-----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, IHcbTiQpdaRnXDxNm4dNNKwYSooy1UhCQTTHqunzm73LihyhO5pVufcAF7rFTM7C /+pVEp8fmkysT0vSUAOH9Q== 0001011438-97-000130.txt : 19970814 0001011438-97-000130.hdr.sgml : 19970814 ACCESSION NUMBER: 0001011438-97-000130 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VETERINARY CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000817366 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE SERVICES [0700] IRS NUMBER: 954097995 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19935 FILM NUMBER: 97659762 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 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10787 VETERINARY CENTERS OF AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4097995 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3420 OCEAN PARK BOULEVARD, SUITE 1000 SANTA MONICA, CALIFORNIA 90405 (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 392-9599 NONE Former name, address and fiscal year, if changed since last report Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ] State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Common Stock, $.001 Par Value 19,509,037 shares as of August 11, 1997. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS June 30, December 31, 1997 1996 ---- ---- Current assets: Cash and equivalents $ 7,829,000 $ 23,820,000 Marketable securities 76,003,000 79,107,000 Trade accounts receivable, less allowance for uncollectible accounts 10,118,000 9,583,000 Inventory, prepaid expenses and other 7,517,000 8,788,000 Deferred income taxes 2,331,000 2,331,000 Prepaid income taxes -- 2,137,000 ----------- ----------- Total current assets 103,798,000 125,766,000 Property, plant and equipment, net 37,861,000 37,467,000 Deferred income taxes 1,352,000 1,352,000 Goodwill, net 228,937,000 178,806,000 Covenants not to compete, net 4,735,000 4,933,000 Building purchase options 887,000 887,000 Notes receivable 2,200,000 1,486,000 Deferred costs and other 3,001,000 3,312,000 ------------- ------------ $ 382,771,000 $354,009,000 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations $ 13,355,000 $ 14,055,000 Accounts payable 7,351,000 6,923,000 Accrued payroll and taxes 4,871,000 7,177,000 Income taxes payable 2,311,000 -- Accrued restructuring costs 7,920,000 8,847,000 Accrued interest 1,821,000 1,256,000 Other accrued liabilities 9,846,000 8,857,000 ----------- ----------- Total current liabilities 47,475,000 47,115,000 Long-term obligations, less current portion 159,386,000 134,767,000 Minority interest 1,453,000 4,777,000 Commitments and contingencies Stockholders' equity: Preferred stock, par value $0.001 1,000 1,000 Common stock, par value $0.001 20,000 20,000 Additional paid-in capital 194,169,000 192,167,000 Accumulated deficit (18,353,000) (24,114,000) Less cost of common stock held in treasury, 135,500 shares at June 30, 1997 and 97,773 shares at December 31, 1996 (1,380,000) (724,000) ----------- ----------- Total stockholders' equity 174,457,000 167,350,000 ------------- ------------ $ 382,771,000 $354,009,000 ============= ============ The accompanying notes are an integral part of these consolidated balance sheets. PAGE 2 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ---------- ---------- ----------- ----------- Revenues $ 63,193,000 $ 42,208,000 $ 119,216,000 $ 77,440,000 Direct costs 45,783,000 30,489,000 89,303,000 57,199,000 ---------- ---------- ---------- ---------- Gross profit 17,410,000 11,719,000 29,913,000 20,241,000 Selling, general and administrative 4,645,000 4,317,000 9,494,000 8,161,000 Depreciation and amortization 2,732,000 1,414,000 5,460,000 2,649,000 Merger costs -- 2,901,000 -- 2,901,000 ---------- ---------- ---------- ---------- Operating income 10,033,000 3,087,000 14,959,000 6,530,000 Interest and other investment income 948,000 1,236,000 2,056,000 1,624,000 Interest expense 3,029,000 2,118,000 5,935,000 3,019,000 ---------- ---------- ---------- ---------- Income before minority interest and provision for income taxes 7,952,000 2,205,000 11,080,000 5,135,000 Minority interest in income of subsidiaries 120,000 1,938,000 291,000 3,309,000 --------- --------- ---------- ---------- Income before provision for income taxes 7,832,000 267,000 10,789,000 1,826,000 Provision for income taxes 3,481,000 1,571,000 5,028,000 2,370,000 ---------- ----------- ------------ ------------ Net income (loss) $ 4,351,000 $(1,304,000) $ 5,761,000 $ (544,000) =========== =========== ============ ============ Earnings (loss) per share $ 0.21 $ (0.09) $ 0.28 $ (0.04) ======= ========= ======= ========= Weighted average common equivalent shares used for computing earnings (loss) per share 20,737,000 14,163,000 20,631,000 13,697,000 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. PAGE 3 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) 1997 1996 ------------- ----------- Cash flows from operating activities: Net income (loss) $ 5,761,000 $ (544,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,460,000 2,649,000 Amortization of debt discount and deferred financing costs 279,000 143,000 Minority interest in income of subsidiaries 291,000 3,309,000 Issuance of common stock in settlement of employment obligations -- 1,163,000 Increase in other assets, net -- (355,000) Decrease in deferred income taxes -- 267,000 Increase in accounts receivable, net (1,978,000) (1,621,000) Decrease (increase) in inventory, prepaid expenses and other 190,000 (39,000) Decrease in prepaid income taxes 2,137,000 2,000 Increase in accounts payable and accrued liabilities 2,088,000 1,231,000 Increase in income taxes payable 2,311,000 -- Payments to minority interest partners (176,000) (2,550,000) ---------- ----------- Net cash provided by operating activities 16,363,000 3,655,000 ---------- ----------- Cash flows from investing activities: Property, plant and equipment additions, net (2,294,000) (2,842,000) Business acquisitions, net of cash acquired (23,015,000) (17,215,000) Proceeds from sale of marketable securities 3,104,000 -- Investments in marketable securities -- (58,141,000) Proceeds from the sale of assets 180,000 -- ------------ ------------ Net cash used in investing activities (22,025,000) (78,198,000) ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of subordinated debentures -- 82,086,000 Reduction of long-term obligations (8,516,000) (5,016,000) Advances made on notes receivable (10,000) -- Payments received on notes receivable 67,000 39,000 Net proceeds from exercise of warrants -- 6,450,000 Proceeds from warrants issued in connection with the Vet Research joint venture -- 1,474,000 Proceeds from issuance of common stock under stock option plans 94,000 500,000 Proceeds from issuance of common stock -- 207,000 Purchase of treasury stock (656,000) -- Capital contribution of minority interest partner 10,000 990,000 Capital distribution to minority interest partner (1,318,000) -- ----------- ---------- Net cash (used in) provided by financing activities (10,329,000) 86,730,000 ----------- ----------- (Decrease) increase in cash and equivalents (15,991,000) 12,187,000 Cash and equivalents at beginning of period 23,820,000 47,551,000 ------------ ------------ Cash and equivalents at end of period $ 7,829,000 $ 59,738,000 ============ =========== The accompanying notes are an integral part of these consolidated financial statements. PAGE 4 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (continued) 1997 1996 ------------- ------------ Supplemental disclosures of cash flow information: Interest paid $ 5,100,000 $ 2,003,000 Taxes paid 580,000 2,101,000 Supplemental schedule of non-cash investing and financing activities: In connection with acquisitions, assets acquired and liabilities assumed were as follows: Fair value of assets acquired $ 55,893,000 $ 31,119,000 Less: Consideration given Cash paid to sellers, net of cash acquired 21,764,000 14,519,000 Cash paid in settlement of assumed liabilities 1,251,000 2,696,000 Common stock issued 1,362,000 3,868,000 ------------- ------------ Liabilities assumed including notes payable issued, net of payments $ 31,516,000 $ 10,036,000 ============= ============ In connection with the formation of the joint venture and partnerships, assets and liabilities contributed by the partners were as follows: Assets $ 100,000 $ 317,000 Liabilities -- -- ------------- ------------ Non-cash capital contribution of minority interest partners $ 100,000 $ 317,000 ============= ============ Non-cash increase in long-term obligations due to purchase of property $ -- $ 120,000 ============= ============ Issuance of common stock in exchange for convertible debt $ -- $ 29,000 ============= ============ Issuance of note receivable for stock options exercised $ 546,000 $ -- ============= ============ The accompanying notes are an integral part of these consolidated financial statements. PAGE 5 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) (1) GENERAL The accompanying unaudited consolidated financial statements of Veterinary Centers of America, Inc. and subsidiaries (the "Company" or "VCA") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the six months ended June 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 1996 included in the Company's Annual Report on Form 10-K/A as filed with the Securities and Exchange Commission on April 30, 1997. On June 19, 1996, the Company acquired all of the outstanding shares of Pets' Rx, Inc. ("Pets' Rx"). The business combination was treated for accounting purposes as a pooling of interests, and accordingly, the accompanying financial statements reflect the combined results of the pooled businesses for the respective periods presented. The financial data presented below reflects the historical results of VCA and the historical results of Pets' Rx adjusted to conform to VCA's methods of accounting. Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- Revenues: Pre-merger VCA $ -- $ 38,587,000 $ -- $ 69,591,000 Pets' Rx -- 3,621,000 -- 7,849,000 ----------- ----------- ------------ ------------ -- 42,208,000 -- 77,440,000 Post-merger 63,193,000 -- 119,216,000 -- ----------- ----------- ------------ ------------ $ 63,193,000 $ 42,208,000 $ 119,216,000 $ 77,440,000 ============ ============ ============= ============= Net income (loss): Pre-merger VCA $ -- $ (580,000) $ -- $ 432,000 Pets' Rx -- (724,000) -- (976,000) ----------- ----------- ------------ ------------ -- (1,304,000) -- (544,000) Post-merger 4,351,000 -- 5,761,000 -- ----------- ----------- ------------ ------------ $ 4,351,000 $(1,304,000) $ 5,761,000 $ (544,000) ============ ============ ============= ============= (2) ACQUISITIONS AND DISPOSITIONS During the second quarter of 1997, the Company purchased two animal hospitals and one laboratory in separate transactions for a total consideration (including acquisition costs) of $1,720,000, consisting of $1,120,000 in cash, $500,000 in long-term obligations, and the assumption of liabilities totaling $100,000. During the first quarter of 1997, the Company purchased four animal hospitals in separate transactions for a total consideration (including acquisition costs) of $6,456,000, consisting of $1,931,000 in cash, $2,713,000 in long-term obligations, 124,056 shares of VCA common stock with a value of $1,362,000, and the assumption of liabilities totaling $450,000. Following the purchase of these facilities, the Company owns the veterinary practice in one case and provides management services to the other three practices. PAGE 6 In January 1997, the Company acquired the remaining 49% interest in the joint venture, Veterinary Research Laboratories, LLC, for a price as computed in accordance with the operating agreement (including acquisition costs), amounting to $18,713,000 in cash and a $29,002,000 note payable, payable in quarterly installments over six years. During the second quarter of 1997, no hospitals were sold or closed. During the first quarter of 1997, the Company sold, closed or merged 11 hospitals with annual revenues of approximately $4 million. The Company continues to analyze the operations of certain former The Pet Practice, Inc. ("Pet Practice") facilities. Certain former Pet Practice facilities which do not generate an acceptable level of operating income may be closed as part of this process. If the Company closes such facilities, the associated writedowns and reserves will be recorded in the final purchase price allocation. (3) VET'S CHOICE JOINT VENTURE In February 1997, the Company's joint venture, Vet's Choice was restructured and management of the joint venture was assumed by the Company's partner, Heinz Pet Products ("HPP"). Pursuant to a restructuring agreement, the Company maintains its 50.5% equity interest in Vet's Choice. Profits and losses are allocated 99.9% to HPP and 0.1% to the Company and all management control has been transferred from the Company to HPP. Additionally, the Company agreed to provide certain consulting and management services for a three-year period commencing on February 1, 1997 for an aggregate fee of $15.3 million payable in semi-annual installments over a five-year period. On or after the earlier of a change of control in the Company or January 1, 2000, HPP may purchase all of the Company's interest in the partnership at a purchase price equal to (i) 51% of (ii) 1.3 times the annual sales of all products bearing the SELECT BALANCE or SELECT CARE brand (the "Annual Sales") less (iii) $4.5 million. If HPP fails to exercise its option prior to January 1, 2001, the Company may purchase all of the interest of HPP in the partnership at a purchase price equal to (i) 49.5% of (ii) 1.3 times the Annual Sales plus (iii) $4.5 million. Effective February 1, 1997, the Company no longer reports the results of operations of Vet's Choice on a consolidated basis. (4) RESTRUCTURING AND ASSET WRITEDOWN For the six months ended June 30, 1997, the Company utilized approximately $927,000 of the 1996 restructuring reserve to write-off certain fixed assets and to fulfill certain contractual obligations. (5) STOCKHOLDERS' LAWSUIT The Company and certain of its current and former officers and directors have been named as defendants in a class action lawsuit filed on April 1, 1997 in Los Angeles Superior Court, entitled Marilyn J. Thompson, et al. v. Veterinary Centers of America, Inc., et al. The lawsuit has been filed on behalf of individuals claiming to have purchased common stock of the Company during the time period from February 15, 1996 through November 14, 1996, and the plaintiffs seek unspecified damages arising from alleged misstatements regarding the Company's animal hospitals, diagnostic laboratories, pet food operations and success in integrating certain acquisitions. While the Company has not yet filed an answer to the complaint, the Company intends to vigorously defend itself against the lawsuit. Since discovery only recently commenced, the Company is unable to assess the likelihood of an adverse result in the class action lawsuit. There can be no assurances as to the outcome of such lawsuit. The inability of the Company to resolve the claims that are the basis for the lawsuit or to prevail in any related litigation could result in the Company being required to pay substantial monetary damages for which the Company may not be adequately insured, which could have a material adverse effect on the Company's business, financial position and results of operations. In any event, the Company's defense of such lawsuit may result in substantial costs to the Company, as well as significant dedication of management resources. (6) RECLASSIFICATIONS Certain 1996 balances have been reclassified to conform with the 1997 financial statement presentation. PAGE 7 (7) ACCOUNTING PRONOUNCEMENTS In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128). SFAS 128 revises and simplifies the computation for earnings per share and requires certain additional disclosures. SFAS 128 will be adopted in the fourth quarter of 1997. Management does not expect the adoption of this standard will have a material effect on the Company's financial position or its results of operations. (8) SUBSEQUENT EVENTS Since June 30, 1997 through August 11, 1997, the Company has purchased four animal hospitals for a total consideration (including acquisition costs) of $4,190,000, consisting of $1,486,000 in cash and $2,664,000 in notes payable, and $40,000 in assumed liabilities. PAGE 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Veterinary Centers of America, Inc. and subsidiaries (the "Company" or "VCA") is a leading animal health care company with operations in two core business lines, animal hospitals and veterinary diagnostic laboratories. In addition, the Company is a partner in a joint venture with Heinz Pet Products ("HPP"), which markets and distributes premium pet foods ("Vet's Choice"). Over the past several years, the Company has focused on building a network of free-standing, full-service animal hospitals and veterinary-exclusive laboratories. The Company has accomplished this task by acquiring animal hospitals and veterinary diagnostic laboratories through the issuance of common stock or notes, or the payment of cash. In the second and third quarters of 1996 the Company completed two significant acquisitions which more than doubled the Company's animal hospital operations. The Company made these acquisitions in order to promote the growth of the Company's hospital network, broaden the geographic scope of the Company's operations, and to take advantage of synergies that the Company believes exist between its business lines. In addition, from January 1, 1997 through June 30, 1997, VCA acquired two animal hospitals in California, one in Connecticut, and entered into management service agreements with three other hospitals in the states of Texas and Nebraska, and acquired one veterinary diagnostic laboratory in Utah. Subsequent to June 30, 1997, the Company acquired four animal hospitals. The Company will continue to look for acquisitions or strategic alliances which it believes complement its overall business strategy. Throughout 1996, a portion of the Company's operations, including Vet's Choice and Veterinary Research Laboratories, LLC ("Vet Research") were operated as joint ventures in which VCA owned a majority interest. The results of operations of the Company included the results of operations of these joint ventures on a consolidated basis. On January 2, 1997, the Company acquired the remaining 49% interest in Vet Research. Commencing February 1, 1997, the day- to-day management of the Company's joint venture, Vet's Choice, was assumed by HPP. The Company maintains its 50.5% equity interest in Vet's Choice but profits and losses are allocated 99.9% to HPP and 0.1% to the Company. Effective February 1, 1997 the Company no longer reports the results of operations of Vet's Choice on a consolidated basis. RESULTS OF OPERATIONS REVENUES The following table summarizes the Company's revenues for the three and six months ended June 30: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- Animal Hospital $ 45,929,000 $ 25,455,000 $ 85,868,000 $ 47,514,000 Laboratory 18,482,000 15,432,000 34,728,000 27,488,000 Premium Pet Food -- 2,120,000 1,064,000 3,970,000 Intercompany Sales (1,218,000) (799,000) (2,444,000) (1,532,000) ------------ ------------ ------------- ------------- $ 63,193,000 $ 42,208,000 $ 119,216,000 $ 77,440,000 ============ ============ ============= ============= Revenues for the Animal Hospital operations increased 80.7% for the six months ended June 30, 1997 compared to the six months ended June 30, 1996. The increase in the three-month period ended June 30, 1997 compared to the three- month period ended June 30, 1996 was 80.4%. This growth was primarily the result of the increase in the number of facilities operated by the Company. The results for 1997 include the results of 74 veterinary hospitals acquired subsequent to June 30, 1996. The increase in revenues resulting from changes in volume or prices at existing facilities as compared to the corresponding period in the prior year was approximately 0.7% and 1.1% for the six and three months ended June 30, 1997, respectively. Pursuant to a restructuring agreement and other related agreements between HPP and the Company, the Company has agreed to provide certain consulting and management services for a three-year period commencing February 1, 1997 for an aggregate fee of $15.3 million payable in semi-annual installments over a five- year period (the "Consulting Fees"). The Consulting Fees earned in the six and three months ended June 30, 1997, amounting to $2,125,000 and $1,275,000, respectively, and are included in Animal Hospital revenues. PAGE 9 Revenues for the Laboratory operations increased 26.3% for the six months ended June 30, 1997 compared to the six months ended June 30, 1996. The increase in the three months ended June 30, 1997 compared to the three months ended June 30, 1996 was 19.8%. This increase was primarily due to the acquisition of four veterinary diagnostic laboratories since June 30, 1996. Effective February 1, 1997, the Company no longer reports the results of operations of Vet's Choice on a consolidated basis. Consequently, revenues for the Pet Food operations include activity for only one month in 1997 compared to three or six months in 1996. Because of the differing time periods, a comparison of the results of the two periods is not meaningful. GROSS PROFIT Gross profit for the three and six months ended June 30 is comprised of the following: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- Animal Hospital $ 10,437,000 $ 4,488,000 $ 16,811,000 $ 7,650,000 Laboratory 6,973,000 6,429,000 12,534,000 11,099,000 Premium Pet Food -- 802,000 568,000 1,492,000 ------------ ------------ ------------- ------------- $ 17,410,000 $ 11,719,000 $ 29,913,000 $ 20,241,000 ============ ============ ============= ============= Gross profit for the Animal Hospital operations is comprised of revenues less all costs of services and products, including salaries of veterinarians, technicians and all other hospital-based personnel, facilities rent and occupancy costs, medical supply costs and costs of goods sold associated with the retail sales of pet food and pet supplies. Animal Hospital gross profit increased 119.8% in the 1997 six-month period when compared to the 1996 six- month period, representing 19.6% and 16.1% of Animal Hospital revenues in 1997 and 1996, respectively. The increase in gross profit as a percentage of revenues from 1996 to 1997 was attributable to an increase in gross profit margins at the Company's existing hospitals (those acquired prior to January 1, 1996), higher gross profit margins at newly acquired hospitals (acquired on or after January 1, 1996) and to the addition of the Consulting Fees. Animal Hospital gross profit margins at existing hospitals, for the six-month period, increased to 18.0% in 1997 from 17.0% in 1996. Gross profit margins at newly acquired hospitals were 17.2% for the six months. Animal Hospital gross profits increased 132.6% for the three months ended June 30, 1997 compared to the three months ended June 30, 1996, representing 22.7% and 17.6% of Animal Hospital revenues in 1997 and 1996, respectively. Animal Hospital gross profit margins at existing hospitals (those acquired prior to April 1, 1996), for the quarter, increased to 19.5% in 1997 from 19.0% in 1996. Gross profit margins at newly acquired hospitals (acquired on or after April 1, 1996) were 21.5% for the quarter. Gross profit of the Laboratory operations is comprised of revenues less all direct costs of services, including salaries of veterinarians, technicians and other non-administrative laboratory-based personnel, facilities rent and occupancy costs and supply costs. Laboratory gross profit increased 12.9% for the six months ended June 30, 1997 compared to the six months ended June 30, 1996, representing 36.1% and 40.4% of laboratory revenues in 1997 and 1996, respectively. As a percentage of revenues, Laboratory gross profit was 37.7% and 41.7% for the three months ended June 30, 1997 and 1996, respectively. The decrease in gross profit as a percentage of revenue for both the six and three months ended June 30, 1997 from the comparable 1996 period was attributable to increased costs in the east coast laboratory operations as a result of the expansion of the management team and services. The Company's Animal Hospital business historically has realized gross profit margins that are lower than that of the Laboratory business. As the portion of the Company's revenues attributable to its Animal Hospital operations grow in the future, the historical gross profit margins for the Company as a whole may not be indicative of those to be expected in the future. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES VCA Corporate selling, general and administrative expenses consists of administrative expense at the Company's headquarters, including the salaries of corporate officers and other personnel, accounting, legal and other professional expense PAGE 10 and rent and occupancy costs. Selling, general and administrative expense for the three and six months ended June 30 is comprised of the following: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- VCA Corporate $ 3,692,000 $ 2,139,000 $ 7,181,000 $ 3,948,000 Laboratory 953,000 980,000 1,913,000 1,895,000 Premium Pet Food -- 1,198,000 400,000 2,318,000 ------------ ------------ ------------- ------------- $ 4,645,000 $ 4,317,000 $ 9,494,000 $ 8,161,000 ============ ============ ============= ============= VCA Corporate and Laboratory selling, general and administrative expense, as a percentage of Animal Hospital and Laboratory revenues was 7.5% and 7.8% for the six months ended June 30, 1997 and 1996, respectively. For the three months ended June 30, 1997 and 1996, VCA Corporate and Laboratory, selling, general and administrative expense as a percentage of Animal Hospital and Laboratory revenues was 7.2% and 7.6%, respectively. The decrease from 1996 to 1997 was primarily attributable to spreading the expense over a larger revenue base. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense primarily relates to the depreciation of capital assets and the amortization of excess cost over the fair value of net assets acquired (goodwill) and certain other intangibles. Depreciation and amortization expense increased to $5,460,000 for the six months ended June 30, 1997 from $2,649,000 for the six months ended June 30, 1996. The increase in depreciation and amortization expense is due to the acquisition of hospitals and laboratories. The Company's policy is to amortize goodwill over the expected period to be benefited, not exceeding forty years. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations during the six months ended June 30, 1997 was $16,363,000. The increase in cash flow provided by operations for the 1997 six-month period compared to the 1996 six-month period, was $12,708,000. This increase is attributable to (i) an increase in income as a result of the growth in the number of facilities operated by the Company and the addition of the Consulting Fees; and (ii) changes in non-cash working capital of approximately $4,900,000. The Company used cash, net of cash acquired, of $23,015,000, to purchase six individual veterinary hospitals, one laboratory and the remaining 49% interest in Vet Research. The Company also used cash of $8,516,000 to retire long-term obligations, $2,294,000 to purchase property, plant and equipment and $656,000 to purchase treasury shares. The Company received $3,104,000 from the sale of marketable securities. The Company has achieved its growth in the past, and anticipates it will continue its growth in the future, through the acquisition of veterinary hospitals and veterinary diagnostic laboratories for cash, stock and notes. The Company intends to fund its future cash requirements primarily from its cash and marketable securities and internally generated funds. The Company believes these sources of funds will be sufficient to continue the Company's operations and planned capital expenditures for at least the next 12 months. RISK FACTORS This filing contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. The words "expect", "estimate", "anticipate", "predict", "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things (i) trends affecting the Company's financial condition or results of operations; and (ii) the Company's business and growth strategies. The readers of this filing are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in this filing, including, without limitation, the information set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the information set forth below. PAGE 11 ANTICIPATED EFFECTS OF ACQUISITIONS VCA acquired Pets' Rx, Inc. ("Pets' Rx") and The Pet Practice, Inc. ("Pet Practice") in 1996 with the expectation that the transactions will result in beneficial synergies for the combined business. These synergies 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 benefits depends in part on the efficient, effective and timely integration of the operations of Pets' Rx and Pet Practice with those of the Company. The combination of these businesses requires, 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 overhead and poor-performing hospitals. These tasks are substantially complete as of the date of this report. However, full integration will require additional efforts requiring substantial dedication from management. There can be no assurance that the problems associated with the integration identified above will not continue or that the integration on an ongoing basis will proceed smoothly or successfully. Furthermore, even if the operations of the three companies are ultimately successfully integrated, it is anticipated that the integration will continue to be accomplished over time and, in the interim, the combination may continue to have an adverse effect on the business, results of operations and financial condition of VCA. RAPID EXPANSION AND MANAGEMENT OF GROWTH Due to the number and size of acquisitions completed since January 1, 1995, the Company has experienced rapid growth. In 1995, the Company completed 32 acquisitions (25 animal hospitals, six veterinary diagnostic laboratories and the remaining 30 percent interest in Professional Animal Laboratory). In 1996, the Company completed the acquisition of Pet Practice, 22 individual animal hospitals and six veterinary diagnostic laboratories and entered into a combination with Pets' Rx in a transaction accounted for as a pooling of interests. In 1997, through August 11, 1997, the Company completed the acquisition of 10 individual animal hospitals and two veterinary diagnostic laboratories. As a result of these acquisitions, the Company's revenues have grown from $51.8 million in 1994 to $107.7 million in 1995, to $182.2 million in 1996 and to unaudited pro forma annualized 1997 revenue of over $240 million. In addition, during this period, the Company entered a new line of business, veterinary diagnostic laboratories. The Company's growth and pace of acquisitions have placed, and will continue to place, a substantial strain on its management, operational, financial and accounting resources. 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. INFORMATION SYSTEMS The growth experienced by the Company, and specifically the acquisitions of Pet Practice and Pets' Rx, and the corresponding increased need for timely information, have placed significant demands on the Company's existing information systems. The Company is in the process of implementing new information systems to collect and organize data from all of its operations. Once integrated, the Company anticipates that the new systems will result in the automation of certain time-intensive manual procedures, daily access, if desired, to information relating to sales, revenues and other financial and operational data from each animal hospital and veterinary laboratory and ultimately in the delivery of financial information to management and preparation of consolidated financial reports, each on a more timely basis. While the Company has begun the process of implementing new systems, the continued development and installation of the systems involves the risk of unanticipated delay and expenses. There can be no assurance that there will be a successful or timely implementation of the new systems or that it will effectively serve the Company's future information requirements. PAGE 12 DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH The Company's growth strategy is dependent principally on its ability to acquire existing animal hospitals. 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 the Company's operations through the assessment of fines or penalties against the Company or the possible requirement of divestiture of one or more of the Company's operations. There can be no assurance that the Company will be able to identify and acquire acceptable acquisition candidates on terms favorable to the Company in a timely manner in the future. Assuming the availability of capital, the Company's plans include an aggressive acquisition program involving the acquisition of at least 15 to 25 facilities per year. The Company continues to evaluate acquisitions and negotiate with several potential acquisition candidates. The failure to complete acquisitions and continue expansion could have a material adverse effect on the Company's 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 The Company has incurred substantial indebtedness in connection with the acquisition of its animal hospitals and veterinary diagnostic laboratories and through the sale of the $84,385,000 of 5.25% convertible debentures in April 1996. The Company had at June 30, 1997, consolidated long-term obligations (including current portion) of $172.7 million. At June 30, 1997 and December 31, 1996, the Company's ratio of long-term debt to total stockholders' equity was 99.0% and 88.9%, respectively. RISKS ASSOCIATED WITH INTANGIBLE ASSETS A substantial portion of the assets of the Company consists of intangible assets, including goodwill and covenants not to compete relating to the acquisition of animal hospitals and veterinary diagnostic laboratories. At June 30, 1997, the Company's balance sheet reflected $233.7 million of intangible assets of these types, a substantial portion of the Company's $382.8 million in total assets at such date. The Company 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 the Company, there can be no assurance that the value of these intangible assets will be realized. In addition, the Company continually evaluates 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, the Company has recognized a writedown of goodwill and related assets in the amount of $9.5 million as part of its restructuring plan adopted during the third and fourth quarters of 1996. There can be no assurance that the Company will not be required to writedown assets further in future periods. GUARANTEED PAYMENTS In connection with acquisitions in which the purchase price consists, in part, of the Company's common stock (the "Guarantee Shares"), the Company 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, the Company typically is obligated either to (i) pay to the seller in cash, notes payable or additional shares of the Company's 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 delivered and registered for resale under the Securities Act, which registration the Company covenants to effect generally within nine months of issuance of the Guarantee Shares, the seller's Guarantee Right typically terminates if the Company's common stock trades at 110% to 120% of the Issue Price (the "Release Price") for five to 15 consecutive days, PAGE 13 depending on the terms of the specific acquisition at issue. There are 256,672 Guarantee Shares outstanding at August 11, 1997 with Issue Prices ranging from $11.62 to $24.53, with a weighted average of $17.30, that have not met their respective Release Prices for the specified period or have not been delivered due to escrow arrangements. If the value of the Company's common stock decreases and is less than an Issue Price at the end of the respective Guarantee Period for these shares, the Company may be obligated to compensate these sellers. SEASONALITY AND FLUCTUATING QUARTERLY RESULTS A large portion of the business of the Company is seasonal, with operating results varying substantially from quarter to quarter. Historically, the Company's revenues have been greater in the second and third quarters than in the first and fourth quarters. The demand for the Company'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 the Company's costs are fixed and do not vary with the level of demand. Consequently, net income for the second and third quarters at individual animal hospitals generally has been higher than that experienced in the first and fourth quarters. DEPENDENCE ON KEY MANAGEMENT The Company's success will continue to depend to a significant extent on the Company'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, and Mr. Neil Tauber, Senior Vice President of VCA, each of which expires in December 2002. 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. 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. The Company 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. The Company'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 the Company's animal hospitals. Among veterinary diagnostic laboratories, the Company 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 the Company. In addition, several national companies provide on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests. GOVERNMENT REGULATION The laws of many states prohibit veterinarians from splitting fees with non-veterinarians and prohibit business corporations from providing, or holding themselves out as providers of, veterinary medical care. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. While the Company seeks to structure its operations to comply with the corporate practice of veterinary medicine laws of each state in which it operates, there can be no assurance that, given varying and uncertain interpretations of such laws, the Company would be found to be in compliance with restrictions on the corporate practice of veterinary medicine in all states. A determination that the Company is in violation of applicable restrictions on the practice of veterinary medicine in any state in which it operates PAGE 14 could have a material adverse effect on the Company if the Company were unable to restructure its operations to comply with the requirements of such states. ANTI-TAKEOVER EFFECT A number of provisions of the Company'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 the Company's principal stockholders consider such a transaction to be in their best interest. In addition, H.J. Heinz Company has an option to purchase the Company'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 Company's common stock. As of August 11, 1997, the Company had 19,509,037 shares of common stock outstanding (including 135,000 shares held in treasury), most of which are either freely tradable in the public market without restriction or tradable in accordance with Rule 144 under the Act. There are also 96,088 shares which the Company is obligated to issue in connection with the Pets' Rx and Pet Practice mergers and certain acquisitions; 583,333 shares issuable upon conversion of outstanding preferred stock; 3,652,751 shares of the Company's common stock issuable upon exercise of outstanding stock options; 35,876 shares issuable upon conversion of convertible notes; and 2,456,623 shares issuable upon conversion of convertible debentures. Shares may also be issued under price guarantees delivered in connection with acquisitions. These shares will be eligible for immediate sale upon issuance. POSSIBLE VOLATILITY OF STOCK PRICE The market price of the Company's common stock could be subject to significant fluctuations caused by variations in quarterly operating results, litigation involving the Company, announcements by the Company 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 Company's common stock. ALLEGED MISSTATEMENTS REGARDING THE COMPANY'S OPERATIONS AND PROSPECTS The Company and certain of its current and former officers and directors have been named as defendants in a class action lawsuit filed on April 1, 1997, entitled Marilyn J. Thompson, et al. v. Veterinary Centers of America, Inc., et al., Los Angeles Superior Court, Case No. BC1268547. The lawsuit has been filed on behalf of individuals claiming to have purchased common stock of the Company during the time period from February 15, 1996 through November 14, 1996, and the plaintiffs seek unspecified damages arising from alleged misstatements regarding the Company's animal hospitals, diagnostic laboratories, pet food operations and success in integrating certain acquisitions. While the Company has not yet filed an answer to the complaint, the Company intends to vigorously defend itself against the lawsuit. Since discovery has only recently commenced, the Company is unable to assess the likelihood of an adverse result in the class action lawsuit. There can be no assurances as to the outcome of such lawsuit. The inability of the Company to resolve the claims that are the basis for the lawsuit or to prevail in any related litigation could result in the Company being required to pay substantial monetary damages for which the Company may not be adequately insured, which could have a material adverse effect on the Company's business, financial condition and results of operations. In any event, the Company's defense of such lawsuit, even if the outcome is favorable to the Company, may result in substantial costs to the Company, as well as significant dedication of management resources. PAGE 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS For discussion on legal proceedings, see Risk Factors - "Alleged Misstatements Regarding the Company's Operations and Prospects." In addition to the legal proceedings described herein, the Company is a party to other litigation which arises in the ordinary course of its business, none of which is material. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of the shareholders held on June 30, 1997, Robert L. Antin and Richard Gillespie, M.D., were elected to serve as Class I Directors of the Company until the year 2000 annual meeting of shareholders. The other directors of the Company are: Arthur J. Antin, Neil Tauber, John B. Chickering, Jr. and John A. Heil. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: Exhibit 11.1 Computation of Per Share Earnings Exhibit 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K: Current Report on Form 8-K Filed May 1, 1997 PAGE 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VETERINARY CENTERS OF AMERICA, INC. Date: August 13, 1997 /S/ Tomas W. Fuller ------------------- Tomas W. Fuller Chief Financial Officer EXHIBIT INDEX ITEM EXHIBIT PAGE - ---- ------- ---- 11.1 Computation of Per Share Earnings 27.1 Financial Data Schedule EX-11.1 2 EXHIBIT 11.1 VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES COMPUTATIONS OF PER SHARE EARNINGS (LOSS) The computations of net earnings (loss) per share for three and six months ended June 30, 1997 and 1996 are as follows: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ------------ ------------ ------------- Primary: Net income (loss) $ 4,351,000 $(1,304,000) $ 5,761,000 $ (544,000) ============ ============ ============ ============= Average common shares outstanding 19,502,000 14,163,000 19,473,000 13,697,000 Dilutive common equivalent share issuable upon: Conversion of preferred stock 583,000 -- 583,000 -- Exercise of options to purchase common shares 511,000 -- 424,000 -- Issuance of contingently issuable shares 141,000 -- 151,000 -- ---------- ---------- ---------- ---------- 20,737,000 14,163,000 20,631,000 13,697,000 ========== ========== ========== ========== Net earnings (loss) per share $ 0.21 $ (0.09) $ 0.28 $ (0.04) ====== ======== ====== ======== Fully Diluted: Net income (loss) $ 4,351,000 $ (1,304,000) $ 5,761,000 $ (544,000) Addback: Interest expense, net of tax, applicable to convertible debt 718,000 897,000 1,437,000 898,000 ----------- ------------ ----------- ---------- $ 5,068,000 $ (407,000) $ 7,198,000 $ 354,000 =========== ============ =========== ========== Average common shares outstanding 19,502,000 14,163,000 19,473,000 13,697,000 Dilutive common equivalent share issuable upon: Conversion of preferred stock 583,000 583,000 583,000 583,000 Redemption of redeemable warrants -- -- -- 1,145,000 Exercise of options to purchase common shares 780,000 970,000 726,000 977,000 Issuance of contingently issuable shares 141,000 1,032,000 151,000 -- Conversion of convertible debt 2,497,000 2,464,000 2,498,000 2,464,000 ---------- ---------- ---------- ---------- 23,503,000 19,212,000 23,431,000 18,866,000 ========== ========== ========== ========== Net earnings (loss) per share $ 0.22 $ (0.02) $ 0.31 $ 0.02 ====== ======= ====== ====== EX-27.1 3 FINANCIAL-DATA-SCHEDULE
5 EX-27.1 FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 7,829,000 76,003,000 10,118,000 0 0 103,798,000 37,861,000 0 382,771,000 47,475,000 0 0 1,000 20,000 174,436,000 382,771,000 0 119,216,000 0 89,303,000 5,460,000 0 5,935,000 10,789,000 5,028,000 5,761,000 0 0 0 5,761,000 .28 .31
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