-----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, AuSPGGSdqHR7/4u7cCtpA4GNENI/uadv1rgscAPr7mMplTv6gIxLIy+putS9pjVS qPvRDv/ZB0FXPwRykJDcHQ== 0001011438-96-000013.txt : 19960712 0001011438-96-000013.hdr.sgml : 19960712 ACCESSION NUMBER: 0001011438-96-000013 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960703 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19960705 DATE AS OF CHANGE: 19960711 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VETERINARY CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000817366 STANDARD INDUSTRIAL CLASSIFICATION: 0700 IRS NUMBER: 954097995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19935 FILM NUMBER: 96591878 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BLVD STE 1000 CITY: SANTA MONICA STATE: CA ZIP: 90405 BUSINESS PHONE: 3103929599 MAIL ADDRESS: STREET 1: 3420 OCEAN PARK BLVD STE 1000 CITY: SANTA MC STATE: CA ZIP: 90405 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) June 19, 1996 VETERINARY CENTERS OF AMERICA, INC. - - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-10787 95-4097995 - - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission (I.R.S. employer of incorporation) file number) identification number) 3420 OCEAN PARK BOULEVARD, SUITE 1000, SANTA MONICA, CALIFORNIA 90405 - - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (310) 392-9599 -------------- Item 2: ACQUISITION OR DISPOSITION OF ASSETS ------------------------------------ GENERAL On June 19, 1996, PRI Merger Company, Inc., a Delaware corporation and a wholly owned subsidiary of VCA merged with and into Pets' Rx, Inc., a Delaware corporation ("Pets' Rx") resulting in Pets' Rx becoming a wholly owned subsidiary of VCA. Pets' Rx is the owner and operator of 16 veterinary hospitals located in Las Vegas, Nevada and Northern California. The Merger provides VCA with entry into the Las Vegas, Nevada market and strengthens the Registrant's presence in Northern California. The outstanding securities of Pets' Rx were converted into 801,081 shares of VCA Common Stock. The closing sale price of the VCA Common Stock on June 19, 1996 was $26.00 per share. There was no prior affiliation between VCA and Pets' Rx, and the determination of the consideration paid was made by arm's length negotiation between the parties. Attached hereto as Exhibit 7.2 is Registrant's press release, issued June 20, 1996, which is incorporated in its entirety by this reference. RECENT DEVELOPMENTS Since January 1, 1996 through June 20, 1996, VCA has acquired 11 animal hospitals in the states of Maryland, Massachusetts, Pennsylvania, Florida, Hawaii and California. In addition, VCA has acquired three veterinary diagnostic laboratories including 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 poooling of interests, VCA issued 151,010 shares of VCA Common Stock. PET PRACTICE On March 21, 1996, VCA signed a definitive merger agreement with The Pet Practice, Inc. ("Pet Practice"), pursuant to which VCA may acquire all of the outstanding securities of Pet Practice. Pet Practice operates 84 veterinary hospitals in 11 states. The merger agreement with Pet Practice may be terminated by either VCA or Pet Practice at any time prior to the closing (i) if any material condition to the obligations of VCA or Pet Practice set forth in the merger agreement is not substantially satisfied at the time or times contemplated thereby, (ii) if 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 time 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. There can be no assurance that the Pet Practice Merger will be consummated or if consummated, that the operations will be successfully integrated. See "Risk Factors - Pending Transactions." DEBT OFFERING On April 17, 1996, VCA issued $84.4 million of 5.25% convertible subordinated debentures (the "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 rate of $34.35 per share. The proceeds of this offering are intended to be used to repay long-term related debt and for general corporate purposes. RISK FACTORS PENDING TRANSACTIONS VCA entered into the merger agreement with Pet Practice (the "Pet Practice Merger") 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. There can be no assurance that Pet Practice will achieve profitability or successfully implement its business strategy. 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 and 1993 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 yet complete, 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 Pet Practice 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 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 prior to pooling adjustments, 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 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 shares of common stock, par value $0.001, of VCA ("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 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 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, as a result of the consummation of the Pets' Rx transaction, VCA will be obligated to issue an aggregate of approximately 801,000 shares (subject to adjustment) and if the Pet Practice transaction is consummated, VCA will be obligated to issue approximately 3,273,000 shares (assuming the VCA Common Stock has an average price at that time of $26.375). 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. Item 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial Statements of Businesses Acquired. PETS' RX, INC. Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1995 and 1994 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements THE PET PRACTICE, INC. Consolidated Balance Sheet as of April 3, 1996 and January 3, 1996 Consolidated Statement of Operations for the Thirteen Weeks Ended April 3, 1996 and March 29, 1995 Consolidated Statement of Changes in Stockholders' Equity for the Thirteen Weeks Ended April 3, 1996 Consolidated Statement of Cash Flows for the Thirteen Weeks Ended April 3, 1996 and March 29, 1995 Notes to Consolidated Financial Statements Report of Independent Accountants Consolidated Balance Sheet as of December 28, 1994, and January 3, 1996 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 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 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 Notes to Consolidated Financial Statements PROFESSIONAL VETERINARY HOSPITALS OF AMERICA, INC. AND SUBSIDIARIES Report of Independent Accountants Statement of Operations for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993 Statement of Stockholders' Deficit for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993 Statement of Cash Flows for the Year Ended January 27, 1993 and the Period January 28, 1993 to October 26, 1993 Notes to Financial Statements VETERINARY CENTERS OF AMERICA, INC. Report of Independent Public Accountants Supplemental Combined Balance Sheets at December 31, 1995 and 1994 and March 31, 1996 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 Supplemental Combined Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 and the Three Months ended March 31, 1996 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 Notes to Supplemental Combined Financial Statements (b) Pro Forma Financial Information VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES Introduction Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1995 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Three Months Ended March 31, 1996 Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 1996 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements THE PET PRACTICE, INC. Introduction Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended January 3, 1996 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Thirteen Weeks Ended April 3, 1996 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements VETERINARY CENTERS OF AMERICA, INC. AND PETS' RX, INC. Introduction Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1995 Unaudited Pro Forma Condensed Combined Statement of Operations for the Three Months Ended March 31, 1996 Unaudited Pro Forma Condensed Combined Balance Sheet at March 31, 1996 Notes to Unaudited Pro Forma Condensed Combined Financial Statements VETERINARY CENTERS OF AMERICA, INC., THE PET PRACTICE, INC. PETS' RX Introduction 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 Unaudited Pro Forma Condensed Combined Balance Sheet at March 31, 1996 Notes to Unaudited Pro Forma Condensed Combined Financial Statements (c) Exhibits. 7.1 Agreement and Plan of Reorganization dated February 27, 1996, as amended by Amendment No. 1 dated April 11, 1996, Amendment No. 2 dated May 23, 1996 and Amendment No. 3 dated June 7, 1996 (as amended, the "Agreement"), by and among Veterinary Centers of America, Inc., a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation, the Company, Trilon Dominion Partners, LLC, Hyprom, S.A., a Swiss corporation, Nancy P. Watson, John W. Hunter, and Richard E. Watson, individually and as Custodian for Andrew Watson. 7.2 Press Release issued June 20, 1996 with respect to the merger with Pets' Rx, Inc. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Price Waterhouse LLP SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. VETERINARY CENTERS OF AMERICA, INC. (Registrant) Dated: July 2, 1996 By: /s/ Tomas W. Fuller Tomas W. Fuller Chief Financial Officer 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-1 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-2 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-3 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 financialinformation. 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-4 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-5 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-6 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-7 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-8 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) ----- ------- ------- ------- F-9 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-10 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-11 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-12 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-13 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-14 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-15 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-16 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-17 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-18 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-19 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-20 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-21 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-22 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-23 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-24 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-25 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-26 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-27 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-28 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-29 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-30 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-31 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-32 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-33 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-34 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-35 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-36 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-37 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-38 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-39 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-40 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-41 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-42 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. F-43 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 ======= ======= ======== ========
F-44 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 ======= ====== ======= =======
F-45 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 ======== ==== ======= ======== ==== ===== ========
F-46 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. F-47 (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. (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." F-48 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. F-49 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 ======= ===== =======
F-50 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 ======= ==== =======
F-51 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. F-52 VCA AND PETS' RX 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 Pets' Rx Inc. ("Pets' Rx). The unaudited pro forma financial data should be read in conjunction with the historical consolidated financial statements and notes thereto of Pets' Rx appearing elsewhere in this 8-K. The Merger is to be accounted for as a pooling. The unaudited pro forma financial data have been prepared utilizing VCA's unaudited pro forma financial data and the historical financial statements of Pets' Rx. The unaudited pro forma financial data are based on estimates and assumptions set forth in the notes to the unaudited pro forma financial data. The unaudited pro forma condensed combined statements of operations represent the unaudited pro forma results of operations of VCA and Pets' Rx for the year ended December 31, 1995 and the three months ended March 31, 1996, 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. F-53 VCA AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share data)
VCA AND VCA PETS' RX PRO FORMA PRO FORMA PRO FORMA COMBINED PETS' RX ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ Revenues Animal hospital........................... $ 85,205 $ 15,622 $100,827 Laboratory................................ 55,405 55,405 Pet food.................................. 4,756 4,756 Intercompany sales........................ (1,852) (1,852) -------- -------- ------- -------- 143,514 15,622 159,136 Direct costs Animal hospital........................... 71,915 13,236 85,151 Laboratory................................ 34,127 34,127 Pet food.................................. 3,205 3,205 Intercompany sales........................ (1,852) (1,852) -------- -------- ------- -------- 107,395 13,236 120,631 Gross profit Animal hospital........................... 13,290 2,386 15,676 Laboratory................................ 21,278 21,278 Pet food.................................. 1,551 1,551 -------- -------- ------- -------- 36,119 2,386 38,505 Selling, general and administrative........ 15,251 2,203 17,454 Depreciation and amortization.............. 5,335 1,200 $ (347)(1) 6,188 Restructuring charge....................... 1,086 1,086 Writedown of assets........................ 2,148 (2) 2,148 -------- -------- ------- -------- Operating income........................... 14,447 (1,017) (1,801) 11,629 Interest expense, net...................... 3,726 910 4,636 -------- -------- ------- -------- Income (loss) before minority interest and provision for income taxes............ 10,721 (1,927) (1,801) 6,993 Minority interest in income of subsidiaries.............................. 3,263 50 3,313 -------- -------- ------- -------- Income (loss) before provision for 7,458 (1,977) (1,801) 3,680 income taxes.............................. Provision for income taxes................. 4,979 4,979 -------- -------- ------- -------- Net income (loss).......................... $ 2,479 $ (1,977) $ (1,801) $ (1,299) ========= ======== ======= ======== Primary earnings (loss) per share.......... $ 0.22 $ (0.11) ========= ======== Weighted average common shares used for computing primary earnings (loss) per share................................. 11,448 801(3) 12,249 ========= ======= ======== Fully diluted earnings (loss) per share.... $ 0.21 ========= Weighted average common shares used for computing fully diluted earnings per share................................. 11,983 =========
F-54 VCA AND PETS' RX 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 PETS' RX PRO FORMA PRO FORMA PRO FORMA COMBINED PETS' RX ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ Revenues Animal hospital........................... $20,670 $4,228 $24,898 Laboratory................................ 14,603 14,603 Pet food.................................. 1,850 1,850 Intercompany sales........................ (733) (733) ------- ------- ------ ------- 36,390 4,228 40,618 Direct costs Animal hospital........................... 17,924 3,507 21,431 Laboratory................................ 8,983 8,983 Pet food.................................. 1,160 1,160 Intercompany sales........................ (733) (733) ------- ------- ------ ------- 27,334 3,507 30,841 Gross profit Animal hospital........................... 2,746 721 3,467 Laboratory................................ 5,620 5,620 Pet food.................................. 690 690 ------- ------- ------ ------- 9,056 721 9,777 Selling, general and administrative........ 4,383 530 4,913 Depreciation and amortization.............. 1,203 307 $ (106)(1) 1,404 ------- ------- ------ ------- Operating income (loss).................... 3,470 (116) 106 3,460 Interest expense, net...................... 524 217 741 ------- ------- ------ ------- Income (loss) before minority interest and provision for income taxes............ 2,946 (333) 106 2,719 Minority interest in income of subsidiaries.............................. 1,346 25 1,371 ------- ------- ------ ------- Income (loss) before provision for income taxes.............................. 1,600 (358) 106 1,348 Provision for income taxes................. 722 722 ------- ------- ------ ------- Net income (loss).......................... $ 878 $ (358) $ 106 $ 626 ======= ======= ====== ======= Primary earnings per share................. $ 0.06 $ 0.04 ======= ======= Weighted average common shares used for computing primary earnings per share..................................... 15,377 801 (3) 16,178 ======= ====== ======= Fully diluted earnings per share........... $ 0.06 $ 0.04 ======= ======= Weighted average common shares used for computing fully diluted earnings per share................................. 15,759 801(3) 16,560 ======= ====== =======
F-55 VCA AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT MARCH 31, 1996 (IN THOUSANDS)
VCA AND VCA PETS' RX PRO FORMA PRO FORMA PRO FORMA COMBINED PETS' RX ADJUSTMENTS COMBINED -------- ------------ ----------- ------------ ASSETS Current assets: Cash and equivalents $115,548 $ 251 $115,799 Accounts receivable, net 8,843 178 9,021 Other current assets 5,588 480 6,068 -------- ------- -------- -------- 129,979 909 130,888 Property and equipment, net 17,813 3,993 21,806 Other assets: Notes receivable 1,183 100 1,283 Goodwill 85,529 8,872 $ (3,116)(1)(2) 91,285 Covenants 6,232 438 (159)(1)(2) 6,511 Other 4,434 269 4,703 -------- ------- -------- -------- $245,170 $14,581 $ (3,275) $256,476 ======== ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFECIT) Current liabilities: Current portion of long-term debt $ 8,020 $ 1,167 $ 9,187 Accounts payable 5,815 1,061 6,876 Other accrued liabilities 6,066 1,217 7,283 -------- ------- -------- -------- 19,901 3,445 23,346 Long-term obligations, less current 116,506 9,219 125,725 portion Other liabilities 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) 102,382 (1,299) $ (328)(2)(4) 100,755 -------- ------- -------- -------- $245,170 $14,581 $ (3,275) $256,476 ======== ======= ======== ========
F-56 VCA AND PETS' RX NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) Represents the reduction of amortization expense due to the conforming reclassification of medical records to goodwill and the reduced goodwill amortization due to the 1993 conforming writedown of assets. (2) To reflect the writedown of assets related to conforming the Pets' Rx method for evaluation the impairment of long lived assets to VCA's method. VCA uses an estimate of the related facility's undiscounted net income over the remaining life of the goodwill and other intangibles in measuring whether the goodwill is recoverable. (3) Reflects the issuance of approximately 801,000 shares of VCA Common Stock for all of the outstanding securities of Pets' Rx. (4) Represents the exchange of the redeemable convertible preferred stock as part of the Merger. 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 Form 8-K. 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. F-57 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 ======= ======= ======== =======
F-58 VCA, PET PRACTICE AND PETS' RX UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AT MARCH 31, 1996 (In thousands)
VCA, PET VCA AND PETS' RX PRACTICE AND PETS' PRO FORMA PRO FORMA RX PRO FORMAT COMBINED (1) PET PRACTICE (2) ADJUSTMENTS COMBINED ------------------ ------------ ---------------- ----------------- ASSETS Current Assets Cash and equivalents......................... $115,799 $ 4,916 $ (3,400)(3) 117,315 Accounts receivable, net..................... 9,021 836 9,857 Other current assets......................... 6,068 5,010 11,078 -------- ------- ------- -------- 130,888 10,762 (3,400) 138,250 Property and equipment, net................... 21,806 15,029 (857)(4) 35,978 Other assets: Notes receivable............................. 1,283 1,283 Goodwill..................................... 91,285 90,309 (5)(8) 181,594 Covenants.................................... 6,511 96 (3)(8) 6,607 Excess of costover fair value of net assets acquired and other intangible assets..................................... 53,775 (53,775)(8) Other........................................ 4,703 149 1,431 (8) 6,283 -------- ------- ------- -------- $256,476 $79,715 $ 33,804 $369,995 ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............ $ 9,187 $ 3,820 $ 13,007 Accounts payable............................. 6,876 2,169 9,045 Other accrued liabilities.................... 7,283 4,989 12,272 -------- ------- ------- -------- 23,346 10,978 34,324 Long-term obligations, less current portion... 125,725 16,216 141,941 Deferred income taxes......................... 1,538 1,538 Minority interest............................. 5,112 5,112 Stockholders' equity ......................... 100,755 52,521 $ 33,804 (6)(7) 187,080 -------- ------- ------- -------- $256,476 $79,715 $ 33,804 $369,995 ======== ======= ======= ========
F-59 VCA, PET PRACTICE AND PETS' RX NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (1) Represents the historical financial position of VCA and Pets' Rx combined as if the merger with Pets' Rx took place on March 31, 1996. (2) Represents the historical financial position of the Pet Practice at March 31, 1996. (3) Represents transaction costs including financial advisor, legal and accounting fees. (4) Represents an adjustment to fair market value of the property and equipment acquired. (5) Represents the excess of cost over the fair value of the net tangible assets acquired in connection with the acquisition of Pet Practice. (6) Adjustment to reflect the elimination of Pet Practice's stockholders' equity in connection with the acquisition. (7) 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. (8) To reclassify Pet Practice balances to conform with VCA's presentation. F-60 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-61 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-62 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-63 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-64 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-65 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-66 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 in the aggregate into 118,329 shares of VCA common stock. Each share of convertible preferred stock outstanding immediately prior to the Merger was converted in the aggregate 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-67 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-68 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-69 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-70 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-71 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-72 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-73 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-74 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 $8,896,000. At December 31, 1995, there are 1,968,492 redeemable warrants outstanding. F-75 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (Information with respect to the unaudited three months ended March 31, 1996 and 1995 is not covered by report of independent public accountants) Under the provisions of the Company's non-qualified and incentive stock option plans for officers and key employees, 750,000 shares of common stock were reserved for issuance at December 31, 1992. On May 5, 1995, the stockholders of the Company approved the adoption of the Veterinary Centers of America, Inc. 1995 Stock Incentive Plan, and authorized the reservation of 750,000 shares of common stock for issuance under the Plan. The options become exercisable over a two to five year period, commencing at the date of grant or one year from the date of grant depending on the option. All options expire 10 years from the date of grant. The prices of all options granted were greater than or equal to the fair market value at the date of the grant. The table below summarizes the transactions in the Company's stock option plans during 1995, 1994 and 1993:
1995 1994 1993 ---------- -------- -------- Options outstanding at beginning of year... 748,172 652,894 379,021 Granted.................................... 820,965 144,993 293,423 Exercised.................................. (21,034) (32,765) (5,838) Canceled................................... (13,200) (16,950) (13,712) ---------- -------- -------- Options outstanding at end of year ($.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-76 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-77 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-78 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-79 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-80 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-81 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-82 EXHIBIT INDEX Exhibit Page Number 7.1 Agreement and Plan of Reorganization dated February 27, 1996, as amended by Amendment No. 1 dated April 11, 1996, Amendment No. 2 dated May 23, 1996 and Amendment No. 3 dated June 7, 1996 (as amended, the "Agreement"), by and among Veterinary Centers of America, Inc., a Delaware corporation ("Parent"), PRI Merger Company, a Delaware corporation, the Company, Trilon Dominion Partners, LLC, Hyprom, S.A., a Swiss corporation, Nancy P. Watson, John W. Hunter, and Richard E. Watson, individually and as Custodian for Andrew Watson. 7.2 Press Release issued June 20, 1996 with respect to the merger with Pets' Rx, Inc. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Price Waterhouse LLP EX-7.1 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-7.2 3 EXHIBIT 7.2 -- PRESS RELEASE 2ND STORY of Level 1 printed in FULL format. Copyright 1996 Business Wire, Inc. Business Wire June 20, 1996, Thursday DISRIBUTION: Business Editors LENGTH: 273 words HEADLINE: Veterinary Centers of America announces completion of acquisition of Pets' Rx DATELINE: SANTA MONICA, Calif. BODY: June 20, 1996--Veterinary Centers of America Inc. (NMS:VCAI/VCAIW) today announced that is has completed its acquisition of Pets' Rx Inc. Pets Rx Inc. operates 16 veterinary hospitals located in California and Nevada. VCA acquired Pets' Rx for approximately 800,000 shares of its common stock. The acquisition will be accounted for as a pooling of interests. Bob Antin, chief executive officer of VCA, said, "The acquisition of Pets' Rx Inc. strengthens our animal hospital operations in Northern California and expands our network to include the state of Nevada. The acquisition of these 16 veterinary hospitals is a significant step in realizing our acquisition goals for this fiscal year." Separately, VCA said that it expects to mail its Joint Proxy Statement/Registration Statement in connection with its planned merger with The Pet Practice Inc. next week. Subject to satisfaction of all conditions to closing the merger with The Pet Practice Inc. is expected to be completed in late July, 1996. VCA operates one of the largest networks of animal hospitals and veterinary-exclusive laboratories in the nation, servicing over 8,000 animal hospitals located in 40 states. In addition, VCA is the managing general partner of Vets Choice, a joint ventrue with Heinz Pet Products, an afiliate of H.J. Heinz Co. (NYUSE:HNZ), which markets and distributes a complete line of specialty pet foods. CONTACT: Veterinary Centers of America Inc. Robert L. Antin or Tomas Fuller, 310/392-9599 LANGUAGE: ENGLISH LOAD-DATE: June 21, 1996 EX-23.1 4 EXHIBIT 23. 1 -- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 8-K, into the Company's previously filed Registration Statements (File Nos. 33-42504, 33-44622, 33-56846, 33-56848, 33-57768, 33-57770, 33-57772, 33-67588, 33-80212, 333-97682, 333-00376 and 333-6667. /s/ Arthur Andersen LLP -------------------------- ARTHUR ANDERSEN LLP Los Angeles, California July 2, 1996 EX-23.2 5 EXHIBIT 23.2 -- CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 33-42504, 33-67588, 33-80212, 33-97682, 333-00376) and the Registration Statements on Form S-8 (Nos. 33-44622, 33-56846, 33-56848, 33-57770, 33-57772, 33-57768) of our reports as of the dates and relating to the financial statements of the companies listed below, which appear in the Current Report on Form 8-K of Veterinary Centers of America, Inc. dated July 2, 1996: Company Date of Report ------- -------------- The Pet Practice, Inc. March, 22, 1996 Professional Veterinary Hospitals of America, Inc. March 29, 1995 /s/ Price Waterhouse LLP - - ------------------------ PRICE WATERHOUSE LLP Philadelphia, PA July 1, 1996 EX-23.3 6 EXHIBIT 23.3 -- CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 of Veterinary Centers of America, Inc. (Nos. 33-44622, 33-56848, 33-57770, 33-57772, 33-57768 and 33-56846) and the Registration Statements on Form S-3 of Veterinary Centers of America, Inc. (Nos. 33-80212, 33-42504, 33,97682 and 33-00376) of our report dated September 12, 1995 relating to the financial statements of Pets' Rx, Inc., which appears in this Current Report on Form 8-K of Veterinary Centers of America, Inc. /s/ Price Waterhouse LLP - - ---------------------------- PRICE WATERHOUSE LLP San Jose, California July 2, 1996 -----END PRIVACY-ENHANCED MESSAGE-----