-----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, OvPaDr4NqJo5QYv8rrfPIcF6o3jJL1OPrdGz7vKfE7sId41gvm8RPs9pYkLjsIls KPuhWBpmNKN9/oT5O5n/eg== 0001011438-97-000064.txt : 19970520 0001011438-97-000064.hdr.sgml : 19970520 ACCESSION NUMBER: 0001011438-97-000064 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97609332 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 March 31, 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 19,355,161 shares as of May 13, 1997. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(UNAUDITED) ASSETS March 31, December 31, 1997 1996 -------- ---------- Current assets: Cash and equivalents . . . . . . . . . . . . . . . $ 8,113,000 $ 23,820,000 Marketable securities. . . . . . . . . . . . . . . 76,880,000 79,107,000 Trade accounts receivable, less allowance for uncollectible accounts . . . . . . . . . . . 9,848,000 9,583,000 Inventory, prepaid expenses and other. . . . . . . 5,250,000 8,788,000 Deferred income taxes. . . . . . . . . . . . . . . 2,331,000 2,331,000 Prepaid income taxes . . . . . . . . . . . . . . . 2,233,000 2,137,000 --------------- --------------- Total current assets . . . . . . . . . . . . 104,655,000 125,766,000 Property, plant and equipment, net. . . . . . . . . 37,578,000 37,467,000 Deferred income taxes . . . . . . . . . . . . . . . 1,352,000 1,352,000 Goodwill, net. . . . . . . . . . . . . . . . . . . 228,923,000 178,806,000 Covenants not to compete, net. . . . . . . . . . . 4,803,000 4,933,000 Building purchase options. . . . . . . . . . . . . 887,000 887,000 Notes receivable . . . . . . . . . . . . . . . . . 2,224,000 1,486,000 Deferred costs and other . . . . . . . . . . . . . 3,090,000 3,312,000 --------------- --------------- $ 383,512,000 $ 354,009,000 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations . . . . . $ 14,579,000 $ 14,055,000 Accounts payable . . . . . . . . . . . . . . . . . 8,338,000 6,923,000 Accrued payroll and taxes . . . . . . . . . . . . 5,795,000 7,177,000 Income taxes payable . . . . . . . . . . . . . . . 1,547,000 -- Accrued restructuring costs. . . . . . . . . . . . 8,088,000 8,847,000 Accrued interest . . . . . . . . . . . . . . . . . 2,844,000 1,256,000 Other accrued liabilities. . . . . . . . . . . . . 9,097,000 8,857,000 --------------- --------------- Total current liabilities . . . . . . . . . . 50,288,000 47,115,000 Long-term obligations, less current portion . . . . 161,121,000 134,767,000 Minority interest . . . . . . . . . . . . . . . . . 1,433,000 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 . . . . . . . . . . . . 194,077,000 192,167,000 Accumulated deficit. . . . . . . . . . . . . . . . (22,704,000) (24,114,000) Less cost of common stock held in treasury, 97,773 shares at March 31, 1997 and at December 31, 1996. . . . . . . . . . . . . . (724,000) (724,000) --------------- --------------- Total stockholders' equity . . . . . . . . . . 170,670,000 167,350,000 --------------- --------------- $ 383,512,000 $ 354,009,000 =============== =============== VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
1997 1996 ---------- --------- Revenues. . . . . . . . . . . . . . . . . . . . . . $ 56,023,000 $ 35,232,000 Direct costs. . . . . . . . . . . . . . . . . . . . 43,520,000 26,509,000 --------------- --------------- Gross profit. . . . . . . . . . . . . . . . . . . . 12,503,000 8,723,000 Selling, general and administrative . . . . . . . . 4,849,000 4,045,000 Depreciation and amortization . . . . . . . . . . . 2,728,000 1,235,000 --------------- --------------- Operating income. . . . . . . . . . . . . . . . . . 4,926,000 3,443,000 Interest income . . . . . . . . . . . . . . . . . . 1,108,000 388,000 Interest expense. . . . . . . . . . . . . . . . . . 2,906,000 901,000 --------------- --------------- Income before minority interest and provision for income taxes . . . . . . . . . . . 3,128,000 2,930,000 Minority interest in income of subsidiaries . . . . 171,000 1,371,000 --------------- --------------- Income before provision for income taxes. . . . . . 2,957,000 1,559,000 Provision for income taxes. . . . . . . . . . . . . 1,547,000 799,000 --------------- --------------- Net income. . . . . . . . . . . . . . . . . . . . . $ 1,410,000 $ 760,000 =============== =============== Net earnings per common share . . . . . . . . . . . $ 0.07 $ 0.05 =============== =============== Average common shares used for computing earnings per share . . . . . . . . . . . . . . . 20,391,000 15,927,000 =============== ===============
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
1997 1996 -------- -------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . $ 1,410,000 $ 760,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . 2,728,000 1,235,000 Amortization of debt discount and deferred financing costs . . . . . . . . . . . 207,000 72,000 Minority interest in income of subsidiaries. . . 171,000 1,371,000 Increase in other assets, net. . . . . . . . . . -- (325,000) Decrease in deferred income taxes. . . . . . . . -- 286,000 Increase in accounts receivable, net . . . . . . (1,726,000) (1,262,000) Decrease (increase) in inventory, prepaid expenses and other . . . . . . . . . . 2,383,000 (403,000) (Increase) decrease in prepaid income taxes (96,000) 241,000 Increase in accounts payable and accrued liabilities. . . . . . . . . . . . . . 4,437,000 208,000 Increase in income taxes payable . . . . . . . . 1,547,000 -- Payments to minority interest partners . . . . . (76,000) (961,000) --------------- --------------- Net cash provided by operating activities. . . 10,985,000 1,222,000 --------------- --------------- Cash flows from investing activities: Property, plant and equipment additions, net . . . (1,084,000) (1,012,000) Business acquisitions, net of cash acquired. . . . (21,803,000) (12,051,000) Proceeds from sale of marketable securities. . . . 2,227,000 -- Proceeds from the sale of assets . . . . . . . . . 180,000 -- --------------- --------------- Net cash used in investing activities. . . . . . . (20,480,000) (13,063,000) --------------- --------------- Cash flows from financing activities: Reduction of long-term obligations . . . . . . . . (4,985,000) (3,527,000) Advances made on notes receivable. . . . . . . . . (556,000) -- Payments received on notes receivable. . . . . . . 48,000 12,000 Net proceeds from exercise of warrants . . . . . . -- 5,330,000 Proceeds from issuance of common stock under stock option plans. . . . . . . . . . . . 589,000 141,000 Proceeds from issuance of common stock . . . . . . -- 200,000 Capital contribution of minority interest partner . . . . . . . . . . . . . . . . 10,000 -- Capital distribution to minority interest partner . (1,318,000) -- --------------- --------------- Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . (6,212,000) 2,156,000 --------------- --------------- Decrease in cash and equivalents . . . . . . . . . (15,707,000) (9,685,000) Cash and equivalents at beginning of period. . . . 23,820,000 47,551,000 --------------- --------------- Cash and equivalents at end of period. . . . . . . $ 8,113,000 $ 37,866,000 =============== ===============
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED) (continued)
1997 1996 ------ ------- Supplemental disclosures of cash flow information Interest paid. . . . . . . . . . . . . . . . . . . $ 1,318,000 $ 832,000 Taxes paid . . . . . . . . . . . . . . . . . . . . 96,000 269,000 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. . . . . . . . . . $ 54,132,000 $ 23,304,000 Less: Consideration given Cash paid to sellers, net of cash acquired . . . 20,646,000 9,875,000 Cash paid in settlement of assumed liabilities. . . . . . . . . . . . . . . . . . 1,157,000 1,010,000 Common stock issued. . . . . . . . . . . . . . . 1,321,000 3,868,000 --------------- --------------- Liabilities assumed including notes payable issued, net of payments . . . . . . . $ 31,008,000 $ 8,551,000 =============== =============== 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 =============== ===============
VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 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 three months ended March 31, 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 MARCH 31, ------------------- 1997 1996 ---- ---- Revenues: Pre-merger VCA $ -- $31,004,000 Pets' Rx -- 4,228,000 ---------- --------- -- 35,232,000 Post-merger 56,023,000 -- ---------- --------- $ 56,023,000 $35,232,000 ========== ========== Net income: Pre-merger VCA $ -- $ 1,012,000 Pets' Rx -- (252,000) ---------- --------- -- 760,000 Post-merger 1,410,000 -- ---------- --------- $ 1,410,000 $ 760,000 ========== =========
(2) ACQUISITIONS AND DISPOSITIONS During the first quarter of 1997, the Company purchased four animal hospitals in separate transactions for a total consideration (including acquisition costs) of $6,417,000, consisting of $1,933,000 in cash, $2,713,000 in long-term obligations, 124,056 shares of VCA common stock with a value of $1,321,000, 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. 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 first quarter of 1997, the Company has sold, closed or merged 10 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. This process will be completed in the second quarter of 1997. 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 In the first quarter of 1997, the Company utilized approximately $750,000 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 has not yet 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. (7) ACCOUNTING PRONOUNCEMENTS In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128) and SFAS No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). SFAS 128 revises and simplifies the computation for earnings per share and requires certain additional disclosures. SFAS 129 requires additional disclosures regarding the Company's capital structure. Both standards will be adopted in the fourth quarter of 1997. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or the results of operations. (8) SUBSEQUENT EVENTS Since March 31, 1997 through May 13, 1997, the Company has purchased one animal hospital and one veterinary diagnostic laboratory for a total consideration (including acquisition costs) of $985,000, consisting of $485,000 in cash and $500,000 in notes payable. 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 three business lines: the Company owns, operates and manages animal hospitals; the Company owns and operates veterinary diagnostic laboratories; and the Company, through a joint venture with Heinz Pet Products ("HPP"), markets and distributes premium pet foods. Over the past several years, the Company has issued common stock or notes or paid cash to acquire animal hospitals and veterinary diagnostic laboratories. The acquisition of individual animal hospitals is an integral part of the Company's business plan. In addition, in the second and third quarter of 1996 the Company completed two significant acquisitions which have 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 March 31, 1997, VCA has acquired one animal hospital in California and entered into management service agreements with three other hospitals in the states of Texas and Nebraska. Subsequent to the end of the quarter, the Company acquired one additional animal hospital in Connecticut and one veterinary diagnostic laboratory in Utah. 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 each of the three-month periods ended March 31:
1997 1996 ----- ---- Animal Hospital $ 39,939,000 $ 22,059,000 Laboratory 16,246,000 12,056,000 Premium Pet Food 1,064,000 1,850,000 Intercompany Sales (1,226,000) (733,000) ----------- ----------- $ 56,023,000 $ 35,232,000 =========== ===========
Revenues for the Animal Hospital operations increased 81.1% for the three-months ended March 31, 1997 compared to the three months ended March 31, 1996. This growth was primarily the result of growth in the number of facilities operated by the Company. The results for 1997 include the results of over 100 veterinary hospitals acquired subsequent to March 31, 1996. There were no material changes in revenues between the periods resulting from changes in volume or prices at facilities existing at March 31, 1996. Pursuant to the 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 first quarter of 1997, amounting to $850,000, are included in Animal Hospital revenues. Revenues for the Laboratory operations increased 34.8% for the three months ended March 31, 1997 compared to the three months ended March 31, 1996. This increase was primarily due to the acquisition of five veterinary diagnostic laboratories since March 31, 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 three month's activity in 1996 compared to one month in 1997. Because of the differing time periods, a comparison of the results of the two periods is not meaningful. GROSS PROFIT Gross profit for each of the three-month periods ended March 31 is comprised of the following:
1997 1996 ---- ---- Animal Hospital $ 6,374,000 $ 3,162,000 Laboratory 5,561,000 4,871,000 Premium Pet Food 568,000 690,000 ---------- --------- $ 12,503,000 $ 8,723,000 ========== =========
Gross profit for the Animal Hospital operations is comprised of revenues less all costs of services and products at the hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel, facilities rent and occupancy costs, medical supply costs and costs of goods sold associated with the retail sales of pet food and pet supplies. Animal Hospital gross profit increased 101.6% in the 1997 three-month period when compared to the 1996 three-month period, representing 16.0% and 14.3% 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 and to the addition of the Consulting Fees. Animal Hospital gross profit margins at existing hospitals increased to 16.1% in 1997 from 13.7% in 1996 due to a 17.5% decrease in expenses (including a 3.4% decrease in labor costs and an 1.6% decrease in supply costs). Gross profit margins at newly acquired hospitals were 12.7% for the quarter. The Company continues to take actions designed to improve gross margins at the newly acquired hospitals. However, there can be no assurance that the Company will be successful in its efforts to improve gross profit margins at these facilities. 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 19.1% for the 1997 first quarter compared to the 1996 first quarter, representing 34.2% and 40.4% of laboratory revenues in 1997 and 1996, respectively. The decrease in gross profit as a percentage of revenue for the three months ended March 31, 1997 from the comparable 1996 period was attributable to increased costs in the east coast laboratory operations as a result of increasing the service level to existing clients and entering new markets. Gross profit of Premium Pet Food is comprised of revenues less cost of goods sold, including warehousing, freight and distribution costs. Gross profit as a percentage of revenues for the quarter ended March 31, 1997 and 1996 was 53.4% and 37.3%, respectively. The Company's Animal Hospital business historically has realized gross profit margins that are lower than that of the Laboratory and Premium Pet Food businesses. 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 and rent and occupancy costs. Selling, general and administrative expense for each of the three-month periods ended March 31 is comprised of the following:
1997 1996 ---- ---- VCA Corporate $ 3,489,000 $ 1,809,000 Laboratory 960,000 1,116,000 Premium Pet Food 400,000 1,120,000 --------- --------- $ 4,849,000 $ 4,045,000 ========= =========
VCA Corporate and Laboratory selling, general and administrative expense, as a percentage of Animal Hospital and Laboratory revenues was 8.1% and 8.7% for the three months ended March 31, 1997 and 1996, respectively. The decrease from 1996 to 1997 was primarily attributable to an increase in revenue without a comparable increase in expense. Premium Pet Food selling, general and administrative expense as a percentage of Premium Pet Food revenues was 37.6% and 60.5% for the three months ended March 31, 1997 and 1996, respectively. The decrease as a percentage of revenue was primarily attributable to spreading the expenses over a larger revenue base. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense primarily relates to the depreciation of capital assets and the amortization of excess cost over the fair value of net assets acquired (goodwill) and certain other intangibles. Depreciation and amortization expense increased to $2,728,000 for the three months ended March 31, 1997 from $1,235,000 for the three months ended March 31, 1996. The increase in depreciation and amortization expense is due to the acquisition of hospitals and laboratories including the Company's purchase of the remaining 49% interest in Vet Research in January 1997 for a total purchase price amounting to approximately $47,715,000. The Company's policy is to amortize goodwill over the expected period to be benefited, not exceeding forty years. NET INCOME Net income for each of the three-month periods ended March 31 is comprised of the following:
1997 1996 ---- ---- Revenues: Pre-merger VCA $ -- $ 31,004,000 Pets' Rx -- 4,228,000 ---------- ---------- -- 35,232,000 Post-merger 56,023,000 -- ---------- ---------- $ 56,023,000 $ 35,232,000 ========== ========== Net income: Pre-merger VCA $ -- $ 1,012,000 Pets' Rx -- (252,000) ---------- ---------- -- 760,000 Post-merger 1,410,000 -- ---------- ---------- $ 1,410,000 $ 760,000 ========== ==========
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations during the three months ended March 31, 1997 was $10,985,000. The Company used cash, net of cash acquired, of $21,803,000, to purchase four individual veterinary hospitals and the remaining 49% interest in Vet Research. The Company used cash of $4,985,000 to retire long-term obligations. The Company received $2,227,000 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 payable. 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 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, Pets' Rx, 22 individual animal hospitals and six veterinary diagnostic laboratories. In 1997, through May 13, 1997, the Company completed the acquisition of four individual animal hospitals and one veterinary diagnostic laboratory. 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 1996 revenue of over $233 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. The successful management of this growth will require the Company to continue to implement and improve its financial and management information systems and to train, motivate and manage its 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. MANAGEMENT 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 accounting and management information systems. The Company is in the process of implementing new management 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. 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 March 31, 1997, consolidated long-term obligations (including current portion) of $175.7 million. At March 31, 1997 and December 31, 1996, the Company's ratio of long-term debt to total stockholders' equity was 102.9% 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 March 31, 1997, the Company's balance sheet reflected $233.7 million of intangible assets of these types, a substantial portion of the Company's $383.5 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, depending on the terms of the specific acquisition at issue. There are 256,672 Guarantee Shares outstanding at May 13, 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 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 May 13, 1997, the Company had 19,355,161 shares of common stock outstanding (including 97,773 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 249,504 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; 3,688,930 shares of the Company's common stock issuable upon exercise of outstanding stock options; 41,608 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 not yet 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. 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 and Note 5 to Notes to Financial Statements." 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 None 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 January 22, 1997 Current Report on Form 8-K filed February 18, 1997 Current Report on Form 8-K filed February 27, 1997 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: May 14, 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 The computations of net earnings per share for three months ended March 31, 1997 and 1996 are as follows:
1997 1996 ---- ---- Primary: Net income $ 1,410,000 $ 760,000 =========== ========== Average common shares outstanding 19,444,000 13,235,000 Dilutive common equivalent shares issuable upon: Conversion of preferred stock 583,000 583,000 Redemption of redeemable warrants -- 1,239,000 Exercise of options to purchase common shares 364,000 870,000 ----------- ---------- 20,391,000 15,927,000 =========== ========== Net earnings per share $ 0.07 $ 0.05 =========== ========== Fully Diluted: Net income $ 1,410,000 $ 760,000 Add back: Interest expense, net of tax, applicable to convertible debt 718,000 53,000 ----------- ---------- $ 2,128,000 $ 813,000 =========== ========== Average common shares outstanding 19,444,000 13,235,000 Dilutive common equivalent shares issuable upon: Conversion of preferred stock 583,000 583,000 Redemption of redeemable warrants -- 1,420,000 Exercise of options to purchase common shares 365,000 1,066,000 Conversion of convertible debt 2,498,000 49,000 ----------- --------- 22,890,000 16,353,000 =========== ========== Net earnings per share $ 0.09 $ 0.05 =========== ==========
EX-27.1 3 FINANCIAL-DATA-SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8,113,000 76,880,000 9,848,000 0 0 104,655,000 37,578,000 0 383,512,000 50,288,000 0 0 1,000 20,000 170,649,000 383,512,000 0 56,023,000 0 43,520,000 2,728,000 0 2,906,000 2,957,000 1,547,000 1,410,000 0 0 0 1,410,000 .07 .07
-----END PRIVACY-ENHANCED MESSAGE-----