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A -15- "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) IN A TRANSACTION ARRANGED BY A BROKER OR DEALER REGISTERED UNDER THE UNITED STATES SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE MEANING OF SUBPARAGRAPHS (a)(1),(2),(3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT) THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY APPLICABLE JURISDICTION; AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (II) ABOVE. IF ANY RESALE OR OTHER TRANSFER OF THIS SECURITY IS PROPOSED TO BE MADE PURSUANT TO CLAUSE II(E) ABOVE PRIOR TO THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS SHALL BE PERMITTED AS A RESULT OF AN AMENDMENT TO THE RULES UNDER THE SECURITIES ACT IN RESPECT THEREOF) AFTER THE DATE OF ORIGINAL ISSUANCE HEREOF, THE TRANSFEROR SHALL DELIVER A LETTER FROM THE TRANSFEREE CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY. ANY OFFER, SALE OR OTHER DISPOSITION PURSUANT TO THE FOREGOING CLAUSES (II)(D),(E) AND (F) IS SUBJECT TO THE RIGHT OF THE ISSUER OF THIS SECURITY AND THE TRUSTEE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS OR OTHER INFORMATION ACCEPTABLE TO THEM IN FORM AND SUBSTANCE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS AGREEMENT DATED APRIL 17, 1996 BETWEEN THE COMPANY AND NATWEST SECURITIES LIMITED, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE. (i) The restrictions imposed by Section 2.6(b) upon the transferability of any particular Restricted Security shall cease and terminate (i) when such Restricted Security has been (x) sold pursuant to an effective registration statement under the Securities Act of (y) transferred pursuant to Rule 144 under the Securities Act (or any successor provisions thereto), unless the holder is an affiliate of the Company within the meaning of said Rule 144 (or such successor provision) or (ii) upon the date which is three years (or such shorter period as shall be permitted as a result of an amendment to the rules under the Securities Act in respect thereof) after the later of the date of original issue and the last date on which the Company or any Affiliate of the Company was the owner of such Restricted Security (or any predecessor security) (the "Resale Restriction Termination Date"). Any Restricted Security as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon surrender of such Restricted Security for exchange to the Trustee in accordance with the provisions of this Section 2.6(i) -16- (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer pursuant to Rule 144 (or any successor provision), by an opinion of counsel reasonably acceptable to the Company, addressed to the Company and the Trustee and in form and scope satisfactory to the Company, to the effect that the transfer of such Restricted Security has been made in compliance with Rule 144 (or such successor provision)), be exchanged for a new Registered Security, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by Section 2.6(h) hereof. The Company shall promptly inform the Trustee in writing of the effective date of any registration statement registering the Securities under the Securities Act. (j) The transfer and exchange of the Rule 144A Global Security or beneficial interest therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (k) At such time as all beneficial interests in the Rule 144A Global Security have either been exchanged for Registered Securities, redeemed, repurchased or canceled, the Rule 144A Global Security shall be returned to or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in the Rule 144A Global Security is exchanged for Registered Securities, redeemed, repurchased or canceled, the principal amount of Securities represented by the Rule 144A Global Security shall be reduced accordingly and an endorsement shall be made on the Rule 144A Global Security, by the Trustee or any custodian therefor, at the direction of the Trustee, to reflect such reduction. (l) All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same obligations, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. (m) Every Registered Security presented for registration of transfer or surrendered for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company, the Trustee and the Transfer Agent to which such Security is presented or surrendered and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. All such instruments shall comply with the applicable provisions of this Section 2.6. The registration of the transfer of a Registered Security by the Registrar shall be deemed to be the written acknowledgment of such transfer on behalf of the Company. (n) No service charge shall be made for any registration of transfer or exchange, but the Company or the Transfer Agent may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 2.7 hereof or not involving any registration of transfer. (o) Neither the Company nor the Trustee nor any of the offices or agencies designated for the purposes specified in Section 4.2 hereof nor any Transfer Agent shall be required (i) to exchange Bearer Securities for Registered Securities during the period between the close of business on any Interest Record Date and the opening of business on the next succeeding Interest Payment Date, (ii) to exchange any Bearer Security (or portion thereof) for a Registered Security if the Company shall determine and inform the Trustee in writing that, as a result thereof, the Company may incur adverse consequences under the federal income tax laws and regulations (including proposed regulations) of the United States in effect or proposed at the time of such exchange, or (iii) in the event of a redemption in part, (A) to register the transfer or exchange of Registered Securities or to exchange any Bearer Securities for Registered Securities during a period of 15 days immediately preceding the date notice is given pursuant to Section 3.1 hereof and Section 3(e) of the Registered Securities and the Bearer Securities identifying the serial numbers of any Securities to be redeemed, or (B) to register the transfer or exchange of any Registered Security so selected for -17- redemption in whole or in part, except portions not being redeemed of Securities being redeemed in part, or (C) to exchange any Bearer Security called for redemption; provided, however, that a Bearer Security called for redemption may be exchanged, on the terms and conditions set forth above, for a Registered Security that is simultaneously surrendered, with written instruction for payment on the Redemption Date, unless the Redemption Date is between the close of business on any Interest Record Date and the close of business on the next succeeding Interest Payment Date, in which case such exchange may only be made prior to the Interest Record Date immediately preceding the Redemption Date. SECTION 2.7. Exchange. (a) At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company in accordance with this Indenture to the Trustee for authentication together with an Officers' Certificate of the Company directing such authentication, and the Trustee shall thereupon authenticate and make such Securities available for delivery upon and in accordance with the written order of the Company. No Security shall be valid or enforceable for any purpose unless and until the certificate of authentication thereon shall have been manually signed by a duly authorized signatory of the Trustee and such duly executed certificate of authentication on any Security shall be conclusive evidence that the Security has been duly authenticated and delivered hereunder. (b) The Regulation S Global Security, the Rule 144A Global Security and the Registered Accredited Investor Securities will be issued upon payment to the Company or its order in United States dollars by wire transfer to a United States dollar account designated by the Company, at 3:00 p.m., London time, on the "Closing Date." Such payment will be made (1) upon authorization from the Manager, (2) against delivery as provided in Section 2.7(c) hereof of the amount, if any, of Rule 144A Securities and Accredited Investor Securities as the Manager may request and as it shall direct, and (3) against the delivery of the Regulation S Global Security for the balance of the Securities to the Common Depositary. The Regulation S Global Security shall be held on deposit with the Common Depositary for the accounts of the Euroclear Operator and Cedel, for credit to the Manager's Securities Clearance Accounts (or to such other accounts as the Manager may have specified) with the Euroclear Operator or Cedel. (c) On the Closing Date, the Company shall execute and deliver to (i) the Manager, at the offices of Stroock & Stroock & Lavan, in The City of New York, temporary Registered Accredited Investor Securities (which shall have been duly authenticated by the Trustee and which may be in typewritten form) in respect of the Accredited Investor Securities and (ii) the Depositary, at its office in New York, the Rule 144A Global Security (which shall have been duly authenticated by the Trustee and which may be in typewritten form) in respect of the Rule 144A Securities. On or before the Exchange Date (as defined in Section 2.7(d)), the Company will execute and deliver to the Trustee at the Principal Corporate Trust Office, Registered Accredited Investor Securities in the aggregate principal amount of the Registered Accredited Investor Securities outstanding. At the request of a Holder of temporary Registered Accredited Investor Securities, the Trustee shall deliver to such Holder Registered Accredited Investor Securities in exchange for an equal aggregate principal amount of temporary Registered Accredited Investor Securities. (d) On or before the Exchange Date, the Company will execute and deliver to the Trustee, at its office in London, definitive Registered Regulation S Securities and Bearer Securities in the aggregate principal amount outstanding in the Regulation S Global Security and in such proportion of Registered Regulation S Securities to Bearer Securities as the Trustee may specify. "Exchange Date" means the date following the expiration of the 40-day period commencing on the Closing Date. On or after the Exchange Date, the Regulation S Global Security may be surrendered to the Trustee at its London office to be exchanged, as a whole or in part, for definitive Bearer Securities without charge, and the Trustee shall authenticate and deliver, in exchange for such Regulation S Global Security or the portions thereof to be exchanged, an equal aggregate principal amount of definitive Bearer Securities, but only upon presentation to the Trustee at its London Office of a certificate of the Euroclear Operator or Cedel with respect to the -18- Regulation S Global Security or portions thereof being exchanged, to the effect that it has received a certificate or certificates satisfactory to it with respect to Non-U.S. Person beneficial ownership on the part of the Holders of the Securities accepted for clearance through Euroclear or Cedel, as appropriate, dated no earlier than 15 days prior to the Exchange Date and signed by the person appearing in its records as the owner of the Regulation S Global Security or portions thereof being exchanged. Similarly, after the Exchange Date, portions of the Regulation S Global Security may be exchanged for an equal aggregate principal amount of definitive Registered Regulation S Securities upon presentation to the Trustee at its office in London of a request for such exchange accompanied by a certification of Non-U.S. beneficial ownership. (e) The definitive Securities and Coupons shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the Officers executing such Securities and Coupons, as evidenced by such execution. (f) Bearer Securities and Registered Securities may only be issued in exchange for interests in the Temporary Regulation S Global Security upon receipt of certification of non-U.S. beneficial ownership and undertakings not to resell the related security in the United States or in contravention of restrictions on resale to U.S. Persons. Bearer Securities will be delivered only outside the United States, its territories or its possessions. (g) The delivery to the Trustee by the Euroclear Operator or Cedel of any certificate referred to above may be relied upon by the Company and the Trustee as conclusive evidence that a corresponding certificate or certificates has or have been delivered to the Euroclear Operator or Cedel pursuant to the terms of this Indenture. (h) Upon any such exchange of a portion of the Regulation S Global Security for a definitive Bearer Security or Securities or a definitive Registered Regulation S Security or Securities, the Regulation S Global Security shall be endorsed by the Trustee to reflect the reduction of its principal amount by an amount equal to the aggregate principal amount of such definitive Security or Securities. Until so exchanged in full for definitive Securities, the Regulation S Global Security shall in all respects be entitled to the same benefits under this Indenture as definitive Securities authenticated and delivered hereunder, except that neither the Holder thereof nor the beneficial owners of the Regulation S Global Security shall be entitled to receive payment of interest thereon or exercise conversion rights with respect thereto. SECTION 2.8. Replacement Securities. If a mutilated Security or a Security with a mutilated Coupon appertaining thereto is surrendered to the Trustee or if the Holder of a Security or Coupon claims and submits to the Trustee an affidavit or other evidence, satisfactory to the Trustee, to the effect that the Security or Coupon has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate and deliver, in lieu of any such lost, destroyed or wrongfully taken Security or in exchange for the Security to which a lost, destroyed or wrongfully taken Coupon appertains (with all appurtenant Coupons not lost, destroyed or wrongfully taken) a replacement Security with Coupons corresponding to the Coupons, if any, appertaining to such lost, destroyed or wrongfully taken Security or to the Security to which such lost, destroyed or wrongfully taken Coupon appertains, if the Trustee's requirements are met. If required by the Trustee or the Company, such Holder must provide an indemnity bond or other indemnity, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss which any of them may suffer if a Security or Coupon is replaced. The Company may charge such Holder for its reasonable, out-of-pocket expenses in replacing a Security or Coupon. -19- In case any such lost, destroyed or wrongfully taken Security or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security or Coupon; provided, however, that principal of and any premium and interest on Bearer Securities shall, except as otherwise provided in the Bearer Securities, be payable only at an office or agency located outside the United States and its possessions. Every replacement Security or Coupon is an additional obligation of the Company. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or Coupons. SECTION 2.9. Outstanding Securities. Securities outstanding at any time are all the Securities that have been authenticated by the Trustee (including any Security represented by a Rule 144A Global Security or a Regulation S Global Security) except those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Security effected by the Trustee hereunder and those described in this Section 2.9 as not outstanding. A Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security, except as provided in Section 2.10 hereof. If a Security is replaced pursuant to Section 2.8 hereof (other than a mutilated Security surrendered for replacement), it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. A mutilated Security ceases to be outstanding upon surrender of such Security and replacement thereof pursuant to Section 2.8 hereof. If on a Redemption Date the Paying Agent (other than the Company or an Affiliate of the Company) holds Cash or U.S. Government Obligations sufficient to pay all of the principal and interest due on the Securities payable on that date in accordance with Section 3.3 hereof and payment of the Securities called for redemption is not otherwise prohibited pursuant to Article XII hereof or otherwise, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. SECTION 2.10. Treasury Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, amendment, supplement, waiver or consent, Securities owned by the Company or an Affiliate of the Company shall be disregarded, except that, for the purposes of determining whether the Trustee shall be protected in relying on any such direction, amendment, supplement, waiver or consent, only Securities that the Trustee actually knows are so owned shall be disregarded. SECTION 2.11. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company reasonably and in good faith considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as permanent Securities authenticated and delivered hereunder, except as provided in Section 2.7(h) hereof. -20- SECTION 2.12. Cancellation. The Company at any time may deliver Securities or Coupons to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities or Coupons surrendered to them for transfer, exchange or payment. The Trustee, or at the direction of the Trustee, the Registrar or the Paying Agent (other than the Company or an Affiliate of the Company), and no one else, shall cancel and, at the written direction of the Company, shall dispose of all Securities or Coupons surrendered for transfer, exchange, payment or cancellation. Subject to Section 2.8 hereof, the Company may not issue new Securities or Coupons to replace Securities or Coupons that have been paid or delivered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 2.12, except as expressly permitted in the form of Securities and as permitted by this Indenture. SECTION 2.13. Payment. (a) The Company will pay or cause to be paid to the Paying Agent the amounts, at the times and for the purposes, set forth herein and in the text of the Securities, and the Company hereby authorizes and directs the Paying Agent to make payment of the principal of, premium, if any, and interest on and Additional Amounts, if any, on the Securities from such payments. (b) At least 15 days prior to the date on which any payment of Additional Amounts shall be required to be made pursuant to Section 2 of the Securities, the Company will furnish the Paying Agent, each other paying agency of the Company and the Trustee with a certificate of one of its duly authorized officers instructing the Paying Agent and each other paying agency of the Company as to the amounts required (i) to be deducted or withheld for or on account of any taxes described in Section 2 of the Securities from a payment to be made on that date and (ii) to be paid to each holder of Securities or Coupons as Additional Amounts pursuant to that paragraph. If the foregoing amounts are not uniform for all Holders, then the Company's certificate shall specify by country of residence or other factor the amounts required to be deducted or withheld and to be paid as Additional Amounts for each Holder or class of Holders of the Securities or Coupons. In the absence of its receipt of any such certificate from the Company, the Paying Agent may make payment without deduction or withholding. The Company hereby agrees to indemnify the Paying Agent, each other paying agency of the Company and the Trustee for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or willful misconduct on their part, arising out of or in connection with actions taken or omitted by any of them in reliance on any certificate furnished pursuant to this Section. (c) Interest on any Registered Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security is registered at the close of business on the Interest Record Date even if such Registered Security is canceled after such Interest Record Date. In case a Bearer Security is surrendered for exchange for a Registered Security after the close of business on any Interest Record Date and before the opening of business on the next succeeding Interest Payment Date, the Trustee shall not be required to perform such transfer or exchange of such Security. (d) If a Registered Security is converted after the close of business on an Interest Record Date and before the opening of business on the next succeeding Interest Payment Date, the interest due on such Interest Payment Date shall be paid on such Interest Payment Date to the person in whose name that Security is registered at the close of business on that Interest Record Date. (e) In order to provide for the payment of the principal of, premium, if any, and interest on the Securities (and Additional Amounts, if any, with respect thereto) as the same shall become due and payable, the Company shall pay to the Paying Agent to accounts specified by the Paying Agent, in same day -21- funds, the following amounts (and the Company shall give notice to the Trustee at least one full Business Day prior to the date payment is due to the Paying Agent as to the means of such payment), to be held and applied by the Paying Agent as hereinafter set forth: (i) The Company shall pay to the Paying Agent on the Business Day immediately prior to each Interest Payment Date an amount sufficient to pay the interest due on (and Additional Amounts, if any, on) all the Securities outstanding on such Interest Payment Date, and the Paying Agent shall apply the amounts so paid to it to the payment of such interest (and Additional Amounts, if any) on such Interest Payment Date. (ii) If the Company shall elect, or shall be required, to redeem all or any part of the Securities in accordance with Section 3.1 hereof, the Company will pay to the Paying Agent (other than the Company or an Affiliate of the Company) on the Business Day immediately prior to the Redemption Date thereof an amount sufficient (with any amount then held by the Paying Agent and available for the purpose) to pay the Redemption Price of the Securities called for redemption or entitled to be redeemed, together with accrued interest thereon (and Additional Amounts, if any, with respect thereto) to the Redemption Date fixed for redemption and not paid pursuant to clause (e)(i) of this Section 2.13, and the Paying Agent shall apply such amount to the payment of the Redemption Price and accrued interest (and Additional Amounts, if any) in accordance with the terms of Article III hereof. (iii) On the Business Day immediately prior to the Stated Maturity of the Securities, the Company shall pay to the Paying Agent an amount which, together with any amounts then held by the Paying Agent, and available for payment thereof, shall be equal to the entire amount of principal and interest (and Additional Amounts, if any) to be due on such maturity date on all the Securities then outstanding, and the Paying Agent shall apply such amount to the payment of the principal of and interest on (and Additional Amounts, if any, on) the Securities in accordance with the terms of the Securities. SECTION 2.14. Defaulted Interest. Any interest on any Registered Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date plus, to the extent lawful, any interest payable on the defaulted interest (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant Interest Record Date, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may make payment of any Defaulted Interest to the Holder of a Registered Security on a subsequent record date established by notice given by mail by or on behalf of the Company to such Holder not less than 15 days preceding such subsequent record date, such record date to be not less than 10 days preceding the date of payment of such Defaulted Interest. (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner shall be deemed reasonably practicable by the Trustee. Any Defaulted Interest payable in respect of any Bearer Security shall be payable pursuant to such procedures as may be satisfactory to the Trustee in such manner that there is no discrimination between the Holders of Registered Securities and Bearer Securities, and notice of the payment date therefor -22- shall be given by the Trustee, in the name and at the expense of the Company, in the manner provided in Section 14.2 hereof. Subject to the foregoing provisions of this Section 2.14, each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 2.15. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE III REDEMPTION SECTION 3.1. Right of Redemption. If, under the circumstances described in Section 3 of the Registered Securities and Bearer Securities, the Company shall elect or be required to redeem the outstanding Securities, the following provisions shall be applicable: (a) Except in the case of redemption pursuant to Section 3(d) of the Registered Securities and the Bearer Securities (in which case notice shall be given by the Company as provided in subsection (c) of this Section 3.1), the Company shall, at least 75 days (or such shorter period as shall be reasonably acceptable to the Trustee) before the date designated for such redemption, give written notice to the Agents of its election to redeem the outstanding Securities on the Redemption Date specified in such notice and state in such notice that the conditions precedent to such redemption have occurred and describe them, and shall request the Trustee to arrange for publication and mailing of the notice specified in clause (b) below. (b) In the case the Company shall give notice to the Agents of its election to redeem the Securities, the Trustee shall cause to be given to Holders on behalf of and at the expense of the Company a notice of redemption in accordance with Section 14.2 hereof. The Trustee shall send a copy of such notice of redemption to the Company, the Paying Agent (if different from the Trustee) and each other paying agency of the Company. In the case of a redemption in whole, notice will be given once not more than 60 nor less than 30 days prior to the Redemption Date. In the case of a partial redemption, notice will be given twice, the first such notice to be given not more than 60 nor less than 45 days prior to the Redemption Date and the second such notice to be given not more than 45 and not less than 30 days prior to the Redemption Date. The Trustee shall notify the Company promptly of the portions of outstanding Securities to be called for redemption as determined pursuant to Section 3(a) of the Registered Securities and Bearer Securities. (c) Under the circumstances described in Section 3(d) of the Registered Securities and Bearer Securities concerning the redemption of outstanding Securities at the option of the Holders thereof, the following provisions shall be applicable: (i) The Company shall give notice to the Trustee of the occurrence of a Change of Control immediately upon the occurrence of such Change of Control or, if later, immediately upon learning of the occurrence of such Change of Control (provided, that the Company shall be deemed to have knowledge of any information contained in any Statement on Schedule 13D or 13G filed with the Commission). Such notice shall state: -23 A. The Holder Redemption Date in respect of such Change of Control; B. The Redemption Price as set forth in Section 3(d) of the Registered Securities and Bearer Securities; C. The place or places of payment of the Registered Securities and Bearer Securities; and D. Such other information as the Company shall deem advisable. (ii) The Trustee shall cause to be given to the Holders on behalf of the Company a notice of entitlement to redeem in accordance with the provisions of Section 14.2 hereof. Such notice shall be given on behalf and at the expense of the Company and shall be given not later than 30 days after the later of the Exchange Date, the date of the occurrence of a Change of Control or the date of receipt of notice by the Trustee from the Company of such Change of Control (the date on which such notice is given by the Trustee shall be the "Change of Control Notice Date"). (iii) Upon the deposit of any of the Registered Securities or Bearer Securities with the agency designated by the Company as the place for payment of the Registered Securities and Bearer Securities together with a duly signed and completed Redemption Notice in the form set forth on the reverse of the Bearer Securities and Registered Securities, all in accordance with the provisions of Section 3 of the Registered Securities and Bearer Securities, the Holder of such Registered Security and Bearer Security shall be entitled to receive a non-transferable receipt evidencing such deposit. (iv) The Trustee shall notify the Company on each Business Day in the five Business Days prior to the Holder Redemption Date for outstanding Securities to be redeemed under this Section 3.1(c) of the amount required to redeem such Securities. (d) Notices relating to the redemption of Securities whether at the option of the Company or the Holder thereof shall specify: the Redemption Date or the Holder Redemption Date, as the case may be; the Redemption Price; the place or places of payment; that payment will be made upon presentation and surrender of the Securities to be redeemed, together, in the case of a Bearer Security, with all appurtenant Coupons, if any, maturing subsequent to the Redemption Date; that interest accrued to the Redemption Date will be paid as specified in such notice; that on and after said date interest thereon will cease to accrue; that the Holder will have the right to convert such Holder's Securities until the close of business on the fifth day (or if such day is not a Business Day, the next succeeding Business Day) preceding the related Redemption Date or Holder Redemption Date, as the case may be; and such other information as the Company may wish to include. In the case of a redemption by the Company at the option of the Holder of a Security, the notices given by the Trustee informing a Holder of such Holder's entitlement to redeem shall also specify that a Holder electing redemption will be entitled to revoke its election by delivering a written notice of such revocation, together with the Holder's nontransferable receipt for such Security, to the agency designated by the Company as the place for the payment of the Securities to be so redeemed not later than the Holder Redemption Date in the case of a redemption pursuant to Section 3(d) of the Registered Securities and Bearer Securities. In the case of a redemption in part at the option of the Company, notices shall specify the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities outstanding after such partial redemption. The first notice shall specify the last date on which exchanges or transfers of Securities may be made (in accordance with Section 2.6(o) hereof), and the second notice shall specify the serial numbers of the Securities and the portions thereof called for redemption. In the case of a redemption in whole or in part by the Company, notices shall specify the date the conversion privilege expires in accordance with Section 4(a) of the Registered -24- Securities and Bearer Securities. Such notices shall also state that the conditions precedent, if any, to such redemption have occurred and, in the case of a redemption pursuant to Section 3(d) of the Registered Securities and Bearer Securities, the last day for surrender of the Securities being redeemed. SECTION 3.2. Effect of Notice of Redemption. Once notice of redemption is made in accordance with Section 3.1 hereof, Securities called for redemption become due and payable on the Redemption Date and at the Redemption Price, including accrued and unpaid interest and Additional Amounts, if any, to the Redemption Date. Upon surrender to the Trustee or Paying Agent, such Securities called for redemption shall be paid at the Redemption Price, including accrued and unpaid interest and Additional Amounts, if any, to the Redemption Date; provided that if the Redemption Date is after a regular Interest Record Date and on or prior to the corresponding Interest Payment Date, the accrued interest to the Redemption Date and Additional Amounts, if any, shall be payable on the Redemption Date to the Holder of the redeemed Securities registered on the relevant Interest Record Date; and provided, further, that if a Redemption Date is not a Business Day, payment shall be made on the next succeeding Business Day and no interest or Additional Amounts shall accrue for the period from such Redemption Date to such succeeding Business Day. SECTION 3.3. Deposit of Redemption Price. On the Business Day immediately prior to the Redemption Date, the Company shall deposit with the Paying Agent (other than the Company or an Affiliate of the Company) Cash sufficient to pay the Redemption Price of, including accrued and unpaid interest on, and Additional Amounts with respect to, all Securities to be redeemed on such Redemption Date (other than Securities or portions thereof called for redemption on that date that have been delivered by the Company to the Trustee for cancellation). The Paying Agent shall promptly return to the Company any Cash so deposited which is not required for that purpose upon the written request of the Company. If the Company complies with the preceding paragraph and the other provisions of this Article III and payment of the Securities called for redemption is not prohibited under Article XII hereof or otherwise, interest and Additional Amounts on the Securities to be redeemed will cease to accrue on the applicable Redemption Date, whether or not such Securities are presented for payment. Notwithstanding anything herein to the contrary, if any Security surrendered for redemption in the manner provided in the Securities shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest and Additional Amounts shall continue to accrue and be paid from the Redemption Date until such payment is made on the unpaid principal, and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate and in the manner provided in Section 4.1 hereof and the Security. SECTION 3.4. Securities Redeemed in Part. Upon surrender of a Security that is to be redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder, without service charge to the Holder, a new Security or Securities equal in principal amount to the unredeemed portion of the Security surrendered. -25- ARTICLE IV COVENANTS SECTION 4.1. Payment of Securities. The Company shall punctually pay the principal of, premium, if any, interest on, and Additional Amounts, if any, with respect to, the Securities on the dates and in the manner provided in the Securities, as applicable. An installment of principal of, premium, if any, interest on, or Additional Amounts, if any, with respect to, the Securities shall be considered paid on the date it is due if the Trustee or Paying Agent (other than the Company or an Affiliate of the Company) holds for the benefit of the Holders on that date Cash deposited and designated for and sufficient to pay the installment. The Company shall pay interest on overdue principal and on overdue installments of interest at the rate specified in the Securities compounded semi-annually, to the extent lawful. SECTION 4.2. Maintenance of Office or Agency. (a) So long as any of the Registered Securities remain outstanding or until monies for the payment of all principal of, premium, if any, and interest on (and Additional Amounts with respect to) all outstanding Securities shall have been made available at the office of the Paying Agent and shall have been returned to the Company as provided in Section 8.2 hereof, the Company will maintain in The City of New York, an office or agency where the Registered Securities may be presented or surrendered for payment, an office or agency where the Securities may be surrendered for conversion as provided in this Indenture and an office or agency where notices and demands to or upon the Company with respect to the Registered Securities or this Indenture may be served, in each case which office or agency shall be a bank or trust company organized, in good standing and doing business under the laws of the United States of America or of any State of the United States of America. So long as any Bearer Securities remain outstanding or until monies for the payment of all principal of, premium, if any, and interest on (and Additional Amounts with respect to) all outstanding Bearer Securities shall have been made available at the office of the Paying Agent and shall have been returned to the Company as provided in Section 8.2 hereof, the Company will maintain, in at least one city in Western Europe, which shall be Luxembourg so long as the Securities are listed on the Luxembourg Stock Exchange, an office or agency where Bearer Securities may be surrendered for payment or conversion pursuant to Section 2.6 hereof and where notices and demands to or upon the Company in respect of the Bearer Securities of that series or of this Indenture may be served. The Company now intends to maintain additional agencies (subject to applicable laws and regulations) where Bearer Securities and Coupons may be surrendered for payment, where Registered Securities may be surrendered for payment and where Securities may be surrendered for conversion in London, England, and during such period to keep the Agents advised of the names and locations of such agencies. Unless the Company shall otherwise notify each of the Agents in writing, the sole such paying agencies and conversion agencies shall be the agencies specified in the Securities. (b) So long as there shall be Securities outstanding or until monies for the payment of all principal of, premium, if any, and interest on (and Additional Amounts with respect to) all outstanding Securities shall have been made available at the office of the Paying Agent and shall have been returned to the Company as provided in Section 8.2 hereof, the Company shall maintain a Security Registrar and additional transfer agencies (each, a "Transfer Agent" and, collectively, the "Transfer Agents") (i) where Registered Securities may be surrendered for registration of transfer or for exchange for Registered Securities in The City of New York and (ii) in at least one city in Western Europe, which shall be Luxembourg so long as the Securities are listed on the Luxembourg Stock Exchange, where Registered Securities may be surrendered for purposes of such transfer or exchange, and where Bearer Securities may be delivered in exchange for Bearer Securities or for Registered Securities. Consistent with applicable laws and regulations, including the provisions of the federal income tax laws of the United States, such agencies -26- may be the same agencies as or different agencies from those maintained by the Company pursuant to Section 4.2(a). The Company hereby appoints the London Office at Woolgate House, Coleman Street, London EC2P 2HD, England of The Chase Manhattan Bank, N.A. and Chase Manhattan Bank Luxembourg S.A., 5 Rue Plaetis, L- 2338 Luxembourg, as Transfer Agents for such transfers and exchanges. The registration of transfer or exchange of Registered Securities shall only be made by the Trustee in The City of New York. (c) The Company will give to the Trustee written notice of the locations of such offices or agencies and of any change in the locations thereof. If at any time the Company shall fail to maintain any such offices or agencies or shall fail to give such notice of the location or of any change in the locations thereof, presentations, surrenders, notices and demands in respect of Registered Securities may be made or served at the principal corporate trust office of the Trustee in The City of New York and in respect of Bearer Securities may be made or served at the London Office at Woolgate House, Coleman Street, London EC2P 2HD, England of The Chase Manhattan Bank, N.A. at which at any particular time its corporate trust business shall be administered. SECTION 4.3. Corporate Existence. Subject to Article V hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate or other existence of each of its Significant Subsidiaries in accordance with the respective organizational documents of each of them and the rights (charter and statutory) and corporate franchises of the Company and each of its Significant Subsidiaries; provided, however, that the Company shall not be required to preserve, with respect to itself, any right or franchise, and with respect to any of its Significant Subsidiaries, any such existence, right or franchise, if (a) the Board of Directors of the Company shall reasonably determine (evidenced by a Board Resolution certified by the Secretary of the Company and delivered to the Trustee) that the preservation thereof is no longer desirable in the conduct of the business of such entity and (b) the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 4.4. Payment of Taxes and Other Claims. Except with respect to immaterial items, the Company shall, and shall cause each of its Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Company or any of its Subsidiaries or any of their respective properties and assets and (ii) all lawful claims, whether for labor, materials, supplies, services or anything else, which have become due and payable and which by law have or may become a Lien upon the property and assets of the Company or any of its Subsidiaries; provided, however, that neither the Company nor any Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which disputed amounts adequate reserves have been established in accordance with GAAP. SECTION 4.5. Maintenance of Properties and Insurance. The Company shall cause all material properties used or useful to the conduct of its business and the business of each of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in their reasonable judgment may be necessary, so that the business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing in this Section 4.5 shall prevent the Company or any Subsidiary from discontinuing any operation or maintenance of any of such properties, or -27- disposing of any of them, if such discontinuance or disposal is (a), in the reasonable judgment of the Board of Directors of the Company (evidenced by a Board Resolution certified by the Secretary of the Company and delivered to the Trustee), desirable in the conduct of the business of such entity and (b) not disadvantageous in any material respect to the Holders. The Company shall provide, or cause to be provided, for itself and each of its Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that, in the reasonable, good faith opinion of the Company is adequate and appropriate for the conduct of the business of the Company and such Subsidiaries in a prudent manner, with (except for self- insurance) reputable insurers or with the government of the United States of America or an agency or instrumentality thereof, in such amounts, with such deductibles, and by such methods as shall be customary, in the reasonable, good faith opinion of the Company and adequate and appropriate for the conduct of the business of the Company and such Subsidiaries in a prudent manner for entities similarly situated in the industry, unless failure to provide such insurance (together with all other such failures) would not have a material adverse effect on the financial condition or results of operations of the Company or such Subsidiary. SECTION 4.6. Compliance Certificate; Notice of Default. (a) The Company shall deliver to the Trustee within 120 days after the end of its fiscal year an Officers' Certificate complying with Section 314(a)(4) of the TIA and stating that a review of its activities and the activities of its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and further stating, as to each such Officer signing such certificate, whether or not the signer knows of any failure by the Company or any Subsidiary of the Company to comply with any conditions or covenants in this Indenture and, if such signor does know of such a failure to comply, the certificate shall describe such failure with particularity. The Officers' Certificate shall also notify the Trustee should the relevant fiscal year end on any date other than the current fiscal year end date. (b) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee, promptly upon becoming aware of any Default, Event of Default or fact which would prohibit the making of any payment to or by the Trustee in respect of the Securities, an Officers' Certificate specifying such Default, Event of Default or fact and what action the Company is taking or proposes to take with respect thereto. The Trustee shall not be deemed to have knowledge of any Default, any Event of Default or any such fact unless one of its Trust Officers receives written notice thereof from the Company or any of the Holders. SECTION 4.7. Reports. Whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the Trustee and to each Holder identified to the Company, and to prospective purchasers of Securities identified to the Company by NatWest Securities Limited, within 15 days after it is or would have been required to file such with the Commission, annual and quarterly consolidated financial statements substantially equivalent to financial statements that would have been included in reports filed with the Commission if the Company was subject to the requirements of Section 13 or 15(d) of the Exchange Act, including, with respect to annual information only, a report thereon by the Company's certified independent public accountants as such would be required in such reports to the Commission and, in each case, together with a management's discussion and analysis of financial condition and results of operations which would be so required. -28- SECTION 4.8. Limitation on Status as Investment Company. Neither the Company nor any of its Subsidiaries shall become an "investment company" (as that term is defined in the Investment Company Act of 1940, as amended), or otherwise become subject to regulation under the Investment Company Act. SECTION 4.9. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of, premium of, interest on, or Additional Amounts with respect to, the Securities as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.10. Rule 144A Information Requirement. The Company shall furnish to the Holders or beneficial holders of the Securities or the underlying Common Stock and prospective purchasers of Securities or the underlying Common Stock designated by the Holders of Securities or the underlying Common Stock, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act until such time as the Securities are no longer "restricted securities" within the meaning of Rule 144 under the Securities Act. ARTICLE V SUCCESSOR CORPORATION SECTION 5.1. Limitation on Merger, Sale or Consolidation. (a) The Company shall not, directly or indirectly, consolidate with or merge with or into another Person or sell, lease, convey or transfer all or substantially all of its assets (computed on a consolidated basis), whether in a single transaction or a series of related transactions, to another Person or group of affiliated Persons, unless (i) either (A) in the case of a merger or consolidation, the Company is the surviving entity or (B) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the obligations of the Company in connection with the Securities and the Indenture; (ii) no Default or Event of Default shall exist or shall occur immediately before or after giving effect on a pro forma basis to such transaction; and (iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and, if a supplemental indenture is required, such supplemental indenture comply with the Indenture and that all conditions precedent relating to such transactions have been satisfied. (b) For purposes of clause (a) of this Section 5.1, the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Company, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. -29- SECTION 5.2. Successor Corporation Substituted. Upon any consolidation or merger or any sale, lease, conveyance or transfer of all or substantially all of the assets of the Company in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such sale, lease, conveyance or transfer is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein as the Company, and when a successor corporation duly assumes all of the obligations of the Company pursuant hereto and pursuant to the Securities, the predecessor (except in the case of a lease) shall be released from such obligations (except with respect to any obligations that arise from or as a result of such transaction). ARTICLE VI EVENTS OF DEFAULT AND REMEDIES SECTION 6.1. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be caused voluntarily or involuntarily or effected, without limitation, by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the failure by the Company to pay any installment of interest or Additional Amounts (as described in Section 2 of the Securities) with respect to any of the Securities as and when due and payable and the continuance of any such failure for a period of 30 days after the date when due; (b) the failure by the Company to pay all or any part of the principal, or premium, if any, on the Securities when and as the same becomes due and payable at maturity or upon redemption, by acceleration or otherwise; (c) the failure by the Company to perform any conversion of the Securities required under this Indenture and the continuance of such failure for a period of 60 days; (d) the failure by the Company duly to perform or observe any other term, covenant or agreement contained in any of the Securities or in this Indenture for a period of 60 days after the date on which written notice of such failure, requiring the Company to remedy the same and stating that such notice is a "Notice of Default" hereunder, shall first have been given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Securities at the time outstanding; provided, however, that, in the event the Company shall within the aforesaid period of 60 days commence legal action in a court of competent jurisdiction seeking a determination that the Company had not failed to duly perform or observe the term or terms, covenant or covenants or agreement or agreements specified in the aforesaid notice, such failure shall not be an Event of Default unless the same continues for a period of 10 days after the date of any final determination to the effect that the Company had failed to duly perform or observe one or more of such terms, covenants or agreements; (e) the entry, by a court having jurisdiction in the premises, of a decree or order for relief in respect of the Company or any Significant Subsidiary of the Company in an involuntary case or proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or appointing a receiver, -30- liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or such subsidiary or for any substantial part of the property of either of them or ordering the winding-up or liquidation of the affairs of its and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; (f) the commencement by the Company or a Significant Subsidiary of the Company of a voluntary case or proceeding under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or its consent to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of the Company or such subsidiary or any substantial part of its property, or its making of any general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due; (g) the Company shall default in the payment of the principal of, premium, if any, or interest when due on any Indebtedness of the Company or any of its Significant Subsidiaries that extends beyond any applicable grace period with respect thereto, or an acceleration so that the same shall be or become due and payable prior to the date on which the same would otherwise have become due and payable of any Indebtedness of the Company or any of its Significant Subsidiaries with an aggregate principal balance in excess of U.S. $10,000,000, and such failure to pay shall not have been remedied or cured by the Company or such Significant Subsidiary or waived by the holders of such Indebtedness; or (h) the entry, by a court having jurisdiction over the Company or any Significant Subsidiary of the Company of a final judgment, decree or order against any of them in an amount in excess of U.S. $2,000,000 at any one time and that is not satisfied, stayed, bonded or discharged within 60 days. Notwithstanding the 60-day period and notice requirement contained in Section 6.1(d) above, with respect to a default under Section 3(d) of the Securities the 60-day period referred to in Section 6.1(d) shall be deemed to have begun as of the date the Change of Control notice is required to be sent in the event that the Company has not complied with the provisions of Section 3 of the Securities and the Trustee or Holders of at least 25% in principal amount of the outstanding Securities thereafter give the Notice of Default referred to in Section 6.1(d) to the Company and, if applicable, the Trustee. SECTION 6.2. Acceleration of Maturity Date; Rescission and Annulment. If an Event of Default occurs and is continuing, then within five Business Days after the Company becomes aware of such Event of Default the Company will provide written notice to the Trustee describing such Event of Default and the date on which it occurred. The Trustee will give notice of such Event of Default to the Holders of the Securities within 90 days after its receipt of written notice thereof from the Company. If an Event of Default occurs and is continuing, unless the principal of all of the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of then outstanding Securities, by a notice in writing to the Company (and to the Trustee if given by Holders) (an "Acceleration Notice"), may declare all of the principal of the Securities, including in each case accrued interest thereon and Additional Amounts, if any, with respect thereto, to be due and payable immediately. If an Event of Default specified in Section 6.1(e) or (f) relating to the Company or any Significant Subsidiary occurs, all principal, accrued interest thereon and Additional Amounts, if any, with respect thereto will be immediately due and payable on all outstanding Securities without any declaration or other act on the part of the Trustee or the Holders. -31- At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article VI, the Holders of not less than a majority in aggregate principal amount of then outstanding Securities, by written notice to the Company and the Trustee, may rescind, on behalf of all Holders, any such declaration of acceleration if: (a) the Company has paid or deposited with the Trustee Cash sufficient to pay: (1) all overdue interest on, and Additional Amounts, if any, with respect to, all Securities; (2) the principal of (and premium, if any, applicable to) any Securities which would then be due otherwise than by such declaration of acceleration, and interest thereon at the rate borne by the Securities; (3) to the extent that payment of such interest is lawful, interest upon overdue interest and Additional Amounts, if any, at the rate borne by the Securities; and (4) all sums paid or advanced by the Trustee hereunder and the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (b) all Events of Default, other than the non-payment of the principal of, premium, if any, interest on and Additional Amounts, if any, with respect to Securities that have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.12 hereof, including, if applicable, any Event of Default relating to the covenants contained in Section 3(d) of the Registered Securities and the Bearer Securities. Notwithstanding the previous sentence of this Section 6.2, no waiver shall be effective against any Holder for any Event of Default or Default with respect to any covenant or provision which cannot be modified or amended without the consent of the Holder of each outstanding Security affected thereby, unless all such affected Holders agree, in writing, to waive such Event of Default or other event. No such waiver shall cure or waive any subsequent Default or Event of Default or impair any right consequent thereon. SECTION 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if an Event of Default in payment of principal, premium, interest or Additional Amounts specified in Section 6.1(a) or (b) occurs and is continuing, the Company shall, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal, premium (if any), interest, Additional Amounts and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any), Additional Amounts and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including compensation to, and expenses, disbursements and advances of, the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust in favor of the Holders, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and -32- may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 6.4. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, interest or Additional Amounts) shall be entitled and empowered, by intervention in such proceeding or otherwise to take any and all actions under the TIA, including: (1) to file and prove a claim for the whole amount of principal (and premium, if any), interest and Additional Amounts owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel) and of the Holders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment, or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.5. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust in favor of the Holders, and any recovery of judgment shall, after provision for the payment of compensation to, and expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. -33- SECTION 6.6. Priorities. Any money collected by the Trustee pursuant to this Article VI shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium (if any), interest or Additional Amounts, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the Trustee in payment of all amounts due pursuant to Section 7.7 hereof; SECOND: To the holders of Senior Indebtedness of the Company to the extent provided in Article XII hereof; THIRD: To the Holders in payment of the amounts then due and unpaid for principal of, premium (if any), interest on and Additional Amounts with respect to, the Securities in respect or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium (if any), interest and Additional Amounts, respectively; and FOURTH: To whosoever may be lawfully entitled thereto, the remainder, if any. The Trustee may fix a record date and payment date for any payment by it to Holders pursuant to this Section. SECTION 6.7. Limitation on Suits. No Holder of any Security shall have any right to order or direct the Trustee to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of then outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities to be incurred or reasonably probable to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of then outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 6.8. Unconditional Right of Holders to Receive Principal, Premium, Interest and Additional Amounts. Notwithstanding any other provision of this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of, and premium (if any), interest on and Additional Amounts with respect to, such Security when due (including, in the case of redemption, the Redemption Price on the applicable Redemption Date) and to institute suit for the enforcement of any such payment after such respective dates, and such rights shall not be impaired without the consent of such Holder. -34- SECTION 6.9. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 2.8 hereof, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.10. Delay or Omission Not Waiver. No delay or omission by the Trustee or by any Holder of any Security to exercise any right or remedy arising upon any Event of Default shall impair the exercise of any such right or remedy or constitute a waiver of any such Event of Default. Every right and remedy given by this Article VI or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 6.11. Control by Holders. The Holder or Holders of no less than a majority in aggregate principal amount of then outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, provided, that (l) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee shall not determine that the action so directed would be unjustly prejudicial to the Holders not taking part in such direction or would subject the Trustee to any liability, and (3) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 6.12. Waiver of Past Default. Subject to Section 6.8 hereof, the Holder or Holders of not less than a majority in aggregate principal amount of the outstanding Securities may, on behalf of all Holders, prior to the declaration of acceleration of the maturity of the Securities, waive any past default hereunder and its consequences, except a default (A) in the payment of the principal of, premium, if any, interest on, or Additional Amounts with respect to, any Security not yet cured as specified in Section 6.1(a) or (b), or (B) in respect of a covenant or provision hereof which, under Article IX hereof, cannot be modified or amended without the consent of the Holder of each outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair the exercise of any right arising therefrom. SECTION 6.13. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted to be taken by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 6.13 shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit -35- instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in aggregate principal amount of then outstanding Securities, or to any suit instituted by any Holder for enforcement of the payment of principal of, premium (if any), interest on or Additional Amounts with respect to, any Security on or after the Stated Maturity of such Security (including, in the case of redemption, on or after the Redemption Date). SECTION 6.14. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.15. Enforcement of Rights of Conversion by Holders. Anything in this Indenture to the contrary notwithstanding, the Holder of any Security, without reference to and without the consent of either the Trustee or the Holder of any other Security, in his own behalf and for his own benefit may enforce, and may institute and maintain any proceedings suitable to enforce, his right to convert his Security into Common Stock as provided in Article XIII. ARTICLE VII TRUSTEE The Trustee hereby accepts the trust imposed upon it by this Indenture and covenants and agrees to perform the same, as herein expressed. SECTION 7.1. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties as are specifically set forth in this Indenture and no others, and no covenants or obligations shall be implied in or read into this Indenture which are adverse to the Trustee. (2) In the absence of willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: -36- (1) This paragraph (c) does not limit the effect of paragraph (b) of this Section 7.1. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.11 hereof. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or to take or omit to take any action under this Indenture or at the request, order or direction of the Holders or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (d) and (f) of this Section 7.1. (f) The Trustee shall not be liable for interest on any assets received by it except as the Trustee may agree in writing with the Company. Assets held in trust by the Trustee need not be segregated from other assets except to the extent required by law. SECTION 7.2. Rights of Trustee. Subject to Section 7.1: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may consult with counsel and may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Sections 14.4 and 14.5 hereof, if applicable. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or the written advice of counsel. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. (e) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Holders, pursuant to the provisions of this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. -37- (g) Unless otherwise specifically provided for in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (h) The Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article IV hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Section 6.1(a) or (b), or (ii) any Default or Event of Default of which a Trust Officer of the Trustee shall have received written notification from the Company or any Holder or obtained actual knowledge. SECTION 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, any of its Subsidiaries, or their respective Affiliates with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11 hereof. SECTION 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities and it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities, other than the Trustee's certificate of authentication, or the use or application of any funds received by a Paying Agent other than the Trustee. SECTION 7.5. Notice of Default. If a Default or an Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall give to Securityholders in accordance with Section 14.2 notice of the uncured Default or Event of Default within 90 days after such Default or Event of Default occurs. Except in the case of a Default or an Event of Default in payment of principal (or premium, if any) of, interest on or Additional Amounts with respect to, any Security (including the payment of the Redemption Price on the Redemption Date), the Trustee may withhold the notice if and so long as a Trust Officer in good faith determines that withholding the notice is in the interest of the Securityholders. SECTION 7.6. Reports by Trustee to Holders. Within 60 days after each June 30 beginning with the June 30 following the date of this Indenture, the Trustee shall, if required by Section 313(a) of the TIA, transmit to the Holders a brief report dated as of such June 30 that complies with Section 313(a) of the TIA. The Trustee also shall comply with Section 313(b) and 313(c) of the TIA. The Company shall promptly notify the Trustee in writing if the Securities become listed on any stock exchange or automatic quotation system. A copy of each report at the time of its mailing to Securityholders shall be mailed to the Company and filed with the Commission and each stock exchange, if any, on which the Securities are listed. Reports pursuant to this Section 7.6 shall be transmitted by mail: (1) to all holders of Registered Securities as the names and addresses of such Holders appear in the Security Register; and (2) to other Holders of Securities as have, within the two years preceding such transmission, filed their names and addresses with the Trustee for such purpose. -38- SECTION 7.7. Compensation and Indemnity. The Company agrees to pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents, accountants, experts and counsel. The Company agrees to indemnify the Trustee, the Paying Agent, the Conversion Agent and the Registrar (each an "Indemnified Party") and each of their respective officers, directors, attorneys-in-fact and agents for, and hold the Indemnified Party harmless against, any claim, demand, expense (including but not limited to reasonable compensation, disbursements and expenses of any Indemnified Party's agents and counsel), loss or liability incurred by any Indemnified Party without negligence or willful misconduct on its part, arising out of or in connection with the administration of this trust and its rights or duties hereunder including the reasonable costs and expenses incurred by any Indemnified Party defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. Each Indemnified Party shall notify the Company promptly of any claim asserted against it for which it may seek indemnity. The Company shall defend the claim and the Indemnified Party shall provide reasonable cooperation at the Company's expense in the defense. The Indemnified Party may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; provided, that the Company will not be required to pay such fees and expenses if it assumes the Indemnified Party's defense and in the Indemnified Party's sole reasonable determination there is no conflict of interest between the Company and the Indemnified Party in connection with such defense. The Company need not pay for any settlement made without its written consent. The Company need not reimburse any expense or indemnify against any loss or liability to the extent incurred by the Indemnified Party through its negligence, bad faith or willful misconduct. To secure the Company's payment obligations in this Section 7.7, the Trustee shall have a lien prior to the Securities on all assets held or collected by the Trustee, in its capacity as Trustee, except assets held in trust prior to any Event of Default to pay principal and premium, if any, of or interest on, or Additional Amounts with respect to, particular Securities. Without limiting any of the rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(e) or (f) hereof occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. The Company's obligations under this Section 7.7 and any lien arising hereunder shall survive the resignation or removal of the Trustee, the discharge of the Company's obligations pursuant to Article VIII of this Indenture and any rejection or termination of this Indenture under any Bankruptcy Law. SECTION 7.8. Replacement of Trustee. The Trustee may resign by so notifying the Company in writing. The Holder or Holders of a majority in principal amount of then outstanding Securities may remove the Trustee by so notifying the Company and the Trustee in writing and may appoint a successor trustee with the Company's consent. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged bankrupt or insolvent; (c) a receiver, custodian, or other public officer takes charge of the Trustee or its property; or -39- (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holder or Holders of a majority in principal amount of then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that and provided that all sums owing to the retiring Trustee provided for in Section 7.7 have been paid, the retiring Trustee shall transfer all property held by it as trustee to the successor Trustee, subject to the lien provided in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture, a successor Trustee shall mail notice of its succession to each Holder. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holder or Holders of at least 10% in principal amount of then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder who has been a bona fide holder of a Security for at least 6 months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.9. Successor Trustee by Merger, Etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. SECTION 7.10. Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of Section 310(a)(1), (2) and (5) of the TIA. The Trustee shall have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with Section 310(b) of the TIA, subject to the penultimate paragraph thereof. SECTION 7.11. Preferential Collection of Claims Against Company. The Trustee shall comply with Section 311(a) of the TIA, excluding any creditor relationship listed in Section 311(b) of the TIA. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the TIA to the extent indicated. -40- ARTICLE VIII SATISFACTION AND DISCHARGE SECTION 8.1. Satisfaction and Discharge of Indenture. If (a) the Company shall deliver to the Trustee for cancellation all Securities theretofore authenticated other than (1) any Securities which shall have been lost, destroyed or wrongfully taken and which shall have been replaced or paid as provided in Section 2.8 or (2) any Securities for the payment of the principal of which money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 8.2, and not theretofore canceled, or (b) all the Securities not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds (other than funds repaid by the Trustee to the Company in accordance with Section 8.2) sufficient to pay at maturity or upon redemption all of such Securities (other than any Securities which shall have been lost, destroyed or wrongfully taken and which shall have been replaced or paid as provided in Section 2.8) not theretofore canceled or delivered to the Trustee for cancellation, including principal of and premium, if any, and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to rights of registration of transfer and exchange of Securities and rights to receive payments thereon and the other rights of the holders of Securities, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee, all of which shall survive, and except that the Company's obligations under this Article, Sections 6.15 and 7.7 and Article XIII shall survive until the Securities are no longer outstanding), and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel complying with Sections 14.4 and 14.5 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses theretofore and thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Securities. SECTION 8.2. Repayment to the Company. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, for the payment of the principal of, premium, if any, interest on or Additional Amounts with respect to any Security and remaining unclaimed for two years after such principal, premium, if any, interest or Additional Amounts has become due and payable shall be paid to the Company; and the Holder of such Security shall thereafter look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money shall thereupon cease. ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.1. Supplemental Indentures Without Consent of Holders. Without the consent of any Holder, the Company, when authorized by Board Resolutions, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to cure any ambiguity, defect, or inconsistency, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided, that the Company has delivered to the Trustee an Opinion of Counsel stating that such action pursuant to this clause (1) does not adversely affect the interests of any Holder; (2) to create additional covenants of the Company -41- for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company or to make any other change that does not adversely affect the rights of any Holder, provided, that the Company has delivered to the Trustee an Opinion of Counsel stating that such change pursuant to this clause (2) does not adversely affect the rights of any Holder; (3) to provide for collateral for or guarantors of the Securities; (4) to evidence the succession of another Person to the Company and the assumption by any such successor of the obligations of the Company herein and in the Securities in accordance with Article V; (5) to comply with the TIA; or (6) to comply with Section 13.6. SECTION 9.2. Amendments, Supplemental Indentures and Waivers with Consent of Holders. Subject to Section 6.8 and the last sentence of this paragraph, with the consent (evidenced as provided in Section 10.2 hereof) of the Holders of not less than a majority in aggregate principal amount of then outstanding Securities, by written act of said Holders delivered to the Company and the Trustee, the Company, when authorized by Board Resolutions, and the Trustee may amend or supplement this Indenture or the Securities or enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or the securities or of modifying in any manner the rights of the Holders under this Indenture or the Securities. Subject to Section 6.8 and the last sentence of this paragraph, the Holder or Holders of not less than a majority in aggregate principal amount of then outstanding Securities may, in writing, waive compliance by the Company with any provision of this Indenture or the Securities. Notwithstanding any of the above, however, no such amendment, supplemental indenture or waiver shall, without the consent of the Holder of each outstanding Security affected thereby: (1) change the Stated Maturity of any Security or reduce the principal amount thereof or the rate (or extend the time for payment) of interest thereon or any premium payable upon the redemption thereof or Additional Amounts with respect thereto, or change the place of payment where, or the coin or currency in which, any Security or any premium or the interest thereon or Additional Amounts with respect thereto is payable, or impair the right to institute suit for the enforcement of any such payment or the conversion of any Security on or after the due date thereof (including, in the case of redemption, on or after the Redemption Date), or reduce the Redemption Price, or alter redemption or Change in Control provisions in a manner adverse to the Holders; (2) reduce the percentage in principal amount of the outstanding Securities, the consent of whose Holders is required for any such amendment, supplemental indenture or waiver provided for in the Indenture; (3) modify any of the provisions of Article XII hereof in a manner adverse to the Holders; (4) adversely affect the right of such Holder to convert Securities; or (5) modify any of the waiver provisions, except to increase any required percentage or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of the Holder of each outstanding Security affected thereby. It shall not be necessary for the consent of the Holders under this Section 9.2 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.2 becomes effective, the Company shall give to the Holders in accordance with Section 14.2 a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. After an amendment, supplement or waiver under this Section 9.2 becomes effective, it shall bind each Holder. In connection with any amendment, supplement or waiver under this Article IX, the Company may, but shall not be obligated to, offer to any Holder who consents to such amendment, supplement or waiver, or (at the option of the Company) to all Holders, consideration for consent to such amendment, supplement or waiver. -42- SECTION 9.3. Compliance with TIA. Every amendment, waiver or supplement of this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.4. Revocation and Effect of Consents. Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of his Security by written notice to the Company or the Person designated by the Company as the Person to whom consents should be sent if such revocation is received by the Company or such Person before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver, which record date shall be the date so fixed by the Company notwithstanding the provisions of the TIA. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date, and only those Persons (or their duly designated proxies), shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Securityholder; provided, that any such waiver shall not impair or affect the right of any Holder to receive payment of principal and premium of and interest on and Additional Amounts with respect to a Security, on or after the respective dates set for such amounts to become due and payable expressed in such Security, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. SECTION 9.5. Notation on or Exchange of Securities. If an amendment, supplement or waiver changes the terms of a Security, the Company may require the Holder of the Security to deliver it to the Trustee or require the Holder to put an appropriate notation on the Security. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Any failure or error in making the appropriate notation or to issue a new Security shall not affect the validity of such amendment, supplement or waiver. SECTION 9.6. Trustee to Sign Amendments, Etc. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article IX is authorized or permitted by this Indenture. ARTICLE X MEETINGS -43- SECTION 10.1. Meetings and Votes of Holders. (a) A meeting of Holders of Securities may be called at any time and from time to time pursuant to this Section 10.1 for any of the following purposes: (i) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any Default hereunder and its consequences, or to take any other action authorized to be taken by Holders of Securities pursuant to Article IX hereof; or (ii) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities under any other provision of this Indenture, the Registered Securities and Bearer Securities or under applicable law. (b) Meetings of Holders of Securities may be held at such place or places in The City of New York or London as the Trustee or, in case of its failure to act, the Company or the Holders calling the meeting shall from time to time determine. (c) The Trustee may at any time call a meeting of Holders of Securities to be held at such time and at such place in any of the locations designated in Section 10.1(b) hereof as the Trustee shall determine. Notice of every meeting of Holders shall be made as specified in Section 14.2 hereof, except that such notice shall set forth the time and the place of such meeting, in general terms the action proposed to be taken at such meeting and a general description of regulations applicable to such meeting and shall be published at least three times in the publications specified in such Section 14.2, the first publication to be not less than 21 nor more than 180 days prior to the date fixed for the meeting. (d) In case at any time the Company or the Holders of at least 25% in aggregate principal amount of the Securities shall have requested the Trustee to call a meeting of the Holders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have given the first notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities in the amount above specified may determine the time and the place in either of the locations designated in Section 10.1(b) hereof for such meeting and may call such meeting to take any action authorized in Section 10.1(a) hereof by giving notice thereof as provided in Section 10.1(c) hereof. (e) To be entitled to vote at any meeting of Holders of Securities, a person shall be (i) a Holder of one or more Securities, or (ii) a person appointed by an instrument in writing as proxy for a Holder or Holders of Securities by such Holder or Holders, which proxy need not be a Holder of Securities. The only persons who shall be entitled to be present or to speak at any meeting of Holders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. (f) The persons entitled to vote a majority in principal amount of the outstanding Securities shall constitute a quorum for the transaction of all business specified in Section 10.1(a) hereof. No business shall be transacted in the absence of a quorum unless a quorum is represented when the meeting is called to order. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Securities (as provided in Section 10.1(d) hereof), be dissolved. In any other case the meeting shall be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting (except pursuant to Section 10.1(j)) shall be given as provided in Section 10.1(c) hereof except that such notice need be published only once but must be given not less than five days prior to the date on which the meeting is scheduled to be reconvened. Subject to the foregoing, at the reconvening of any meeting adjourned for a lack of a quorum the persons entitled to vote 25% in principal amount of the Securities shall constitute a quorum for the taking of any action set forth in the notice of the original meeting. Notice of the reconvening of an adjourned meeting shall state expressly the percentage of the aggregate principal amount of the Securities that shall constitute a quorum. At a -44- meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid, any resolution and all matters (except as limited by Section 6.8 and the last sentence of the first paragraph of Section 9.2 hereof) shall be effectively passed and decided if passed or decided by the persons entitled to vote a majority in principal amount of the Securities represented and voting at such meeting, provided that such amount shall be not less than 25% in principal amount of the Securities outstanding. Any Holder of a Security who has executed an instrument in writing appointing a person as his proxy shall be deemed to be present for the purposes of determining a quorum and be deemed to have voted; provided, however, that such Holder shall be considered as present or voting only with respect to the matters covered by such instrument in writing. Any resolution passed or decision taken at any meeting of the Holders of Securities duly held in accordance with this Section 10.1 shall be binding on all the Holders of Securities whether or not present or represented at the meeting. (g) Notwithstanding any other provision of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities in regard to proof of the holding of Securities and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Bearer Securities shall be proved by the production of the Bearer Securities or by a certificate executed, as depositary, by, and the appointment of any proxy shall be proved by having the signature of the person executing the proxy witnessed or guaranteed by, in each case, any trust company, bank or banker satisfactory to the Trustee. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified herein or other proof. The holding of Registered Securities shall be proved by the registry books maintained in accordance with Section 2.3 hereof or by a certificate or certificates of the Trustee in its capacity as the Company's agent for the maintenance of such books. (h) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by the Holders of Securities as provided in Section 10.1(d) hereof, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Securities represented at the meeting and entitled to vote. (i) At any meeting each Holder or proxy shall be entitled to one vote for each U.S.$1,000 principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Securities challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote, except as a Holder or proxy. (j) Any meeting of Holders of Securities duly called pursuant to Section 10.1(c) or 10.1(d) hereof at which a quorum is present may be adjourned from time to time by vote of the Holders (or proxies for the Holders) of a majority in principal amount of the Securities represented at the meeting and entitled to vote; and the meeting may be held as so adjourned without further notice. (k) The vote upon any resolution submitted to any meeting of Holders of Securities shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities shall be prepared by the secretary of the meeting -45- and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was published as provided in Section 10.1(c) or 10.1(d) hereof and, if applicable, Section 10.1(f) hereof. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting, and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the copy delivered to the Trustee to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 10.2. Action by Holders. Subject to Section 14.6, whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (b) by the record of Holders voting in favor thereof at any meeting of such Holders duly called and held in accordance with the provisions of Section 10.1 hereof, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Holders. ARTICLE XI AGENTS SECTION 11.1. Offices, Resignation, Successors, Etc. of Agents; Paying, Conversion and Transfer Agencies. (a) Each of the Agents may at any time resign as such Agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, however, that such date shall never be less than 90 days after receipt of such notice by the Company unless the Company agrees to accept less notice. Each of the Agents hereunder may be removed at any time by the filing with it of any instrument in writing signed on behalf of the Company and specifying such removal and the date when it is intended to become effective. Such resignation or removal shall take effect upon the date of the appointment by the Company, as hereinafter provided, of a successor Conversion Agent, Transfer Agent or Paying Agent, as the case may be, and the acceptance of such appointment by such successor Agent. Upon its resignation or removal, each of the Agents shall be entitled to the payment by the Company of its compensation for the services rendered hereunder and to the reimbursement of all reasonable out-of-pocket expenses incurred in connection with the services rendered hereunder by such Agent. (b) In case at any time any of the Agents shall resign, or shall be removed, or shall be incapable of acting, or shall file a voluntary petition as a debtor under Chapter 7 or 11 of Title 11 of the United States Code or have an order for relief entered against it as a debtor under Chapter 7 or 11 of Title 11 of the United States Code or make an assignment for the benefit of its creditors or consent to the appointment of a receiver of all or any substantial part of its property, or shall admit in writing its inability to pay or meet its debts as they mature, or if an order of any court shall be entered approving any petition filed by or against any of the Agents under any legislation similar to the provisions of Title 11 of the United States Code, or if a receiver of it or of all or any substantial part of its property shall be appointed, or if any public officer shall take charge or control of it or of its property or affairs, for the purpose of rehabilitation, conservation or liquidation, a successor Agent, qualified as aforesaid, shall be appointed by the Company by an instrument in writing. Upon the appointment as aforesaid of a successor Agent and acceptance by it of such appointment, the Agent so superseded shall cease to be such Agent hereunder. If no successor Agent shall have been so appointed by the Company and shall have accepted appointment as hereinafter provided, -46- any Holder of a Security, on behalf of itself and all others similarly situated, or any Agent may petition any court of competent jurisdiction for the appointment of a successor Agent and shall promptly notify the Company of such action. (c) Any successor Conversion Agent, Transfer Agent or Paying Agent appointed hereunder shall execute, acknowledge and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder, and thereupon such successor Agent, without any further act, deed or conveyance, shall become vested with all the authority, rights, powers, trusts, immunities, duties and obligations of such predecessor with like effect as if originally named as such Agent hereunder, and such predecessor, upon payment of its charges and disbursements then unpaid, shall thereupon become obligated to transfer, deliver and pay over, and such successor Agent shall be entitled to receive, all monies, securities or other property on deposit with or held by such predecessor, as such Agent hereunder and any such predecessor removed pursuant to the second sentence of Section 11.1(a) shall be entitled to repayment of all costs associated with the transfer and delivery thereof. (d) Any corporation or bank into which any of the Agents hereunder may be merged or converted, or any corporation or bank with which such Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which such Agent shall be a party, or any corporation or bank to which such Agent shall sell or otherwise transfer all or substantially all the corporate trust assets and business of such Agent, shall be the successor to such Agent under this Indenture without the execution or filing of any document or any further act on the part of any of the parties hereto. ARTICLE XII SUBORDINATION SECTION 12.1. Securities Subordinated to Senior Indebtedness. The Company and each Holder, by its acceptance of Securities, agree that (a) the payment of the principal of and interest on, or Additional Amounts with respect to, the Securities and (b) any other payment in respect of the Securities, including on account of the acquisition or redemption of the Securities by the Company (including, without limitation, pursuant to Section 3(d) of the Registered Securities and the Bearer Securities) is subordinated, to the extent and in the manner provided in this Article XII, to the prior payment in full of all Senior Indebtedness of the Company, and all other Obligations in respect thereof, whether outstanding at the date of this Indenture or thereafter created, incurred, assumed or guaranteed, and that these subordination provisions are for the benefit of the holders of Senior Indebtedness. This Article XII shall constitute a continuing offer to all Persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and any one or more of them may enforce such provisions. To the extent any provision of this Article XII conflicts or is inconsistent with any other provision of this Indenture, the provisions of this Article XII shall govern and supersede such inconsistent or conflicting provision. SECTION 12.2. No Payment on Securities in Certain Circumstances. (a) No payment may be made by the Company on account of the principal of, premium, if any, interest on, or Additional Amounts with respect to, the Securities, or to acquire any of the Securities (including redemptions of Securities at the option of the Holder) for cash or property (other than Junior Securities), or on account of the redemption provisions of the Securities, (i) upon the maturity of any Senior Indebtedness of the Company by lapse of time, acceleration (unless waived) or otherwise, unless and -47- until all principal of, premium, if any, and interest on such Senior Indebtedness and all other Obligations in respect thereof are first paid in full (or such payment is duly provided for), or (ii) in the event of default in the payment of any principal of, premium, if any, or interest on, or any other Obligation in respect of, any Senior Indebtedness of the Company when it becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Payment Default"), unless and until such Payment Default has been cured or waived by the holders of such Senior Indebtedness or otherwise has ceased to exist. (b) Upon (i) the happening of an event of default (other than a Payment Default) that permits the holders of any Senior Indebtedness or their representative immediately to accelerate its maturity and (ii) written notice of such event of default given to the Company and the Trustee by the requisite holders of such Senior Indebtedness or their representative (a "Payment Notice"), then, unless and until such event of default has been cured or waived by the requisite holders of such Senior Indebtedness or otherwise has ceased to exist, no payment (by set-off or otherwise) may be made by or on behalf of the Company on account of the principal of, premium, if any, interest on, or Additional Amounts with respect to, the Securities, or to acquire or repurchase any of the Securities for cash or property, or on account of the redemption provisions of the Securities, in any such case other than payments made with Junior Securities of the Company. Notwithstanding the foregoing, unless (I) the Senior Indebtedness in respect of which such event of default exists has been declared due and payable in its entirety within the Payment Blockage Period, and (II) such declaration has not been rescinded or waived by the requisite holders of such Senior Indebtedness, at the end of the Payment Blockage Period, the Company shall be required to pay all sums not paid to the Holders of the Securities during the Payment Blockage Period due to the foregoing prohibitions and to resume, subject to this Article XII, all other payments as and when due on the Securities. Any number of Payment Notices may be given; provided, however, that (A) not more than one Payment Notice shall be given within a period of any 360 consecutive days, and (B) no default that existed upon the date of such Payment Notice or the commencement of such Payment Blockage Period (whether or not such event of default is on the same issue of Senior Indebtedness) shall be made the basis for the commencement of any other Payment Blockage Period. (c) In furtherance of the provisions of Section 12.1, in the event that, notwithstanding the foregoing provisions of this Section 12.2, any payment or distribution of assets of the Company (other than Junior Securities) shall be received by the Trustee or the Holders or any Paying Agent at a time when such payment or distribution is prohibited by the provisions of this Section 12.2, then such payment or distribution shall be received and held in trust by the Trustee or such Holders or Paying Agent (or, if the Company or any Affiliate of the Company is acting as its own Paying Agent, money for any such payment or distribution shall be segregated or held in trust) for the benefit of the holders of Senior Indebtedness of the Company, and shall be paid or delivered by the Trustee or such Holders or such Paying Agent, as the case may be, to the holders of Senior Indebtedness of the Company remaining unpaid or unprovided for or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness of the Company may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness of the Company held or represented by each, for application to the payment of all Senior Indebtedness of the Company in full after giving effect to any concurrent payment and distribution to the holders of such Senior Indebtedness, but only to the extent that as to any holder of such Senior Indebtedness, as promptly as practical following receipt by such holder of written notice from the Trustee to the holders of such Senior Indebtedness that such prohibited payment has been received by the Trustee, Holder(s) or Paying Agent (or has been segregated as provided above), such holder (or a representative therefor) notifies the Trustee of the amounts then due and owing on such Senior Indebtedness, if any, held by such holder and only the amounts specified in such notices to the Trustee shall be paid to the holders of such Senior Indebtedness. -48- SECTION 12.3. Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization. Upon any distribution of assets of the Company upon any dissolution, winding up, total or partial liquidation or reorganization of the Company, whether voluntary or involuntary, in bankruptcy, insolvency, receivership or a similar proceeding or upon assignment for the benefit of creditors or any marshalling of assets or liabilities: (a) the holders of all Senior Indebtedness of the Company shall first be entitled to receive payments in full (or have such payment duly provided for) before the Holders are entitled to receive any payment on account of the principal of, premium, if any, interest on, and Additional Amounts with respect to, the Securities (other than Junior Securities); (b) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than Junior Securities) to which the Holders or the Trustee on behalf of the Holders would be entitled (by set-off or otherwise), except for the provisions of this Article XII, shall be paid by the liquidating trustee or agent or other Person making such a payment or distribution directly to the holders of Senior Indebtedness of the Company or their representative to the extent necessary to make payment in full of all such Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than Junior Securities), shall be received by the Trustee or the Holders or any Paying Agent (or, if the Company or any Affiliate of the Company is acting as its own Paying Agent, money for any such payment or distribution shall be segregated or held in trust) on account of the principal of, premium, if any, interest on, or Additional Amounts with respect to, the Securities before all Senior Indebtedness of the Company is paid in full, such payment or distribution shall be received and held in trust by the Trustee or such Holder or Paying Agent (or, if the Company or any Affiliate of the Company is acting as its own Paying Agent, money for any such payment or distribution shall be segregated or held in trust) for the benefit of the holders of such Senior Indebtedness, or their respective representative, or the trustee or trustees under any indenture pursuant to which any instruments evidencing any of such Senior Indebtedness of the Company may have been issued, ratably according to the respective amounts of such Senior Indebtedness held or represented by each, to the extent necessary to make payment as provided herein of all such Senior Indebtedness remaining unpaid after giving effect to all concurrent payments and distributions and all provisions therefor to or for the holders of such Senior Indebtedness, but only to the extent that as to any holder of such Senior Indebtedness, as promptly as practical following receipt by such holder of written notice from the Trustee to the holders of such Senior Indebtedness that such prohibited payment has been received by the Trustee, Holder(s) or Paying Agent (or has been segregated as provided above), such holder (or a representative therefor) notifies the Trustee of the amounts then due and owing on such Senior Indebtedness, if any, held by such holder and only the amounts specified in such notices to the Trustee shall be paid to the holders of such Senior Indebtedness. SECTION 12.4. Securityholders to Be Subrogated to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness of the Company as provided herein, the Holders of Securities shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness until all amounts owing on the Securities shall be paid in full, and for the purpose of such subrogation no such payments or distributions to the holders of such Senior Indebtedness by the Company, or by or on behalf of the Holders by virtue of this Article XII, which otherwise would have been made to the Holders shall, as between the Company and the Holders, be deemed to be payment by the Company on account of such -49- Senior Indebtedness, it being understood that the provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders, on the one hand, and the holders of such Senior Indebtedness, on the other hand. If any payment or distribution to which the Holders would otherwise have been entitled but for the provisions of this Article XII shall have been applied, pursuant to the provisions of this Article XII, to the payment of amounts payable under Senior Indebtedness of the Company, then the Holders shall be entitled to receive from the holders of such Senior Indebtedness any payments or distributions received by such holders of Senior Indebtedness in excess of the amount sufficient to pay all amounts payable under or in respect of such Senior Indebtedness in full. SECTION 12.5. Obligations of the Company Unconditional. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall impair as between the Company and the Holders, the obligation of each such Person, which is absolute and unconditional, to pay to the Holders the principal of, premium, if any, interest on, and Additional Amounts with respect to, the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XII, of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Notwithstanding anything to the contrary in this Article XII or elsewhere in this Indenture or in the Securities, upon any distribution of assets of the Company referred to in this Article XII, the Trustee, subject to the provisions of Sections 7.1 and 7.2, and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII so long as such court has been apprised of the provisions of, or the order, decree or certificate makes reference to, the provisions of this Article XII. The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder) to establish that such a notice has been given by a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder). In the event that the Trustee determines, in good faith, that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XII, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, as to the extent to which such person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such person under this Article XII, and if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. Nothing in this Article XII shall apply to the claims of, or payments to, the Trustee under or pursuant to Section 7.7. SECTION 12.6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Trustee or any Paying Agent (other than the Company acting as its own Paying Agent) shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee or such Paying Agent unless and until a Trust Officer of the Trustee or such Paying Agent (other than the Company acting as its own Paying Agent), as the case may be, shall have received, no later than one Business Day prior to such payment, written notice thereof from the -50- Company or from one or more holders of Senior Indebtedness or from any representative therefor and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Sections 7.1 and 7.2, and such Paying Agent shall be entitled in all respects conclusively to assume that no such fact exists. SECTION 12.7. Application by Trustee of Assets Deposited with It. Any deposit of assets with the Trustee or the Agent (whether or not in trust) for the payment of principal of or interest on, or Additional Amounts with respect to, any Securities shall be subject to the provisions of Sections 12.1, 12.2, 12.3 and 12.4; provided that, if prior to one Business Day preceding the date on which by the terms of this Indenture any such assets may become distributable for any purpose (including, without limitation, the payment of either principal of or interest on any Security) the Trustee or a Paying Agent shall not have received with respect to such assets the written notice provided for in Section 12.6, then the Trustee or such Paying Agent shall have full power and authority to receive such assets and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. SECTION 12.8. Subordination Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce subordination provisions contained in this Article XII shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. The holders of Senior Indebtedness may extend, renew, modify or amend the terms of the Senior Indebtedness or any security therefor and release, sell or exchange such security and otherwise deal freely with the Company, all without affecting the liabilities and obligations of the parties to this Indenture or the Holders. SECTION 12.9. Securityholders Authorize Trustee to Effectuate Subordination of Securities. Each Holder of the Securities by his acceptance thereof authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provisions contained in this Article XII and to protect the rights of the Holders pursuant to this Indenture, and appoints the Trustee its attorney-in-fact for such purpose, including, in the event of any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors of the Company), the making of a timely filing of a claim for the unpaid balance of its Securities in the form required in said proceedings and cause said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of the Senior Indebtedness or their representative are or is hereby authorized to have the right to file and are or is hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Nothing herein contained shall be deemed to authorize the Trustee or the holders of Senior Indebtedness or their representative to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee or the holders of Senior Indebtedness or their representative to vote in respect of the claim of any Securityholder in any such proceeding. -51- SECTION 12.10. Right of Trustee to Hold Senior Indebtedness. The Trustee shall be entitled to all of the rights set forth in this Article XII in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. SECTION 12.11. Article XII Not to Prevent Events of Default. The failure to make a payment on account of principal of, premium, if any, interest on, or Additional Amounts with respect to, the Securities by reason of any provision of this Article XII shall not be construed as preventing the occurrence of a Default or an Event of Default under Section 6.1 or in any way prevent the Holders or the Trustee from exercising any right or remedy hereunder or at law or in equity other than the right to receive payment on the Securities in accordance with the terms of this Article XII. SECTION 12.12. No Fiduciary Duty of Trustee to Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders (other than for its willful misconduct or negligence) if it shall in good faith mistakenly pay over or distribute to the Holders of Securities or the Company or any other Person, cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article XII or otherwise. Nothing in this Section 12.12 shall affect the obligation of any other such Person to hold such payment for the benefit of, and to pay such payment over to, the holders of Senior Indebtedness or their representative in accordance with the provisions hereof. ARTICLE XIII CONVERSION OF SECURITIES SECTION 13.1. Conversion Privilege. Subject to and upon compliance with the provisions of this Article XIII, at the option of the Holder thereof, any outstanding Registered Security or Bearer Security or, in the case of any Registered Security or Bearer Security of a denomination other than $1,000, any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000, may be converted on or after the Exchange Date and prior to the Stated Maturity thereof, at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares of Common Stock ("Conversion Shares") as set forth in the Registered Securities and Bearer Securities. The right to convert Securities called for redemption or delivered for repurchase will terminate at the close of business on the fifth day next preceding the Redemption Date (or if such date is not a Business Day, on the next succeeding Business Day) and will be lost if not exercised prior to that time. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $34.35 per share of Common Stock. The Conversion Price shall be adjusted in certain instances as provided in paragraphs (c)(i), (ii), (iii), (iv), (v) and (vi) of Section 4 of the Registered Securities and Bearer Securities. SECTION 13.2. Exercise of Conversion Privilege. (a) In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, together with all unmatured Coupons (except that any Bearer Security called for redemption on May 16, 1999 need not be delivered with the Coupon that matures on that date), if any, and any matured Coupons in default appertaining thereto, if any, at the office of the -52- Conversion Agent or any office or agency of the Company maintained for that purpose pursuant to Section 4.2 hereof, accompanied by written notice, in substantially the form set forth in the Registered Securities and the Bearer Securities, to the Company, at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount of a Registered Security or Bearer Security of a denomination other than $1,000 is to be converted, the portion thereof to be converted. Upon presentment for conversion of any Securities pursuant to this Section 13.2, the Conversion Agent shall immediately on that day notify the Company, the Trustee and the transfer agent with respect to the Common Stock (initially, First Interstate Bank of California) of such presentment. Such notice to the Company shall identify the aggregate principal amount of Securities to be converted and the number of shares of Common Stock to be issued in connection with such conversion. If less than the full principal amount of the Security or Securities presented for conversion is requested to be converted or may be converted, such notice to the Company shall also specify the amount, if any, of cash to be distributed to the presenter thereof or the aggregate principal amount of the Security or Securities to remain outstanding upon conversion. No payment or adjustment shall be made upon any conversion on account of any dividends on the Common Stock issued upon conversion. If a Registered Security is converted after the close of business on an Interest Record Date and before the opening of business on the next succeeding Interest Payment Date, the interest due on such Interest Payment Date shall be paid on such Interest Payment Date to the person in whose name that Security is registered at the close of business on that Interest Record Date. Except as otherwise provided in this paragraph, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends or distributions on the Conversion Shares issued upon conversion. Registered Securities surrendered for conversion during the period after the close of business on any Interest Record Date next preceding any Interest Payment Date to the close of business on such Interest Payment Date shall (except in the case of Registered Securities or portions thereof which are called for redemption on May 16, 1999) be accompanied by payment of an amount equal to the interest payable on such Interest Payment Date on the principal amount being surrendered for conversion. Upon receipt of such notice, the Company shall take all necessary actions in connection with the issuance, execution, authentication and delivery to the Conversion Agent of the requisite number of shares of Common Stock together with any amounts or replacement Securities representing any unconverted portion of the Security or Securities presented for conversion, and to cause the transfer agent with respect to the Common Stock to register the issuance of the same in the name of the presenter of such Security or Securities (or its nominee), whereupon the Conversion Agent shall deliver to the presenter of such Security or Securities such shares of Common Stock, amounts, if any, and replacement Securities, if any, and concurrently shall cancel the Security or Securities presented. (b) Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease (except for the right to receive the related Conversion Shares), and the person or persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall cause to be issued or delivered at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable or deliverable upon conversion, together with payment, in lieu of any fraction of a share, as provided below. (c) In the case of any Registered Security or Bearer Security of a denomination other than $ 1,000 that is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Conversion Agent, and the Conversion Agent shall deliver to the Holder thereof, in each case at the expense of the Company, a new Security or Securities of any authorized kind or denomination as requested by such Holder, in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. -53- SECTION 13.3. Fractional Interests. No fractional shares of Common Stock shall be issued or delivered upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable or deliverable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or, in the case of Registered Securities or Bearer Securities of a denomination other than $1,000, specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable or deliverable upon conversion of any Security or Securities (or, in the case of Registered Securities or Bearer Securities of a denomination other than $1,000, specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price per share of Common Stock at the close of business on the day preceding the day of conversion. SECTION 13.4. Adjustment of Conversion Price. Whenever the Conversion Price is adjusted as provided in the Registered Securities and Bearer Securities: (a) the Company shall compute the adjusted Conversion Price in accordance with the terms of the Registered Securities and Bearer Securities and shall prepare a certificate signed by the President, any Vice President or the Treasurer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Trustee and the Conversion Agent and at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 4.2 hereof; and (b) a notice stating that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall forthwith be required, and, as soon as practicable after it is required, the Company shall promptly cause a notice setting forth the adjusted Conversion Price to be given to the Holders of the Securities as provided in Section 14.2 hereof. SECTION 13.5. Notice of Certain Events. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its retained earnings (excluding dividends payable in stock for which adjustment is made pursuant to the terms of the Registered Securities and Bearer Securities); (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; -54- (d) of the involuntary dissolution, liquidation or winding up of the Company; or (e) the Company proposes to take any other action which would require an adjustment of the Conversion Price pursuant to the Registered Securities and Bearer Securities; then the Company shall cause to be filed with the Conversion Agent and at each office or agency maintained for the purpose of conversion of Securities a notice setting forth the adjusted Conversion Price and shall cause notice to be given as provided in Section 14.2 hereof except that notice need be given to the Holders once at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record date hereinafter specified, stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants is to be determined, or (y) the date on which a reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for the securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. The failure to give notice required by this Section 13.5 or any defect therein shall not affect the legality or validity of any dividend, distribution, rights, warrants, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or the vote on any such action. SECTION 13.6. Continuation of Conversion Privilege in Case of Reclassification, Change, Merger, Consolidation or Sale of Assets. (a) In case of any consolidation with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), or in case of any sale or transfer of all or substantially all of the assets of the Company, the corporation formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture to the Indenture providing that the Holder of each Registered Security and Bearer Security shall have the right during the period such Security shall be convertible as specified in the Registered Securities and Bearer Securities to convert such Security only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company into which such Security might have been converted immediately prior to such consolidation, merger, sale or transfer assuming such holder of Common Stock failed to exercise any rights of election as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer, and assuming, if such consolidation, merger, sale or transfer is prior to the period such Security shall be convertible, that the Securities were convertible at such time at the initial Conversion Price as adjusted pursuant to the terms of the Registered Securities and Bearer Securities. Such amendment shall provide for adjustments which, for events subsequent to the effective date of such amendment, shall be as nearly equivalent as may be practicable to the adjustments provided for in the Registered Securities and the Bearer Securities. The above provisions of this Section 13.6(a) shall similarly apply to successive consolidations, mergers, sales or transfers. (b) Any Common Stock issued upon conversion of a Restricted Security ("Restricted Common Stock") at any time prior to the date which is three years (or such shorter period as shall be permitted as a result of an amendment to the rules under the Securities Act in respect thereof, after the Closing Date when a registration statement in respect of such Common Stock is not effective under the Securities Act shall be subject to the restrictions on transfer set forth in Section 2.6 hereof to the same extent as the Restricted Securities which were so converted. All shares of Restricted Common Stock shall -55- bear the legend and transfer requirements set forth on the form of Registered Security set forth as Exhibit A hereto. SECTION 13.7. Taxes on Conversion. The Company will pay any and all documentary, stamp or similar taxes in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant thereto; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the Holder of the Securities to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. The Company extends no protection with respect to any other taxes imposed in connection with conversion of Securities. SECTION 13.8. Company to Provide Stock. The Company shall reserve, free from preemptive rights, out of its authorized but unissued shares, sufficient shares to provide for the conversion of the Securities from time to time as such Securities are presented for conversion, provided, that nothing contained herein shall be construed to preclude the Company from satisfying its obligations in respect of the conversion of Securities by delivery of repurchased shares of Common Stock which are held in the treasury of the Company. If any shares of Common Stock to be reserved for the purpose of conversion of Securities hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued or delivered upon conversion, then the Company covenants that it will in good faith and as expeditiously as possible use its best efforts to secure such registration or approval, as the case may be, provided, however, that nothing in this Section 13.8 shall be deemed to limit in any way the obligations of the Company provided in this Article XIII. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the Common Stock, the Company will take all corporate action which may, in the Opinion of Counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be fully paid and non- assessable by the Company and free of preemptive rights. SECTION 13.9. Disclaimer of Responsibility for Certain Matters. Neither the Trustee, any agent of the Trustee, the Conversion Agent nor any agency appointed by the Company shall at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the certificate referred to in Section 13.4 hereof, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee, any agent of the Trustee, the Conversion Agent nor any agency appointed by the Company shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property (including cash), which may at any time be issued or delivered upon the conversion of any Security; and neither the Trustee nor the Conversion Agent or any agency appointed by the Company makes any representation with respect thereto. Neither the Trustee, any agent of the Trustee, the Conversion Agent nor any agency appointed by the Company shall be responsible for any failure of the Company to issue, register the transfer of or deliver any shares of Common Stock or stock certificates or other securities or property (including cash) upon the surrender of any Security for the purpose of conversion or, subject to Article VIII hereof, to comply with any of the covenants of the Company contained in this Article XIII. -56- SECTION 13.10. Return of Funds Deposited for Redemption of Converted Securities. Any funds which at any time shall have been deposited by the Company or on its behalf with the Trustee or any other Paying Agent for the purpose of paying the principal of and interest on, or Additional Amounts with respect to, any of the Securities and which shall not be required for such purposes because of the conversion of such Securities, as provided in this Article XIII, shall after such conversion be repaid to the Company by the Trustee or such other Paying Agent. ARTICLE XIV MISCELLANEOUS SECTION 14.1. TIA Controls. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of the TIA, the imposed duties, upon qualification of the Indenture under the TIA, shall control. SECTION 14.2. Notices. All notices hereunder shall be deemed to have been given when deposited in the mail as first class mail, registered or certified, return receipt requested, postage prepaid, addressed to any party hereto as follows: The Company: Veterinary Centers of America, Inc 3420 Ocean Park Boulevard, Suite 1000 Santa Monica, California 90405 Attn: Chief Financial Officer (with a copy of the attention of the General Counsel at the same address) The Trustee: The Chase Manhattan Bank, N.A. 4 Chase MetroTech Center 3rd Floor, Institutional Trust Brooklyn, New York 11245 Attn: Corporate Trust Administration The Paying Agents: The Chase Manhattan Bank, N.A., International London Branch Woolgate House Coleman Street London EC2P 2HD England Attn: Manager Corporate Trust Operations Chase Manhattan Bank Luxembourg, S.A. 5 Rue Plaetis L-2338 Luxembourg Attn: Manager Corporate Trust Operations or at any other address of which any of the foregoing shall have notified the others in writing. Notices to Holders of the Securities will be given by publication in an Authorized Newspaper in The City of New York and in London and, for so long as the Securities are listed on the Luxembourg Stock Exchange, in Luxembourg, or, if publication in either London or Luxembourg is not practical, in an Authorized Newspaper as directed by the Company in Europe. In addition, notices to Holders of Registered Securities -57- will be given by first-class mail at the Company's expense to the addresses of such Holders as they appear in the register maintained by the Trustee on the fifteenth day prior to such mailing. Such notices will be deemed to have been given on the date of such publication or mailing or, if published in such newspapers on different dates, on the date of the first such publication. The Trustee shall promptly furnish to the Company, the Paying Agent and to each other paying agency of the Company a copy of each notice so published or mailed. SECTION 14.3. Communications by Holders with Other Holders. Securityholders may communicate pursuant to Section 312(b) of the TIA with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and any other Person shall have the protection of Section 312(c) of the TIA. SECTION 14.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (1) an Officers' Certificate (in form reasonably satisfactory to the Trustee) stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel (in form reasonably satisfactory to the Trustee) stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 14.5. Statements Required in Certificate or Opinion. Each certificate or opinion delivered by or on behalf of the Company with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of each such Person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 14.6. Rules by Trustee, Paying Agent, Registrar. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Paying Agent or Registrar may make reasonable rules for its functions. -58- SECTION 14.7. Legal Holidays. In any case where the date of maturity of the principal of or interest on (or Additional Amounts, if any, with respect to) the Securities or the date fixed for redemption of any Security or the last day on which a Security may be converted shall be at any place of payment (or such other act) a day other than a Business Day, then payment of principal or interest (or Additional Amounts, if any), or presentation for conversion, need not be made on such date at such place but may be made on the next succeeding Business Day at such place of payment (or such other act), with the same force and effect as if made on the date of maturity or the date fixed for redemption or such last day on which a Security may be converted, and no interest shall accrue for the period after such date. SECTION 14.8. Taxes. The Company will pay all stamp taxes and other similar duties, if any, that may be imposed by the United States of America or the United Kingdom, or any state or political subdivision thereof or taxing authority therein, with respect to the execution or delivery of this Indenture, or the issuance of the Regulation S Global Security, or the exchange from time to time of the Regulation S Global Security for Registered Securities or Bearer Securities, or with respect to the issuance or delivery of shares of Common Stock on conversion of Securities; provided, however, that the Company shall not be required to pay any tax or duty which may be payable in respect of any transfer involved in the issuance or delivery of shares of Common Stock in a name other than that of the holder of the Security or Securities to be converted, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to the Company the amount of any such tax or duty or has established to the satisfaction of the Company that such tax or duty has been paid; and further provided, that the Company shall not be required to pay any tax or duty that may be payable in respect of any accrued interest paid in connection with the conversion of the Securities. SECTION 14.9. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. SECTION 14.10. Agent for Service of Process. As long as any of the Securities or Coupons remain outstanding, the Company will at all times have an authorized agent in The City of New York, upon whom process may be serviced in any legal -59- action or proceeding arising out of or relating to this Indenture or any Security or any Coupons appertaining thereto. Service of process upon such agent and written notice of such service mailed or delivered to the Company shall to the extent permitted by law be deemed in every respect effective service of process upon the Company in any such legal action or proceeding. The Company hereby appoints the Trustee as its agent for such purpose, and covenants and agrees that service of process in any legal action or proceeding may be made upon it at the office of the Trustee at 4 Chase MetroTech Center, 3rd Floor, Institutional Trust Administration, Brooklyn, New York 11245, U.S.A., Attention: Corporate Trust Department (or such other address in The City of New York as may be the Principal Corporate Trust Office of the Trustee in The City of New York), unless and until the Company shall designate another agent for such purpose by written notice to the Trustee. If the Trustee receives any such service of process, it shall promptly notify the Company of such service. SECTION 14.11. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 14.12. No Recourse Against Others. No direct or indirect partner, employee, stockholder, director or officer, as such, past, present or future of the Company or any successor corporation, shall have any personal liability in respect of the obligations of the Company under the Securities or this Indenture by reason of his, her or its status as such partner, stockholder, employee, director or officer. Each Securityholder by accepting a Security waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Securities. SECTION 14.13. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 14.14. Duplicate Originals. All parties may sign any number of copies or counterparts of this Indenture. Each signed copy or counterpart shall be an original, but all of them together shall represent the same agreement. SECTION 14.15. Severability. In case any one or more of the provisions in this Indenture or in the Securities shall be held invalid, illegal or unenforceable, in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions shall not in any way be affected or impaired thereby, it being intended that all of the provisions hereof shall be enforceable to the full extent permitted by law. SECTION 14.16. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table and headings of the Articles and the Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. -60- SECTION 14.17. Qualification of Indenture. The Company shall qualify this Indenture under the TIA in accordance with the terms and conditions of the Registration Rights Agreement and shall pay all reasonable costs and expenses (including attorneys' fees for the Company, the Trustee and the Manager) incurred in connection therewith, including, but not limited to, costs and expenses of qualification of the Indenture and the Securities and printing this Indenture and the Securities. The Trustee shall be entitled to receive from the Company any such Officers' Certificate, Opinions of Counsel or other documentation as it may reasonably request in connection with any such qualification of this Indenture under the TIA. SECTION 14.18. Registration Rights. Certain Holders of the Securities are entitled to certain registration rights with respect to such Securities pursuant to, and subject to the terms of, the Registration Rights Agreement. -61- SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above. VETERINARY CENTERS OF AMERICA, INC. a Delaware corporation [Seal] By: [SIGNATURE ILLEBIBLE] --------------------- Name: Title: [SIGNATURE ILLEGIBLE] Attest: THE CHASE MANHATTAN BANK, N.A., as Trustee [Seal] By: _____________________ Name: Title: Attest: SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this indenture to be duly executed as of the date first written above. VETERINARY CENTERS OF AMERICA, INC. a Delaware corporation [Seal] By: _______________________ Name Title Attest: THE CHASE MANHATTAN BANK, N.A., as Trustee [Seal] By: Lucia Jaklitsch ------------------------ Name: LUCIA JAKLITSCH Title: ASSISTANT TREASURER Attest: [SIGNATURE ILLEGIBLE] EXHIBIT A (FORM OF FACE OF REGISTERED SECURITY) [Unless and until it is exchanged in whole or in part for Securities in definitive form, this Security may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.] [THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. EACH PURCHASER OF THIS SECURITY 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 THIS SECURITY, BY ITS ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES AND AGREES FOR THE BENEFIT OF THE COMPANY THAT: (I) IT HAS ACQUIRED A "RESTRICTED" SECURITY WHICH HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS SHALL BE PERMITTED AS A RESULT OF AN AMENDMENT TO THE RULES UNDER THE SECURITIES ACT IN RESPECT THEREOF) AFTER THE LATER OF THE DATE OF ORIGINAL ISSUANCE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, A-1 (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) IN A TRANSACTION ARRANGED BY A BROKER OR DEALER REGISTERED UNDER THE UNITED STATES SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE MEANING OF SUBPARAGRAPHS (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT) THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY APPLICABLE JURISDICTION; AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THIS SECURITY OF THE RESALE RESTRICTIONS SET FORTH IN (II) ABOVE. IF ANY RESALE OR OTHER TRANSFER OF THIS SECURITY IS PROPOSED TO BE MADE PURSUANT TO CLAUSE II(E) ABOVE PRIOR TO THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS SHALL BE PERMITTED AS A RESULT OF AN AMENDMENT TO THE RULES UNDER THE SECURITIES ACT IN RESPECT THEREOF) AFTER THE DATE OF ORIGINAL ISSUANCE HEREOF, THE TRANSFEROR SHALL DELIVER A LETTER FROM THE TRANSFEREE CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY. ANY OFFER, SALE OR OTHER DISPOSITION PURSUANT TO THE FOREGOING CLAUSES (II)(D), (E) AND (F) IS SUBJECT TO THE RIGHT OF THE ISSUER OF THIS SECURITY AND THE TRUSTEE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS OR OTHER INFORMATION ACCEPTABLE TO THEM IN FORM AND SUBSTANCE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THIS SECURITY IS SUBJECT TO A REGISTRATION RIGHTS AGREEMENT DATED APRIL 17, 1996 BETWEEN THE COMPANY AND NATWEST SECURITIES LIMITED, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY OR THE TRUSTEE.] A-2 VETERINARY CENTERS OF AMERICA, INC. (Incorporated in the State of Delaware) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2006 CUSIP No. U.S.$_________ Veterinary Centers of America, Inc., a corporation duly incorporated and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to ________________________,or registered assigns, the principal sum of ______________ United States dollars on May 1, 2006 upon presentation and surrender hereof and to pay interest thereon, from the most recent Interest Payment Date (as defined below) to which interest has been paid or duly provided for (or from April 17, 1996 if no interest has been paid or duly provided for in respect of this Security), semiannually in arrears on May 1 and November 1 in each year (each an "Interest Payment Date"), commencing November 1, 1996, at the rate of 5 1/4% per annum until the principal hereof is paid or made available for payment. Interest hereon shall be calculated on the basis of a 360-day year comprised of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture (as defined on the reverse hereof), be paid to the person in whose name this Security is registered at the close of business on the Interest Record Date for such interest payment, which shall be April 15 or October 15 (whether or not a Business Day) next preceding such Interest Payment Date. To the extent lawful, the Company shall pay interest on overdue principal and overdue installments of interest at the rate borne by this Security, compounded semi-annually. Except as otherwise provided in the Indenture, any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Interest Record Date and, together with Defaulted Interest relating thereto, may be paid at any time in any lawful manner, all as more fully provided in the Indenture. Payment of interest on this Security shall be made by United States dollar check drawn on a bank in The City of New York and mailed to the person entitled thereto at his address as it shall appear in the Security Register, or (if arrangements satisfactory to the Company and the Trustee (as defined on the reverse hereof) are made) by wire transfer to a United States dollar account maintained by the payee with a bank in The City of New York; provided, however, that if such mailing is not possible and no such application shall have been made, payment of interest shall be made at the Principal Corporate Trust Office of the Trustee (as defined in the Indenture referred to below), or such other office or agency of the Company as may be designated for such purpose in The City of New York, in United States currency. Reference is hereby made to the provisions of this Security set forth under Terms and Conditions of the Securities on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. This Security shall not become valid or enforceable for any purpose unless and until the certificate of authentication hereon shall have been manually signed by a duly authorized officer of the Trustee. A-3 IN WITNESS WHEREOF, the Company has caused this Security to be duly executed in its corporate name and under its corporate seal by the manual or facsimile signature of a duly authorized signatory. VETERINARY CENTERS OF AMERICA, INC. Dated: By:__________________________ Name: Title: [Corporate Seal] Attest: ____________________ CERTIFICATE OF AUTHENTICATION This is one of the Securities described in the within mentioned Indenture. THE CHASE MANHATTAN BANK, N.A., as Trustee By:________________________________ Authorized Officer Dated: A-4 (FORM OF FACE OF BEARER SECURITY) ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. VETERINARY CENTERS OF AMERICA, INC. (Incorporated in the State of Delaware) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2006 No. B __ U.S.$__ Veterinary Centers of America, Inc., a corporation duly incorporated and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to bearer upon presentation and surrender of this Security the principal sum of_____________________________ United States dollars on May 1, 2006 upon presentation and surrender hereof and to pay interest thereon, from April 17, 1996, semiannually in arrears on May 1 and November 1 in each year (each an "Interest Payment Date"), commencing November 1, 1996, at the rate of 5 1/4% per annum until the principal hereof is paid or made available for payment. Interest hereon shall be calculated on the basis of a 360-day year comprised of twelve 30-day months. To the extent lawful, the Company shall pay interest on overdue principal and overdue installments of interest of the rate borne by this Security, compounded semi-annually. Payments in respect of this Security shall be made by United States dollar check, subject to any laws or regulations applicable thereto and to the right of the Company (limited as provided in the Indenture (as defined on the reverse hereof) to terminate the appointment of any paying agency, at the London office of The Chase Manhattan Bank, N.A. located at Woolgate House, Coleman Street, London EC2P 2HD, England, or Chase Manhattan Bank Luxembourg S.A., 5 Rue Plaetis, L- 2338 Luxembourg, or at such other offices or agencies outside the United States of America, its territories or its possessions as the Company may designate, by United States dollar check drawn on a bank in The City of New York, or (if arrangements satisfactory to the Company and the Trustee (as defined on the reverse hereof are made) by wire transfer to a United States dollar account maintained by the Holder at a bank outside the United States, its territories and its possessions. Interest on this Security shall be paid only at an office or agency located outside the United States, its territories or its possessions and, in the case of interest due on or before maturity, only upon presentation and surrender at such an office or agency of the interest coupons hereto attached as they severally mature. No payment on this Security or any coupon will be made at the Principal Corporate Trust Office of the Trustee (as defined in the Indenture referred to below) or any other paying agency maintained by the Company in the United States, nor will any payment be made by transfer to an account in, or by mail to an address in, the United States, except as may be permitted by United States tax laws and regulations in effect at the time of such payment without detriment to the Company. Notwithstanding the foregoing, payment of this Security and coupons may be made at the office of the Trustee in The City of New York if full payment at all paying agencies outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions. Reference is hereby made to the further provisions of this Security set forth under Terms and Conditions of the Securities on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Neither this Security nor any of the coupons attached hereto shall become valid or enforceable for any purpose unless and until the certificate of authentication hereon shall have been manually signed by a duly authorized officer of the Trustee. A-5 IN WITNESS WHEREOF, the Company has caused this Security to be duly executed in its corporate name and under its corporate seal by the manual or facsimile signature of a duly authorized officer and coupons bearing the facsimile signature of a duly authorized signatory to be annexed hereto. VETERINARY CENTERS OF AMERICAN, INC. Dated: By:___________________ Name: Title: [Corporate Seal] Attest: ____________________ CERTIFICATE OF AUTHENTICATION This is one of the Securities described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, N.A., as Trustee By:________________________________ Authorized Officer Dated: A-6 (FORM OF FACE OF COUPON ON BEARER SECURITIES) ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. VETERINARY CENTERS OF AMERICA, INC. (Incorporated in the State of Delaware) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2006 No. ________ U.S. $______ Due ________ Unless the Bearer Security to which this coupon appertains shall have been called for redemption prior to the due date hereof (unless such date of redemption is May 16, 1999) and payment thereof duly provided for or shall have been converted, Veterinary Centers of America, Inc. (herein called the "Company") shall, subject to and in accordance with the terms and conditions of the Bearer Security and the Indenture dated as of April 17, 1996 between the Company and The Chase Manhattan Bank, N.A., as Trustee, pay to the bearer, on the date set forth herein upon surrender hereof, the amount shown hereon (together with any Additional Amounts in respect hereof which the Company may be required to pay according to the terms of said Bearer Security) at the paying agencies set out on the reverse hereof or at such other places outside the United States of America, its territories and its possessions as the Company may determine from time to time, by United States dollar check drawn on a bank in The City of New York, or (if arrangements satisfactory to the Company and the Trustee are made) wire transfer to a United States dollar account maintained by the bearer at a bank outside the United States of America, its territories and its possessions, being one-half year's interest then payable on said Bearer Security. VETERINARY CENTERS OF AMERICA, INC. By:__________________________________ Name: Title: Attest: A-7 [Reverse of Coupon] The Chase Manhattan Bank, N.A. Chase Manhattan Bank Woolgate House 5 Rue Plaetis Coleman Street L-2338 Luxembourg London EC2P 2HD ENGLAND A-8 (FORM OF REVERSE OF REGISTERED AND BEARER SECURITIES) Terms and Conditions of the Securities 1. General. (a) This Security is one of a duly authorized issue of securities of the Company designated as its 5 1/4% Convertible Subordinated Debentures due 2006 (herein called the "Securities"), limited in aggregate principal amount to U.S. $92,000,000. The Company issued the Securities under an Indenture, dated as of April 17, 1996 (the "Indenture"), between the Company and The Chase Manhattan Bank, N.A., as trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the United States Trust Indenture Act of 1939, as amended, as in effect on the date of the Indenture. The Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and said Act for a statement of them. The Securities are unsecured obligations of the Company. (b) The Securities are issuable as bearer securities (the "Bearer Securities"), without interest Coupons attached, in the denominations of U.S.$1,000 and U.S.$10,000, and as registered securities (the "Registered Securities"), without coupons, in denominations of U.S.$1,000 and integral multiples thereof. The Registered Securities, and transfers thereof, shall be registered as provided in the Indenture. The holder of any Bearer Security or any Coupon and the registered holder of a Registered Security shall (to the fullest extent permitted by applicable law) be treated at all times, by all persons and for all purposes, except as provided in the Indenture, as the absolute owner of such Security or Coupon, as the case may be, regardless of any notice of ownership, theft or loss or of any writing thereon. 2. Additional Amounts. The Company will pay, as additional interest ("Additional Amounts"), to the Holder of this Security or of any Coupon appertaining hereto who is a United States Alien (as defined below) such amounts as may be necessary in order that every net payment of the principal of and premium, if any, and interest on this Security and any cash payments made in lieu of issuing shares of Common Stock upon conversion of this Security, after withholding for or on account of any present or future tax, assessment or other governmental charge imposed upon or as a result of such payment by the United States or any political subdivision or taxing authority thereof or therein, will not be less than the interest provided herein or any Coupon appertaining hereto to be then due and payable; provided, however, that the foregoing obligation to pay Additional Amounts shall not apply to any one or more of the following: (a) any tax, assessment or other governmental charge which would not have been so imposed but for (i) the existence of any present or former connection between such Holder (or between a fiduciary, settlor, beneficiary, member or stockholder of, or a person holding a power over, such Holder, if such Holder is an estate, trust, partnership or corporation) and the United States, including, without limitation, such Holder (or such fiduciary, settlor, beneficiary, member, stockholder or person holding a power) being or having been a citizen or resident or treated as a resident thereof or being or having been engaged in a trade or business or being or having been present therein or having or having had a permanent establishment therein, (ii) such Holder's present or former status as a personal holding company, foreign personal holding company, passive foreign investment company, foreign private foundation or other foreign tax- exempt entity or controlled foreign corporation for United States federal income tax purposes or a corporation which accumulates earnings to avoid United States federal income tax, or (iii) such Holder's status as a bank extending credit pursuant to a loan agreement entered into in the ordinary course of business; A-9 (b) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by the Holder of this Security or any Coupon appertaining hereto for payment on a date more than 10 days after the date on which such payment became due and payable or on the date on which payment thereof is duly provided, whichever occurs later; (c) any estate, inheritance, gift, sales, transfer or personal or intangible property tax or any similar tax, assessment or other governmental charge; (d) any tax, assessment or other governmental charge which would not have been imposed but for the failure to comply with certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or present or former connection with the United States of the Holder or beneficial owner of this Security or any related Coupon if such compliance is required by statute, regulation or ruling of the United States or any political subdivision or taxing authority thereof or therein as a precondition to relief or exemption from such tax, assessment or other governmental charge; (e) any tax, assessment or other governmental charge which is payable otherwise than by deduction or withholding from payments of principal of and premium, if any, or interest on this Security; (f) any tax, assessment or other governmental charge imposed on interest received by a person holding, actually or constructively, 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote; or (g) any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment of principal of and premium, if any, or interest on any Security or interest on any Coupon appertaining thereto if such payment can be made without such withholding by any other paying agent; nor shall Additional Amounts be paid with respect to any payment of the principal of or premium, if any, or interest on this Security (or cash in lieu of issuance of shares of Common Stock upon conversion) to a person other than the sole beneficial owner of such payment or that is a partnership or fiduciary to the extent such beneficial owner, member of such partnership or beneficiary or settlor with respect to such fiduciary would not have been entitled to the payment of Additional Amounts had such beneficial owner, member, beneficiary or settlor been the holder of this Security or any Coupon appertaining hereto. The term "United States Alien" means any person who, for United States federal income tax purposes, is (i) a foreign corporation, (ii) a foreign partnership one or more of the members of which are, for United States federal income tax purposes, foreign corporations, non-resident alien individuals or non-resident alien fiduciaries of a foreign estate or trust, (iii) a non-resident alien individual or (iv) a non-resident alien fiduciary of a foreign estate or trust, and the term "United States" means the United States of America (including the several States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. Except as specifically provided herein and in the Indenture, the Company shall not be required to make any payment with respect to any tax, assessment or other governmental charge imposed by any government or any political subdivision or taxing authority thereof or therein. Whenever any Additional Amounts are to be paid on the Securities, the Company will give notice to the Trustee, the Paying Agent and any paying agency of the Company, all as provided in the Indenture. 3. Redemption. (a) The Company, at its option, may redeem the Securities, in whole or in part (but if in part, in aggregate principal amounts of no less than $1,000), at any time or times on and after May 16, 1999, upon notice as hereinafter prescribed, at a redemption price equal to 103% of their principal amount if redeemed during the 12-month period commencing May 16, 1999, 102% of their principal amount if redeemed during the 12-month period commencing May 16, 2000, 101% of their principal amount if redeemed during the 12-month period commencing May 16, 2001, and 100% of their principal amount if redeemed on or after May 16, 2002, in each case together with accrued and unpaid interest to the date fixed for redemption. If fewer A-10 than all of the then outstanding Securities are to be redeemed, the Securities to be redeemed will be selected by the Trustee not more than 75 days prior to the date fixed for redemption, by such method as the Trustee shall deem fair and appropriate. Provisions of this Security that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be called for redemption. (b) If, at any time, the Company shall determine that as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or any amendment to or change in an official application or interpretation of such laws, regulations or rulings which change or amendment becomes effective on or after April 17, 1996 the Company has or will become obligated to pay to the holder of any Security or Coupon Additional Amounts and such obligation cannot be avoided by the Company taking reasonable measures available to it, then the Company may, as its election exercised at any time when such conditions continue to exist, redeem such Securities as a whole but not in part, upon notice as hereinafter prescribed, at a redemption price equal to 100% of the principal amount, together with accrued interest, if any, to the date fixed for redemption; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company would be obligated to pay such Additional Amounts were a payment in respect of such Securities then due; and provided further, that at the time such notice is given, such obligation to pay such Additional Amounts remains in effect. Prior to any redemption of the Securities pursuant to the preceding paragraph, the Company shall provide the Trustee with one or more certificates (signed by the President or any Vice President and the Treasurer or the Secretary) of the Company on which the Trustee may conclusively rely to the effect that the Company is entitled to redeem such Securities pursuant to such paragraph and that the conditions precedent to the right of the Company to redeem such Securities pursuant to such paragraph have occurred and a written Opinion of Counsel (who may be an employee of the Company) stating that all legal conditions precedent to the right of the Company to redeem such Securities pursuant to such paragraph have occurred. (c) The Company shall, except as set forth in the next succeeding paragraph, redeem the Bearer Securities as a whole but not in part, upon notice as hereinafter prescribed, at 100% of their principal amount, together with interest accrued and unpaid to the date fixed for redemption, less applicable withholding taxes, if any, plus any applicable Additional Amounts payable, after the Company determines, based on a written Opinion of Counsel, that any certification, identification or information reporting requirement of any present or future United States law or regulation with regard to the nationality, residence or identity of a beneficial owner of a Bearer Security or a Coupon appertaining thereto who is a United States Alien would be applicable to a payment of principal of or interest on a Bearer Security or a Coupon appertaining thereto made outside the United States by the Company or a paying agent (other than a requirement (i) which would not be applicable to a payment made by the Company or any one of its paying agents (A) directly to the beneficial owner or (B) to a custodian, nominee or other agent of the beneficial owner, or (ii) which could be satisfied by the Holder, custodian, nominee or other agent certifying that the beneficial owner is a United States Alien, provided, however, in each case referred to in clauses (i)(B) and (ii) payment by such custodian, nominee or agent of the beneficial owner is not otherwise subject to any requirement referred to in this sentence). The Company shall make such determination and will notify the Trustee thereof in writing as soon as practicable, stating in the notice the effective date of such certification, identification, or information reporting requirement and the dates within which the redemption shall occur, and the Trustee shall give prompt notice thereof in accordance with the Indenture. The Company shall determine the Redemption Date by notice to the Trustee at least 75 days before the Redemption Date, unless shorter is acceptable to the Trustee. Such redemption of the Securities must take place on such date, not later than one year after the publication of the initial notice of the Company's determination of the existence of such certification, identification or information reporting requirement. The Company shall not so redeem the Bearer Securities, however, if the Company shall, based on a subsequent event, determine, based on a written Opinion of Counsel (who shall not be an employee of the Company), not less than 30 days prior to the date fixed for redemption, that no such payment would be subject to any requirement A-11 described above, in which case the Company shall notify the Trustee, which shall give prompt notice of that determination in accordance with the Indenture and any earlier redemption notice shall thereupon be revoked and of no further effect. Notwithstanding the preceding paragraph, if and so long as the certification, identification or information reporting requirement referred to in the preceding paragraph would be fully satisfied by payment of United States withholding, backup withholding or similar taxes, the Company may elect, prior to the giving of the notice of redemption, to have the provisions of this paragraph apply in lieu of the provisions of the preceding paragraph. In that event, the Company will pay such Additional Amounts (without regard to Section 2 hereof) as are necessary in order that, following the effective date of such requirements, every net payment made outside the United States by the Company or a paying agent of the principal of and interest on a Bearer Security or a Coupon appertaining thereto to a Holder who is a United States Alien (without regard to a certification, identification or information reporting requirement as to the nationality, residence or identity of such Holder), after deduction for United States withholding, backup withholding or similar taxes (other than withholding, backup withholding or similar taxes (i) which would not be applicable in the circumstances referred to in the parenthetical clauses of the first sentence of the next preceding paragraph or (ii) are imposed as a result of presentation of such Bearer Security or Coupon for payment more than 10 days after the date on which such payment becomes due and payable or on which payment thereof is duly provided for, whichever is later), will not be less than the amount provided in the Bearer Security or the Coupon to be then due and payable. If the Company elects to pay such Additional Amounts and as long as it is obligated to pay such Additional Amounts, the Company may subsequently redeem the Bearer Securities, at any time, in whole but not in part, upon not more than 60 days nor less than 30 days notice, given as hereinafter prescribed, at 100% of their principal amount, plus accrued interest to the date fixed for redemption and Additional Amounts, if any. (d) If there shall occur a Change of Control (as defined in the Indenture) with respect to the Company, then the Holder of this Security shall have the right, at such Holder's option, exercised in accordance with this Section 3(d), to require the Company to purchase this Security, in whole but not in part, on the Holder Redemption Date at a Redemption Price equal to 100% of the principal amount, together with accrued interest to the Holder Redemption Date. Notwithstanding the fact that a Security is called for redemption by the Company otherwise than pursuant to this Section 3(d), each Holder of a Security desiring to exercise the option for redemption set forth in this Section 3(d) shall, as a condition to such redemption, on or before the close of business on the fifth Business Day prior to the Holder Redemption Date, surrender the Security to be redeemed (together with all unmatured Coupons, if applicable), in whole but not in part, together with the Redemption Notice hereon duly executed at the place or places specified in the notice required by Section 3(e) and otherwise comply with the provisions of Section 3(f). A Holder of a Security who has tendered a Redemption Notice (i) will be entitled to revoke its election by delivering a written notice of such revocation together with the Holder's non-transferable receipt for such Security to the office or agency of the Company designated as the place for the payment of the Securities to be so redeemed on or before the Holder Redemption Date and (ii) will retain the right to convert its Securities into shares of Common Stock of the Company on or before the close of business on the fifth day (or if such day is not a Business Day, or the next succeeding Business Day) next preceding the Holder Redemption Date. In connection with any repurchase of Securities pursuant to this Section 3(d), the Company will comply with any applicable rules and regulations promulgated by the U.S. Securities and Exchange Commission and nothing herein, including the time periods in which redemption is to occur, shall require the Company to take action which violates such applicable rules and regulations. (e) Notice of any redemption or notice in connection with a Change of Control will be given in accordance with Section 3.1 of the Indenture. A-12 (f) If (i) notice of redemption has been given in the manner set forth in Section 3.1 of the Indenture with respect to Securities to be redeemed at the option of the Company, or (ii) notice of redemption has been given by the Holder of a Security to be redeemed pursuant to Section 3(d) hereof, the Securities so to be redeemed shall become due and payable on the applicable Redemption Date specified in such notice and upon presentation and surrender of the Securities at the place or places specified in the notice given by the Company with respect to such redemption, together in the case of Bearer Securities with all appurtenant Coupons, if any, maturing subsequent to the Redemption Date, the Securities shall be paid and redeemed by the Company, at the places and in the manner and currency herein specified and at the Redemption Price together with accrued interest, if any, to the Redemption Date; provided, however, that interest due in respect of Coupons maturing on or prior to the Redemption Date shall be payable only upon the presentation and surrender of such Coupons (at an office or agency located outside of the United States of America). If any Bearer Security surrender for redemption shall be accompanied by all appurtenant Coupons maturing after the Redemption Date, such Security may be paid after deducting from the amount otherwise payable an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Company and the Trustee if they are furnished with such security or indemnity as they may require to save each of them and each other paying agency of the Company harmless. From and after the Redemption Date, if monies for the redemption of Securities shall have been available at the principal corporate trust office of the Trustee for redemption on the Redemption Date, the Securities shall cease to bear interest, the Coupons for interest appertaining to Bearer Securities maturing subsequent to the Redemption Date shall be void, and the only right of the holders of such Securities shall be to receive payment of the Redemption Price together with accrued interest to the Redemption Date. If monies for the redemption of the Securities are not made available by the Company for payment until after the Redemption Date, the Securities shall not cease to bear interest until such monies have been so made available. 4. Conversion. (a) Subject to and upon compliance with the provisions of the Indenture, a holder of Securities is entitled, at its option, at any time on and after the Exchange Date and prior to the close of business on May 1, 2006 to convert such Security (or any portion of the principal amount thereof which is U.S.$1,000 or an integral multiple thereof), at the principal amount thereof, or of such portion, into fully paid and nonassessable shares ("Conversion Shares") of common stock, par value $0.001 per share ("Common Stock"), of the Company (calculated as to each conversion to the nearest 1/1000 of a share) at a Conversion Price equal to U.S. $34.35 aggregate principal amount of Securities for each Conversion Share (the "Conversion Price") (or at the current adjusted Conversion Price if an adjustment has been made as provided herein) by surrender of the Security, together with (i) if a Bearer Security, all unmatured Coupons (except that any Bearer Security called for redemption on May 16, 1999 need not be delivered with the Coupon that matures on that date) and any matured Coupons in default appertaining thereto, or (ii) if a Registered Security (if so required by the Company or the Trustee), instruments of transfer in form satisfactory to the Company and the Trustee, duly executed by the registered holder or by his duly authorized attorney, and, in either case, (iii) the Conversion Notice hereon duly executed (x) at the Principal Corporate Trust Office of the Trustee, or at such other office or agency of the Company as may be designated by it for such purpose in the City of New York, or (y) subject to any laws or regulations applicable thereto and subject to the right of the Company to terminate the appointment of any such conversion agency, at the London office of The Chase Manhattan Bank, N.A. located at Woolgate House, Coleman Street, London EC2P 2HD, England and Chase Manhattan Bank, Luxembourg S.A., 5 Rue Plaetis, L-2338 Luxembourg, or at such other offices or agencies as the Company may designate; provided, however, that if any Security or a portion thereof is called for redemption by the Company, or the holder thereof elects to have such Security redeemed in whole by the Company pursuant to Section 3(d) hereof, then in respect of such Security (or, in the case of partial redemption by the Company, such portion thereof) the right to convert such Security (or, in the case of partial redemption by the Company, such portion thereof) shall expire (unless the Company defaults in making the payment due upon redemption) at the close of business on the fifth day (or if such date is not a Business Day, on the next succeeding Business Day) next preceding the Redemption Date or the Holder A-13 Redemption Date (unless in the latter case the holder shall have first revoke his redemption election in accordance with Section 3(d) hereof). (b) In the case of any Registered Security which is converted after any Interest Record Date and on or prior to the next succeeding Interest Payment Date, interest that is payable on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest shall be paid to the person in whose name that Registered Security is registered at the close of business on such Interest Record Date. Except as otherwise provided in the immediately preceding sentence and in the parenthetical clause in Section 4(a)(i) above, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends or distributions on the Conversion Shares issued upon conversion. Registered Securities surrendered for conversion during the period after the close of business on any Interest Record Date next preceding any Interest Payment Date to the close of business on such Interest Payment Date shall (except in the case of Registered Securities or portions thereof which are called for redemption on May 16, 1999) be accompanied by payment of an amount equal to the interest payable on such Interest Payment Date on the principal amount being surrendered for conversion. No fractions of shares or script representing fractions of shares will be issued or delivered on conversion, but instead of any fractional interest the Company shall pay a cash adjustment as provided in the Indenture. (c) (i) In case at any time the Company shall pay or make a stock dividend or other distribution on any class of capital stock of the Company in shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares of Common Stock constituting such dividend or other distribution, such adjustment to become effective immediately after the opening of business on the day following the date fixed for such determination; and in the event that such dividend or other distribution is not so made, or is made in part, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect (i) if such record date has not been fixed or (ii) based on the actual number of shares actually issued, as the case may be. (ii) In case at any time the Company shall (A) subdivide its outstanding shares of Common Stock into a greater number of shares, (B) combine its outstanding shares of Common Stock into a smaller number of shares, or (C) issue by reclassification of its shares of Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation) any shares of capital stock, the Conversion Price in effect at the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of any Security surrendered for conversion after such time shall be entitled to receive the aggregate number and kind of shares which, if such Security had been converted immediately prior to such time, he would have owned upon such conversion and been entitled to receive upon such subdivision, combination or reclassification. Such adjustment shall become effective immediately after the effective date of such subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. (iii) In case at any time the Company shall fix a record date for the issuance of rights, options or warrants to all holders of its Common Stock entitling them to subscribe for or purchase Common Stock (or securities convertible into Common Stock) at a price per share less than the Current Market Price per share of Common Stock on such record date, the Conversion Price in effect at the opening of business on the day following such record date shall be reduced so that the same shall equal the price determined by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such record date plus the number of shares of Common Stock (or its equivalent) which the aggregate of the offering price of the total number of shares so offered for A-14 subscription or purchase would purchase at such Current Market Price per share of Common Stock and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such record date plus the number of shares of Common Stock (or its equivalent) so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following such record date; provided, however, that no adjustment to the Conversion Price shall be made pursuant to this Section 4(c)(iii) if the holders of Securities receive, or are entitled to receive upon conversion or otherwise, the same rights, options or warrants as are issued to the holders of Common Stock, on the same terms and conditions as such rights, options or warrants are so issued to the holders of Common Stock. Such reduction shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, or are issued in part, or are issued but all or part of which expire unexercised, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect (i) if such record date had not been fixed or (ii) based on the actual number of rights, options or warrants actually issued, as the case may be. (iv) In case at any time the Company shall fix a record date for the making of a distribution, by dividend or otherwise, to all holders of its shares of Common Stock, of evidences of its indebtedness or assets (including securities, but excluding (x) any dividend or distribution referred to in paragraph (i) of this subsection (c) and any rights, options or warrants referred to in paragraph (iii) of this subsection (c), and (y) any dividend, return of capital or distribution paid in cash out of the retained earnings of the Company and regular quarterly dividends consistent with past practice ), then in each such case the Conversion Price in effect after such record date shall be determined by multiplying the Conversion Price in effect immediately prior to such record date by a fraction, of which the numerator shall be the total number of outstanding shares of Common Stock multiplied by the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined by a Board Resolution, whose determination shall be conclusive and described in a statement filed with the Trustee) of the portion of the assets or evidences of indebtedness so to be distributed, and of which the denominator shall be the total number of outstanding shares of Common Stock multiplied by such Current Market Price per share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution; and in the event that such distribution is not so made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such record date has not been fixed. (v) The Company may make such downward adjustments in the Conversion Price, in addition to those required by paragraphs (i), (ii), (iii) and (iv) of this section, as it considers to be advisable in order that any event treated for United States federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (vi) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least U.S.$0.25 in such Conversion Price; provided, however, that any adjustment which by reason of this paragraph (vi) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subsection (c) shall be made to the nearest cent or to the nearest 1/1000 of a share, as the case may be. (d) Whenever the Conversion Price is adjusted and in the event of certain other corporate actions, as herein provided, the Company shall give notice, all as provided in the Indenture. (e) The Company shall use its reasonable best efforts to cause all registrations with, and to obtain any approvals by, any governmental authority under any federal or state law of the United States that may be required before the Conversion Shares (or other securities issuable upon conversion of the Securities) may be lawfully issued or transferred and delivered. 5. Transfer and Exchange of Securities. A-15 (a) Title to Bearer Securities and Coupons shall pass by delivery. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of Registered Securities is registrable on the Security Register upon surrender of a Registered Security for registration of transfer at the office or agency of the Trustee in The City of New York, or, subject to applicable laws and regulations, at the office of the paying agency in Luxembourg, duly endorsed by, or accompanied by a written instrument of transfer in the form satisfactory to the Company and the Security Registrar duly executed by, the holder thereof or his attorney duly authorized in writing, and thereupon one or more new Registered Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. (b) As provided in the Indenture and subject to certain limitations therein set forth, Bearer Securities (with all unmatured Coupons appertaining thereto) are exchangeable at, subject to applicable laws and regulations, the offices of the paying agencies in London and Luxembourg or as designated by the Company for such purpose pursuant to the Indenture, for an equal aggregate principal amount of Registered Securities and/or Bearer Securities of authorized denominations, and Registered Securities are exchangeable at the principal corporate trust office of the Trustee in The City of New York or, subject to applicable laws and regulations, the offices of the paying agencies in London and Luxembourg or as designated by the Company for such purpose pursuant to the Indenture, for an equal aggregate principal amount of Registered Securities of authorized denominations as requested by the Holder surrendering the same. Registered Securities will not be exchangeable for Bearer Securities. The Company shall not be required (i) to exchange Bearer Securities for Registered Securities during the period between the close of business on any Interest Record Date and the opening of business on the next succeeding Interest Payment Date, (ii) to exchange any Bearer Security (or portion thereof) for a Registered Security if the Company shall determine and inform the Trustee in writing that, as a result thereof, the Company may incur adverse consequences under the federal income tax laws and regulations (including proposed regulations) of the United States in effect or proposed at the time of such exchange, or (iii) in the event of a redemption in part, (A) to register the transfer of Registered Securities or to exchange Bearer Securities for Registered Securities during a period of 15 days immediately preceding the date notice is given identifying the serial numbers of the Securities called for such redemption; (B) to register the transfer of or exchange any such Registered Securities, or portion thereof, called for redemption; or (C) to exchange any such Bearer Securities called for redemption; provided, however, that a Bearer Security called for redemption may be exchanged for a Registered Security which is simultaneously surrendered, with written instruction for payment on the Redemption Date, unless the Redemption Date is during the period between the close of business on any Interest Record Date and the close of business on the next succeeding Interest Payment Date, in which case such exchange may only be made prior to the close of business on the Interest Record Date immediately preceding the Redemption Date. The Company also shall not be required to exchange Securities if, as a result thereof, the Company would incur adverse consequences under United States federal income tax laws in effect at the time of such exchange. In the event of redemption or conversion of a Registered Security in party only, a new Registered Security or Securities for the unredeemed or unconverted portion hereof will be issued in the name of the holder thereof. (c) The costs and expenses of effecting any exchange or registration of transfer pursuant to the foregoing provisions, except for the expenses of delivery (if any) by other than regular mail and except, if the Company shall so require, the payment of a sum sufficient to cover any tax or other governmental charge or insurance charges that may be imposed in relation thereto, will be borne by the Company. (d) The Company has initially appointed the Trustee as registrar, transfer agent, paying agent and conversion agent acting through the Trustee's principal corporate trust office in The City of New York and its agents in London. The Company has also initially appointed Chase Manhattan Bank Luxembourg S.A. as a transfer agent, paying agent and conversion agent. The Company may at any time terminate the appointment of the registrar and such agents and appoint additional or other registrars and agents or approve any change in an office through which the registrar or any agent acts; provided that, until all of the Securities have been delivered to the Trustee for cancellation, or monies sufficient to pay the Securities have A-16 been made available for payment and either paid or returned to the Company as provided in the Securities and the Indenture, the Company will maintain a paying agent and a conversion agent (i) in The City of New York in the United States for the payment of the principal and interest on Registered Securities and for the surrender of Securities for conversion or redemption and (ii) in a European city that, so long as the Securities are listed on the Luxembourg Stock Exchange and such exchange shall so require, shall be Luxembourg, for the payment of the principal and interest on Securities and for the surrender of Securities for conversion or redemption. 6. Meetings of Holders. A meeting of Holders of Securities may be called at any time and from time to time in the manner and for the purposes set forth in the Indenture. The Trustee may at any time call a meeting of Holders of the Securities to be held at such time and at such place in any of such designated locations as the Trustee shall determine. Notice of every meeting of Holders shall be made as specified in the Indenture. 7. Amendment; Supplement; Waiver. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented, and any existing Default or Event of Default or compliance with any provision may be waived, with the written consent of the Holders of a majority in aggregate principal amount of the Securities then outstanding. Without notice to or consent of any Holder, the parties thereto may amend or supplement the Indenture or the Securities to, among other things, cure any ambiguity, defect or inconsistency, or make any other change that does not adversely affect the rights of any Holder of a Security. 8. Subordination. Payment of principal, premium, if any, interest on and Additional Amounts with respect to the Securities is subordinated, in the manner and to the extent set forth in the Indenture, to the prior payment in full of all Senior Indebtedness. 9. Successors. Except as otherwise provided in the Indenture, when a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. 10. Defaults and Remedies. If an Event of Default occurs and is continuing (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization in which events all principal, accrued interest and Additional Amounts, if any, with respect to the Securities will be immediately due and payable without any declaration or other act on the part of the Trustee or the Holders), then in every such case, unless the principal of all of the Securities shall have already become due and payable, either the Trustee or the Holders of 25% in aggregate principal amount of Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Securities may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Securities then outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Securities notice of any continuing Default or Event of Default (except a Default in payment of principal, interest or Additional Amounts), if it determines that withholding notice is in their interest. 11. No Recourse Against Others. A-17 No stockholder, director, officer or employee, as such, past, present or future, of the Company or any successor corporation shall have any personal liability in respect of the obligations of the Company under the Securities or the Indenture by reason of his, her or its status as such stockholder, director, officer or employee. Each Holder of a Security by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Securities. 12. Non-Business Days. In any case where the date of maturity of the principal of or interest on (or Additional Amounts, if any, with respect thereto) the Securities or the date fixed for redemption of any Security shall be at any place of payment a day other than a Business Day, then payment of principal or interest (or Additional Amounts, if any) need not be made on such date at such place but may be made on the next succeeding Business Day at such place of payment, with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. 13. Notices. All notices to the Holders of Securities will be published on a Business Day in Authorized Newspapers in The City of New York and in London, and, as long as the Securities are listed on the Luxembourg Stock Exchange, in an Authorized Newspaper in Luxembourg, or, if either publication in London or Luxembourg is not practical, in an Authorized Newspaper in Western Europe. Notices shall be deemed to have been given on the date of publication as aforesaid or, if published on different dates, on the date of the first such publication. A copy of each notice will be mailed by the Trustee, on behalf of and at the expense of the Company, by first-class mail to each holder of a Registered Security at the registered address of such holder as the same shall appear in the Security Register on the day fifteen days prior to such mailing. The Trustee shall promptly furnish to the Company, the Paying Agent and to each other paying agency of the Company a copy of each notice so published or mailed. 14. Governing Law. (a) The Indenture, this Security and any coupons appertaining hereto shall be governed by and construed in accordance with the laws of the State of New York, United States of America, without regard to principles of conflicts of laws. (b) The Company has appointed the Trustee as its agent upon whom process may be served in any legal action or proceeding relating to or arising out of this Security, the Indenture or any Coupon appertaining hereto. 15. Authentication. This Security and any Coupon appertaining thereto shall not become valid or obligatory for any purpose until the certificate of authentication hereon shall have been duly signed by the Trustee or an authenticating agent acting under the Indenture. 16. Warranty of the Issuer. Subject to Section 15 hereof, the Company hereby certifies and warrants that all acts, conditions and things required to be done and performed and to have happened precedent to the creation and issuance of this Security and any Coupons appertaining thereto, and to constitute the same legal, valid and binding obligations of the Company enforceable in accordance with their terms, have been done and performed and have happened in due and strict compliance with all applicable laws. 17. Status as United States Real Property Holding Corporation. A-18 To the best of its knowledge, as of the date of the issuance of this Security, the Company is not a "United States real property holding corporation" as defined in Section 897(c)(2) of the United States Internal Revenue Code of 1986, as amended (the "Code"). A non-United States person disposing of this Security may request from the Company a statement as to whether this Security constitutes a "United States real property interest" (as defined in Code Section 897(c)(1)) as of the date of disposition. It may be necessary to obtain a statement that this Security does not constitute a "United States real property interest" prior to the time that a tax return would otherwise be required to be filed with the United States Internal Revenue Service with respect to such disposition in order to avoid a withholding tax on such disposition. If, at any time while this Security is outstanding, the Company determines that it is at such time a "United States real property holding corporation", it shall provide notice of such determination in accordance with the provisions of Section 13 hereof. The Holder of this Security can contact the Company at 3420 Ocean Park Boulevard, Suite 1000, Santa Monica, California 90405 to obtain information as to the United States income tax consequences of the classification of the Company as a "United States real property holding corporation." 18. Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Holder of a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company will cause CUSIP numbers to be printed on the Securities as a convenience to the Holders of the Securities. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. 20. Additional Rights of Holders of Restricted Securities. In addition to the rights provided to Holders of Securities under the Indenture, Holders of Restricted Securities shall have all the rights set forth in the Registration Rights Agreement. 21. Accounting Terms. All accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with generally accepted accounting principles as applied in the United States. 22. Descriptive Headings: The descriptive headings appearing herein are for convenience of reference only and shall not alter, limit or define the provisions hereof. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture and/or the Registration Rights Agreement. Request may be made to: Veterinary Centers of America, Inc. 3420 Ocean Park Boulevard, Suite 1000 Santa Monica, California 90405 Attention: Secretary A-19 TRANSFER NOTICE FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and transfer(s) unto ___________________________ whose taxpayer identification number is ________________ and whose address including postal/ZIP code is ____________________________________________________the within Security and all rights thereunder, hereby irrevocably constituting and appointing ____________________________________________________________ attorney-in-fact to transfer said Security on the books of the Company with full power of substitution in the premises. Only if a Restricted Security: In connection with the transfer of this Security, the undersigned certifies that (check one): [_] (a) This Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act")) in compliance with the exemption from registration under the Securities Act of 1933 provided by Rule 144A thereunder. [_] (b) This Security is being transferred in an Offshore Transaction (as defined in Regulation S under the Securities Act) in compliance with the exemption from registration under the Securities Act provided by Regulation S thereunder. [_] (c) This Security is being transferred in a transaction arranged by a broker or dealer registered under the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), to an institutional "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act) in a transaction not involving any general solicitation or general advertising and in connection with which transfer the Company has received, if it has so requested, an opinion of counsel (satisfactory to it in form and substance) to the effect that the transfer is being made pursuant to an exemption from the registration requirements of the Securities Act. [_] (d) This Security is being transferred to Veterinary Centers of America, Inc.. [_] (e) In connection with a transfer, other than those above, as to which the Company has received an opinion of counsel (satisfactory to it in form and substance) to the effect that the transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. [_] (f) This Security is being exchanged for a beneficial interest in the Rule 144A Global Security and the undersigned is a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act). Dated: Name: By:______________________ Name: Title: NOTICE: The signature of the Holder to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without enlargement or any change whatsoever. SIGNATURE GUARANTEED A-20 TO BE COMPLETED BY A BROKER OR DEALER IF (c) ABOVE IS CHECKED: The undersigned represents and warrants that (i) it is a broker or dealer registered under Section 15 of the Exchange Act, (ii) each person which will become a beneficial owner of this Security upon transfer is an institutional investor which is an "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act); (iii) no general solicitation or general advertising was made or used by it in connection with the offer and sale of this Security to such person(s); and (iv) each such person has been notified that this Security has not been registered under the Securities Act and is subject to the restrictions on transfer of the Security set forth herein and in the Indenture. Dated: By:__________________________ Name: Title: IF NONE OF THE FOREGOING BOXES IS CHECKED, THE TRUSTEE SHALL NOT BE OBLIGATED TO REGISTER THE TRANSFER OF THIS SECURITY UNLESS AND UNTIL THE CONDITIONS TO ANY SUCH TRANSFER OF REGISTRATION SET FORTH HEREIN, ON THE FACE HEREOF AND IN THE INDENTURE SHALL HAVE BEEN SATISFIED. A-21 CONVERSION NOTICE If (i) Registered Security of denomination U.S.$1,000 or (ii) Bearer Security of denomination U.S.$1,000: The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security into shares of Common Stock of Veterinary Centers of America, Inc. in accordance with the terms of this Security and directs that such shares be registered in the name of and delivered, together with a check in payment for any fractional share, to the undersigned unless a different name has been indicated below. If shares are to be registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: _____________________________ Signature MUST BE MEDALLION GUARANTEED IF THE STOCK IS TO BE ISSUED IN A NAME OTHER THAN THE REGISTERED HOLDER OF THE SECURITY If shares are to be registered in the name of and delivered to a person other than the holder, please print such person's name and address and, if this is a Restricted Security, complete Transfer Notice: _____________________________ HOLDER Please print name and address of holder: CONVERSION NOTICE If (i) Registered Security of denomination greater than U.S.$1,000 or (ii) Bearer Security of denomination U.S.$10,000: The undersigned holder of this Security hereby irrevocably exercises the option to convert this Security, or portion hereof (which is U.S.$1,000 or an integral multiple thereof below designated, into shares of Common Stock of Veterinary Centers of America, Inc. in accordance with the terms of this Security, and directs that such shares, together with a check in payment for any fractional share and any Securities representing any unconverted principal amount hereof, be delivered to and be registered (if a Registered Security) in the name of the undersigned unless a different name has been indicated below. If shares or A-22 Securities are to be registered in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: ____________________________ Signature MUST BE MEDALLION GUARANTEED IF THE STOCK IS TO BE ISSUED IN A NAME OTHER THAN THE REGISTERED HOLDER OF THE SECURITY If shares of Securities are to be registered in the If only a portion of the Securities in the name of name is to be converted, please indicate: of a Person other than the holder, please print such person's name and address and, if this is a 1. Principal Amount to be Security, Restricted complete Transfer Notice: converted: Security, complete Transfer Notice U.S.$ 2. Kind, amount and denomination of Securities representing unconverted principal amount to be issued: Bearer-U.S.$_____________________________ Denominations: U.S.$____________________ (U.S.$1,000 or $10,000) Registered-U.S.$ Denominations: U.S.$____________________ (U.S. $1,000 or an integral multiple thereof) Registered Securities are not exchangeable for Bearer Securities.
REDEMPTION NOTICE UNDER SECTION 3(d) The undersigned holder of this Security hereby requests and instructs the Company to redeem this Security in accordance with the terms of Section 3(d) of this Security and directs that a check in payment of the redemption amount be delivered to the undersigned unless a different name has been indicated below. The undersigned understands that this request can be revoked by delivering written notice to the Paying Agent on or before the Holder Redemption Date, together with the undersigned's non-transferable receipt for such Security. Dated: _____________________________ Signature MUST BE MEDALLION GUARANTEED IF CHECK IS TO BE MADE PAYABLE TO A NAME OTHER THAN THE REGISTERED HOLDER OF THE SECURITY If a check in payment of the redemption amount is to be delivered to a person other than the holder, please print such person's name and address: A-23 ___________________________ HOLDER Please print name and address of holder: A-24 [SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES The following exchanges of a part of this Rule 144A Global Security for Registered Accredited Investor Securities have been made:
Principal Amount Signature of Amount of Decrease Amount of Increase of This Global Authorized Officer in Principal in Principal Security Following of Trustee or Amount of This Amount of This Such Decrease Security Date of Exchange Global Security Global Security or Increase Registrar] ---------------- --------------- --------------- ----------- ----------
A-25 EXHIBIT B (FORM OF REGULATION S GLOBAL SECURITY) THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OF AMERICA (INCLUDING THE STATES AND THE DISTRICT OF COLUMBIA), ITS TERRITORIES, ITS POSSESSIONS AND OTHER AREAS SUBJECT TO ITS JURISDICTION (THE "UNITED STATES") OR TO ANY CITIZEN, NATIONAL OR RESIDENT OF THE UNITED STATES OR TO ANY CORPORATION, PARTNERSHIP OR OTHER ENTITY CREATED OR ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES OR ANY POLITICAL SUBDIVISION THEREOF, OR TO ANY ESTATE OR TRUST THE INCOME OF WHICH IS SUBJECT TO UNITED STATES FEDERAL INCOME TAXATION REGARDLESS OF ITS SOURCE OR TO ANY OTHER PERSON DEEMED A U.S. PERSON UNDER REGULATION S UNDER THE SECURITIES ACT ("UNITED STATES PERSONS"), EXCEPT TO CERTAIN INSTITUTIONAL INVESTORS IN THE UNITED STATES IN TRANSACTIONS NOT REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT. ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES FEDERAL INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED. THIS SECURITY IS A TEMPORARY GLOBAL SECURITY, WITHOUT COUPONS, EXCHANGEABLE FOR DEFINITIVE BEARER SECURITIES WITH INTEREST COUPONS OR REGISTERED SECURITIES WITHOUT INTEREST COUPONS. THE RIGHTS ATTACHING TO THIS GLOBAL SECURITY, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR DEFINITIVE SECURITIES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN). NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS GLOBAL SECURITY SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST HEREON EXCEPT PURSUANT TO THE PROVISIONS HEREOF. B-1 VETERINARY CENTERS OF AMERICA, INC. (Incorporated in the State of Delaware) 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2006 TEMPORARY GLOBAL DEBENTURE Veterinary Centers of America, Inc., a corporation duly incorporated and existing under the laws of the State of Delaware (the "Company"), for value received, hereby promises to pay to bearer upon presentation and surrender of this Global Security the principal sum of $________________ United States Dollars on May 1, 2006 and to pay interest thereon, from April 17, 1996 semiannually in arrears on May 1 and November 1 in each year, commencing November 1, 1996, at the rate of 5 1/4% per annum, until the principal hereof is paid or made available for payment; provided, however, that interest on this Global Security shall be payable only after the issuance of the definitive Securities for which this Global Security is exchangeable and, in the case of definitive Securities in bearer form, only upon presentation and surrender (at an office or agency outside the United States, its territories and its possessions, except as otherwise provided in the Indenture referred to below) of the interest coupons thereto attached as they severally mature. This Global Security is one of a duly authorized issue of Securities of the Company designated as specified in the title hereof, issued and to be issued under the Indenture dated as of April 17, 1996 (the "Indenture") between the Company and The Chase Manhattan Bank, N.A., as Trustee (the "Trustee," which term includes any successor trustee under the Indenture). This Global Security is a temporary Security and is exchangeable in whole or from time to time in part without charge upon request of the holder hereof for definitive Securities in bearer form, with interest coupons attached, or in registered form, without coupons, of authorized denominations, (a) not earlier than 40 days after the date hereof and (b) as promptly as practicable following presentation of each certification called for in the Indenture for such purpose, that the beneficial owner or owners of this Global Security (or, if such exchange is only for a part of this Global Security, of such part) are not United States persons or other Persons who have purchased such Security for resale to United States persons. Definitive Securities in bearer form to be delivered in exchange for any part of this Global Security shall be delivered only outside of the United States, its territories and its possessions. Upon any exchange of a part of this Global Security for definitive Securities, the portion of the principal amount hereof so exchanged shall be endorsed by the Trustee or its agent on the Schedule of Exchanges hereto, and the principal amount hereof shall be reduced for all purposes by the amount so exchanged. Until exchanged in full for definitive Securities, this Global Security shall in all respects be entitled to the same benefits under, and subject to the same terms and conditions of, the Indenture as definitive Securities authenticated and delivered thereunder, except that neither the holder hereof nor the beneficial owners of this Global Security shall be entitled to receive payment of interest hereon or to convert this Global Security into shares of Common Stock of the Company or any other security, cash or other property. THIS GLOBAL SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,UNITED STATES OF AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. All terms used in this Global Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. Unless the certificate of authentication hereon has been manually executed by an authorized signatory of the Trustee, this Global Security shall not be entitled to any benefit under the Indenture or valid or obligatory for any purpose. B-2 IN WITNESS, WHEREOF, the Company has caused this Global Security to be duly executed in its corporate name by its duly authorized signatory under its corporate seal. Dated: April 17, 1996 VETERINARY CENTERS OF AMERICA, INC. By: ________________________ Name: Title: [Corporate Seal] Attest: CERTIFICATE OF AUTHENTICATION This is one of the Securities described in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, N.A., as Trustee By: _______________________ Name: Title: B-3 EX-5.1 5 OPINION OF TROOP MEISINGER EXHIBIT 5.1 [LETTERHEAD OF TROOP MEISINGER STEUBER & PASICH, LLP] June 19, 1996 Veterinary Centers of America, Inc. 3420 Ocean Park Boulevard, Suite 1000 Santa Monica, CA 90405 Ladies/Gentlemen: At your request, we have examined the Registration Statement on Form S-4 (the "Registration Statement") to which this letter is attached as Exhibit 5.1 filed by Veterinary Centers of America, Inc., a Delaware corporation (the "Company"), in order to register under the Securities Act of 1933, as amended (the "Act"), shares of Common Stock of the Company and any additional shares of Common Stock of the Company which may be registered pursuant to Rule 462(b) under the Act (the "Shares"). We are of the opinion that the Shares have been duly authorized and upon issuance and sale in conformity with and pursuant to the Registration Statement, and receipt of the purchase price therefor as specified in the Registration Statement, the Shares will be legally and validly issued, fully paid and non-assessable. We consent to the use of this opinion as an Exhibit to the Registration Statement and to use of our name in the Proxy Statement -- Prospectus constituting a part thereof. Respectfully submitted, /s/ Troop Meisinger Steuber & Pasich, LLP TROOP MEISINGER STEUBER & PASICH, LLP EX-10.38 6 LEASE AGREEMENT OFFICE LEASE Project: SANTA MONICA BUSINESS PARK Building: 3420 Ocean Park Boulevard (A) Tenant: VETERINARY CENTERS OF AMERICA, INC. TABLE OF CONTENTS
ARTICLE PAGE 1. FUNDAMENTAL LEASE PROVISIONS........................................ 1 2. PREMISES............................................................ 1 3. TERM................................................................ 2 4. RENT AND EXPENSE PAYMENTS........................................... 2 5. INTENTIONALLY OMITTED............................................... 3 6. EXPENSES............................................................ 3 7. TAXES PAYABLE SOLELY BY TENANT...................................... 7 8. LATE PAYMENTS....................................................... 7 9. SECURITY DEPOSIT.................................................... 8 10. INTENTIONALLY OMITTED............................................... 8 11. USE................................................................. 8 12. SERVICE AND UTILITIES............................................... 8 13. ENTRY BY LANDLORD................................................... 9 14. MAINTENANCE AND REPAIR.............................................. 10 15. ALTERATIONS AND ADDITIONS........................................... 10 16. INDEMNITY........................................................... 11 17. INSURANCE........................................................... 12 18. DAMAGE AND DESTRUCTION.............................................. 13 19. CONDEMNATION........................................................ 13 20. LIENS............................................................... 14 21. DEFAULTS BY TENANT.................................................. 14 22. LANDLORD'S REMEDIES................................................. 15 23. DEFAULT'S BY LANDLORD............................................... 16 24. COSTS OF SUIT....................................................... 16 25. SURRENDER OF PREMISES; HOLDING OVER................................. 16 26. SURRENDER OF LEASE.................................................. 17 27. TRANSFER OF LANDLORD'S INTEREST..................................... 17 28. ASSIGNMENT AND SUBLETTING........................................... 17 29. ATTORNMENT.......................................................... 20 30. SUBORDINATION....................................................... 20 31. ESTOPPEL CERTIFICATE................................................ 21 32. BUILDING OCCUPANCY PLANNING......................................... 21 33. QUIET ENJOYMENT..................................................... 21 34. WAIVER OF REDEMPTION BY TENANT...................................... 21 35. WAIVER OF LANDLORD, TENANT'S PROPERTY............................... 21 36. RULES AND REGULATIONS............................................... 22 37. NOTICES............................................................. 22 38. WAIVER.............................................................. 22 39. MISCELLANEOUS....................................................... 22 40. INTENTIONALLY OMITTED............................................... 24 41. INTENTIONALLY OMITTED............................................... 24 42. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS....................... 24 43. OPTION TO EXTEND TERM............................................... 24 44. NON-DISTURBANCE AGREEMENT........................................... 25 45. HAZARDOUS MATERIALS................................................. 25
EXHIBITS A Description of Page A-1 Description of Project B Verification of Term and Basic Rent C Intentionally Omitted D Subordination of Lease D-1 Subordination of Deed of Trust E Estoppel Statement F Building Rules and Regulations G Intentionally Omitted H Intentionally Omitted INDEX OF DEFINED TERMS After-Hours..................................... EXHIBIT F - PAGE 2 Agreed Rate................................................... 23 assign........................................................ 25 Assignment.................................................... 17 Assigns....................................................... 25 Assuming Tenant............................................... 16 Audit Notice.................................................. 6 Bankruptcy Code............................................... 20 Base Year..................................................... 3 Building...................................................... 1 Commencement Date............................................. 2 Common Area................................................... 4 Expenses...................................................... 23 Extended Term................................................. 24 Extension Rental Notice....................................... 24 gross area.................................................... 1 gross square footage.......................................... 1 Initial Term.................................................. 24 Landlord...................................................... 1 Landlord's Base Year Costs.................................... 3 Mortgagee..................................................... 12 Normal Business Hours........................... EXHIBIT F - PAGE 2 Notice to Extend Term......................................... 24 Option to Extend Term......................................... 4 Premises...................................................... 1 Project....................................................... 2 Proposed Effective Date....................................... 17 Rent.......................................................... 2 rentable area................................................. 2 rentable square footage....................................... 2 Rental........................................................ 2 Subsequent Year............................................... 4 taking........................................................ 13 Tenant........................................................ 1 Tenant's Share................................................ 4 usable area................................................... 1 usable square footage......................................... 1 ii OFFICE LEASE THIS LEASE is made as of this ______ day of ________________ 1996 by and between BARCLAY CURCI INVESTMENT COMPANY, a California general partnership ("Landlord") and VETERINARY CENTERS OF AMERICA, INC., a Delaware corporation ("Tenant"). In consideration of the rents and covenants hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the following described Premises, upon the following terms and conditions: 1. FUNDAMENTAL LEASE PROVISIONS 1.1 PREMISES: Project: Santa Monica Business Park (Article 2) Building: 3420 Ocean Park Boulevard [A] Suite: 2000 Floor: 2nd City: Santa Monica County: Los Angeles State: California 1.2 FLOOR AREA: Rentable Area: 9,176 square feet. (Article 2) Usable Area: 8,193 square feet. 1.3 TERM: 33 months and 3 days (Article 3) Commencement Date: June 1, 1996 Expiry Date: March 3, 1999 1.4 BASIC RENT: Dollars Per Dollars Per (Article 4) Months Rentable Square Foot Month ------ -------------------- ----- 1-Expiry Date $ 1.60 $ 14,681.60 1.5 EXPENSES: Tenant shall pay Tenant's Share of all Expenses that exceed (Article 5) landlord's Base Year costs together with other items of Expense as set forth in Article 6. Tenant's Share is 8.77%. The Base Year shall be the calendar year 1996. 1.6 AFTER-HOURS After-Hours Charges payable by Tenant as of the (Article 6) CHARGES: Commencement Date shall be as follows: Air Conditioning $25.00 per hour, per unit Ventilation only Not available Lighting only $0.00 per hour 1.7 PREPAID Tenant shall pay the Basic Rent for the first month of the (Article 12) RENT: term upon execution of this Lease. 1.8 SECURITY $14,681.60 (Article 9) DEPOSIT: 1.9 LANDLORD'S c/o TRANSPACIFIC DEVELOPMENT COMPANY (Article 37) ADDRESS FOR 2377 Crenshaw Boulevard, Suite 300 NOTICES: Torrance, California 90501-3325 1.10 TENANT'S To the Premises (Article 37) ADDRESS FOR NOTICES: with a copy to: --------------- Troop Meisinger Steuber & Pasich LLP 10940 Wilshire Boulevard, 8th Floor Los Angeles, California 900024-3902 Attention: Robert J. Plotkowski 1.11 BROKER: Julien J. Studley, Inc., Charles Dunn Company, Inc. and (Section 39.3) Transpacific Development Company.
2. PREMISES 2.1 The approximate location of the premises (the "Premises") leased hereunder is shown on the drawing attached hereto Exhibit A. The Premises --------- consist of that certain space situated in the building (the "Building") described in Section 1.1 hereof. The area of the Premises for all purposes hereunder is stipulated to be the square feet of usable area and square feet of rentable area specified at Section 1.2. As used in this Lease, the following terms have the meanings indicated: 2.1.1 The term "gross area" or "gross square footage" means the entire area being measured, including vertical elevator and ventilation shafts, maintenance, telephone, mechanical and electrical rooms and closets, and all other public areas measured from the exterior of exterior walls and from the center line of interior demising walls; 2.1.2 The term "usable area" or "usable square footage" means the entire floor area of tenant space being measured, excluding vertical shafts and all public areas, measured from the exterior walls and the exterior of interior corridor walls, and the center line of interior demising walls; and 1 2.1.3 The term "rentable area" or "rentable square footage" means the entire area measured in the same way within exterior Building walls including all common or public areas of the Building allocated proportionately to each floor of the Building but excluding public stairwells and such vertical shafts. As to the area leased by Tenant, the rentable area is stipulated to be the usable area of the Premises increased by 12%. 2.2 Intentionally Omitted. 2.3 The Premises are a part of a business/commercial complex consisting of the Building and other buildings, landscaping, parking facilities and other improvements described as the "Project" in Section 1.1 hereof. The Project is generally shown on the drawing attached hereto as Exhibit A-1. Landlord may, in its sole discretion, change the size, shape, location, number and extent of any or, all of the improvements in the Project without any liability to or consent of Tenant, except that no material change in the size or location of the Premises shall be made without Tenant's consent. Tenant does not rely on the fact nor does Landlord represent that any specific tenant or number of tenants shall occupy any space in the Project. 2.4 Landlord reserves the right to use the roof and exterior walls of the Premises, and the area beneath, adjacent to and above the Premises, together with the right to install, use, maintain and replace equipment, machinery, pipes, conduits and wiring through the Premises, which serve other parts of the Project, in a manner and in locations which do not unreasonably interfere with Tenant's use of the Premises. No light, air or view easement is created by this Lease. 2.5 Tenant hereby acknowledges that the Project is being, or may be, constructed or reconstructed in phases, and that by reason of construction or reconstruction activities there may be temporary incidents thereof such as dust, dirt, barricades, detours, equipment or material in the Building or Common Areas. Tenant hereby agrees that so long as Landlord conducts such activities in a reasonable manner Landlord shall not be liable for any such incidents of construction or reconstruction. 2.6 Tenant shall lease the Premises in an "As Is" condition and Landlord shall have no obligation to improve, remodel, alter or otherwise modify the Premises for Tenant's occupancy thereof. Landlord warrants that, as of the date Landlord delivers possession of the Premises to Tenant, the Building plumbing, electrical, mechanical, and heating, ventilating and air conditioning systems serving the Premises shall be in good and working condition. The Premises shall be delivered to Tenant "broom-clean", free of debris. 3. TERM 3.1 COMMENCEMENT DATE. The term of this Lease shall be for the duration set forth in Section 1.3 hereof and shall commence on the date specified as the Commencement Date (the "Commencement Date") at Section 1.3 and shall expire upon the Expiry Date set forth at Section 1.3 unless earlier terminated in accordance with the provisions of this Lease. Landlord shall complete and deliver to Tenant an instrument substantially in the form set forth in Exhibit B attached hereto and Tenant shall promptly execute and return the same to Landlord after making any corrections to any factual errors. This Lease shall be a binding contractual agreement effective upon the date of execution hereof by both Landlord and Tenant, notwithstanding the later commencement of the term of this Lease. 3.2 INTENTIONALLY OMITTED. 3.3 INTENTIONALLY OMITTED. 3.4 EARLY ACCESS. Tenant shall be permitted continuous access to the Premises (including the parking to which Tenant is entitled pursuant to the Parking License Agreement and the use of the heating, ventilating and air conditioning system) three (3) weeks prior to the Commencement Date pursuant to all of the terms and conditions contained in this Lease, except for the obligation to pay Basic Rent and Tenant's Share of Expenses solely for the purpose of installing furniture, fixtures and telephone systems; however, if Tenant should conduct business from the Premises at any time during such three (3)-week period, the Basic Rent and Tenant's Share of Expenses shall commence upon such date. Tenant shall not be charged for the use of freight elevators for the purpose of installing such furniture, fixtures and telephone system. Tenant shall inform Landlord or its representative at the property management office at the Project of the date or dates it will require access to the Premises and Landlord shall provide Tenant access to the Premises on such days. Prior to Tenant obtaining any access to the Premises under this Section 3.4, Tenant shall deliver to Landlord the certificates of insurance required pursuant to Article 17, and Landlord shall have no obligation to admit Tenant or any of its employees, agents or contractors until such certificates have been so delivered. 4. RENT AND EXPENSE PAYMENTS 4.1 GENERAL. The "Rent" or "Rental" hereunder is composed of "Basic Rent" as set forth in Section 1.4 hereof and adjustments thereto as hereinafter provided. The term "Expenses" hereunder means all costs, expenses, fees, charges or other amounts described in Article 6. Tenant agrees to pay to Landlord all Rent and Expenses required under this Lease, which shall be payable monthly to Landlord (unless expressly provided otherwise), without deduction or offset except as otherwise expressly provided in this Lease, in lawful money of the United States of America at the office maintained by Landlord in the Project or at such other place as Landlord may from time to time designate in writing. Notwithstanding any contrary provisions of this Lease, all Expenses, 2 late payment fees, interest, "After-Hours Charges", parking fees payable under the "Parking License Agreement" attached hereto, and all other sums of money or charges required to be paid pursuant to this Lease shall be deemed "Additional Rent" for the Premises; and in any notice to pay rent or quit the Premises, Landlord. may include and designate same as rent then past due and owing, if such is the case. No acceptance by Landlord of partial payment of any sum due from Tenant shall be deemed a waiver by Landlord of any of its rights to the full amount due. nor shall any endorsement or statement on any check or accompanying letter from Tenant be deemed an accord and satisfaction. Any Rent payments or other sums received from Tenant or any other person shall be conclusively presumed to have been paid on Tenant's behalf, unless Landlord has been given prior written notice to the contrary by Tenant. Tenant agrees that the acceptance by Landlord of any such payment shall not constitute a consent by Landlord or a waiver of any of its rights under this Lease. In no event shall the foregoing be construed as requiring Landlord to accept any Rent or other sums from any person other than Tenant. If the term hereof begins or ends on a day other than the last day of a month, then the Rent and Expenses for such month shall be prorated based on the actual number of days in such month. All prorations of Rent or Expenses under this Lease for fractional periods shall be based on the actual number of days in such month and on the actual number of days in such year. 4.2 BASIC RENT. Tenant shall pay the "Basic Rent" set forth in Section 1.4 hereof on the first day of each month in advance, beginning on the Commencement Date. Landlord may, but shall not be obligated to, send a bill or statement for Rent to Tenant each month, but Tenant shall be obligated to pay Rent on the first day of each month regardless of whether or not it receives a bill or statement. 4.3 PREPAID RENT. Tenant shall pay prepaid Basic Rent concurrently with the execution of this Lease, as set forth in Section 1.7 hereof. 5. INTENTIONALLY OMITTED 6. EXPENSES 6.1 Tenant shall pay its share of "Expenses" on the first day of each month during the term hereof or otherwise as set forth in this Article 6. The monthly Expenses payable by Tenant hereunder consist of the amount by which Tenant's Share of Expenses exceeds Landlord's, Base Year Costs (as such terms are hereinafter defined), calculated as follows: Total Expenses (estimated or actual) multiplied by Tenant's Share minus Landlord's Base Year Costs, divided by twelve (12) months. 6.2 DEFINITIONS. As used in this Lease, the following terms have the meanings indicated: 6.2.1 "Landlord's Base Year Costs" means the annualized dollar amount which results from multiplying the total actual Expenses incurred by Landlord during the Base Year by Tenant's Share. Such amount constitutes the amount per year which Landlord agrees to pay towards Expenses allocable to the Premises, without reimbursement from Tenant. Landlord's Base Year Costs shall be adjusted to be equal to Landlord's reasonable estimate of Expenses assuming at least ninety-five percent (95%) of the total rentable area of the Building was occupied for the entire year, and assuming the Building was fully completed and fully assessed for property tax assessment, maintenance and repair purposes. 6.2.2 The term "Expenses" means all expenses, costs and fees paid or incurred by Landlord during any calendar year during the term hereof in connection with or attributable to the Building and Common Area (as described hereinafter), including any parking facilities therein, for: 6.2.2.1 Electricity, water, gas, sewer, and all other utility services to or for the Building or Common Area, including any utility taxes, fees, charges or other similar impositions paid or incurred by Landlord in connection therewith; and 6.2.2.2 Operation, maintenance, security services, replacement for normal wear and tear, repair, restriping or resurfacing of paving, management (including costs of on-site offices and personnel and a reasonable home-office overhead allocation), insurance (including public liability and property damage, rent continuation, boiler and machinery and extended coverage insurance), and cleaning of the Building and Common Area and all furnishings, fixtures and equipment therein, but excluding the costs of special services rendered to tenants (including Tenant) for which a separate charge is made, costs of leasing and preparing space for new tenants in the Building, or costs borne solely by Tenant under the Lease. The term "Expenses" includes the annual amortization of costs (including financing at the then prevailing rate, if any) of any equipment, device or improvement (a) required after completion of the Building by governmental authority or (b) incurred as a labor saving measure or to reduce operation or maintenance expenses with respect to the Building and Common Area where such costs are amortized over the useful life thereof and which do not inure primarily to the benefit of any particular tenant; however, the annual amortization of costs under (b) preceding shall be limited to an amount reasonably anticipated to be the annual reduction of labor, operation or maintenance expenses resulting from such equipment, device or improvement; and 6.2.2.3 All real property taxes and personal property taxes, licenses, charges and assessments which are levied, assessed, imposed or collected by any governmental authority or improvement or assessment district during any calendar year with respect to the Building or Common Area and the land on which the same is located, and any improvements, fixtures, 3 equipment and other property of Landlord, real or personal, located in the Project and used in connection with the operation or maintenance of the Building or Common Area (computed on a cash basis or as if paid in permitted installments regardless of whether actually so paid), as well as any tax which shall be levied or assessed in addition to or in lieu of such taxes (it being acknowledged that because of the passage of laws which limit increases in real property taxes, government agencies may impose fees, charges, assessments or other levies in connection with services previously furnished without charge or at a lesser charge and which were previously paid for in whole or in part, directly or indirectly by real property taxes), any gross excise tax or other similar tax, and any costs or expenses of contesting any such taxes, licenses, charges or assessments, but excluding any federal or state income or gift tax or any franchise, capital stock, estate or inheritance taxes. 6.2.3 The term "Common Area" means that portion of the Project other than the Building and other buildings for lease to tenants which is from time to time designated and improved for nonexclusive, common use by tenants of the Project, their employees and invitees. The general location of the Common Area is shown on Exhibit A-1 attached hereto and incorporated by reference. The Common Area includes parking facilities in the Project. Any cost or expense included in Expenses which is attributable to Common Area shall be prorated by Landlord to the Building based on the proportion which the total square footage of the Building bears to the total square footage of all buildings in the Project from time to time or by such other fair and reasonable method of allocations based on use or benefit as Landlord may determine, except that, with regard to taxes, Landlord may use such allocation of taxes among the various parcels in the Project as may have been used by the taxing authority. 6.2.4 The term "Base Year" means the calendar year specified at Section 1.5. 6.2.5 The term "subsequent Year" means the first full calendar year following the Base Year and each calendar year, or part thereof, thereafter occurring during the term of this Lease, 6.2.6 "Tenant's Share" is hereby agreed by Landlord and Tenant to be the percentage set forth in Section 1.5 hereof. 6.2.7 Notwithstanding the foregoing, for purposes of this Lease, Expenses shall not, except as otherwise set forth in this Section 6.2.7, include the following: 6.2.7.1 Bad debt and interest, principal, points and fees on debts (except in connection with the financing of items which may be included in Expenses) or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building or the Project (including the land on which the Building is situated) except that interest, principal and amortization of expenditures permitted pursuant to this Article 6 are expressly included as Expenses. 6.2.7.2 Marketing costs, including leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with present or prospective tenants or other occupants of the Building, including attorneys' fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Building. 6.2.7.3 Real estate brokers' leasing commissions. 6.2.7.4 Costs, including permit, license and inspection costs, incurred with respect to the installation of other tenants' or occupants' improvements made for tenants or other occupants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants in the Building. 6.2.7.5 The cost of providing any service directly to and paid directly by any tenant (except if such service is paid for as part of such tenant's share of Expenses. 6.2.7.6 Costs of any items (including costs incurred by Landlord for the repair of damage to the Building) to the extent Landlord receives reimbursement from insurance proceeds therefor or from a third party, except as an item of Expense under such third party's lease (except that any deductible amount under any insurance policy shall be included within Expenses) or to the extent covered by warranties then in effect. 6.2.7.7 Costs of capital improvements, except those set forth in Section 6.2.2.2 hereof. 6.2.7.8 Depreciation, amortization and interest payments, on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, except if such depreciation, amortization and 4 interest payments would otherwise have been included in the charge for such third party's services. 6.2.7.9 Costs incurred by Landlord for equipment and tools which are considered capital improvements under generally accepted accounting principles, consistently applied, except as specifically included in Expenses pursuant to the terms of this Lease. 6.2.7.10 Expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged for directly (and not as an item of Expense) but which are provided to another tenant or occupant of the Building, without charge. 6.2.7.11 Costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building (however, this will not excuse Tenant from the payment of Tenant's Share of insurance premiums and deductibles otherwise payable as items of Expense hereunder). 6.2.7.12 Costs arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitration pertaining to Landlord and any other tenant (however, this shall not excuse Tenant from the payment of Tenant's Share of insurance premiums and deductibles otherwise payable as items of Expense hereunder). 6.2.7.13 Overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Building to the extent the same exceeds the costs of such goods and/or services that would otherwise have been paid to unaffiliated third parties on a reasonably competitive basis. 6.2.7.14 Landlord's general corporate overhead, corporate general and corporate administrative expenses. 6.2.7.15 Costs associated with the business of the partnership or entity which constitutes Landlord as the same are distinguished from the costs of the operation of the Project and the Building, including partnership accounting and legal fees, costs of defending lawsuits with any mortgagee (except as the actions of Tenant may be in issue). 6.2.7.16 Advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building or other tenants' signs. 6.2.7.17 Tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or file returns when due. 6.2.7.18 Costs arising from Landlord's charitable or political contributions. 6.2.7.19 Costs arising from latent defects in the original construction of the base, shell and core of the Building or improvements installed by Landlord. 6.2.7.20 Costs necessitated by or resulting from the gross negligence of Landlord, or any of its agents, employees or independent contractors (however, this shall not excuse Tenant from paying Tenant's Share of Expenses associated with any insurance premiums or deductibles covering any such acts). 6.2.7.21 Costs for the removal, treatment, disposal and clean-up of any hazardous materials (as defined by applicable governmental agencies). 6.2.7.22 Salaries and benefits for leasing agents, promotional directors end executives above the level of regional property manager. 6.3 PAYMENT OF ESTIMATED EXPENSES. Tenant shall pay estimated Expenses to Landlord as follows: 6.3.1 Landlord shall submit to Tenant, on or before March 31 of the first Subsequent Year or as soon thereafter as Landlord has sufficient data, a reasonably detailed and itemized statement showing the Expenses for the Base Year. 6.3.2 For each Subsequent Year, Landlord shall submit to Tenant, prior to January 1 of such Subsequent Year or as soon thereafter as practicable, a reasonably detailed statement showing the estimated Expenses for such Subsequent Year. The determination of estimated Expenses hereunder shall be made by Landlord reasonably and without discrimination based upon Landlord's experience with actual costs and projections for the Project. Tenant shall pay monthly to Landlord an amount equal to the excess of (a) the sum of the total annual estimated Expenses multiplied by Tenant's Share minus (b) Landlord's Base Year Costs, over (c) twelve (12) months. If Landlord does not submit said statement to Tenant prior to January 1 of any such Subsequent Year, Tenant shall continue to pay its share of estimated Expenses at the then existing rate until such statement is submitted, and, thereafter, at the monthly Rent payment date next following the submittal of such statement, shall pay its share of estimated Expenses based on the rate set 5 forth in such statement together with any amounts based on such rate which may have theretofore accrued from January 1 of such Subsequent Year. Landlord may revise such estimated Expenses at the end of any calendar quarter, and Tenant shall pay Tenant's Share of such revised estimated Expenses after notice thereof as herein provided. In the event estimated Expenses are so revised at the end of a calendar quarter, Tenant may request in writing the basis for such recalculation and Landlord shall provide Tenant with the reasonable basis for such revision. 6.4 PAYMENT OF ACTUAL EXPENSES. Actual Expenses shall be reconciled against payments of estimated Expenses as follows: 6.4.1 On or before March 31 of the second Subsequent Year and each Subsequent Year thereafter, or as soon thereafter as Landlord has sufficient data, Landlord shall submit to Tenant a reasonably detailed and itemized statement showing the actual Expenses paid or incurred by Landlord during the previous calendar year. If Tenant's Share of such actual Expenses is less than the amount of estimated Expenses for such previous year theretofore paid by Tenant, then Landlord shall credit the amount of such difference against estimated and/or actual Expenses which may thereafter be due from Tenant; provided, however, that in no event shall Tenant receive a credit as provided herein for any amount calculated to be less than Landlord's Base Year Costs. If Tenant's Share of such actual Expenses is more than the amount of the estimated Expenses for such previous year theretofore paid by Tenant, then Tenant shall, at the later of (a) 15 days after its receipt of such statement or (b) the monthly Rent payment date next following the submittal of such statement to Tenant, pay to Landlord the full amount of such difference. 6.4.2 The reconciliation of the Expenses paid by Tenant for the calendar year in which this Lease terminates shall be made upon Landlord's submittal to Tenant of the statement of actual Expenses for such calendar year. The estimated and actual Expenses for such calendar year shall be prorated based on the actual number of days in such calendar year that this Lease was in effect, and shall be compared. If pursuant to such comparison it is determined that there has been an underpayment or an overpayment by Tenant for such calendar year, Landlord shall refund the overpayment to Tenant, or Tenant shall pay the amount calculated as owing to Landlord, as the case may be, within thirty (30) days after the submittal of the statement by Landlord. This provision shall survive the expiration or termination of the Lease, If Landlord deems it advisable, Landlord may submit partial year statements pursuant to this Section 6.4.2 in order to cause an earlier reconciliation of Expenses for the calendar year in which this Lease terminates. Such reconciliation shall be final and binding upon the parties and there shall be no further obligation by Tenant to pay any further sums to Landlord (whether pursuant to Section 6.5.4 or otherwise) nor shall Landlord have any further obligation to pay to Tenant any credit against Expenses. 6.4.3 Tenant's Right of Audit. If Tenant should in good faith dispute the amount of Tenant's Share of Expenses as contained in such statement ("Disputed Statement"), Tenant shall have the right to audit Landlord's records with respect thereto in accordance with the provision of this Section 6.4.3: 6.4.3.1 Tenant shall give Landlord no less than thirty (30)days prior written notice of such dispute and of Tenant's intent to audit ("Audit Notice"), which Audit Notice must be given to Landlord within ninety (90) days following the date of Tenant's receipt of the Disputed Statement. However, in no event shall Tenant conduct an audit more than once in any calendar year. 6.4.3.2 The records relating to the Disputed Statement shall be audited by an independent certified public accountant, who shall not, however, be retained or compensated on a contingency fee basis. The audit shall be conducted at the office where such records are maintained during regular business hours. The auditor shall deliver a certified copy of the audit to Landlord concurrently with the delivery of such audit to Tenant. The audit, the results of the audit and the records pertaining thereto shall be considered confidential and shall not be revealed by Tenant or its auditor to anyone other than Tenant's accountants, Tenant's legal counsel and Landlord. No records or copies of records in any form may be removed from the office where such records are maintained. 6.4.3.3 If such audit reveals that Landlord has overcharged or undercharged Tenant, such audit shall be subject to the reasonable review of, and acceptance by, Landlord, and the results of such reasonable review of Landlord shall be binding upon the parties. 6.4.3.4 If, as a result of these audit provisions, it is determined that Tenant was overcharged in such statement, then Landlord shall reimburse Tenant within thirty (30) days after the later to occur of (a) Landlord's receipt of Tenant's written demand therefor or (b) Landlord's receipt of the certified auditor's report, uncontested by Landlord. If, as a result of these audit provisions, it is determined that Tenant was undercharged, then notwithstanding any contrary provision contained in this Article 6, Tenant shall pay to Landlord the difference within thirty (30) days after written demand therefor from Landlord. 6.4.3.5 Tenant shall pay the costs and expenses for such audit; however, if as a final result of these audit procedures it is determined that (a) the difference in Expenses is in excess of five percent (5%) and (b) Tenant was overcharged in the Disputed Statement, then Landlord shall 6 reimburse Tenant for the reasonable, usual and customary costs for such audit (exclusive, however, of travel and lodging costs and attorneys' fees), within thirty (30) days after Landlord has received from Tenant an itemized paid invoice from such auditor. 6.4.3.6 Tenant shall not be permitted to conduct an audit at any time Tenant is in default of this Lease. 6.5 OTHER EXPENSE PROVISIONS. 6.5.1 Notwithstanding any provision of this Article 6 to the contrary, if at any time during the term of this Lease any tenant, pursuant to an express provision in its lease and with Landlord's approval, contracts for certain Building or Common Area services to be provided directly to it and at its expense, which services would normally be furnished by Landlord (e.g., janitorial, maintenance, utilities, etc.), then Landlord may make an appropriate adjustment in calculating Tenant's Share of Expenses to the end that the cost of the remaining services provided by Landlord are shared proportionately by all tenants receiving such services. 6.5.2 In determining the amount of Expenses hereunder, the Expenses shall be adjusted to be equal to Landlord's reasonable estimate of Expenses assuming at least ninety-five percent (95%) of the total rentable area of the Building was occupied for the entire year, and assuming the Building was fully completed and fully assessed for property tax assessment, maintenance and repair purposes. 6.5.3 The computation of Expenses pursuant to this Article 6 is intended to constitute a formula for an agreed sharing of costs by tenants, and may or may not constitute an exact reimbursement to Landlord for costs paid by Landlord, and for Landlord's administration. 6.5.4 Any delay or failure of Landlord in computing or billing for Expenses shall not constitute a waiver of, or in any way impair, the obligation of Tenant to pay Expenses hereunder provided that, with the exception of taxes, items of expense not included as an Expense hereunder within two (2) years following the end of the year in which such expense was incurred shall not be included as an Expense hereunder. However, Tenant shall not be charged interest on unpaid Expenses which have accrued during such time that Landlord has failed to submit a statement for such Expenses. 7. TAXES PAYABLE SOLELY BY TENANT 7.1 In addition to the Rental and Expenses to be paid by Tenant, Tenant shall pay before delinquency and without notice or demand by Landlord any and all taxes levied or assessed on and which become payable by Tenant during the term of this Lease (excluding, however, state and federal personal or corporate income taxes measured by the income of Landlord from all sources, capital stock taxes, and estate and inheritance taxes), whether or not now customary or within the contemplation of the parties hereto, which are based upon, measured by or otherwise calculated with respect to: (i) the gross or net Rent payable under this Lease, including, without limitation, any gross receipts tax or any other gross income tax or excise tax levied by any taxing authority with respect to the receipt of the Rental hereunder, (ii) the value of Tenant's equipment, furniture, fixtures or other personal property located in the Premises; (iii) the possession, lease, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; (iv) the value of any improvements, alterations or additions made in or to the Premises by or on behalf of Tenant, except for those improvements (if any) which are a part of the Premises as of the date of this Lease or (v) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. Real property taxes on improvements which are a part of the Premises as of the date of this Lease shall be deemed to be included in the taxes described in Section 6.2.2.3 above, as to which Tenant shall pay Tenant's Share. 8. LATE PAYMENTS 8.1 If Tenant fails to pay to Landlord when due any Rent, Expenses or other sums owing to Landlord pursuant to the terms of this Lease, said late payment shall bear interest at the Agreed Rate as herein provided and, in addition: 8.1.1 For each such late payment that is not paid within five (5) days after the date the same was due (or, if the payment is for non- recurring rent, then five (5) days after Tenant has received notice to make such payment), Tenant shall pay to Landlord a service charge equal to five percent (5%) of the overdue amount. Tenant acknowledges and agrees that such late payment by Tenant will cause Landlord to incur costs and expenses not contemplated by this Lease, the exact amounts of which will be extremely difficult to ascertain, and that such service charge represents a fair estimate of the costs and expenses which Landlord would incur by reason of Tenant's late payment. Tenant further agrees that such service charge shall neither constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any other right or remedy available to Landlord; and 8.1.2 Following any three (3) consecutive late payments of Rent, Landlord may, upon notice to Tenant, 8.1.2.1 Intentionally Omitted. 7 8.1.2.2 Require that Tenant increase the amount of any Security Deposit required herein by one hundred percent (100%), which additional Security Deposit shall be retained by Landlord, and which may be applied by Landlord, in the manner provided herein with respect to any Security Deposit required herein. 9. SECURITY DEPOSIT 9.1 Upon Tenant's execution of this Lease, Tenant shall deposit with Landlord a "Security Deposit" in the amount set forth in Section 1.8 hereof, which shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease, it being expressly understood and agreed that the deposit is neither an advance Rent deposit nor a measure of Landlord's damages in case of Tenant's default. If Basic Rent is increased pursuant to Article 43, the Security Deposit shall be increased in the same proportion and Tenant shall deposit cash with Landlord in an amount sufficient to increase the Security Deposit to the appropriate amount. The Security Deposit may be retained, used or applied by Landlord to remedy any default by Tenant, to repair damage caused by Tenant to any part of the Project, and to clean the Premises upon expiration or earlier termination of the Lease, As well as to reimburse Landlord for any amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount required hereunder, and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. Tenant may not elect to use any portion of said Security Deposit as a Rental payment although Landlord may elect to do so in the event Tenant is in default hereunder or is insolvent. The Security Deposit or any balance thereof shall be returned to Tenant at Tenant's last known address (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the Lease term has ended and the Premises have been vacated by Tenant in the manner required by this Lease. 10. INTENTIONALLY OMITTED 11. USE 11.1 The Premises shall be used and occupied by Tenant for general office purposes and for no other purpose without the prior written consent of Landlord, which Landlord may withhold in its sole discretion. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, or the Project, with respect to the suitability thereof for the conduct of Tenant's business. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect or cause a cancellation of any fire or other insurance covering the Building, Common Area, or the Premises or any of its contents, nor shall Tenant sell or permit to be kept, used or sold in or about the Premises any article which may be prohibited by a standard form policy of insurance. Tenant shall promptly upon demand reimburse Landlord for any additional premium charged for any such insurance by reason of Tenant's failure to comply with the provisions of this Article 11. Tenant agrees that it will use the Premises in such manner as not to unreasonably interfere with the rights of other tenants of the Building or Common Area. Tenant shall neither use nor allow the Premises, Building or Common Area to be used for any unlawful or objectionable purpose, nor cause, maintain or permit any nuisance or waste in, on or about any portion of the Project. Tenant will not place a load upon any floor exceeding the floor load which such floor was designed to carry, and Landlord reserves the right to prescribe the location of any safe or other heavy equipment in the Premises. Tenant shall not use or allow anything to be done in or about the Premises or the Project which will in any way conflict with any law, ordinance or governmental regulation or requirement of any board of fire underwriters or any duly constituted public authority now in force or hereafter enacted or promulgated affecting the use or occupancy of the Premises, and shall promptly comply with all such laws or requirements at its sole cost and expense. The judgment of any court of competent jurisdiction or any admission by Tenant that Tenant has violated any such law, statute, ordinance, rule, regulation or requirement shall be conclusive of such fact as between Landlord and Tenant. 12. SERVICE AND UTILITIES 12.1 Landlord's Obligations. Landlord shall as a part of Expenses make available to the Premises during the Building's normal business hours as set forth in Rule 17 of the Rules and Regulations described in Article 36 hereof, such amounts of air conditioning, heating and ventilation as shall be required in Landlord's reasonable judgment for the comfortable use of the Premises, as well as elevator service, reasonable amounts of electric current for normal lighting by Building Standard overhead fixtures and for fractional horsepower office machines, and water for lavatory and drinking purposes. "Building Standard" fixtures and equipment are as described in Schedule A to Exhibit C --------- attached hereto or, in absence thereof, as installed in the typical common corridor. Landlord shall as a part of Expenses replace Building Standard light bulbs, tubes and ballasts which need replacing due to normal use. Landlord shall also as a part of Expenses maintain and keep lighted (and, during business hours, air-conditioned) the common stairs, entries and toilet rooms in the Building and shall provide trash removal, janitorial service and window washing customary for similar buildings in the same geographical area. Except to the extent caused by Landlord's negligence, Landlord shall not be in default hereunder or liable for any damages directly or indirectly resulting from, nor shall the Rent be abated or shall there be deemed a constructive or other eviction of Tenant by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing utilities and services, (ii) failure to furnish, or delay in furnishing, any such utilities or services when such failure or delay is caused by acts of God, acts of government, labor disturbances of any kind, or other 8 conditions beyond the reasonable control of Landlord, or by the making of repairs or improvements to the Premises or any part of the Project, or (iii) governmental limitation, curtailment, rationing or restriction on use of water, electricity or any other service or utility whatsoever serving the Premises, Building or Common Area. If (a) Landlord fails to provide any utility Landlord is required to provide Tenant under the provisions of this Section 12.1 (except where such failure is the result of casualty damage to, or a condemnation of, all or a part of the Building), and (b) such failure constitutes a material interference with Tenant's use and occupancy of the Premises, and (c) Tenant has notified Landlord in writing of such failure ("Utility Interruption Notice"), then if such interruption continues for five (5) consecutive days after Landlord has received the Utility Interruption Notice, then (i) Basic Rent shall be wholly abated commencing upon the said fifth (5th) day and continuing until such utility is restored and (ii) if such interruption continues for a period of thirty (30) consecutive days after Landlord has received the Utility Interruption Notice and if Landlord or Landlord's agent is solely responsible for such interruption, then Tenant shall have the right to terminate this Lease by providing Landlord ten (10) days' written notice thereof, which notice must be given after the expiration of the said thirty (30-day period and received by Landlord prior to the date such utility is restored. Landlord shall be entitled to cooperate with the energy conservation efforts of governmental agencies or utility suppliers. The failure of Landlord to provide such services if consistent with the foregoing shall not constitute a constructive or other eviction of Tenant. 12.2 AFTER-HOURS CHARGES. During non-business hours Landlord shall as a part of Expenses keep the public areas of the Building lighted and shall provide elevator service with at least one (1) elevator, but shall not be obligated to furnish ventilation, lighting or air conditioning to the Premises. If Tenant requires ventilation, lighting and/or air conditioning during non-business hours Tenant shall give Landlord at least twenty-four (24) hours prior notice of such requirement or shall follow such other procedure for activating the building energy management system as Landlord may advise Tenant, and Tenant shall pay Landlord the "After-Hours Charges" for such extra service at the rate set forth in Section 1.6 hereof. Such rates are subject to increase from time to time based on increases in Landlord's costs associated with providing such extra services. All payment required for After-Hours Charges shall be deemed to be Additional Rent and Landlord shall have the same remedies for a default in payment thereof as for a default in payment of Rent. 12.3 TENANT'S OBLIGATIONS. Tenant shall pay, prior to delinquency, for all telephone charges and all other materials and services not expressly required to be paid by Landlord, which may be furnished to or used in, on or about the Premises during the term of this Lease. Tenant shall also pay, as Additional Rent, all charges and fees required to be paid by Tenant by the Rules and Regulations described in Article 36 of this Lease. 12.4 EXCESS UTILITY USAGE. Tenant will not without the prior written consent of Landlord use any apparatus or device in the Premises, including (without limitation) electronic data processing machines, punch card machines, and telephone switchgear, which will materially increase the amount of cooling or ventilation or electricity or water usually furnished or supplied for use of the Premises as general office space; nor shall Tenant connect with electric current (except through existing electrical outlets in the Premises) or water pipes, any apparatus or device for the purpose of using electrical current or water, except as may be provided in the Construction Provisions. If Tenant uses electricity at a rate in excess of 4 kilowatt/hours per usable square foot of the Premises per year, the cost to Landlord of any such excess use of utility service by Tenant shall be paid by Tenant based on Landlord's reasonable estimates and costs. If Tenant requires or uses ventilation, cooling, water or electric current or any other resource in excess of that usually furnished or supplied for use of the Premises as general office space, Landlord may cause a special meter or other measuring device to be installed in or about the Premises to measure the amount of water, electric current or other resource consumed by Tenant. The cost of any such meter, and of the installation, maintenance and repair thereof, shall be paid for by Tenant, and Tenant agrees to pay Landlord promptly upon demand for all such water, electric current or other resource consumed, as shown by said meter, at the rates charged by the local public utility or other supplier furnishing the same, plus any additional expense incurred by Landlord in keeping account of the foregoing and administering same. If any lights, machines or equipment (including but not limited to computers) are used by Tenant in the Premises which materially affect the temperature otherwise maintained by the heating, ventilation or air conditioning system, or generate substantially more heat in the Premises than would be generated by Building Standard lights or usual fractional horsepower office equipment, Landlord shall have the right to install any machinery and equipment which Landlord deems necessary to restore the temperature balance in any affected part of the Building, including but not limited to modifications to the Building Standard air conditioning equipment, and the cost thereof including the cost of installation and any additional cost of operation and maintenance occasioned thereby shall be paid by Tenant to Landlord upon demand. Any sums payable under this Section 12.4 shall be considered Additional Rent, and Landlord shall have the same remedies for a default in payment of such sum as for a default in the payment of Rent. 13. ENTRY BY LANDLORD 13.1 Landlord and its authorized representatives shall have the right to enter the Premises upon advance oral notice (except in an emergency, when no notice shall be required) at all reasonable times during normal business hours and at any time in case of an emergency (i) to determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease, (ii) to maintain or to make any repair or restoration to the Building that Landlord has the right or obligation to perform, (iii) to install any meters or other equipment which Landlord may have the right to install, (iv) to serve, post, or keep posted any notices required or allowed under the provisions of this Lease, (v) to post "for sale" signs at any time during the term, and to post "for rent" or "for lease" signs during the last three (3) months of the term, (vi) during the last nine (9) months, to show the Premises to prospective brokers, agents, buyers, tenants, or persons interested in an exchange, (vii) to shore the foundations, footings, and walls of the Building and to erect scaffolding and protective barricades around and about the Building or the Premises, but not so as to prevent entry into the Premises, and (viii) to do any other 9 act or thing necessary for the safety or preservation of the Premises or the Building. Landlord shall have the right at all times to have and retain a key with which to unlock all doors in, upon and about the Premises excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to gain entry in an emergency, and any entry to the Premises obtained by Landlord in accordance with the foregoing shall not be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. Except to the extent caused by the negligence or willful misconduct of Landlord, its agents or employees, Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business and any loss of occupancy or quiet enjoyment of the Premises by reason of Landlord's exercise of its rights or entry in accordance with this Article 13. Tenant shall not be entitled to an abatement or reduction of Rent Expenses, in connection with any such entry. 14. MAINTENANCE AND REPAIR 14.1 LANDLORD'S OBLIGATIONS. Landlord shall as part of Expenses maintain or cause to be maintained in good order, condition and repair the structural and common portions of the Building and all Common Areas in the Project and the Building systems consisting of the Building Standard heating, ventilating and air conditioning system, the Building Standard electrical systems and the Building Standard plumbing systems, but excluding any over-Building standard systems in the Premises (such as Tenant's dedicated HVAC, kitchen plumbing and modular furniture electrical systems) (except to the extent of damage caused by Tenant which shall be repaired by Landlord at Tenant's expense). Landlord shall not be liable, and neither Rent nor Expenses shall be abated, for any failure by Landlord to maintain and repair areas which are being used in connection with construction or reconstruction of improvements, or for any failure to make any repairs or perform any maintenance, unless such failure shall persist for an unreasonable time after written notice of the need thereof is given to Landlord by Tenant. To the extent the provisions of this Article 14 are in conflict with any statute now or hereafter in effect which would afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease, the provisions of this Article 14 shall govern. 14.2 TENANT'S OBLIGATIONS. 14.2.1 Tenant shall, at its sole cost and expense, except for janitorial services furnished by Landlord pursuant to Article 12 hereof, maintain the Premises including all improvements therein in good order, condition and repair excluding preexisting structural defects and the removal or remediation of hazardous materials (for which Tenant, its agents, contractors, employees or invitees were not responsible for creating or bringing onto the Premises). 14.2.2 In connection with Tenant surrendering possession of the Premises at the end of the Lease term, Tenant agrees to repair any damage caused by or in connection with the removal of any article of personal property, business or trade fixtures, machinery, equipment, cabinetwork, furniture, movable partitions or permanent improvements or additions, including without limitation thereto, repairing damage caused by Tenant to the floor and patching and painting the walls where required by Landlord to Landlord's reasonable satisfaction, all at Tenant's sole cost and expense. Tenant shall indemnify, defend and hold Landlord harmless against any loss, liability, cost or expense (including reasonable attorney's fees) resulting from delay by Tenant in so surrendering the Premises. Tenant's obligation hereunder shall survive the expiration or termination of this Lease. 14.2.3 If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant thereafter fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord (together with a charge for Landlord's administration and overhead equal to five percent (5%) thereof) shall be paid by Tenant promptly after demand. Landlord shall have no liability to Tenant for any inconvenience or interference with the use of the Premises by Tenant as a result of performing any such work. 14.3 COMPLIANCE WITH LAW. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. 15. ALTERATIONS AND ADDITIONS 15.1 Tenant may recarpet and/or re-paint the Premises using Building Standard materials and specifications (or better) without the prior consent of Landlord. Otherwise, Tenant shall make no alterations, additions or improvements to the Premises or any part thereof which affects the exterior appearance of the Premises or the Building or any common portion of the Building or any portion of the Common Area or the electrical, mechanical, plumbing or other systems in the Building, without obtaining the prior written consent of Landlord in each instance. Such consent may be granted or withheld at Landlord's sole discretion; however, Landlord shall not unreasonably withhold its consent to any alterations, additions, or improvements to the interior of the Premises, provided the same does not (a) affect the exterior appearance of the Premises, the Building or the Project, or (b) affect any structural portion of the Premises, the Building or the Project, or (c) affect any electrical, mechanical, plumbing or other systems of the Building, or (d) diminish the value of the Premises, and further provided Tenant complies with the provisions this Section 15.1. Tenant shall be permitted to select a contractor and subcontractors from Landlord's list of approved contractors and subcontractors, or such other contractors and subcontractors as 10 Landlord shall approve in writing in advance of the commencement of such work; provided, however, Landlord's designated contractors and subcontractors shall be used for any work involving the mechanical, electrical, plumbing, heating, ventilating and air conditioning systems and other Building systems and the roof. Tenant may elect to have Landlord undertake such work of alterations and additions and, provided Landlord agrees to undertake such work (which may be granted or withheld in Landlord's sole discretion), then Tenant shall reimburse Landlord for the cost thereof (together with a charge for Landlord's administration and management thereof equal to five percent (5%) of the cost incurred) within thirty (30) days after an invoice therefor is submitted to Tenant. Landlord may impose as a condition to such consent such requirements as Landlord may deem necessary in its sole discretion, including without limitation the requirement that Landlord be furnished with working drawings before work commences and that a bond be furnished (however, so long as Tenant hereunder is Veterinary Centers of America, Inc., a Delaware corporation, such bond shall not be required), and requirements relating to the manner in which the work is done, the contractor by whom it is performed, and the times during which it is accomplished, as well as the requirement that upon written request of Landlord prior to the expiration or earlier termination of the Lease, Tenant will remove at its expense any such alterations, improvements or additions to the Premises. Any damage done to the Premises in connection with any such removal shall be repaired at Tenant's sole cost and expense. Landlord may, in connection with any such removal which reasonably might involve damaging the Premises, require that such removal be performed by a bonded contractor or other person for which a bond satisfactory to Landlord has been furnished covering the cost of repairing the anticipated damage. Unless so removed, all such alterations, additions or improvements shall at the expiration or earlier termination of the Lease become the property of Landlord and remain upon the Premises. All such improvements, alterations or additions must be done in a good and workmanlike manner and diligently prosecuted to completion so that the Premises shall at all times be a complete unit except during the period of work. Such improvements, alterations or additions shall only be constructed by a contractor which is bondable. Tenant shall deliver to Landlord upon commencement of such work a copy of the building permit with respect thereto. Upon completion of such work Tenant shall file for record in the office of the County Recorder where the Project is located a Notice of Completion, as required or permitted by law. All such work shall be performed and done strictly in accordance with the laws and ordinances relating thereto and shall be performed so as not to unreasonably obstruct the access to the premises of any other tenant in the Building or Project. Tenant agrees to carry insurance as required by Article 17 covering any improvements, alterations or additions to the Premises made by Tenant under the provisions of this Article 15, it being expressly agreed that none of such improvements, additions or alterations shall be insured by Landlord under the insurance Landlord may carry upon the Building, nor shall Landlord be required under any provision for reconstruction to reinstall any such improvements, additions or alterations. In addition, it is expressly agreed that if any tax is imposed, or the amount of taxes on the Building or the Project is increased, by reason of any such improvements, alterations or additions, Tenant shall be solely responsible therefor under Article 7. 16. INDEMNITY 16.1 INDEMNIFICATION BY TENANT. Tenant shall indemnify, defend and hold Landlord, its agents and employees, harmless from and against any and all claims, liability, loss, cost or expense (including reasonable attorneys' fees) arising out of or in connection with (i) any injury or damage to any person or property occurring in, on or about the Premises or any part thereof or the Building or Common Area, if such injury or damage is caused in part or in whole by any act or omission by Tenant, its agents, contractors, employees or invitees or (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under this Lease. If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause except Landlord's negligence or wrongful acts, and Tenant hereby waives all claims with respect thereto against Landlord. The foregoing provisions shall survive the termination of this Lease. The provisions of this Section 16.1 are subject to the release and waiver contained in Section 17.7 below. 16.2 EXEMPTION OF LANDLORD FROM LIABILITY. If the Premises, the Building, or the Common Area, or any part thereof, is damaged by fire or other cause against which Tenant is required to carry insurance pursuant to this Lease, Landlord shall not be liable to Tenant for any loss, cost or expense arising out of or in connection with such damage. Tenant hereby releases Landlord, its directors, officers, shareholders, partners, employees, agents and representatives, from any liability, claim or action arising out of or in connection with such damage. Furthermore, Tenant shall, pursuant to Article 17, maintain insurance against loss, injury, or damage which may be sustained by the person, goods, wares, merchandise or property of Tenant, its agents, contractors, employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water, or rain, which may leak or flow from or into any part of the Premises or the Building, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether such damage or injury results from conditions arising within the Premises or other portions of the Building, or from other sources, and Landlord shall not be liable therefor, unless caused by Landlord's negligence or wrongful act, and in that event only to the extent not covered by the insurance which Tenant is required to carry pursuant to this Lease. Landlord shall not be liable to Tenant for any damages arising out of or in connection with any act or omission of any other tenant in the Project or for losses due to theft or burglary or other wrongful acts of third parties. 16.3 INDEMNIFICATION BY LANDLORD. Landlord shall indemnify, defend and hold Tenant, its agents and employees, harmless from and against any and all claims, liability, loss, cost or expense (including reasonable attorneys' fees, but excluding consequential damages) arising out of or in connection with (a) any injury or damage to any person or property occurring in, on or about the Premises or any part thereof or the Building or Common 11 Area, to the extent such injury or damage is caused by any act or omission by Landlord, its agents, contractors, employees or invitees, or (b) any breach or default in the performance of any obligation on Landlord's part to be performed under this Lease. If any action or proceeding is brought against Tenant by reason of any such claim, upon notice from Tenant, Landlord shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. The foregoing provisions shall survive the termination of this Lease. The provisions of this Section 16.3 are subject to the release and waiver contained in Section 17.7 below. 17. INSURANCE 17.1 GENERAL. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and the holder of any deed of trust or mortgage secured by any portion of the Premises (hereinafter referred to as a "Mortgagee"). All policies of insurance provided for herein shall be issued by insurance companies with general policyholder's rating of not less than A and a financial rating of not less than Class X as rated in the most current available "Best Insurance Reports". Each policy shall name Landlord and at Landlord's request any Mortgagee and an agent of Landlord as an additional insured, as their respective interests may appear. Tenant shall deliver certificates of such insurance to Landlord, evidencing the existence and amounts of such insurance prior to Tenant's occupancy in the Premises. Failure to make such delivery shall constitute a material default by Tenant under this Lease. All policies of insurance delivered to Landlord must contain a provision that the company writing said policy will give Landlord ten (10) days prior written notice of any modification, cancellation or lapse or reduction in the amounts of insurance. All public liability, property damage and other casualty insurance policies shall be written as primary policies, not contributing with, and not in excess of coverage which Landlord may carry. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least thirty (30) days prior to the expiration thereof. Tenant agrees that if Tenant does not procure and maintain such insurance, Landlord shall provide Tenant written notice thereof and Tenant shall thereafter have five (5) business days to procure such insurance and provide Landlord with evidence therein (as required herein). If Tenant shall fail to procure such insurance and provide such evidence to Landlord within such five-business-day period, then Landlord may (but shall not be required to) obtain such insurance on Tenant's behalf and charge Tenant the premiums therefor together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant may carry such insurance under a blanket policy provided such blanket policy expressly affords the coverage required by this Lease and contains a per location aggregate endorsement and evidence thereof is furnished to Landlord as required above. 17.2 CASUALTY INSURANCE. At all times during the term hereof, Tenant shall maintain in effect policies of casualty insurance covering (i) all improvements in, on or to the Premises (including any Building Standard furnishings, and any alterations, additions or improvements as may be made by Tenant), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or upon the Premises. Such policies shall include coverage in an amount not less than one hundred percent (100%) of the actual replacement cost thereof from time to time during the term of this Lease Such policies shall provide protection against any peril included within the classification "Fire and Extended Coverage", against vandalism and malicious mischief, theft, sprinkler leakage, earthquake sprinkler leakage, and against flood damage (and including cost of demolition and debris removal). Replacement cost for purposes hereof shall be determined by an accredited appraiser selected by mutual agreement between Landlord and Tenant. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth in Article 18, the proceeds under (i) above shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. 17.3 LIABILITY INSURANCE. Tenant shall at all times during the term hereof obtain and continue in force bodily injury liability and property damage liability insurance adequate to protect Landlord against liability for injury to or death of any person in connection with the activities of Tenant in, on or about the Premises or with the use, operation or condition of the Premises. Such insurance at all times shall be in an amount of not less than Two Million Dollars ($2,000,000) for injuries to persons in one (1) accident, not less than One Million Dollars ($1,000,000) for injury to any one (1) person and not lease than Five Hundred Thousand Dollars ($500,000) with respect to damage to property. The limits of such insurance do not necessarily limit the liability of Tenant hereunder. All public liability and property damage policies shall contain a provision that Landlord, although named as an additional insured, shell nevertheless be entitled to recovery under said policies for any loss occasioned to it, its partners, agents and employees by reason of the negligence of Tenant. 17.4 WORKERS' COMPENSATION INSURANCE. Tenant shall, at all times during the term hereof, maintain in effect workers' compensation insurance as required by applicable statutes. 17.5 INTENTIONALLY OMITTED. 17.6 LANDLORD'S INSURANCE. Landlord shall at all times from and after substantial completion of the Premises maintain in effect as an item of Expense a policy or policies of insurance covering the Common Area and the buildings in the Project in an amount of not less than eighty percent (80%) of the actual replacement cost thereof (exclusive of the cost of excavations, foundations and footings) from time to time during the term of this Lease, providing protection against rental loss and any peril generally included in the classification "Fire and Extended Coverage" which may include insurance against sprinkler damage, vandalism, malicious mischief, earthquake and third party liability, and including such coverages in such amounts as Landlord may designate Landlord's obligation to carry the insurance provided for herein may be brought within the coverage of any so-called blanket policy or policies of insurance carried and maintained by Landlord, provided that the coverage afforded will not be reduced or diminished by reason of the use of such blanket policy of insurance. 12 17.7 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any and all rights of recovery against the other or against the directors, officers, shareholders, partners, employees, agents and representatives of the other, on account of loss or damage of such waiving party or its property, or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage. The provisions of this Section 17.7 shall control over any conflicting provisions of this Lease. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier(s) that the foregoing mutual waiver of subrogation is contained in this Lease. The waivers set forth herein shall be required to the extent that same are available from each party's insurer without additional premium, if an extra charge is incurred to obtain such waiver, it shall be paid by the party in whose favor the waiver runs within fifteen (15) days after written notice from the other party. 18. DAMAGE AND DESTRUCTION 18.1 PARTIAL DAMAGE--INSURED. If the Premises, Building or Common Area are damaged by a risk covered under fire and extended coverage insurance protecting Landlord, then Landlord shall restore such damage provided insurance proceeds are available to Landlord to pay eighty percent (80%) or more of the cost of restoration, and provided such restoration by Landlord can be completed within six (6) months after the commencement of work, in the professional and independent opinion of a registered architect or engineer appointed by Landlord. In such event this Lease shall continue in full force and effect so long as the Premises can be used by Tenant, except that Tenant shall be entitled to an equitable reduction of Rent and Expenses while such restoration takes place, such reduction to be based upon the extent to which the damage and the restoration efforts actually, materially interfere with Tenant's use of the Premises. 18.2 PARTIAL DAMAGE--UNINSURED. If the Premises, Building or Common Area are damaged by a risk not covered by such insurance or the insurance proceeds available to Landlord are less than eighty percent (80%) of the cost of restoration, or if the restoration cannot be completed within six (6) months after the commencement of work in the professional and independent opinion of the registered architect or engineer appointed by Landlord, then Landlord shall have the option either to (i) repair or restore such damage, this Lease continuing in full force and effect so long as the Premises can be used by Tenant, but the Rent end Expenses to be equitably reduced as hereinabove provided, or (ii) give notice to Tenant at any time within ninety (90) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than thirty (30) nor more than sixty (60) days after giving such notice. If such notice is given, this Lease shall expire and any interest of Tenant in the Premises shall terminate on the date specified in such notice and the Rent and Expenses, reduced by an equitable reduction (except as hereinabove provided) based upon the extent, if any, to which such damage directly and materially interfered with Tenant's use of the Premises, shall be paid to the date of such termination, and Landlord agrees to refund to Tenant any Rent or Expenses theretofore paid in advance for any period of time subsequent to such termination date. 18.3 TOTAL DESTRUCTION. If the Premises are totally destroyed (i.e, over eighty percent (80%) of the Premises is destroyed or if Tenant cannot use the Premises without major restoration) or if in Landlord's judgment the Premises cannot be restored as set forth above, then, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective as of the date of the damage. 18.4 LANDLORD'S OBLIGATIONS. Landlord shall not be required to carry insurance of any kind on Tenant's property and shall not in the absence of Landlord's negligence or wrongful acts be required to repair any injury or damage thereto by fire or other cause, or to make any restoration or replacement of any paneling, decorations, partitions, ceilings, floor covering, office fixtures or any other improvements or property installed in the Premises by or at the direct or indirect expense of Tenant, and Tenant shall be required to restore or replace same in the event of damage and shall have no claim against Landlord for any loss suffered by reason of any such damage, destruction, repair or restoration. Notwithstanding anything to the contrary contained in this Article 18, Landlord shall have the option not to repair, reconstruct or restore the Premises with respect to damage or destruction as described in this Article 18 occurring during the last twelve (12) months of the term of this Lease or any extension thereof, provided, however, that if Landlord exercises such option this Lease shall be terminated upon such exercise. 18.5 WAIVER BY TENANT. It is expressly agreed that this Article 18 shall govern the rights of Landlord and Tenant in the event of damage and destruction and supersedes the provisions of any statutes with respect to any damage or destruction of the Premises. 19. CONDEMNATION 19.1 If all or a substantial part of the Premises, Building or Common Area is taken or appropriated for public or quasi-public use by the right of eminent domain or otherwise by a taking in the nature of inverse condemnation, with or without litigation, or is transferred by agreement in lieu thereof (any of the foregoing being referred to herein as a "taking"), either party hereto may, by written notice given to the other within thirty (30) days of receipt of notice of such taking, elect to terminate this Lease as of the date possession is transferred pursuant to the taking; provided, however, that before such party may terminate this Lease for a taking, such taking shall be of such an extent and nature as to economically frustrate its business therein, or to substantially handicap, impede or impair its use thereof. No award for any partial or entire taking shall be apportioned, and Tenant thereby assigns to Landlord any and all rights of Tenant now or hereafter arising in or to the same or any part thereof; provided, however, that Tenant may file a separate claim for an award and nothing contained herein shall be deemed to give Landlord any interest in, or to require Tenant to assign to Landlord, any award made to Tenant for the taking of 13 personal property belonging to Tenant. In the event of a taking which does not result in a termination of this Lease, Rent and Expenses shall be equitably reduced to the extent Tenant's business in or use of the Premises is economically impaired as described above. No temporary taking of the Premises or any part of the Project shall terminate this Lease, or give Tenant any right to any abatement of Rent or Expenses hereunder, except that Rent and Expenses shall be equitably reduced as described above during that portion of any temporary taking. To the extent the provisions of this Article 19 conflict with California Code of Civil Procedure Section 1265.130 allowing either party to petition the court to terminate this Lease for a partial taking, the provisions of this Article 19 shall govern. 20. LIENS 20.1 Tenant shall keep the Premises, the Building and the Project free from any liens arising out of work performed, materials furnished, or obligations incurred by Tenant, and shall indemnify, hold harmless and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. Tenant shall give Landlord at least ten (10) business days' prior written notice of the expected date of commencement of work relating to alterations, improvements, or additions to the Premises and if requested by Landlord shall secure a completion and indemnity bond for said work, satisfactory to Landlord, in an amount at least equal to one and one-half (1 1/2) times the estimated cost of such work (however, so long as Veterinary Centers of America, Inc., a Delaware corporation, is Tenant hereunder, such bond shall not be required). Landlord shall have the right at all times to keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord and the Premises, and any other party having any interest therein, against mechanic's and materialmen's liens. If any claim of lien is filed against the Premises or any part of the Project or any similar action affecting title to such property is commenced, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. If Tenant fails, within twenty (20) days following the imposition of any lien, to cause such lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right (but not the obligation) to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all costs and expenses incurred by it in connection therewith (including reasonable attorneys' fees) shall be payable to Landlord by Tenant on demand, with interest at the Agreed Rate from the date of expenditure. 21. DEFAULTS BY TENANT 21.1 The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: 21.1.1 The abandonment of the Premises by Tenant. 21.1.2 The failure by Tenant to make any payment of Rent or Expenses or of any other sum required to be made by Tenant hereunder, within five (5) business days after written demand therefor (which notice shall serve as the notice required under Section 1161 of the California Code of Civil Procedure or any similar or superseding statute). 21.1.3 The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, if such failure is not cured within thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that it cannot be cured solely by payment of money and more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within the thirty (30) day period and thereafter diligently prosecutes such cure to completion; provided, further, that violations by Tenant of the Rules and Regulations described in Article 36 which materially interfere with the rights of other tenants to the extent such tenant(s) could make a claim against Landlord or exercise any remedy under their lease or at law or which constitute a material nuisance or hazard to person or property shall be cured by Tenant within forty-eight (48) hours after written notice thereof from Landlord, failing which Landlord may (but need not) cure same, in which event Tenant shall pay Landlord, within ten (10) days after written notice thereof by Landlord, the amount expended by Landlord to effect such cure together with an administrative charge of fifteen percent (15%) of the amount thereof. 21.1.4 The making by Tenant of any general assignment for the benefit of creditors, the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days) or, the appointment of a trustee or receiver to take possession of, or the attachment, execution or other judicial seizure of, substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. 21.1.5 Intentionally Omitted. 21.2 Any notice required or permitted by this Article 21 is intended to satisfy to the maximum extent possible any and all notice requirements imposed by law on Landlord. Landlord may serve a statutory notice to quit, a statutory notice to pay rent or quit, or a statutory notice of default, as the case may be, to effect the giving of any notice required by this Article 21. 14 22. LANDLORD'S REMEDIES 22.1 In the event of any material default or breach of this Lease by Tenant, Landlord may at any time thereafter, without limiting Landlord in the exercise of any other right or remedy at law or in equity which Landlord may have (all remedies provided herein being non-exclusive and cumulative), do any one or more of the following: 22.1.1 Maintain this Lease in full force and effect and recover the Rent, Expenses and other monetary charges as they become due, without terminating Tenant's right to possession irrespective of whether Tenant shall have abandoned the Premises. If Landlord does not elect to terminate the Lease, Landlord shall have the right to attempt to relet the Premises at such rent and upon such conditions, and for such a term, as Landlord deems appropriate in its sole discretion and to do all acts necessary with regard thereto, without being deemed to have elected to terminate the Lease, including re-entering the Premises to make repairs or to maintain or modify the Premises, and removing all persons and property from the Premises, which property if removed may at Landlord's election be abandoned or stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. Reletting may be for a period shorter or longer than the remaining term of this Lease, and for more or less rent, but Landlord shall have no obligation to relet at less than prevailing market rental rates. If reletting occurs, this Lease shall terminate automatically when the new tenant takes possession of the Premises and commences rent payment. Notwithstanding that Landlord fails to elect to terminate the Lease initially, Landlord at any time thereafter may elect to terminate the Lease by virtue of any uncured default by Tenant. In the event of any such termination, Landlord shall be entitled to recover from Tenant any and all damages incurred by Landlord by reason of Tenant's default (including, without limitation, the damages described in Section 22.1.2 below), as well as all costs of reletting, including commissions, reasonable attorneys' fees, restoration or remodeling costs, and costs of advertising. 22.1.2 Terminate Tenant's right to possession by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including (without limitation) the following: (1) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award, of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (4) any other amount, and court costs, necessary to compensate Landlord for all the detriment proximately caused by Tenant's default or which in the ordinary course of things would be likely to result therefrom (including, without limiting the generality of the foregoing, the amount of any commissions and/or finder's fee for a replacement tenant); plus (5) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) of this Section 22.1.2, the "worth at the time of award" is to be computed by allowing interest at the then maximum rate of interest allowable under law which could be charged Tenant by Landlord, and, as used in subparagraph (3) of this Section 22.1.2, the "worth at the time of award" is to be computed by discounting such amount at the discount rate of the U.S. Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). The term "Rent", as used in this Article 22, shall be deemed to be and to mean all Rent, Expenses, parking fees and other monetary sums required to be paid by Tenant pursuant to this Lease or as defined in Section 4.1 hereof. For the purpose of determining the amount of "unpaid Rent which would have been earned after termination" or the "unpaid Rent for the balance of the term" (as referenced in subparagraphs (2) and (3) hereof), the amount of parking fees and Expenses shall be deemed to increase annually for the balance of the term by an amount equal to the average annual percentage increase in parking fees and Expenses during the three (3) calendar years preceding the year in which the Lease was terminated, or, if such termination shall occur prior to the expiration of the third calendar year occurring during the term of this Lease, then the amount of parking fees and Expenses shall be deemed to increase monthly for the balance of the term by an amount equal to the average monthly percentage increase in parking fees and Expenses during all of the calendar months preceding the month in which the Lease was terminated. 22.1.3 Collect sublease rents (or appoint a receiver to collect such rent) and otherwise perform Tenant's obligations at the Premises, it being agreed, however, that neither the filing of a petition for the appointment of a receiver for Tenant nor the appointment itself shall constitute an election by Landlord to terminate this Lease. 22.1.4 Proceed to cure the default at Tenant's sole cost and expense, without waiving or releasing Tenant from any obligation hereunder. If at any time Landlord pays any sum or incurs any expense as a result of or in connection with curing any default of Tenant (including any administrative fees provided for herein and reasonable attorneys' fees), the amount thereof shall be immediately due as of the date of such expenditure and, together with interest at the Agreed Rate from the date of such expenditures, shall be paid by Tenant to Landlord immediately upon demand, and Tenant hereby covenants to pay any and all such sums. 22.1.5 If Tenant is not occupying the Premises, retain possession of all of Tenant's fixtures, furniture, equipment, improvements, additions and other personal property left in the Premises or, at 15 Landlord's option, at any time, to require Tenant to forthwith remove same, and if not so removed to deem them abandoned and dispose of same. 22.1.6 ADDITIONAL REMEDIES. Upon the occurrence of any of the events specified in Section 21.1.4 or Section 21.1.5, if Landlord shall elect not to exercise, or by law shall not be able to exercise. its right hereunder to terminate this Lease, then, in addition to any other rights or remedies of Landlord under this Lease or provided by law: (i) [intentionally omitted]; and (ii) neither Tenant, as debtor in possession, nor any trustee or other person (collectively, the "Assuming Tenant") shall be entitled to assume this Lease, unless on or before the date of such assumption, the Assuming Tenant (A) cures, or provides adequate assurance that such Assuming Tenant will promptly cure, any existing default under this Lease; (B) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate Landlord for any loss (including, without limitation, reasonable attorneys' fees and disbursements, including on appeal and in connection with any bankruptcy) resulting from such default; and (C) provides adequate assurance of future performance under this Lease Tenant covenants and agrees that, for such purposes (i) any cure or compensation shall be effected by the immediate payment of any monetary default or any required compensation, or the immediate correction acceptable to Landlord of any non-monetary default; (ii) any "adequate assurance" of such cure or compensation shall be effected by the establishment of an escrow fund for the amount at issue or by other method acceptable to Landlord; and (iii) "adequate assurance" of future performance shall be effected by the establishment of an escrow fund for the amount at issue or other method acceptable to Landlord. Provided, further, upon the occurrence of any of the events specified in Section 21.1.4 prior to the date fixed as the Commencement Date (whether or not such default is cured within the time period, if any, provided in such Article), this Lease shall inso facto be canceled and terminated. In such event, (i) neither Tenant nor any person claiming through or under Tenant, or by virtue of any statute or order of any Court, shall be entitled to possession of the Premises; and (ii) in addition to such other rights and remedies provided in this Article 22, Landlord may retain as damages any Rent, Security Deposit (if any) or monies received from Tenant or others on account of Tenant. The foregoing is a material consideration to Landlord for the execution of this Lease. 22.2 All covenants and agreements to be performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and, except as otherwise expressly permitted in this Lease, without any offset to or abatement of Rent or Expenses. 23. DEFAULTS BY LANDLORD 23.1 Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying such failure; provided, however, that if the nature of Landlord's default is such that more than thirty (30) days are required for its cure, then Landlord shall not be deemed to be in default if it commences such cure within the thirty (30)-day period and thereafter diligently prosecutes such cure to completion. Tenant agrees to give any Mortgagee a copy, by certified mail, of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of the address of such Mortgage. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then any such Mortgagee shall have an additional forty-five (45) days within which to have the right, but not the obligation, to cure such default on the part of the Landlord or if such default cannot be cured within that time. then such additional time as may be necessary if within that forty-five (45) days the Mortgagee has commenced and is pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary, to effect such cure), in which event this Lease shall not be terminated while such remedies are being so pursued. If Tenant recovers any judgment against Landlord for a default by Landlord of this Lease, the judgment shall be satisfied only out of the interest of Landlord in the Project and neither Landlord nor any of its partners, shareholders, officers, directors, employees or agents shall be personally liable for any such default or for any deficiency. 24. COSTS OF SUIT 24.1 If either party brings action for relief against the other, declaratory or otherwise. arising out of this Lease, including any suit by Landlord for the recovery of Rent or possession of the Premises, the losing party shall pay the successful party its costs incurred in connection with and in preparation for said action, including its reasonable attorneys' fees. If Landlord, without fault on Landlord's part, is made a party to any action instituted by Tenant against a third party or by a third party against Tenant or by or against any person holding under or using the Premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person, or otherwise arising out of or resulting from any act or omission of Tenant or of any such other person, Tenant shall at its cost and at Landlord's option defend Landlord therefrom and further, except to the extent Landlord is found separately liable for its own negligence or wrongful acts, indemnify and hold Landlord harmless from any judgment rendered in connection therewith and all costs and expenses (including reasonable attorneys' fees) incurred by Landlord in connection with such action. 25. SURRENDER OF PREMISES; HOLDING OVER 25.1 SURRENDER. On expiration or termination of this Lease, Tenant shall surrender to Landlord the Premises, and all Tenant's improvements thereto and alterations thereof, broom clean and in good condition (except for ordinary wear and tear, destruction to the Premises covered by Article 18 of this Lease, and for alterations that Tenant has the right to remove or is obligated to remove, so long as Tenant repairs any damage to the Premises 16 under the provisions of this Article 25 or Article 15), and shall remove all of its personal property including any signs, notices and displays. Tenant shall perform all restoration made necessary by the removal of any such improvements or alterations or personal property, prior to the expiration of the Lease term. If any such removal would damage the Building structure, Tenant shall give Landlord prior written notice thereof and Landlord may elect to make such removal at Tenant's expense or otherwise to require Tenant to post security for such restoration. Landlord may retain or dispose of in any manner any such improvements or alterations or personal property that Tenant does not remove from the Premises on expiration or termination of the term as allowed or required by this Lease and title to any such improvements or alterations or personal property that Landlord so elects to retain or dispose of shall vest in Landlord. Tenant waives all claims against Landlord for any damage or loss to Tenant arising out of Landlord's retention or disposition of any such improvements, alterations or personal property and shall be liable to Landlord for Landlord's costs of storing, removing and disposing of any such improvements, alterations or personal property which Tenant fails to remove from the Premises. Tenant shall indemnify, defend and hold Landlord harmless from all damages, loss, cost and expense (including reasonable attorneys' fees) arising out of or in connection with Tenant's failure to surrender the Premises in accordance with this Section 25.1. 25.2 HOLDING OVER. It Tenant holds over after the term hereof, such tenancy shall be at sufferance only, and not a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a rental in the amount of one hundred fifty percent (150%) of the Rent in effect as of the last month of the term hereof and at the time specified in this Lease, and such tenancy shall be subject to every other term, covenant and agreement contained herein other than any provisions for rent concessions, any obligation of Landlord to undertake any work of improvement upon the Premises or optional rights of Tenant requiring Tenant to exercise same by written notice (such as options to extend the term of the Lease). The foregoing shall not, however, be construed as a consent by Landlord to any holding over by Tenant and Landlord reserves the right to require Tenant to surrender possession of the Premises upon expiration or termination of this Lease. 26. SURRENDER OF LEASE 26.1 The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work as a merger. Such surrender or cancellation shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. The delivery of keys to the Premises to Landlord or its agent shall not, of itself, constitute a surrender and termination of this Lease. 27. TRANSFER OF LANDLORD'S INTEREST 27.1 If Landlord sells or transfers its interest in the Premises (other than a transfer for security purposes) Landlord shall be released from all obligations and liabilities accruing thereafter under this Lease, if Landlord's successor has assumed in writing Landlord's obligations under this Lease. Any Security Deposit, prepaid Rent or other funds of Tenant in the hands of Landlord at the time of transfer shall be delivered to such successor and Tenant agrees to attorn to the purchaser or assignee, provided all Landlord's obligations hereunder are assumed in writing by such successor. Notwithstanding the foregoing, Landlord's successor shall not be liable to Tenant for any such funds of Tenant which Landlord does not deliver to the successor. 28. ASSIGNMENT AND SUBLETTING 28.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not sell, assign, mortgage, pledge, hypothecate or encumber this Lease (any such act being referred to herein as an "assignment"), and shall not sublet the Premises or any part thereof, without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld, and any attempt to do so without such consent shall be voidable by Landlord and, at Landlord's election, shall constitute a material default under this Lease. 28.2 TENANT'S APPLICATION. If Tenant desires at any time to assign this Lease (which assignment shall in no event be for less than its entire interest in this Lease) or to sublet the Premises or any portion thereof and such transaction requires Landlord's consent pursuant to the provisions of this Article 28, Tenant shall submit to Landlord at least thirty (30) days prior to the proposed effective date of the transaction ("Proposed Effective Date"), in writing, a notice of intent to assign or sublease, setting forth: (i) the Proposed Effective Date, which shall be no less than thirty (30) nor more than ninety (90) days after the sending of such notice; (ii) the name of the proposed subtenant or assignee; (iii) the nature of the proposed subtenant's or assignee's business to be carried on in the Premises; and (iv) a description of the terms and provisions of the proposed sublease or assignment. Such notice shall be accompanied by (i) such financial information as Landlord may request concerning the proposed subtenant or assignee, including recent financial statements and bank references; (ii) evidence satisfactory to Landlord that the proposed subtenant or assignee will immediately occupy and thereafter use the affected portion of the Premises for the entire term of the sublease or assignment agreement; (iii) a conformed or photostatic copy of the proposed sublease or assignment agreement; and (iv) any fee required under Section 28.9. During the time that Landlord has in which to exercise the options available to Landlord upon the giving of such notice, as hereinafter described, Tenant shall not sublet all or any part (of the Premises nor assign all or any part of this Lease. 28.3 LANDLORD'S OPTION TO RECAPTURE PREMISES. If Tenant proposes to sublease all or part of the Premises for the balance of the Lease term, Landlord may, at its option upon written notice to Tenant given within thirty (30) days after its receipt of the above-described notice from Tenant, elect to recapture such portion of the Premises as Tenant proposes to sublease and upon such election by Landlord, this Lease shall terminate as to the portion of the Premises recaptured. In the event a portion only of the Premises is recaptured, the Rental payable 17 under this Lease, the Security Deposit, and Tenant's Share shall be proportionately reduced based on the rentable square footage retained by Tenant and the rentable square footage leased by Tenant hereunder immediately prior to such recapture and termination, and Landlord and Tenant shall thereupon execute an amendment of this Lease in accordance therewith. If Landlord recaptures only a portion of the Premises, it shall construct and erect at its sole cost such partitions as may be required to separate the space retained by Tenant from the space recaptured by Landlord; provided, however, that said partitions need only be finished in Building Standard condition. Landlord may, at its option, lease the recaptured portion of the Premises to the proposed subtenant without liability to Tenant. If Landlord does not elect to recapture pursuant to this Section 28.3, Tenant may thereafter enter into a valid sublease with respect to the Premises, provided Landlord, pursuant to this Article 28, consents thereto, and provided further that (i) the sublease is executed within ninety (90) days after notification to Landlord of such proposal, and (ii) the rental therefor is not less than that stated in such notification. Any termination as provided in this Section 28.3 shall be subject to the written consent of any Mortgagee of Landlord. The effective date of any such termination shall be the Proposed Effective Date so long as Tenant has complied with the provisions of Section 28.2 above, and otherwise shall be as specified in Landlord's notice of termination. 28.4 APPROVAL/DISAPPROVAL STANDARDS. In the event that Tenant complies with the provisions of Section 28.2, and Landlord does not exercise an option provided to Landlord under Section 28.3, Landlord's consent to a proposed assignment or sublease shall not be unreasonably withheld. In determining whether to grant or withhold consent to a proposed assignment or sublease, Landlord may consider any reasonable factor. Without limiting what may be construed as a reasonable factor, it is hereby agreed that any one of the following factors will be reasonable grounds for disapproval of a proposed assignment or sublease: 28.4.1 Tenant has not complied with the requirements set forth in Section 28.2 above; 28.4.2 The proposed assignee or subtenant does not have sufficient financial worth, considering the responsibility involved; 28.4.3 The proposed assignee or subtenant does not, in Landlord's reasonable judgment, have a good reputation as a tenant of property; 28.4.4 Landlord has had prior negative leasing experience with the proposed assignee or subtenant; 28.4.5 The use of the Premises by the proposed assignee or subtenant will not be identical to the use permitted by this Lease; 28.4.6 In Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in a business, and the Premises, or the relevant part thereof, will be used in a manner, that is not in keeping with the then current standards of the Building, or that will violate any restrictive or exclusive covenant as to use contained in any other lease of space in the Building or the Project; 28.4.7 The use of the Premises by the proposed assignee or subtenant will violate any applicable law, ordinance or regulation; 28.4.8 Intentionally Omitted; 28.4.9 The proposed assignee or subtenant is a person from whom Landlord has received a signed letter of intent to lease space in the Building or the Project; or, 28.4.10 Intentionally Omitted; 28.4.11 The proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this Article 28. 28.4.12 Intentionally Omitted. 28.5 APPROVAL/DISAPPROVAL PROCEDURE. Landlord shall approve or disapprove the proposed assignment or sublease by written notice to Tenant. If Landlord shall exercise any option to recapture the Premises as herein provided, or denies a request for consent to a proposed sublease or assignment, Landlord shall not be liable to the proposed assignee or subtenant, or to any broker or other person claiming a commission or similar compensation in connection with the proposed assignment or sublease. If Landlord approves the proposed assignment or sublease, Tenant shall, prior to the Proposed Effective Date, submit to Landlord all executed originals of the assignment or sublease agreement and, in the event of a sublease, Landlord's customary and reasonable consent to subletting form executed by Tenant and sublessee for execution by Landlord. Provided such assignment or sublease agreement is in accordance with the terms approved by Landlord, Landlord shall execute each original as described above and shall retain two originals for its file and return the others to Tenant. No purported assignment or sublease shall be deemed effective as against Landlord and no proposed assignee or subtenant shall take occupancy unless such document is delivered to Landlord in accordance with the foregoing. 28.6 REQUIRED PROVISIONS. Any and all assignment or sublease agreements shall (i) contain such terms as are described in Tenant's notice under Section 28.2 above or as otherwise agreed by Landlord; (ii) prohibit further assignments or subleases, (iii) impose the same obligations and conditions on the assignee or sublessee as 18 are imposed on Tenant by this Lease except as to Rent and term or a,a otherwise agreed by Landlord; (iv) be expressly subject and subordinate to each and every provision of this Lease, (v) have a term that expires on or before the expiration of the term of this Lease; (vi) provide that if Landlord succeeds to sublessor's position, Landlord shall not be liable to sublessee for advance rental payments, deposits or other payments which have not been actually delivered to Landlord by the sublessor, and (vii) provide that Tenant and/or the assignee or sublessee shall pay Landlord the amount of any additional costs or expenses incurred by Landlord for repairs, maintenance or otherwise as a result of any change in the nature of occupancy caused by the assignment or sublease. Any and all sublease agreements shall also provide that in the event of termination, re-entry, or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant as sublessor under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of the sublease, except that Landlord shall not: (i) be liable for any previous act or omission of Tenant under the sublease; (ii) be subject to any offset not expressly provided in the sublease, that theretofore accrued to the subtenant against Tenant; or (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one (1) month's fixed rent or any additional rent then due. 28.7 PAYMENT OF ADDITIONAL RENT UPON ASSIGNMENT OR SUBLEASE. If Landlord shall give its consent to any assignment of this Lease or to any sublease of the Premises, Tenant shall, in consideration therefor, pay to Landlord, as additional Rent: 28.7.1 In the case of an assignment, an amount equal to fifty percent (50%) of all sums and other consideration paid to Tenant by the assignee for, or by reason of, such assignment (including, without limiting the generality of the foregoing, all sums paid for the sale of Tenant's leasehold improvements); and 28.7.2 In the case of a sublease, fifty percent (50%) of any rents, additional charges, or other consideration payable under the sublease by the subtenant to Tenant (including, without limiting the generality of the foregoing, all sums paid for the sale or rental of Tenant's leasehold improvements, but excluding reasonable lease concessions granted by Tenant to its subtenant, the cost of tenant improvements made by Tenant for its subtenant, reasonable and customary lease commissions) and sums paid to Landlord pursuant to Section 28.9 hereof, that are in excess of the Rent and Tenant's Share of Expenses and all other costs to Tenant accruing during the term of the sublease in respect of the subleased space and for parking hereunder pursuant to the terms hereof. 28.8 The sums payable under Section 28.7.1 above shall be paid to Landlord as and when paid to Tenant. The sums payable under Section 28.7.2 above shall be paid to Landlord as and when payable by the sublessee to Tenant, after the permitted cost exclusions have been recouped. Within fifteen (15) days after written request therefor by Landlord, Tenant shall at any time and from time to time furnish evidence to Landlord of the amount of all such sums or other consideration received or expected to be received. 28.9 FEES FOR REVIEW. Simultaneously with the giving of the notice described in Section 28.2 above, Tenant shall pay to Landlord or Landlord's designee a non-refundable fee in the amount of Three Hundred Dollars ($300.00) as reimbursement for expenses incurred by Landlord in connection with reviewing each such transaction. 28.10 NO RELEASE OF TENANT. No consent by Landlord to any assignment or subletting by Tenant shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether occurring before or after such consent, assignment or subletting, including Tenant's obligation to obtain Landlord's express prior written consent to any other assignment or subletting. In no event shall any permitted subtenant assign its sublease, further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space, or any part thereof, to be used or occupied by others, except upon compliance with, and subject to the provisions of this Article 28. The acceptance by Landlord of payment from any person other than Tenant shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any subsequent assignment or sublease, or to be a release of Tenant from any obligation under this Lease. 28.11 ASSUMPTION OF OBLIGATIONS. Each assignee of Tenant shall assume the obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of the Rent and the performance of all the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the term of this Lease. No assignment shall be binding on Landlord unless the assignee or Tenant delivers to Landlord a counterpart of the instrument of assignment in recordable form which contains a covenant of assumption by the assignee satisfactory in substance and form to Landlord, and consistent with the requirements of this Article 28. The failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability to Landlord hereunder. Landlord shall have no obligation whatsoever to perform any duty to or respond to any request from any sublessee, it being the obligation of Tenant to administer the terms of its subleases. 28.12 CORPORATE OR PARTNERSHIP TRANSFERS. If the Tenant is a privately held corporation, or is an unincorporated association or partnership, the cumulative or aggregate transfer, assignment or hypothecation of fifty percent (50%) or more of the total stock or interest in such corporation, association or partnership shall be deemed an assignment or sublease within the meaning end provisions of this Article. If Tenant and so long as Tenant is a publicly-traded corporation (i.e., if shares of Tenant are held or traded pursuant to the Securities Act of 1933, as amended, on a national stock exchange) then such trading of shares shall not constitute an assignment, subletting or other transfer under the provisions of this Article 28. This Article shall, however, not apply to assignments or subleases to a corporation (i) into or with which Tenant is merged or consolidated; (ii) to which substantially all 19 of Tenant's assets are transferred, or (iii) that controls, is controlled by, or is under common control with Tenant, provided that, in any of such events: 28.12.1 The successor of Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the greater of (a) the net worth of Tenant immediately prior to such merger, consolidation or transfer, or (b) the net worth of Tenant herein named on the date of this Lease; 28.12.2 Proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of such transaction; 28.12.3 Any such assignment or sublease shall be subject to all of the terms and provisions of this Lease, and such assignee or sublessee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord promptly upon the assignment or sublease, all the obligations of Tenant under this Lease; 28.12.4 Tenant shall remain fully liable for all obligations to be performed by Tenant under this Lease; and 28.12.5 Intentionally Omitted. 28.13 INVOLUNTARY ASSIGNMENT. No interest of Tenant in this Lease shall be assignable by operation of law (including without limitation, the transfer of this Lease by testacy or intestacy, or in any bankruptcy or insolvency proceeding). Each of the following acts shall be considered an involuntary assignment: (i) If Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes a proceeding under any bankruptcy law in which Tenant is the bankrupt; or, if Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other such person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; (ii) If a writ of attachment or execution is levied on this Lease; (iii) If, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises; or (iv) there is any assumption, assignment, sublease or other transfer under or pursuant to the Bankruptcy Code, 11 U.S.C. 101 et seq. (hereinafter referred to as the "Bankruptcy Code"). An involuntary assignment shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. If Landlord shall elect not to exercise its right hereunder to terminate this Lease in the event of an involuntary assignment, then, in addition to any other rights or remedies of Landlord under this Lease or provided by law, the provisions of Sections 28.3, 28.6, 28.7, 28.9, 28.10, and 28.14 shall apply to any such involuntary assignment. Such sums, if any, payable pursuant to the referenced Sections shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Such sums which are not paid or delivered to Landlord shall be held in trust for the benefit of Landlord, and shall be promptly paid or turned over to Landlord upon demand. Any person or entity to which this Lease is assigned pursuant to the provisions of said Code shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver such instruments and documents reasonably requested by Landlord confirming such assumption. 28.14 Intentionally Omitted. 29. ATTORNMENT 29.1 If any proceeding is brought for default under any ground or underlying lease to which this Lease is subject, or in the event of foreclosure or the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the successor upon any such foreclosure or sale and shall recognize that successor as Landlord under this Lease, provided such successor expressly agrees in writing to be bound to all future obligations by the terms of this Lease, and agrees in writing that so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof, and, if so requested, Tenant shall enter into a new lease with that successor on the same terms and conditions as are contained in this Lease (for the unexpired term of this Lease then remaining). 30. SUBORDINATION 30.1 Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to: (i) all ground or underlying leases which may now exist or hereafter be executed affecting the Premises, and (ii) the lien of any first mortgage or first deed of trust which may now exist or hereafter be executed in any amount for which the Premises, such ground or underlying leases, or Landlord's interest or estate in any of them, is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground or underlying leases or any such liens to this Lease. If any ground or underlying lease terminates for any reason, Tenant shall, notwithstanding any subordination, attorn to and become tenant of the successor in interest to Landlord at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any documents evidencing the priority or subordination of this Lease with respect to any such ground or underlying leases or the lien of any such first mortgage, or first deed of trust, and specifically to execute, acknowledge and deliver to Landlord from time to time within ten (10) days after written request to do so a subordination of lease, or a subordination of deed of trust, in substantially the form set forth in Exhibit D or Exhibit D-l, respectively, attached hereto, or such other --------- ----------- form as may be customarily 20 required by any Mortgagee of Landlord, and failure of Tenant to do so shall be a material default hereunder. Notwithstanding anything to the contrary contained herein, Tenant's obligation to subordinate its rights hereunder shall be conditioned upon Tenant receiving from such party seeking such superior position an agreement that so long as Tenant pays all rents due under this Lease and otherwise complies with the terms hereof, Tenant's occupancy hereunder shall not be disturbed. 31. ESTOPPEL CERTIFICATE 31.1 Tenant shall from time to time within ten (10) days after prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing in the form set forth in Exhibit E attached hereto, or such --------- other form as may be customarily and reasonably required by Landlord's Mortgagee, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the Rent and other charges are paid in advance, if any; (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder (or specifying such defaults if they are claimed); and (iii) containing such other matters as are reasonably set forth in such form. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than one (1) month's Rent has been paid in advance. 32. BUILDING OCCUPANCY PLANNING 32.1 Notwithstanding any contrary provision of this Lease, if Landlord requires the Premises for use in conjunction with another suite or for other reasons related to Landlord's occupancy plans for the Building, then upon at least thirty (30) days' prior written notice to Tenant, Landlord shall have the right to move Tenant to other space in the Project, and thereupon such other space shall be deemed to be the Premises covered by this Lease. The expense of moving Tenant, its property and equipment to the substituted space and of improving same to a condition similar to the then current condition of the Premises shall be borne by Landlord. If the substituted space is smaller or larger than the Premises the Basic Rent, Security Deposit and Tenant's Share specified in this Lease shall be adjusted proportionately, and Landlord and Tenant shall execute an amendment to this Lease in accordance therewith. However, if the substituted space does not meet with Tenant's approval, Tenant may cancel this Lease upon thirty (30) days' prior written notice to Landlord, given within ten (10) days after Tenant's receipt of Landlord's notice referred to above. 33. QUIET ENJOYMENT 33.1 So long as Tenant pays all Rent and other sums due under this Lease, performs its covenants and obligations under this Lease and recognizes any successor to Landlord in accordance with the terms of this Lease, Tenant shall lawfully and quietly have, hold and enjoy the Premises without hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, subject, however, to all the provisions of this Lease. 34. WAIVER OF REDEMPTION BY TENANT 34.1 Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. 35. WAIVER OF LANDLORD, TENANT'S PROPERTY 35.1 Landlord shall, within thirty (30) days after written request from Tenant, execute and deliver to Tenant any statement in form reasonably acceptable to Landlord as may be required by any supplier, lessor, installment seller or chattel mortgagee in connection with the installation in the Premises of any personal property or trade fixtures of Tenant, pursuant to which Landlord shall agree to waive any rights it may have or may acquire with respect to any such property, provided in all cases that such supplier, lessor, installment seller or chattel mortgagee expressly agrees in writing that: (i) It will remove at its sole cost and expense all such property from the Premises upon the expiration or termination of the Lease and if it fails to do so within ten (10) days after written request from Landlord it shall be deemed to have waived any and all rights it may have had to such property; (ii) Prior to making any such removal it will advise Landlord in writing of the date and time of such removal and will at the time of such removal, allow a representative of Landlord to be present; (iii) It will promptly and diligently and at its sole cost and expense repair any and all damage to the Premises attributable to such removal and shall restore the Premises to substantially the same condition it was in prior to such removal; (iv) It will cause a performance and completion bond, satisfactory to Landlord, to be furnished to Landlord with regard to the work of such removal, repair and restoration or will use a contractor reasonably acceptable to Landlord; (v) It will promptly pay Landlord any costs and expenses incurred by Landlord in connection with the enforcement of Landlord's rights hereunder, including attorneys' fees, and will indemnify and hold Landlord harmless against any and all claims, loss, cost or expense arising out of or in connection with such removal, repair and restoration; (vi) It will pay Landlord interest on any outstanding amounts payable by it to Landlord at the "Agreed Rate" (as hereinafter defined); (vii) It will not record such statement without Landlord's prior written consent which Landlord may withhold in its sole discretion and (viii) It will not assign its rights or delegate its duties under such statement without Landlord's prior written consent. 21 36. RULES AND REGULATIONS 36.1 The Rules and Regulations attached hereto as Exhibit F are expressly --------- made a part hereof. Tenant agrees to comply with such Rules and Regulations and any reasonable and nondiscriminatory amendments, modifications or additions thereto as may hereafter be adopted and published by notice to tenants in the Building, and to cause its agents, contractors and employees to comply therewith, and agrees that the violation of any of them shall constitute a default by Tenant under this Lease. If there is a conflict between the Rules and Regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall use reasonable efforts to enforce the Rules and Regulations against all tenants of the Project; however, Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building or of the Project of any of the Rules and Regulations. 37. NOTICES 37.1 Any notice, demand or communication required or permitted to be given hereunder to Landlord by Tenant shall be personally served or deposited in the United States mails, duly registered or certified with postage fully prepaid thereon, addressed to Landlord at Landlord's address as set forth in Section 1.9 hereof, or to such other address or such other parties as Landlord may from time to time designate. Any notice, demand or communication required or permitted to be given hereunder to Tenant by Landlord may be mailed as above stated to Tenant's address as set forth in Section 1.10 hereof or delivered personally to Tenant at the address of the Premises. Either party may by written notice similarly given designate a different address for notice purposes, except that Landlord may in any event use the Premises as Tenant's address for notice purposes. Notice shall be effective when mailed or delivered as above specified. 38. WAIVER 38.1 No delay or omission in the exercise of any right or remedy of Landlord or Tenant for any default by the other shall impair such right or remedy or be construed as a waiver. The receipt and acceptance by Landlord of delinquent payments shall not constitute a waiver of any other default, and shall not constitute a waiver of timely payment of the particular payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only an express notice to such effect from Landlord to Tenant shall constitute acceptance of the surrender of the Premises sufficient to terminate this Lease Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not constitute a consent or approval of any subsequent act by Tenant. Any waiver by Landlord or Tenant of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 39. MISCELLANEOUS 39.1 EXECUTION BY LANDLORD. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or an option for, the Premises. This document becomes effective and binding only upon execution by Tenant and by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall alter, change or modify any of the provisions hereof. 39.2 LANDLORD AND TENANT. As used in this Lease, the words "Landlord" and "Tenant" include the plural as well as the singular. Words used in the neuter gender include the masculine and feminine and words in the masculine or feminine gender include the neuter. If them is more than one person or entity constituting Landlord or Tenant, the obligations imposed hereunder upon Landlord or Tenant are joint and several. If Tenant consists of a husband and wife, the obligations of Tenant hereunder extend individually to the sole and separate property of each of them as well as to their community property. The obligations contained in this Lease to be performed by Landlord shall be binding on Landlord's successors and assigns only during their respective periods of ownership of the Premises. 39.3 BROKERS. Tenant shall hold Landlord harmless from all damages (including reasonable attorneys' fees and costs) resulting from any claims that may be asserted against Landlord by any broker, finder, or other person with whom Tenant has or purportedly has dealt, except as set forth at Section 1.11. 39.4 SIGNS. Tenant shall not place or permit to be placed in or upon the Premises, where visible from outside the Premises, or outside the Premises on any part of the Building or Project, any signs, notices, drapes, shutters, blinds, or displays of any type, without the prior written consent of Landlord. Landlord reserves the right in its sole discretion to place and locate on the roof or exterior of the Building, and in any area of the Project not leased to Tenant, any signs, notices, displays and similar items as Landlord deems appropriate. 39.5 NAME OF BUILDING. Tenant shall not use the name of the Building or the Project for any purpose other than the address of the business to be conducted by Tenant in the Premises. Tenant shall not use any picture of the Building or the Project in its advertising, stationery or in any manner so as to imply that the entire Building is leased by Tenant. Landlord expressly reserves the right at any time to change the name of the Building or Project without in any manner being liable to Tenant therefor. 39.6 PARKING. The provisions of this Section 39.6 are subject to the provisions of that certain Parking License Agreement of even date herewith ("License") by and between Landlord, as "Licensor" thereunder, and Tenant, as Licensee thereunder. During the term of this Lease, Tenant shall only be entitled to such use of parking 22 spaces in the parking areas located in the Project as shall be confirmed in writing by the parties, and absent any written agreement to the contrary, parking for Tenant and its employees, agents, customers, invitees and licensees shall be on a first-come, first-served basis, at rates and upon other terms and conditions as may be established from time to time by Landlord or Landlord's operator of the parking areas. Parking rates may be hourly, weekly or monthly, or such other rate system as Landlord deems advisable, and Tenant acknowledges that its employees shall not be entitled to park in such parking areas located in and about the Building which are from time to time be designated for visitors of the Building. Landlord may also designate areas for assigned, reserved or employee parking either within the parking areas located in and about the Building, or in other areas reasonably close thereto. Landlord shall have the right to change any such designated parking areas from time to time. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty as to the suitability of the parking areas for the conduct of Tenant's business. 39.7 INTENTIONALLY OMITTED. 39.8 APPROVAL OF LANDLORD'S MORTGAGEE. Tenant acknowledges that this Lease is subject to the approval of Landlord's Mortgagee, and Tenant agrees to make such reasonable modifications to this Lease as may be ordinarily and customarily requested by Landlord's Mortgagee, so long as such modifications shall not affect the Rent payable hereunder, increase Tenant's obligations hereunder, or otherwise adversely affect Tenant in any material way. 39.9 NONRECORDABILITY OF LEASE. Tenant agrees that in no event shall this Lease or a memorandum hereof be recorded without Landlord's express prior written consent. 39.10 MATTERS OF RECORD. This Lease and Tenant's rights hereunder are subject and subordinate in all respects to matters affecting Landlord's title recorded in the official records of the county recorder's office for the county in which the Project is located prior or subsequent to the date of execution of this Lease, and is expressly subject and subordinate to the following: Declaration of Restrictions dated September 15, 1978, and recorded on October 2, 1978, as Document No 78-1093326 in the Official Records of Los Angeles County, State of California, as amended, and Reciprocal Parking Agreement dated January 3, 1979, and recorded on January 19, 1979, as Document No. 79-86214 in the Official Records of Los Angeles County, State of California, as amended. Tenant agrees that as to its leasehold estate it, and all persons in possession or holding under it, will conform with and will not violate any such covenants, conditions and restrictions, or other matters of record. 39.11 SEVERABILITY. If any provision of this Lease shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and every other term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 39.12 CONSTRUCTION. All provisions hereof, whether covenants or conditions, shall be deemed to be both covenants and conditions. The definitions contained in this Lease shall be used to interpret this Lease. 39.13 INTEREST. Except as expressly provided otherwise in this Lease, any amount due to Landlord which is not paid when due shall bear interest from the date due at the prime commercial rate of interest charged from time to time by Citibank N.A. plus two percent (2%) per annum, but not to exceed the maximum rate of interest allowable under the law (the "Agreed Rate"). Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 39.14 BINDING EFFECT; CHOICE OF LAW. Except as expressly provided otherwise in this Lease, all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California. 39.15 VENUE. Landlord and Tenant agree that the venue for any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease or Tenant's use or occupancy of the Premises, including any claim of injury or damage, and any emergency and other statutory remedy with respect thereto shall be in the City of Santa Monica and County of Los Angeles, in the State of California. 39.16 TIME; RIGHTS CUMULATIVE. Time is of the essence of this Lease and each and every provision hereof, except as may be expressly provided otherwise. All rights and remedies of the parties shall be cumulative and non-exclusive of any other remedy at law or in equity. 39.17 INABILITY TO PERFORM. This Lease and the obligations of Tenant hereunder shall not be affected or impaired because Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of force majeure, strike, labor troubles, acts of God, acts of government, unavailability of materials or labor, or any other cause beyond the control of Landlord. 39.18 CORPORATE AUTHORITY. Upon execution of this Lease, and documents ancillary thereto, and delivery thereof to Landlord, Tenant shall provide Landlord with either an incumbency statement or a copy of a Corporate Resolution duly certified (in original) by the secretary of the corporation. 39.19 PARTNERSHIP AUTHORITY. If Tenant is a partnership, joint venture, or other unincorporated association, each individual executing this Lease on behalf of Tenant represents that this Lease is binding on Tenant. Furthermore, Tenant agrees that the execution of any written consent hereunder, or of any written modification or 23 termination of this Lease, by any general partner of Tenant or any other authorized agent of Tenant, shall be binding on Tenant. 39.20 SUBMITTAL OF FINANCIAL STATEMENT. At any time and from time to time during the term of this Lease (but in no event more often than once in any calendar year), within fifteen (15) days after request therefor by Landlord, Tenant shall supply to Landlord and/or any Mortgagee a current financial statement or such other financial information as may be required by any such party; however, so long as Tenant is a publicly-traded corporation, Tenant may provide the most recent annual or quarterly report in lieu of the foregoing. 39.21 RIDERS. Clauses, plats, addenda, and riders, if any, that are signed by Landlord and Tenant and affixed to this Lease, are a part hereof. 40. INTENTIONALLY OMITTED 41. INTENTIONALLY OMITTED 42. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS 42.1 This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement, negotiations, brochures, arrangements, or understanding pertaining to any such matter shall be effective for any purpose unless expressed herein. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. 43. OPTION TO EXTEND TERM 43.1 GRANT OF OPTION TO EXTEND TERM. Landlord hereby grants Tenant one (1) option ("Option to Extend Term") to extend the initial Lease term ("Initial Term") in accordance with the terms of this Article 43. 43.2 OPTION TERM. The Option to Extend Term shall extend the term of the Lease for an additional thirty-six (36) months ("Extended Term") commencing upon the expiration of the Initial Term. 43.3 TERM. If Tenant exercises the Option to Extend Term, then all of the terms contained in this Lease shall continue in full force and effect during the Extended Term, except with respect to the following: 43.3.1 CALCULATION OF BASIC RENT. Basic Rent for the Extended Term shall be adjusted on the first day of the Extended Term to the then Fair Market Rental Value of the Premises, including escalations, but in no event less than the Basic Rent payable immediately preceding the Extended Term. The term "Fair Market Rental Value of the Premises' shall be Landlord's good faith calculation of the then prevailing fair market rental rate for the Premises as of the commencement of the Extended Term. 43.3.2 NO FURTHER EXTENSIONS. Tenant shall have no further right to extend the term of this Lease whether pursuant to the provisions of this Article 43 or otherwise. 43.4 NOTICE TO EXTEND TERM. The Option to Extend shall be exercised, if at all, only by written notice ("Notice to Extend Term") delivered by Tenant to Landlord at-least six (6) months, but not more than twelve (12) months, prior to the expiration of the Initial Term. If Tenant does not deliver the Notice to Extend Term within the time period set forth herein, the Option to Extend Term shall lapse and Tenant shall have no right to extend the Lease term. 43.5 EXTENSION RENTAL NOTICE. Within a reasonable period of time after Landlord's receipt of the Notice to Extend Term, Landlord shall provide Tenant written notice setting forth the Fair Market Rental Value of the Premises for the Extended Term ("Extension Rental Notice"). Within twenty (20) days following the date Landlord delivers the Extension Rental Notice to Tenant, Tenant shall, by written notice delivered to Landlord either (a) accept the Fair Market Rental Value of the Premises as stated in the Extension Rental Notice ("Notice of Acceptance") or (b) reject the Fair Market Rental Value of the Premises as stated in the Extension Rental Notice ("Notice of Rejection"). 43.6 EFFECT OF NOTICES. If Tenant delivers the Notice of Acceptance in the manner and within the time frames herein provided, this Lease shall be deemed extended at the Basic Rent and upon the terms specified in this Article 43 without the need for any further notice or documentation. If Tenant does not deliver to Landlord either the Notice of Acceptance or the Notice of Rejection within the said twenty (20)-day period, the same shall constitute Tenant's Notice of Rejection. If Tenant delivers or is deemed to have delivered the Notice of Rejection to Landlord within the said twenty (20)-day period, then this Lease shall expire upon the expiration date of the Initial Term, unless terminated earlier in accordance with the provisions of this Lease. The Notice of Acceptance or Notice of Rejection, as the case may be, shall be irrevocable, and shall be binding upon both Landlord and Tenant without the need for any further documentation. 43.7 DOCUMENTATION. If, within thirty (30) days following Landlord's receipt of the Notice of Acceptance, either party shall request that both parties enter into an amendment documenting the Extended Term and Basic Rent during the Extended Term, then Landlord shall prepare an amendment to this Lease setting forth the Extended Term and Basic Rent for the Extended Term pursuant to this Article 43 ("Extended Term 24 Amendment"). The Extended Term Amendment shall be submitted to Tenant for execution and Tenant shall have thirty (30) days following receipt thereof from Landlord in which to execute and deliver the Extended Term Amendment to Landlord and Landlord shall have thirty (30) days after receipt of the same in which to execute the Extended Term Amendment and to deliver one fully-executed copy to Tenant. The failure of either or both Landlord or Tenant to execute the Extended Term Amendment shall not have the effect of nullifying Tenant's Notice of Acceptance, and the Lease shall nevertheless be extended for the Extended Term as herein provided. 43.8 PERSONAL OPTION. The Option to Extend Term is personal to Tenant named at page 1 of this Lease. If Tenant assigns, mortgages, pledges, hypothecates or encumbers this Lease or its interest in the Premises or sublets all or any portion of the Premises ("Assigns" or "Assign" for purposes of this Article 43 only) prior to the exercise of the Option to Extend Term, then the Option to Extend Term shall lapse. If Tenant Assigns any interest of Tenant in the Lease or the Premises to an entity after the exercise of the Option to Extend Term, but prior to the commencement of the Extended Term, the Option to Extend Term shall lapse and this Lease shall expire as if the Option to Extend Term had not been exercised, unless such restriction is expressly waived in writing by Landlord (which election shall be in Landlord's sole discretion). 43.9 ADDITIONAL CONDITIONS. The Option to Extend Term shall be exercisable by Tenant on the express conditions that at the time of the exercise of the Option to Extend Term and upon the date of, the commencement of the Extended Term, Tenant shall not be in default under any of the provisions of this Lease, unless such restriction is expressly waived in writing by Landlord (which election shall be in Landlord's sole discretion). The Option granted herein is subject to any existing or prior rights of expansion, extension, renewal, negotiation, offer and other rights and options which third parties may have for the Premises. 44. NON-DISTURBANCE AGREEMENT 44.1 NON-DISTURBANCE AGREEMENT. Landlord shall use commercially reasonable efforts to obtain for the benefit of Tenant a non-disturbance agreement from Landlord's Mortgagee, within thirty (30) days after the later to occur of (a) the date of this Lease or (b) the date Tenant submits to Landlord a properly executed and acknowledged non-disturbance agreement. If Tenant should not provide Landlord with a non-disturbance agreement properly executed and acknowledged in the form submitted by Landlord to Tenant within thirty (30) days after Tenant has received the same from Landlord, the same shall constitute Tenant's waiver of the rights and benefits of this Article 44 and Landlord shall have no further obligations hereunder. 45. HAZARDOUS MATERIALS 45.1 As used in this Lease, the term "Hazardous Material" means any material, substance, or waste defined as or included in the definition of "hazardous substance," "hazardous waste," "hazardous material," "hazardous substances" or "toxic substances" under any present or future federal, state, or local laws or regulations, or whose presence, use, storage, handling, or disposal is the subject of regulation under any present or future federal, state, or local laws or regulations the purpose of which is to protect human health or the environment. The term "Hazardous Material" includes, without limitation, crude oil and any fraction thereof, including petroleum products, and asbestos, PCBs, and any other substances that are known or subsequently found to have adverse affects on human health or the environment. 45.2 Landlord represents that to its actual knowledge without investigation, (i) no Hazardous Material is located in, on, or under the Premises, or is in use on the Premises, other than those Hazardous Materials commonly used in the construction, maintenance, and operation of commercial office premises, including, but not limited to, associated parking facilities and landscaping, in accordance with all applicable federal, state, and local laws and regulations. 45.3 Tenant shall not cause or permit any Hazardous Material to be generated, produced brought upon, used, handled, stored, treated or disposed of in, on, or under the Premises, except for normal office products used in compliance with all applicable laws, without the prior written consent of the Landlord, which may be withheld at Landlord's sole discretion. Tenant's obligation to surrender the Premises pursuant to Article 25 shall expressly include removal of all Hazardous Material present on the Premises by reason of any act or omission of the Tenant, in accordance with all applicable federal, state, and local laws and regulations and any valid order or requirement of any court or administrative agency. 25 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: BARCLAY CURCl INVESTMENT COMPANY, a California general partnership By: SC ENTERPRISES, a California limited partnership, a general partner By: SHURL CURCl, a general partner By: ----------------------------------------------- Roberta P. Irish, his attorney-in-fact TENANT: VETERINARY CENTERS OF AMERICA, INC. a Delaware corporation By: ----------------------------------------------- Name: ----------------------------------------------- Title: ----------------------------------------------- President By: ----------------------------------------------- Name: ----------------------------------------------- Title: ----------------------------------------------- Secretary 26 EXHIBIT A DESCRIPTION OF PREMISES [MAP APPEARS HERE] EXHIBIT A EXHIBIT A-1 DESCRIPTION OF PROJECT [MAP APPEARS HERE] EXHIBIT A-1 EXHIBIT B VERIFICATION OF TERM AND INITIAL RENT Re: Lease dated _________________________ between ___________________________ ___________________________________________________________________ ("Landlord") and _______________________________________________________________ ("Tenant") for premises in ________________________________________________________________ Tenant hereby verifies that the information stated below is correct and further acknowledges and accepts possession of the Premises. Area: ____________________(rentable/usable/gross) sq. ft. Commencement Date: ________________________________________________ Termination Date: ________________________________________________ Initial Rent: ________________________________________________ Address for Notices: ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ Billing Address: ________________________________________________ ________________________________________________ ________________________________________________ ________________________________________________ ATTN: ________________________________________________ Telephone: (___) __________________________________________ Federal Tax ID No.: ________________________________________________ By: __________________________________________ Title: ________________________________________ Date: ____________________________, 19___ EXHIBIT B EXHIBIT C Exhibit C has been intentionally omitted. EXHIBIT C - PAGE 1 EXHIBIT D SUBORDINATION OF LEASE Recording Requested by and When Recorded Mail to: AUSA Life Insurance Company of America c/o 1740 Advisers, Inc. 19712 MacArthur Boulevard, Suite 200 Irvine, California 92715 Attn: William K. Carnahan - -------------------------------------------------------------------------------- (Space above this line for Recorder's use) SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (Santa Monica Business Park/AUSA Loan No._____) NOTICE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER OR LATER INSTRUMENT. THIS AGREEMENT, made effective as of the ______ day of ______ , 1995, by and between BARCLAY CURCI INVESTMENT COMPANY, a California general partnership ("Lessor"), Lessor under the Lease hereinafter described, and ______________________________ ("Lessee"), the lessee under the Lease hereinafter described, in favor of AUSA LIFE INSURANCE COMPANY, INC., a New York life insurance company ("Beneficiary"), successor-in-interest to THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, a New York corporation, the owner and holder of the Deed of Trust and Note hereinafter described. W I T N E S S E T H: -------------------- WHEREAS, Lessor has executed a Deed of Trust in favor of Beneficiary (the "Deed of Trust"), covering certain real property (the "Property") located in Los Angeles County, State of California, more particularly described in Exhibit A --------- attached hereto and incorporated herein by this reference, to secure a loan evidenced by a promissory note (the "Note") dated of even date therewith, payable to Beneficiary or order, which Deed of Trust has been recorded in the Official Records of said County; and WHEREAS, Lessor and Lessee have entered into a lease dated ___________________, covering a portion of the building(s) located on the Property, for the term and upon the terms and conditions therein set forth (the "Lease"); and, WHEREAS, Lessee has requested Beneficiary to accept Lessee as a tenant and Beneficiary has requested that Lessee and Lessor expressly subordinate the Lease and all rights and interests of the Lessor and Lessee thereunder to the lien of the Deed of Trust, and that the lien of the Deed of Trust be unconditionally and at all times prior and superior to the leasehold interests and estates created by the Lease. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and of the mutual benefits to accrue to the parties hereto, it is hereby declared, understood and agreed as follows: 1. Lessor and Lessee declare and acknowledge that each hereby intentionally waives, relinquishes and subordinates the priority and superiority of the Lease, the leasehold interests and estates created thereby, and the rights, privileges and powers of the Lessee and Lessor thereunder, including without limitation any purchase options, rights of first refusal, rights to any condemnation award and similar rights or interests of the Lessee in the Property (whether or not the Lease or other documents or instruments creating or evidencing such rights or interests shall have been filed of record in the Official Records of Los Angeles County, California, or otherwise), in favor of the Deed of Trust and any instrument modifying or amending the same, or entered into in substitution or replacement thereof. 2. It is expressly understood and agreed that this Agreement shall supersede, to the extent inconsistent herewith, the provisions of the Lease. 3. In the event Beneficiary or any other purchaser at a foreclosure sale, or sale under private power contained in the Deed of Trust, or sale held by the trustee thereunder, succeeds to the interest of Lessor in the Property by reason of any foreclosure of the Deed of Trust or the acceptance of a deed in lieu of foreclosure, or by any other manner, it is agreed that, notwithstanding the subordination of the Lease provided for hereinabove: a. Lessee shall be bound to Beneficiary or such other purchaser under all of the terms, covenants and conditions of the Lease for the remaining balance of the term thereof and EXHIBIT D - PAGE 1 any extensions thereof, with the same force and effect as if Beneficiary or such other purchaser were the original lessor under such Lease, and Lessee does hereby agree to attorn to Beneficiary or such other purchaser as its lessor, such attornment to be effective and self-operative without the execution of any further instruments on the part of any of the parties to this Agreement, immediately upon Beneficiary or such other purchaser succeeding to the interest of Lessor in the Property. b. Subject to the observance and performance by Lessee of all of the terms, covenants and conditions of the Lease on the part of the Lessee to be observed and performed, and provided that Lessee is then in possession of the leased premises, Beneficiary or such other purchaser shall recognize the leasehold estate of Lessee under all of the terms, covenants and conditions of the Lease for the remaining balance of the term or extension thereof with the same force and effect as if Beneficiary or such other purchaser were the original lessor under the Lease; provided, however, that Beneficiary or such other purchaser shall not be (i) liable for any act or omission of any prior lessor (including Lessor), (ii) obligated to cure any defaults of any prior lessor (including Lessor) under the Lease which occurred prior to the time that Beneficiary or such other purchaser succeeded to the interest of Lessor in the Property, (iii) subject to any offsets or defenses which Lessee may be entitled to assert against any prior lessor (including Lessor), (iv) bound by any payment of rent or additional rent by Lessee to any prior lessor (including Lessor) for more than the current month, (v) bound by any amendment or modification of the Lease made without the prior written consent of Beneficiary or such other purchaser, or (vi) liable or responsible for or with respect to the retention, application and/or return to Lessee of any security deposit paid to any prior lessor (including Lessor), unless and until Beneficiary or such other purchaser has actually received for its own account as lessor the full amount of such security deposit; and further provided that the Lease shall be subject to the rights of Beneficiary under the Deed of Trust with respect to insurance and condemnation proceeds relating to the Property. 4. Lessee hereby agrees that it will not exercise any right granted it under the Lease, or which it might otherwise have under applicable law, to terminate the Lease or perform any obligations of Lessor under the Lease for Lessor's account, because of a default of Lessor thereunder or the occurrence of any other event, without first giving to Beneficiary prior written notice of its intent to terminate or so perform, which notice shall include a statement of the default or event on which such intent to terminate or perform is based. Thereafter, Lessee shall not take any action to terminate the Lease or so perform if Beneficiary: (i) within sixty (60) days after service of such written notice on Beneficiary by Lessee of its intention to terminate the Lease or so perform, shall cure such default or event if the same can be cured by the payment or expenditure of money; or, (ii) shall diligently take action to obtain possession of the leased premises (including possession by receiver) and to cure such default or event in the case of a default or event which cannot be cured unless and until the Beneficiary has obtained possession. 5. Subject to paragraph 4 above, Lessor and Lessee hereby agree not to terminate, modify or amend the Lease, or any of the terms thereof, without the prior written consent of Beneficiary, and further agree that any attempted termination, modification, or amendment of the Lease without prior written consent of Beneficiary shall be null and void. 6. For the purposes of facilitating Beneficiary's rights hereunder, Beneficiary shall have, and for such purposes is hereby granted by Lessee and Lessor, the right to enter upon the Property and any improvements thereon for the purpose of effecting any cure provided for herein. 7. Lessee hereby agrees to give to Beneficiary, concurrently with the giving of any notice of any nature given by Lessee to the Lessor under the Lease, a copy of such notice by mailing the same to Beneficiary in the manner set forth hereinbelow, and no such notice given to the Lessor which is not at or about the same time also given to Beneficiary shall be valid or effective against Beneficiary for any purpose. For purposes of any notices to be given to Beneficiary hereunder, the same shall be sent by U.S. certified mail, return receipt requested, postage prepaid, to Beneficiary at the following address: AUSA LIFE INSURANCE COMPANY INC., a New York life insurance company 19712 MacArthur Boulevard, Suite 200 Irvine, California 92715 Attn: William K. Carnahan or to such other address as Beneficiary may hereafter notify Lessee in writing by notice sent to Lessee as aforesaid at Lessee's address at the Property, or such other address as Beneficiary may hereafter be advised of in writing by notice sent to Beneficiary as aforesaid. EXHIBIT D - PAGE 2 8. The agreements contained herein shall run with the land and shall be binding upon and inure to the benefit of the respective heirs, administrators, executors, legal representatives, successors and assigns of the parties hereto. 9. Lessee, by the execution of this Agreement, acknowledges: (i) that Lessor has collaterally assigned to Beneficiary all of Lessor's right, title and interest in and to the Lease pursuant to an Assignment of Lessor's Interest (the "Assignment"); (ii) that under the terms of the Assignment, until the Note is paid in full, Lessor may not without the prior written consent of Beneficiary, agree to any modification or termination of the Lease, accept the surrender of the Lease, collect any rent in advance of the due date specified in the Lease, exercise any right of election which would have an adverse effect upon the Lease, or consent to any assignment or further subordination of Lessee's interest in the Lease; and, (iii) that in the event of a default of any of the terms and conditions of the Note or any documents executed in connection therewith, Beneficiary has the right to collect the rental and other payments due under the Lease in partial satisfaction of the Note. Unless and until Beneficiary notifies Lessee in writing of such a default (at which time all payments are to ba made as the notice directs), all payments called for by the Lease are to be made as required by the Lease. Lessee acknowledges that the Lease has been assigned as security for the repayment of the Note only and no duty, liability, or obligation whatsoever under said Lease, solely by virtue of the Assignment, is assumed by Lender. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the day and year first above written. LESSOR: BARCLAY CURCI INVESTMENT COMPANY, a California general partnership By: SC ENTERPRISES, a California limited a general partnership, a general partner By: ____________________________________________ SHURL CURCI, a general partner LESSEE: ____________________________________________ By:_________________________________________ Its:________________________________________ BENEFICIARY: AUSA LIFE INSURANCE COMPANY, INC. a New York life insurance company By:_________________________________________ Its:________________________________________ EXHIBIT D - PAGE 3 ACKNOWLEDGMENTS --------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF _________ ) On _____________, 1995, before me, _________________________________, personally appeared ________________________________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. --------------------------- Notary Public (Notary Seal) STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On ________, 1995, before me, ___________________________________________, personally appeared _______________________________________ personally known to me (or __________________________________ proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ----------------------- Notary Public (Notary Seal) EXHIBIT D - PAGE 4 ACKNOWLEDGMENTS --------------- STATE OF CALIFORNIA ) ) ss. COUNTY OF __________) On ____________, 1995, before me, _____________________________, personally appeared _________________________________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Notary Public --------------------------- Notary Public (Notary Seal) EXHIBIT D - PAGE 5 EXHIBIT A --------- Legal Description of Property ----------------------------- (Santa Monica Business Park/AUSA Loan No. __________) THE LAND REFERRED TO HEREIN IS SITUATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS: EXHIBIT D - PAGE 6 EXHIBIT D-1 SUBORDINATION OF DEED OF TRUST ________________________________________________(hereinafter called "Lender") as owner and holder of a certain promissory note dated __________________ in the principal sum of _______________Dollars ($_______) and a Deed of Trust dated of even date therewith securing said Note, now a first lien upon the premises more particularly demised and described in those certain leases by and between _______________________________________, as Landlord, and the persons named (whose agreement hereto is evidenced by unrecorded agreements in the possession of Landlord and Lender) in Exhibit A attached hereto and made a part hereof, as Tenant, and upon other property, in consideration of such leasing and of the sum of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged, DOES hereby covenant and agree that the said Deed of Trust shall be, and the same is hereby made, SUBJECT AND SUBORDINATE to said leases with the same force and effect as if the said leases had been executed, delivered and recorded prior to the execution, delivery and recording of said Deed of Trust, without regard to the date on which said leases had been executed, delivered and recorded in relation to the date on which said Deed of Trust has become an effective lien by the terms therein demised; EXCEPT, HOWEVER, that this Subordination shall not affect or be applicable to and does hereby expressly exclude: (a) The prior right, claim and lien of the said Deed of Trust in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of said premises, and to the right of disposition thereof in accordance with the provisions of said Deed of Trust, (b) The prior right, claim and lien of the said Deed of Trust in, to and upon any proceeds payable under all policies of fire and rent insurance upon the said premises and as to the right of disposition thereof in accordance with the terms of said Deed of Trust, and (c) Any lien, right, power or interest, if any which may have arisen or intervened in the period between the recording of the said Deed of Trust and the execution of the said leases, or any lien or judgment which may arise at any time under the terms of such leases. The subordination shall inure to the benefit of and shall be binding upon the undersigned, its successors and assigns. IN WITNESS WHEREOF, this Subordination has been duly signed and delivered by the undersigned this ________ day of ______________________, 19_____. "LENDER": EXHIBIT D-1 - PAGE 1 EXHIBIT E ESTOPPEL STATEMENT Re: Lease dated as of ____________ (hereinafter the "Lease"), between _____________(hereinafter the "Lessor") and _________________________ (hereinafter the "Lessee"), (and amended on ________________________), concerning the premises described in Exhibit A attached hereto (the "Premises"). As Lessee under the above referenced Lease, the undersigned hereby acknowledges for the benefit of _____________________________________________ ("Lender"), which has or is about to make a loan to said Lessor, part of the security for which will be a mortgage or deed of trust covering the Premises leased to the undersigned and an assignment of Lessor's interest in the Lease, the truth and accuracy of the following statements pertaining to said Lease. 1. Lessee has accepted, is satisfied with (except for only nonsubstantial defects, notice of which has previously been given to Lessor), and is in full possession of said Premises, including all improvements. additions and alterations thereto required to be made by Lessor under the said Lease, and that to the best of Lessee's actual knowledge Lessee is not aware of any patent or latent defects in construction of said improvements (except for only nonsubstantial defects, notice of which has previously been given to Lessor) which would constitute a default by Lessor pursuant to the Lease. 2. Lessee is paying the full rent stipulated in said Lease to be paid by Lessee as of the date hereof with no offsets, defenses or claims. 3. Lessor, to the best of Lessee's actual knowledge, is not presently in default under any of the terms, covenants or provisions of said Lease. 4. Lessor has satisfactorily complied with all of the requirements and conditions precedent to the commencement of the term of said Lease as specified in said Lease. 5. The current fixed base monthly rent under said Lease is $ ________ and no moneys have been paid to Lessor in advance of the due date set forth in the Lease described above, except as follows: ______________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ _____________________. 6. The Lease is for a term of _________________ years and Lessee has been in occupancy since _____ and paying rent since ______________________________. 7. The Lease commenced on _____________________________________________. 8. Lessee acknowledges that Lender assumes no liability for its security deposits, if any, or for sums escrowed with the Lessor for taxes or insurance or other expenses in the event that Lender acquires the Premises through foreclosure or through a transfer of title in lieu of foreclosure. 9. Lessee hereby acknowledges (a) that there have been no modifications or amendments to said Lease other than herein specifically stated, (b) that to the best of its actual knowledge it has no notice of a prior assignment, hypothecation or pledge of rents or of the Lease, (c) that the Lease is in full force and effect and Lessee has no defenses, setoffs or counterclaims against Lessor arising out of the Lease or in any way relating thereto, or arising out of any other transaction between Lessee and Lessor, (d) that the Lease represents the entire agreement between the parties thereto as to the leased premises, and Lessee neither has nor claims any right or interest in or under any contract, option or agreement involving the sale or transfer of the leased premises except as specifically provided in the Lease, (e) that no prepayment or reduction of rent, and no modification, termination or acceptance of surrender of the Lease will be valid as to Lender without the consent of Lender, and (f) that notice of the proposed assignment of Lessor's interest in said Lease may be given Lessee by Certified or Registered Mail, Return Receipt Requested, at the Premises, or as otherwise directed herein. Dated: _______________, 19_________ LESSEE: ______________________________________________________________________ ______________________________________________________________________ By: _______________________________________________________ Its:_______________________________________________________ EXHIBIT E - PAGE 1 (Address to which notices are to be sent if other than Premises) ------------------------------ ------------------------------ ------------------------------ EXHIBIT E - PAGE 2 EXHIBIT F --------- BUILDING RULES AND REGULATIONS ------------------------------ The following rules and regulations shall be applicable to the Building: 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, or printed or affixed on or to any part of the Building or Premises if visible from outside the Premises, without the prior written consent of Landlord. Tenant's identification signs and lettering shall be in accordance with Landlord's standard requirements for the Building unless otherwise approved in writing by Landlord, and shall be printed, painted, affixed, or inscribed at the expense of Tenant by a person approved by Landlord. 2. Tenant shall not place or maintain any window covering, blinds or drapes on any window without Landlord's prior written approval. A breach of this rule will directly and adversely affect the exterior appearance of the Building. Upon request by Landlord, Tenant shall remove any window covering, or any other item visible from outside the Premises, if installed or placed without Landlord's written approval. 3. A directory of the Building will be provided for the display of the name and location of tenants. Landlord will install at Tenant's expense directory strips for Tenant's name and a reasonable number of the principal employees thereof, and Landlord reserves the right to exclude any other names therefrom. 4. The sidewalks, halls, passages, exits, entrances, elevators, escalators, and stairways shall not be obstructed by Tenant or used by it for any purpose other than for ingress to and egress from the Premises. The halls, passages, exits, entrances, elevators, escalators, stairways, balconies and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord might be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed so as to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities or are creating a nuisance. No employee, invitee, contractor or agent of Tenant shall go upon the roof of the Building. 5. Tenant shall be responsible for assuring that doors to the Premises are locked during non-business hours. Such doors shall not be left open during business hours, except while moving furniture or other items in or out of the Premises, unless Landlord consents otherwise. 6. The toilet rooms and urinals, wash bowls and other apparatus therein shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be placed therein; the expense of breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees, invitees, contractors or agents, shall have caused it. 7. Except as to normal pictures and furnishings, Tenant shall not mark, drive nails, screw or drill into partitions, woodwork or piaster or in any way deface the Premises or any part thereof. No boring, cutting or stringing of wires shall be permitted except with the prior written consent of Landlord and as Landlord may direct. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant. 8. Tenant shall not overload any floor of the Premises or the Building. No furniture, freight or equipment of any kind shall be brought into the Building by Tenant or its contractors or agents without prior consent of Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy objects brought into the Building and also the time and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute weight. Landlord will not be responsible for loss or damage to any property from any such cause, and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant. There shall not be used in any part of the Building any hand truck unless it is equipped with rubber tires and side guards. 9. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises unless otherwise agreed to in writing by Landlord. Except with the prior written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant or any of its employees or other persons by the janitor of Landlord. Janitor service shall be customary in quality and frequency with similar class buildings in the Santa Monica-West Side market and shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include clearing of carpets or rugs, except normal vacuuming, or moving of furniture and other special services. Janitor service will not be furnished to rooms which are occupied after 9:30 p.m. unless such occupants immediately vacate such rooms and inform the janitorial service that they may clean the same, when such janitorial service arrives. Window cleaning shall be done only by Landlord at reasonable intervals and as Landlord reasonably deems necessary. EXHIBIT F - PAGE 1 10. Tenant shall not use, keep or permit to be used or kept any noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein. No tenant shall make or permit to be made any loud or disturbing noises or disturb or interfere with occupants of the Building or those having business with them whether by the use of any musical instrument, radio, phonograph, shouting or in any other manner. Tenant shall not throw anything out of doors or down the passageways. 11. The Premises shall not be used for the storage of merchandise except as such storage may be incidental to the use of the Premises authorized by the Lease. No cooking shall be done or permitted in the Premises without Landlord's consent, except that use by Tenant of Underwriter's Laboratory approved microwave ovens or equipment for brewing coffee or similar beverages shall be permitted. Tenant shall not advertise for day laborers giving an address at the Premises. The Premises shall not be used for lodging or for any illegal purposes. Tenant shall not keep or maintain pets or animals of any type except animals assisting the disabled in accordance with applicable law and shall not store or keep bicycles, mopeds or motorcycles in the Premises or the Building. 12. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or flammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied or permitted by Landlord. 13. Landlord will direct electricians as to where and how electrical, telephone and telegraph wires are to be introduced to the Premises. No boring or cutting for wires will be allowed without the prior consent of Landlord. The location of telephone switching equipment, call boxes and other similar equipment in the Premises shall be subject to the approval of Landlord. 14. Landlord will furnish Tenant free of charge two (2) keys for each locking door in the Premises. Any additional or replacement keys will be furnished at a reasonable charge. All keys to offices, rooms and toilet rooms shall be obtained from Landlord and Tenant shall not duplicate or obtain such keys from any other source. Upon termination of the Lease, Tenant shall deliver to Landlord the keys to the offices, rooms and toilet rooms which were previously furnished to Tenant, failing which Tenant shall pay Landlord the cost of replacing same or of changing the lock or locks opened by any unreturned key if Landlord deems it necessary to make such changes. Landlord shall have the right periodically to change all locks and furnish Tenant with new keys therefor. Tenant shall not alter any lock or install any new or additional locks or any bolts on any door of the Premises without the prior written consent of Landlord (except as to safes, vaults and other secured areas of Tenant approved by Landlord). 15. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours and in such elevators as shall be designated by Landlord. 16. Landlord reserves the right to close and keep locked all entrances and exit doors of the Building on Saturdays, Sundays, legal holidays and on other days between non-business hours, and during such further hours as Landlord may deem advisable for the adequate protection of the Building and the property of its tenants (such hours are referred to as "After-Hours"). However, during such After-Hours Tenant and/or authorized employees as well as guests, licensees or invitees of Tenant who are accompanied by Tenant or an authorized employee of Tenant, shall be allowed access to the Building upon proper identification. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of same. 17. The "normal business hours" for the Building are from 7:00 a.m. to 6:00 p.m. Monday through Friday, excluding nationally recognized standard holidays. All other hours are deemed "After-Hours". 18. Tenant shall not canvass or solicit other tenants in the Building and Tenant shall cooperate to prevent any such canvassing and/or solicitation. Canvassing and peddling in the Building is prohibited. Tenant shall not obtain for use in the Premises food, beverage, shoe-shine or other services except as expressly permitted by Landlord. 19. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, has no legitimate purpose to be in the Building, or is violating the rules and regulations of the Building. 20. The requirements of Tenant will be attended to only upon application to Landlord's designated property manager. Tenant acknowledges that employees of Landlord shall have no obligation to perform work for Tenant or do anything outside their regular duties for Tenant unless under special instructions from Landlord, and that no employee will have any obligation to admit any person (Tenant or otherwise) to any office of Landlord without specific instructions from Landlord. 21. No vending machines of any description shall be installed, maintained, or operated by Tenant upon the Premises or in the Building, without the prior written consent of Landlord. EXHIBIT F - PAGE 2 22. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant shall also provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. 23. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with broadcasting or reception from or in the Building or elsewhere. 24. Tenant shall store its trash and garbage within the Premises or in other facilities designated by Landlord. Tenant shall not place in any trash receptacle any material which cannot be disposed of in the ordinary practice of trash disposal. All trash and garbage disposal shall be made pursuant to directions issued from time to time by Landlord. 25. Landlord may waive any one or more of the rules and regulations as to any tenant without being construed as having waived same as to any other tenant. 26. Tenant shall be responsible for the observance of the rules and regulations by Tenant's employees, agents, customers, invitees and guests. 27. Landlord reserves the right upon written notice to Tenant, to rescind, alter or waive any rule or regulation at any time prescribed for the Building, or to establish additional reasonable, nondiscriminatory rules and regulations when, in Landlord's sole, reasonable judgment, it is necessary, desirable or proper for the best interest of the Building and its tenants. 28. The rules and regulations shall be administered fairly by Landlord and Landlord shall not enforce them in a discriminatory manner as between the tenants of the Building. EXHIBIT F - PAGE 3 EXHIBIT G Exhibit G has been intentionally omitted. EXHIBIT G - PAGE 1 EXHIBIT H Exhibit H has been intentionally omitted. EXHIBIT H - PAGE 1 PARKING LICENSE AGREEMENT BARCLAY CURCI INVESTMENT COMPANY, a California general partnership ("Licensor"), hereby grants to VETERINARY CENTERS OF AMERICA, INC., a Delaware corporation ("Licensee"), the right and license to use parking spaces in Santa Monica Business Park (the "Project"), as described below and subject to the following conditions: 1. TYPE AND NUMBER OF PARKING SPACES. Licensee shall have the right to use up to 27 unassigned automobile parking spaces. If the area of Licensee's Premises in the Project is reduced, Licensee's allotment of parking spaces will be adjusted proportionately. If the area of Licensee's Premises is increased, Licensee may, at its option, increase the number of its allotted parking spaces proportionately. Notwithstanding the preceding, Licensee shall have no right to use any number of parking spaces in excess of the number of employees of Licensee actually employed at the Premises. 2. MONTHLY FEE. Licensee shall pay for the right and license granted hereby the prevailing rates charged for such spaces by Licensor from time to time ("market rate"). Such sums shall be payable in advance on the first day of each calendar month. Licensor shall have no obligation to accept any such payment from anyone other than Licensee (e.g. Licensee's employees, subtenants, etc.). If Licensee fails to make any such payment when due, the same shall constitute a monetary default under the Lease and Tenant shall be entitled to the same notice and cure period specified at Section 22.1.2 of the Lease. Any late payment of the monthly fee will result in additional administrative and processing costs being incurred by Licensor, the exact amount of which would be extremely difficult to determine, and it is agreed that with respect thereto a late fee of Ten Dollars ($10.00) per space is a reasonable estimate thereof and will be payable by Licensee with regard to any monthly fee not paid when due. 3. TERM. Licensee shall be entitled to the foregoing parking rights for a period equivalent to the term of that certain "Lease" of Premises in the Project entered into by Licensor and Licensee. Licensee's rights to any and all parking spaces shall be revoked and shall terminate upon any expiration or termination of said Lease, as well as upon any assignment of such Lease or sublease of such Premises in violation of the terms of such Lease, Licensee must exercise its rights under this Agreement by delivering all required security deposits and the initial monthly fee for the parking spaces described above within thirty (30) days after the "Commencement Date" of the aforementioned Lease (as defined herein) unless otherwise agreed by Licensor. Failure of Licensee to so exercise its rights will entitle Licensor without notice to transfer to others Licensee's rights to park in any and all parking spaces as to which Licensee has not so exercised its rights hereunder, and Licensee will be deemed to have waived its rights hereunder with regard thereto. 4. LOCATION OF PARKING SPACES. Licensor shall have the right in its sole discretion to designate the particular location of said parking space(s), which designation is subject to change from time to time provided that such designated spaces are in reasonable proximity to the Building in which the Premises are located. 5. RIGHTS NON-TRANSFERRABLE. The foregoing parking rights are personal to Licensee and Licensee shall not assign, convey, or otherwise transfer said rights separate from the said Lease without Licensor's prior written consent. Any attempt by Licensee to do so shall be null and void and, at Licensor's election, shall constitute a material default hereunder. If the Premises or any portion thereof is assigned or sublet pursuant to the terms of the Lease, the number of parking spaces allotted to Licensee under paragraph 1 hereof shall automatically be adjusted accordingly and Licensor and Licensee shall immediately execute an amendment to this Agreement setting forth (i) the number of spaces retained by Licensee, (ii) the number of spaces allotted to Licensee's assignee or subtenant (which number shall not exceed the amount stated in paragraph 1 above), (iii) the then current "market rate" to be charged Licensee for the spaces allotted to its assignee or subtenant, and (iv) the security deposit to be paid by Licensee for its assignee's or subtenant's parking cards. 6. LICENSEE INDEMNIFICATION. Use of said parking spaces and of the parking areas in the Project shall be at the sole risk of Licensee. Unless caused by the negligence or wrongful acts of Licensor, its agents or employees, Licensee hereby agrees to defend, indemnify and hold Licensor harmless against any liability, loss, cost or expense (including reasonable attorneys' fees) for any damage to or loss or theft of any vehicle or property within any vehicle or any other property (including property of Licensee), or injury to or death of any person (including Licensee and Licensee's family, agents, employees, visitors or customers), arising directly or indirectly out of or in connection with the use by Licenses or such other persons of the parking areas or any part thereof. 7. INTERRUPTION OF USE. Licensor shall not be liable to Licensee for any interruption of Licensee's use of the rights granted hereunder due to repairs, improvements or alterations of the parking areas or the Project, or due to any labor controversy, or resulting from any cause beyond the reasonable control of Licensor. However, Licensee shall be entitled to an abatement of the monthly fee with regard to any assigned parking space to the extent it is prevented from using such space and no reasonably similar alternative space is made available to it by Licensor. 8. RULES AND REGULATION. Licensor's parking rules and regulations are attached hereto. Licensor may adopt such other reasonable, nondiscriminatory rules and regulations relating to the use of the parking areas as in Licensor's opinion are necessary or desirable for the proper, orderly and safe use of the parking areas. If Licensee fails to comply with the rules and regulations the same shall constitute a default under the Lease for which Tenant shall be entitled to notice and a period to cure as specified in the Lease for a nonmonetary default. Licensee shall at all times be required to park in a lawful manner, and no vehicle shall at any time be parked in more than one marked space at a time Licensor shall be entitled to tow away any vehicle which is improperly parked, at the vehicle PARKING LICENSE AGREEMENT PAGE 1 owner's sole cost and expense. In the event of such tow away, neither Licensor nor any Mortgagee of Licensor shall have any liability therefor to Licensee or to such vehicle owner. 9. LICENSOR'S PROPERTY RIGHTS. Licensor shall have the right to decrease the size of any or all of the parking areas in the Project, to alter or rearrange parking spaces and improvements in the parking areas, to take all or any portion of the parking areas for purposes of maintaining, repairing or restoring same, or for purposes of construction and operating structures thereon or adjacent thereto, to have ingress and egress in connection with the exercise of any such rights, and to do and perform such other acts with respect to the parking areas as Licensor shall in its reasonable discretion deem appropriate. Licensor may at any time and from time to time in its discretion designate any portion of the parking areas in the Project for use as assigned parking, visitor parking or employee parking. If Licensor establishes an "employee parking" area or other assigned parking area for Licensee's employees to park in, Licensee shall furnish Licensor, within five (5) days after written request to do so, with a list of the vehicle license numbers of Licensee's employees parking in the Project. Licensor may charge Licensee Ten Dollars ($10.00) per day for each day or partial day for each vehicle parked by Licensee or any of its employees in a parking space or area other than the space or parking area assigned or designated for such vehicle. Licensor may tow away any such improperly parked vehicles and may also attach violation notices or stickers to improperly parked vehicles. In the event of such tow away, neither Licensor nor any Mortgagee of Licensor shall have any liability therefor to Licensee or to such vehicle owner. 10. SECURITY DEPOSIT. If parking is in a controlled lot, a monthly parking card or decal may be issued to Licensee for each parking space to be used by Licensee hereunder. Licensee will pay a security deposit for each parking card at the time of issuance of the card. Licensor shall have no obligation to accept any such security deposit from anyone other than License. The security deposit shall be held by Licensor to secure Licensee's due performance of its obligations with regard to parking hereunder and the return to Licensor of such parking card(s) in good condition, normal wear and tear excepted, upon termination of Licensee's rights hereunder. Licensee shall be obligated to take reasonable steps to protect such cards from warping or mutilation. Without limitation as to the generality of the foregoing, Licensor may apply such security deposit to remedy any default by Licensee hereunder and further, if such card(s) are lost or mutilated, Licensor may apply any or all of said deposit toward Licensor's cost of such card(s). If at any time Licensor applies any or all of such security deposit as provided herein, Licensee shall be obligated to deposit with Licensor the amount so applied by Licensor within ten (10) days after written request therefor is given. Upon termination of Licensee's rights hereunder and the return to Licensor of the aforementioned card(s) (or cards issued in substitution thereof) the security deposit or balance thereof shall be returned to Licensee provided Licensee is not then in default hereunder. Licensor need not hold said security deposit in a separate account. 11. REPLACEMENT CARDS. If for any reason (other than a malfunction for which Licensee is not responsible hereunder) any card issued to Licensee is requested by Licensee to be replaced, Licensee shall pay Licensor the then current non-refundable charge for said replacement card. 12. MISCELLANEOUS. No waiver by Licensor of any breach of this agreement by Licensee shall constitute a waiver of any other breach. Any amount due to Licensor that is not paid when due shall bear interest at the maximum rate allowable under law. In the event of any legal action taken or proceeding brought to enforce the provisions hereof. the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs incurred in connection therewith. DATED this ___________ day of ___________________________ 1996. LICENSOR: BARCLAY CURCI INVESTMENT COMPANY, a California general partnership By: SC ENTERPRISES, a California limited partnership, a general partner By: SHURL CURCI, a general partner By: Roberta R Irish, his attorney-in-fact LICENSEE: VETERINARY CENTERS OF AMERICA, INC., a Delaware corporation By: ____________________________________ Name: __________________________________ Title: President By: ____________________________________ Name: __________________________________ Title: Secretary PARKING LICENSE AGREEMENT PAGE 2 PARKING RULES AND REGULATIONS 1. All claimed damage or loss must be reported and itemized in writing delivered to the parking facility office or property manager's office within ten business days after any claimed damage or loss occurs. Any claim not so made is waived. Licensor has the option to make repairs at its expense of any claimed damage within ten business days after filing a claim. In all court actions the burden of proof to establish a claim remains with Licensee. Court actions by Licensee for any claim must be filed within ninety days from date of parking, in a court of jurisdiction where the claimed loss occurred. Licensor is not responsible for damage by water, fire, or defective brakes, or parts, or for the acts or omissions of others, or for loss of articles left in vehicles. The total liability of Licensor is limited to $250.00 for all damages or loss to any vehicle. Licensor is not responsible for loss of use. 2. Licensee shall not park or permit the parking of any vehicle under its control in any parking area designated by Licensor as areas for parking by visitors. Licensee shall not leave vehicles in the parking area overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. 3. Parking stickers or any other device or form of identification supplied by Licensor as a condition of use of the parking facilities shall remain the property of Licensor. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. 4. No extended term storage of vehicles shall be permitted. 5. Vehicles must be parked entirely within the painted stall lines of a single parking stall. 6. All directional signs and arrows must be observed. 7. The speed limit within all parking areas shall be 5 miles per hour. 8. Parking is prohibited: (a) in areas not striped for parking; (b) in driveways; (c) where "no parking" signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated by Licensor or its parking operator. 9. Every parker is required to park and lock his own vehicle unless Licensor furnishes valet service. Valet parking attendants may refuse to drive any vehicle reasonably believed to be unsafe. 10. Loss or theft of parking identification devices from vehicles must be reported to the parking operator immediately, and a lost or stolen report must be filed at that time. Licensor has the right to exclude any vehicles from the parking facilities that does not have an identification device. 11. Any parking identification devices reported lost or stolen found on any unauthorized vehicle will be confiscated and the illegal holder will be subject to prosecution. 12. Lost or stolen identification devices found by the Licensee should be reported to the parking facility office or property manager immediately to avoid confusion. 13. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 14. Licensee shall acquaint all persons to whom Licensee assigns parking space of these Rules and Regulations. Parking facility managers or attendants are not authorized to make or allow any exceptions to these Rules and Regulations. 15. Licensor reserves the right to refuse the sale of monthly stickers or other parking identification devices to any person and/or his agents or representatives who willfully refuses to comply with these Rules and Regulations. PARKING LICENSE AGREEMENT PAGE 3 EX-21.1 7 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUBSIDIARIES OF REGISTRANT
LEGAL NAME JURISDICTION DOING BUSINESS AS - ------------------------------------- ------------ -------------------------------- West Los Angeles Veterinary Medical Group, Inc. California Veterinary Centers of Monrovia, Inc. California VCA Santa Anita Animal Hospital VCA Clinical Veterinary Labs, Inc. California Veterinary Centers of Lakewood/ California Robertson, Inc. Lakewood Animal Hospital, Inc. California VCA Lakewood Animal Hospital Robertson Blvd. Animal Hospital, Inc. California VCA Robertson Blvd. Animal Hospital VCA of Orange Olive, Inc. California Bay Area Animal Hospital, Inc. California VCA of Agoura, Inc. California Agoura Meadows Veterinary Clinic VCA of Phoenix, Inc. California Northern Animal Hospital Inc. Arizona VCA Northern Animal Hospital VCA of San Jose, Inc. California VCA Crocker Animal Hospital VCA Real Property Acquisition California Corporation VCA of Colorado - Anderson, Inc. California VCA Anderson Animal Hospital Anderson Animal Hospital, Inc. Colorado VCA - Animal Hospital West, Inc. California Westwood Dog and Cat Hospital, Inc. California VCA Animal Hospital West VCA of Woodland Hills, Inc. California VCA Parkwood Animal Hospital VCA of Teresita, Inc. California VCA Teresita Animal Hospital VCA of Asher, Inc. California VCA Asher Animal Hospital VCA Wingate, Inc. California Wingate, Inc. Colorado VCA Wingate Animal Hospital VCA-Mission, Inc. California VCA Mission Animal Hospital VCA Albuquerque, Inc. California VCA Veterinary Care Animal Hospital VCA Wyoming Animal Hospital, Inc. California
LEGAL NAME JURISDICTION DOING BUSINESS AS - ------------------------------------- ------------ -------------------------------- VCA Berwyn, Inc. California Berwyn Veterinary Associates, Inc. Illinois VCA Berwyn Animal Hospital VCA Specialty Pet Products, Inc. California VCA Rossmoor, Inc. California Rossmoor-El Dorado Animal Hospital, California VCA-Rossmoor El Dorado Animal Inc. Hospital VCA Albany Animal Hospital, Inc. California VCA West Mesa Animal Hospital, Inc. California VCA Howell Branch Animal Hospital California Inc. VCA Cacoosing Animal Hospital, Inc. California Cacoosing Animal Hospital, Ltd. Pennsylvania Cacoosing Pet Care & Nutrition Center, Pennsylvania Inc. VCA Sinking Spring Animal Hospital, California Inc. Vet Research Laboratories, LLC Delaware VCA South County Animal Hospital, California Inc. South County Veterinary Clinic, Inc. California VCA Clinipath Labs, Inc. California VCA Florida Veterinary Labs, Inc. California VCA Eagle River Animal Hospital, Inc. California Eagle River Veterinary Hospital, Inc. Alaska VCA Miller Animal Hospital, Inc. California Miller Animal Hospital, Inc. California VCA Marina Animal Hospital, Inc. California Veterinary Hospitals, Inc. California Marina Veterinary Clinic VCA All Pet Animal Complex, Inc. California VCA Castle Shannon Animal Hospital, California Inc. VCA APAC Animal Hospital, Inc. California VCA Northwest Diagnostic Labs, Inc. California VCA Information Systems, Inc. California
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LEGAL NAME JURISDICTION DOING BUSINESS AS - ------------------------------------- ------------ -------------------------------- VCA East Anchorage Animal Hospital, California Inc. East Anchorage Veterinary Hospital, Alaska Inc. VCA Fox Chapel - Shadyside Animal, California Inc. Fox Chapel Animal Hospital, Inc. Pennsylvania VCA Companion Animal Hospital, Inc. California VCA Animal Hospital East, Inc. California MS Animal Hospitals, Inc. California VCA Professional Animal Lab, Inc. California VCA Detwiler Animal Hospital, Inc. California Detwiler Veterinary Clinic, Inc. Pennsylvania VCA Lakeside Animal Hospital, Inc. California VCA Cenvet, Inc. California VCA Golden Cove Animal Hospital, California Inc. BerLa, Inc. California VCA Golden Cove Animal Hospital VCA Tampa Animal Hospital, Inc. California Tampa Animal Medical Center, Inc. Florida VCA Tampa Animal Hospital VCA Silver Spur Animal Hospital, Inc. California Silver Spur Animal Hospital, Inc. California VCA Lewis Animal Hospital, Inc. California VCA Lewelling Animal Hospital, Inc. California Lewelling Veterinary Hospital, Inc. California VCA South Shore Animal Hospital, Inc. California VCA Alpine Animal Hospital, Inc. California VCA Greater Savannah Animal California Hospital, Inc. VCA Kaneohe Animal Hospital, Inc. California VCA Elkton Animal Hospital, Inc. California VCA Rotherwood Animal Hospital, Inc. California VCA Lammers Animal Hospital, Inc. California Lammers Veterinary Hospital, Inc. California
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LEGAL NAME JURISDICTION DOING BUSINESS AS - ------------------------------------- ------------ -------------------------------- VCA Referral Associates Animal California Hospital, Inc. VCA Clarmar Animal Hospital, Inc. California VCA Conewago Animal Hospital, Inc. California VCA St. Petersburg Animal Hospital, California Inc. VCA Northboro Animal Hospital, Inc. California PRI Merger Company, Inc. Delaware Golden Merger Corporation Delaware VCA Beacon Hill Cat Hospital, Inc. California VCA Animal Care Center, Inc. California VCA Lakeshore Animal Hospital, Inc. California VCA Bering Sea Animal Hospital, Inc. VCA Acacia Animal Hospital, Inc. VCA Merrimack Animal Hospital, Inc. VCA Rockcreek Animal Hospital, Inc. Pets' Rx, Inc. Delaware Pets' Rx Nevada, Inc. Nevada William C. Fouts, Ltd. Nevada Decatur Animal Clinic H.B. Animal Clinics, Inc. California Blossom Veterinary Clinic Princeton Animal Hospital California Almaden Valley Veterinary Hospital Spring Mountain Animal Hospital, Nevada L.L.C. Old Town Veterinary Hospital, Inc. Virginia North Rockville Veterinary Hospital, Maryland Inc.
4 EX-23.1 8 CONSENT OF ARTHUR ANDERSEN CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP June 24, 1996 EX-23.2 9 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-4 of our reports as of the dates and relating to the financial statements of the companies listed below, which appear in such Prospectus:
COMPANY DATE OF REPORT ------- -------------- The Pet Practice, Inc. ................................... March 22, 1996 Professional Veterinary Hospitals of America, Inc. ....... March 29, 1995
We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Philadelphia, PA June 20, 1996 EX-99.1 10 CONSENT OF NATIONAL WESTMINSTER CONSENT OF NATIONAL WESTMINSTER BANK PLC The Board of Directors The Pet Practice, Inc. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Members of the Board: We hereby consent to the inclusion of our opinion letter to the Board of Directors of Veterinary Centers of America, Inc. ("VCA") relating to the proposed merger of The Pet Practice, Inc. with and into a wholly owned subsidiary of VCA and references made to our firm and such opinion in "SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS--The Merger--VCA's Reasons for the Merger; Recommendations of the VCA Board," "--Opinion of VCA's Financial Advisor" and "THE MERGER--Background of the Merger," "-- VCA's Reasons for the Merger; Recommendations of the VCA Board" and "--Opinions of Financial Advisors--VCA." In giving such consent, we do not admit that we come within the category of persons whose consent is required under, and we do not admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. By: /s/ National Westminster Bank PLC _________________________________ National Westminster Bank PLC New York, New York June 24, 1996 EX-99.2 11 CONSENT OF SMITH BARNEY INC. EXHIBIT 99.2 CONSENT OF SMITH BARNEY INC. The Board of Directors The Pet Practice, Inc. 1018 West Ninth Avenue King of Prussia, Pennsylvania 19406 Members of the Board: We hereby consent to (i) the inclusion of our opinion letter to the Board of Directors of The Pet Practice, Inc. ("Pet Practice") as Appendix C to the Joint Proxy Statement/Prospectus of Pet Practice and Veterinary Centers of America, Inc. ("VCA") relating to the proposed merger of Pet Practice with and into a wholly owned subsidiary of VCA and (ii) references made to our firm and such opinion in "SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS--The Merger-- Opinion of Pet Practice's Financial Advisor" and "THE MERGER--Background of the Merger," "--Pet Practice's Reasons for the Merger; Recommendations of the Pet Practice Board" and "--Opinions of Financial Advisor--Pet Practice." In giving such consent, we do not admit that we come within the category of persons whose consent is required under, and we do not admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. By: /s/ Smith Barney Inc. ----------------------------------- SMITH BARNEY INC. New York, New York June 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----