424(B)1
Filed Pursuant to Rule 424(b)1
Registration No. 333-102439
462(b) Registration No. 333-102821
10,050,000 Shares
Common Stock
This is an offering of shares of common stock of VCA Antech, Inc. This prospectus relates to an offering of 10,050,000 shares.
VCA Antech, Inc. is offering 3,300,000 shares of the shares to be sold in this offering. The selling stockholders identified in this
prospectus are offering an additional 6,750,000 shares. VCA Antech, Inc. will not receive any proceeds from the sale of shares by the selling stockholders.
Our common stock is quoted on The Nasdaq Stock Markets National Market under the symbol WOOF. The last reported sale price of our common stock on January 29, 2003 was $15.49 per share.
See Risk Factors beginning on page 10 to read about the factors you should consider before buying shares of
our common stock.
Neither
the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
|
|
Per Share
|
|
Total
|
Initial price to public |
|
$ |
15.25 |
|
$ |
153,262,500.00 |
Underwriting discount |
|
$ |
0.76 |
|
$ |
7,638,000.00 |
Proceeds, before expenses, to VCA Antech, Inc. |
|
$ |
14.49 |
|
$ |
47,817,000.00 |
Proceeds, before expenses, to the selling stockholders |
|
$ |
14.49 |
|
$ |
97,807,500.00 |
To the extent that the underwriters sell more than 10,050,000 shares of
common stock, the underwriters have the option to purchase up to an additional 1,507,500 shares from VCA Antech, Inc. and the selling stockholders at the initial price less the underwriting discount.
The underwriters expect to deliver the shares against
payment in New York, New York on February 4, 2003.
Joint Book-Running Managers
Credit Suisse First Boston |
|
Goldman, Sachs & Co. |
Banc of
America Securities LLC
Salomon Smith Barney
Jefferies &
Company, Inc.
Wells Fargo Securities, LLC
Prospectus dated January 29, 2003.
DESCRIPTION OF ARTWORK:
The artwork includes the VCA Antech logo, VCA Animal Hospitals logo and Antech Diagnostics logo. The gatefold also includes pictures of a VCA animal hospital, a VCA veterinarian
performing a surgical procedure, a VCA laboratory and a VCA laboratory worker. The following text is contained on this artwork: VCA Animal Hospitals: Largest network of free standing animal hospitals in the nation; 225* hospitals in 33 states. * as
of September 30, 2002; Antech Diagnostics: Largest network of veterinary diagnostic laboratories in the nation; Established infrastructure serving 13,000 animal hospitals in all 50 states; 83 veterinary specialist consultants; Capitalizing on
growing demand for diagnostics in veterinary medicine.
You should read the following summary together with the more detailed
information regarding our company and the common stock sold in this offering and our consolidated financial statements and notes to those statements appearing elsewhere in this prospectus. We urge you to read this entire prospectus carefully,
including the Risk Factors section.
VCA Antech, Inc.
Our Business
We are a leading animal health care services company
and operate the largest networks of veterinary diagnostic laboratories and free-standing, full-service animal hospitals in the United States. Our network of veterinary diagnostic laboratories provides sophisticated testing and consulting services
used by veterinarians in the detection, diagnosis, evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. Our network of animal hospitals offers a full range of general medical and surgical services for
companion animals. We treat diseases and injuries, provide pharmaceutical products and offer a variety of pet wellness programs, including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care.
Diagnostic Laboratories
We operate the only full-service, veterinary diagnostic laboratory network serving all 50 states. Our 19 state-of-the-art, automated diagnostic laboratories service a diverse client base of over 13,000 animal hospitals, and
non-affiliated animal hospitals generated approximately 95% of our laboratory revenue in 2001. We support our laboratories with what we believe is the industrys largest transportation network, which picks up an average of 20,000 to 25,000
samples daily. In the nine months ended September 30, 2002, we derived approximately 70.1% of our laboratory revenue from our clients in major metropolitan areas, where we offer twice-a-day pick-up service and same-day results. Outside of these
areas, we typically provide test results to veterinarians before 8:00 a.m. the following day.
Our diagnostic spectrum
includes over 300 different tests in the areas of chemistry, pathology, endocrinology, hematology and microbiology, as well as tests specific to particular diseases. In 2001, we handled approximately 6.9 million requisitions and performed
approximately 18.3 million tests. Although modified to address the particular requirements of the species tested, the tests performed in our veterinary laboratories are similar to those performed in human clinical laboratories and utilize similar
laboratory equipment and technologies.
From 1999 through the twelve months ended September 30, 2002, our laboratory
revenue, laboratory operating income and laboratory operating income before depreciation and amortization increased at compounded annual growth rates of 14.5%, 24.0% and 20.6%, respectively. We will refer to operating income before depreciation and
amortization as EBITDA. In the twelve months ended September 30, 2002, our laboratory operating income was $50.7 million, or 33.8% of our laboratory revenue, and our laboratory EBITDA was $54.0 million, or 36.1% of our laboratory
revenue.
Animal Hospitals
At September 30, 2002, we operated 225 animal hospitals in 33 states that were supported by over 750 veterinarians. In addition to general medical and surgical services, we offer specialized treatments for companion animals,
including advanced diagnostic services, internal medicine, oncology, ophthalmology, dermatology and cardiology. We also provide pharmaceutical products for
1
use in the delivery of treatments by our veterinarians and pet owners. Our facilities typically are located in high-traffic, densely populated areas and have an established reputation in the
community with a stable client base. Since 2000, our animal hospitals have been connected to an enterprise-wide management information system. This system provides us opportunities to manage our animal hospitals more effectively and to implement
throughout our animal hospital network veterinarian practices and procedures that we have identified, tested and believe to provide a high level of client care.
From 1999 through the twelve months ended September 30, 2002, our animal hospital revenue, animal hospital operating income and our animal hospital EBITDA increased at compounded annual growth rates of 10.9%,
25.6% and 18.9%, respectively. In the twelve months ended September 30, 2002, our animal hospital operating income was $50.1 million, or 17.3% of our animal hospital revenue, and our animal hospital EBITDA was $60.0 million, or 20.7% of our animal
hospital revenue.
Our Opportunity
We intend to continue to grow by capitalizing on the following market opportunities:
|
|
Large, Growing Market. According to the 2001-2002 American Pet Products Manufacturers Association Pet Owners Survey, the ownership of
pets is widespread, with over 62% of U.S. households owning at least one pet, including companion and other animals. The U.S. population of companion animals is approximately 188 million, including about 141 million dogs and cats. According to the
U.S. Pet Ownership & Demographics Sourcebook published by the American Veterinary Medical Association, over $11 billion was spent on companion animal health care services in 1996, with an annual growth rate of over 9.5% from 1991 through 1996
for spending on dogs and cats. We believe this growth is primarily driven by an increased emphasis on pet health and wellness, continued technological developments driving new and previously unconsidered diagnostic tests, procedures and treatments,
and favorable demographic trends supporting a growing pet population. |
|
|
Rapidly Growing Veterinary Diagnostic Testing Services. We believe that outsourced diagnostic testing is among the fastest growing
segments of the animal health care services industry. Reflecting this trend, our laboratory internal revenue growth has averaged 11.4% over the last three fiscal years. The growth in outsourced diagnostic testing resulted from an overall increase in
the number of tests requisitioned by veterinarians and from veterinarians increased reliance on outsourced diagnostic testing rather than in-house testing. The overall increase in the number of tests performed is primarily due to the growing
focus by veterinarians on wellness and monitoring programs, the emphasis in veterinary education on utilizing diagnostic tests for more accurate diagnoses and continued technological developments in veterinary medicine leading to new and improved
tests. The increased utilization of outsourced testing is primarily due to the relative low cost and high accuracy rates provided by outside laboratories and the diagnostic consulting provided by experts employed by the leading outside laboratories.
|
|
|
Attractive Client Payment Dynamics. The animal health care services industry does not experience the problems of extended payment
collection cycles or pricing pressures from third-party payors faced by human health care providers. Outsourced laboratory testing is a wholesale business that collects payments directly from animal hospitals, generally on terms requiring payment
within 30 days of the date the charge is invoiced. Fees for animal hospital services are due and typically paid for at the time of the service. For example, over 95% of our animal hospital services are paid for in cash or by credit card at the time
of the service. In addition, over the past three fiscal years, our bad debt expense has averaged only 1% of total revenue. |
2
Competitive Strengths
We believe we are well positioned for profitable growth due to the following competitive strengths:
|
|
Market Leader. We are a market leader in each of the business segments in which we operate. We maintain the only veterinary
diagnostic laboratory network serving all 50 states, which is supported by the largest group of consulting veterinary specialists in the industry. Our network of animal hospitals and veterinarians is the largest in the United States. We believe that
it would be difficult, time consuming and expensive for new entrants or existing competitors to assemble a comparable nationwide laboratory or animal hospital network. |
|
|
Compelling Business Model. The fixed cost nature of our business allows us to generate strong margins, particularly on incremental
revenues. In each quarter since 1999, we have generated positive laboratory internal revenue growth. The growth in our laboratory revenue, combined with greater utilization of our infrastructure, has enabled us to improve our laboratory operating
margin from 27.1% in 1999 to 33.8% for the twelve months ended September 30, 2002, and our laboratory adjusted EBITDA margin from 31.2% to 36.1% over the same period. In each quarter since 1999, we have generated positive animal hospital
same-facility revenue growth. Due to the operating leverage associated with our animal hospital business, the increase in animal hospital revenue has enabled us to improve our animal hospital operating margin from 12.3% in 1999 to 17.3% for the
twelve months ended September 30, 2002, and our animal hospital adjusted EBITDA margin from 17.1% to 20.7% over the same period. These high margins, combined with our modest working capital needs and low maintenance capital expenditures, provide
cash that we can use for acquisitions or to reduce indebtedness. |
|
|
Leading Team of Specialists. We believe our laboratories are a valuable diagnostic resource for veterinarians. Due to the trend
towards offering specialized services in veterinary medicine, our network of 83 specialists, which includes veterinarians, chemists and other scientists with expertise in fields such as pathology, internal medicine, oncology, cardiology,
dermatology, neurology and endocrinology, provides us with a significant competitive advantage. These specialists are available to consult with our laboratory clients, providing a compelling reason for them to use our laboratories rather than those
of our competitors, most of whom offer no comparable service. Our team of specialists represents the largest interactive source for readily available diagnostic advice in the veterinary industry and interact with animal health care professionals
over 90,000 times a year. |
|
|
High Quality Service Provider. We believe that we have built a reputation as a trusted animal health brand among veterinarians and
pet owners alike. In our laboratories, we maintain rigorous quality assurance programs to ensure the accuracy of reported results. We calibrate our laboratory equipment several times daily with test specimens of known concentration or reactivity to
assure accuracy and use only qualified personnel to perform testing. Further, our specialists review all test results outside of the range of established norms. As a result of these measures, we believe our diagnostic accuracy rate is over 99%. In
our animal hospitals, we provide continuing education programs, promote the sharing of professional knowledge and expertise and have developed and implemented a program of best practices to promote quality medical care.
|
|
|
Shared Expertise Among Veterinarians. We believe our group of animal hospitals and veterinarians provide us with a competitive
advantage through our collective expertise and experience. Our veterinarians consult with other veterinarians in our network to share information regarding the practice of veterinary medicine, which continues to expand our collective knowledge. We
maintain an internal continuing education program for our veterinarians and have an established infrastructure for the dissemination of information on new developments in diagnostic testing, procedures and treatment programs.
|
3
Business Strategy
Our business strategy is to continue to expand our market leadership in animal health care services through our diagnostic laboratories and animal hospitals. Key elements of our
strategy include:
|
|
Capitalizing on Our Leading Market Position to Generate Revenue Growth. Our leading market position in each of our business segments
positions us to take advantage of favorable growth trends in the animal health care services industry. In our laboratories, we seek to generate revenue growth by capitalizing on the growing number of outsourced diagnostic tests and by increasing our
market share. In our animal hospitals, we seek to generate revenue growth by capitalizing on the growing emphasis on pet health and wellness and favorable demographic trends supporting a growing pet population. |
|
|
Leveraging Established Infrastructure to Improve Margins. Due to our established networks and the fixed cost nature of our
business model, we are able to realize high margins on incremental revenues from both laboratory and animal hospital clients. For example, given that our nationwide transportation network servicing our laboratory clients is a relatively fixed cost,
we are able to achieve significantly higher margins on most incremental tests ordered by the same client when picked up by our couriers at the same time. We estimate that in most cases, we realize an operating and EBITDA margin between 60% and 75%
on these incremental tests. |
|
|
Utilizing Enterprise-Wide Systems to Improve Operating Efficiencies. In 2001, we completed the migration of our animal hospital
operations to an enterprise-wide management information system. This common system has enabled us to effectively manage the key operating metrics that drive our business. We use this system to help standardize our pricing, implement and monitor the
effectiveness of targeted marketing programs, expand the services provided by our veterinarians and capture unbilled services. |
|
|
Pursuing Selected Acquisitions. Although we have substantially completed our laboratory infrastructure, we may make selective,
strategic laboratory acquisitions, with any new operations likely to be merged into existing facilities. Additionally, the fragmentation of the animal hospital industry provides us with significant expansion opportunities in our animal hospital
segment. Depending on the attractiveness of the candidates and the strategic fit with our existing operations, we intend to acquire approximately 15 to 25 animal hospitals per year primarily utilizing internally generated cash.
|
4
Business Risks
Some of the key risks associated with our business strategy include:
|
|
Continued Growth. Our success depends, in part, on our ability to build on our position as a leading animal health care services
company through a balanced program of internal growth initiatives and selective acquisitions of established animal hospitals and laboratories. We may be unable to successfully execute our growth strategy and, as a result, our business may be harmed.
|
|
|
Management of Growth. Our business and results of operations may be adversely affected if we are unable to manage our growth
effectively, which may increase our costs of operations and hinder our ability to execute our business strategy. |
|
|
Substantial Debt. Our substantial amount of debt, including senior and secured debt, as well as the guarantees of our subsidiaries
and the security interests in our assets, could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. |
|
|
Concentration of Ownership. Concentration of ownership among our existing executive officers, directors and principal stockholders
may inhibit new investors from influencing significant corporate decisions. These stockholders will be able to significantly affect our management, our policies and all matters requiring stockholder approval. |
|
|
Fixed Costs. A significant percentage of our expenses, particularly rent and personnel costs, are fixed costs and are based in part
on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenues. |
Our principal offices are located at 12401 West Olympic Boulevard, Los Angeles, California 90064-1022. Our telephone number is (310) 571-6500.
5
The Offering
Common stock offered |
|
10,050,000 shares |
By us |
|
3,300,000 shares |
By the selling stockholders |
|
6,750,000 shares |
Over-allotment granted |
|
1,507,500 shares |
By us |
|
500,000 shares |
By the selling stockholders |
|
1,007,500 shares |
Common stock to be outstanding after this offering |
|
40,060,975 shares |
Use of proceeds |
|
We intend to use the net proceeds from this offering to repay indebtedness and for general corporate purposes. We will not receive any proceeds from the sale of shares
by the selling stockholders. |
Nasdaq National Market symbol |
|
WOOF |
Unless
otherwise indicated, all share information in this prospectus is based on the number of shares outstanding as of September 30, 2002 and:
|
|
excludes 1,955,901 shares of common stock issuable upon exercise of outstanding options under our stock incentive plans, at a weighted average exercise price of $9.95 per
share; |
|
|
excludes 650,000 shares available for future issuance under our stock incentive plans; and |
|
|
assumes no exercise of the underwriters over-allotment option. |
6
Summary Consolidated Financial Data
The summary financial data for the years in the periods ended December 31, 2001, 2000 and 1999 were derived from our audited financial statements. The summary financial data for the
nine month periods ended September 30, 2002 and 2001 were derived from our unaudited financial statements and include, in the opinion of management, all adjustments necessary for a fair presentation of our financial position and operating results
for these periods and as of those dates. Our results for the interim periods are not necessarily indicative of our results for a full years operations. The pro forma statement of operations data adjusts the financial data to give effect to
this offering, our initial public offering, concurrent note offering by one of our wholly owned subsidiaries and the application of the net proceeds therefrom and the use of $12.3 million cash on hand, as more fully described in note (2) below. You
should read the following information together with Selected Historical Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial
statements and related notes included elsewhere in this prospectus.
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
|
(dollars in thousands) |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory revenue |
|
$ |
116,911 |
|
|
$ |
101,855 |
|
|
$ |
134,711 |
|
|
$ |
119,300 |
|
|
$ |
103,282 |
|
Animal hospital revenue |
|
|
225,383 |
|
|
|
207,665 |
|
|
|
272,113 |
|
|
|
240,624 |
|
|
|
217,988 |
|
Total revenue (1) |
|
|
336,892 |
|
|
|
305,365 |
|
|
|
401,362 |
|
|
|
354,687 |
|
|
|
320,560 |
|
Operating income |
|
|
75,000 |
|
|
|
33,680 |
|
|
|
27,706 |
|
|
|
19,205 |
|
|
|
47,016 |
|
Net income (loss) available to common stockholders |
|
|
23,165 |
|
|
|
(22,368 |
) |
|
|
(46,574 |
) |
|
|
(13,802 |
) |
|
|
22,357 |
|
Pro forma net income (loss) available to common stockholders (2) |
|
|
25,791 |
|
|
|
|
|
|
|
(24,130 |
) |
|
|
|
|
|
|
|
|
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (3) (4) |
|
$ |
84,330 |
|
|
$ |
70,892 |
|
|
$ |
89,505 |
|
|
$ |
73,526 |
|
|
$ |
64,445 |
|
Adjusted EBITDA margin (5) |
|
|
25.0 |
% |
|
|
23.2 |
% |
|
|
22.3 |
% |
|
|
20.7 |
% |
|
|
20.1 |
% |
Adjusted laboratory EBITDA (6) |
|
$ |
43,734 |
|
|
$ |
35,264 |
|
|
$ |
45,561 |
|
|
$ |
38,827 |
|
|
$ |
32,273 |
|
Adjusted laboratory EBITDA margin (6) |
|
|
37.4 |
% |
|
|
34.6 |
% |
|
|
33.8 |
% |
|
|
32.5 |
% |
|
|
31.2 |
% |
Adjusted animal hospital EBITDA (7) |
|
$ |
49,472 |
|
|
$ |
43,159 |
|
|
$ |
53,658 |
|
|
$ |
42,985 |
|
|
$ |
37,237 |
|
Adjusted animal hospital EBITDA margin (7) |
|
|
22.0 |
% |
|
|
20.8 |
% |
|
|
19.7 |
% |
|
|
17.9 |
% |
|
|
17.1 |
% |
Net cash provided by operating activities |
|
$ |
60,838 |
|
|
$ |
49,316 |
|
|
$ |
57,104 |
|
|
$ |
60,054 |
|
|
$ |
38,467 |
|
Net cash used in investing activities |
|
|
(29,700 |
) |
|
|
(30,331 |
) |
|
|
(36,202 |
) |
|
|
(47,679 |
) |
|
|
(13,676 |
) |
Net cash used in financing activities |
|
|
(5,883 |
) |
|
|
(5,873 |
) |
|
|
(24,318 |
) |
|
|
(12,476 |
) |
|
|
(23,148 |
) |
Capital expenditures |
|
|
13,405 |
|
|
|
9,929 |
|
|
|
13,481 |
|
|
|
22,555 |
|
|
|
21,803 |
|
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory internal revenue growth (8) |
|
|
14.8 |
% |
|
|
11.5 |
% |
|
|
12.5 |
% |
|
|
12.6 |
% |
|
|
9.1 |
% |
Animal hospital same-facility revenue growth (9) |
|
|
3.6 |
% |
|
|
4.4 |
% |
|
|
5.0 |
% |
|
|
7.0 |
% |
|
|
2.6 |
% |
|
|
|
As of September 30, 2002
|
|
|
|
|
|
|
Actual
|
|
As Adjusted (10)
|
|
Pro Forma As Adjusted (11)
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
32,358 |
|
$ |
7,602 |
|
$ |
13,978 |
|
|
|
|
Total assets |
|
|
513,380 |
|
|
489,984 |
|
|
499,019 |
|
|
|
|
Total debt |
|
|
388,834 |
|
|
373,048 |
|
|
339,346 |
|
|
|
|
Total stockholders equity |
|
|
64,914 |
|
|
59,339 |
|
|
102,076 |
|
|
|
|
(1) |
Includes other revenue of $1.5 million for each of the nine months ended September 30, 2002 and 2001, and $2.0 million, $925,000 and $5.1 million for the years ended
December 31, 2001, 2000 and 1999. Total revenue is net of intercompany eliminations of $6.9 million and $5.7 million for the nine months ended September 30, 2002 and 2001, and $7.5 million, $6.2 million and $5.8 million for the years ended December
31, 2001, 2000 and 1999. |
7
(2) |
The pro forma statement of operations data for the nine months ended September 30, 2002 and the year ended December 31, 2001 are presented as if this offering, our
initial public offering, concurrent note offering by one of our wholly owned subsidiaries and the application of the net proceeds therefrom, and our use of $12.3 million of cash on hand, which occurred in November 2001, occurred on January 1, 2001.
|
(3) |
EBITDA is operating income before depreciation and amortization. Adjusted EBITDA for the 2001 and 2000 periods represents EBITDA adjusted to exclude non-cash compensation
and management fees paid pursuant to our management services agreement with Leonard Green & Partners, which was terminated in November 2001. Adjusted EBITDA for the 2001 periods also excludes agreement termination costs and write-down of assets.
Adjusted EBITDA for the 2000 period also excludes recapitalization costs. Adjusted EBITDA for the 1999 period represents EBITDA adjusted to exclude Year 2000 remediation expense and other non-cash operating items. No adjustments were made to the
EBITDA calculations for 2002. |
|
EBITDA and adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. We believe EBITDA is a useful measure of our
operating performance as it reflects earnings before the impact of items that may change from period to period for reasons not directly related to our operations, such as the depreciation and amortization, interest and taxes and other non-operating
or non-recurring items. EBITDA also is an important component of the financial ratios included in our debt covenants and provides us with a measure of our ability to service our debt and meet capital expenditure requirements from our operating
results. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies. |
The calculation of EBITDA and adjusted EBITDA is shown below (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
2001
|
|
2001
|
|
2000
|
|
1999
|
|
Operating income |
|
$ |
75,000 |
|
$ |
33,680 |
|
$ |
27,706 |
|
$ |
19,205 |
|
$ |
47,016 |
|
Depreciation and amortization |
|
|
9,330 |
|
|
19,121 |
|
|
25,166 |
|
|
18,878 |
|
|
16,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
84,330 |
|
|
52,801 |
|
|
52,872 |
|
|
38,083 |
|
|
63,479 |
|
Management fees (a) |
|
|
|
|
|
1,860 |
|
|
2,273 |
|
|
620 |
|
|
|
|
Agreement termination costs |
|
|
|
|
|
|
|
|
17,552 |
|
|
|
|
|
|
|
Recapitalization costs |
|
|
|
|
|
|
|
|
|
|
|
34,268 |
|
|
|
|
Year 2000 remediation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,839 |
|
Other non-cash operating items (b) |
|
|
|
|
|
16,231 |
|
|
16,808 |
|
|
555 |
|
|
(1,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
84,330 |
|
$ |
70,892 |
|
$ |
89,505 |
|
$ |
73,526 |
|
$ |
64,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Management fees were paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations.
Effective November 27, 2001, the parties terminated the management services agreement. |
|
(b) |
Other non-cash operating items include a write-down of assets of $8.6 million and non-cash compensation of $1.4 million included in direct costs and $6.2 million included
in selling, general and administrative expense for the nine months ended September 30, 2001; a write-down of assets of $9.2 million and non-cash compensation of $1.4 million included in direct costs and $6.2 million included in selling, general and
administrative expense for the year ended December 31, 2001; non-cash compensation of $103,000 included in direct costs and $452,000 included in selling, general and administrative expense for the year ended December 31, 2000 and reversal of
restructuring charges of $1.9 million for the year ended December 31, 1999. |
8
(4) |
Adjusted EBITDA is the sum of adjusted laboratory EBITDA, adjusted animal hospital EBITDA and other revenue, less corporate selling, general and administrative expense,
excluding non-cash compensation and management fees and including the effect of gain (loss) on sale of assets. |
The calculation of adjusted EBITDA is shown below (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
Adjusted laboratory EBITDA |
|
$ |
43,734 |
|
|
$ |
35,264 |
|
|
$ |
45,561 |
|
|
$ |
38,827 |
|
|
$ |
32,273 |
|
Adjusted animal hospital EBITDA |
|
|
49,472 |
|
|
|
43,159 |
|
|
|
53,658 |
|
|
|
42,985 |
|
|
|
37,237 |
|
Other revenue |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
2,000 |
|
|
|
925 |
|
|
|
5,100 |
|
Corporate selling, general and administrative expense (a) |
|
|
(10,456 |
) |
|
|
(8,906 |
) |
|
|
(11,832 |
) |
|
|
(9,211 |
) |
|
|
(10,165 |
) |
Gain (loss) on sale of assets |
|
|
80 |
|
|
|
(125 |
) |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
84,330 |
|
|
$ |
70,892 |
|
|
$ |
89,505 |
|
|
$ |
73,526 |
|
|
$ |
64,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Corporate selling, general and administrative expense excludes non-cash compensation of $771,000 and management fees of $1.9 million for the nine months ended September
30, 2001, non-cash compensation of $771,000 and management fees of $2.3 million for the year ended December 31, 2001; and non-cash compensation of $56,000 and management fees of $620,000 for the year ended December 31, 2000. Management fees were
paid pursuant to our management services agreement. Effective November 27, 2001, the parties terminated the management services agreement. |
(5) |
Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. |
(6) |
Adjusted laboratory EBITDA excludes non-cash compensation of $4.3 million for the nine months ended September 30, 2001, and non-cash compensation of $4.3 million and
$311,000 for the years ended December 31, 2001 and 2000. Adjusted laboratory EBITDA margin is calculated by dividing adjusted laboratory EBITDA by laboratory revenue. |
(7) |
Adjusted animal hospital EBITDA excludes non-cash compensation of $2.6 million for the nine months ended September 30, 2001, and non-cash compensation of $2.6 million and
$188,000 for the years ended December 31, 2001 and 2000. Adjusted animal hospital EBITDA margin is calculated by dividing adjusted animal hospital EBITDA by animal hospital revenue. |
(8) |
Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude, for those laboratories that we did not own for the entire
period presented, an estimate of revenue generated by these newly acquired laboratories subsequent to the date of our purchase. We calculate this estimate of revenue for each newly acquired laboratory using an historical twelve-month revenue figure
(in some cases on an annualized basis) provided to us by the seller of the acquired laboratory, which amount is increased by our laboratory revenue growth rate for the prior year. In calculating the laboratory revenue growth rate for the year in
which the acquisition occurred, we exclude from our reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a fraction representing the portion of the year that we owned the related
facility. In calculating the laboratory revenue growth rate for the year following the acquisition, we exclude from our reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a fraction
representing the portion of the year that we did not own the facility. To determine laboratory internal revenue growth rate for the applicable period, we compare laboratory revenue net of estimated laboratory revenue of acquired laboratories to
laboratory revenue as reported for the prior comparable period. We believe this fairly presents laboratory internal revenue growth for the periods presented, although our calculation may not be comparable to similarly titled measures reported by
other companies. |
(9) |
Animal hospital same-facility revenue growth is calculated using the combined revenue of the animal hospitals owned and managed for the entire periods presented.
|
(10) |
The as adjusted balance sheet data are presented as if (a) the issuance of $25.0 million in additional senior term C notes under our senior credit facility; (b) the
redemption of the entire principal amount of our 13.5% senior subordinated notes; and (c) the redemption of $30.0 million principal amount of our 15.5% senior notes, each of which occurred in October 2002, had occurred at September 30, 2002.
|
(11) |
The pro forma as adjusted balance sheet data are presented as if (a) this offering and the application of the net proceeds therefrom; (b) the issuance of $25.0 million in
additional senior term C notes under our senior credit facility; (c) the redemption of the entire principal amount of our 13.5% senior subordinated notes; and (d) the redemption of $30.0 million principal amount of our 15.5% senior notes, each of
which occurred in October 2002, had occurred at September 30, 2002. |
9
You should carefully consider the risks and uncertainties described below and
other information included in this prospectus in evaluating us and our business. If any of the events described below occur, our business and financial results could be adversely affected in a material way. This could cause the trading price of our
common stock to decline, perhaps significantly.
Risks Related to Our Business
If we are unable to effectively execute our growth strategy, we may not achieve our desired economies of scale and our margins and profitability may decline.
Our success depends in part on our ability to build on our position as a leading animal health care services company
through a balanced program of internal growth initiatives and selective acquisitions of established animal hospitals and laboratories. If we cannot implement or effectively execute these initiatives and acquisitions, our results of operations will
be adversely affected. Even if we effectively implement our growth strategy, we may not achieve the economies of scale that we have experienced in the past or that we anticipate. Our internal growth rate may decline and could become negative. Our
laboratory internal revenue growth rate has fluctuated between 9.1% and 12.6% for each fiscal year from 1999 through 2001. Similarly, our animal hospital same-facility revenue growth rate has fluctuated between 2.6% and 7.0% over the same fiscal
years. Our internal growth may continue to fluctuate and may be below our historical rates. Any reductions in the rate of our internal growth may cause our revenues and margins to decrease. Our historical growth rates and margins are not necessarily
indicative of future results.
Our business and results of operations may be adversely affected if we are unable to manage our growth
effectively.
Since January 1, 1996, we have experienced rapid growth and expansion. Our failure to manage our growth
effectively may increase our costs of operations and hinder our ability to execute our business strategy. Our rapid growth has placed, and will continue to place, a significant strain on our management and operational systems and resources. At
January 1, 1996, we operated 59 hospitals, operated laboratories servicing approximately 9,000 customers in 27 states and had approximately 1,150 full-time equivalent employees. At September 30, 2002, we operated 225 hospitals, operated laboratories
servicing approximately 13,000 customers in all 50 states and had approximately 3,500 full-time equivalent employees. If our business continues to grow, we will need to continue to improve and enhance our overall financial and managerial controls,
reporting systems and procedures, and expand, train and manage our workforce in order to maintain control of expenses and achieve desirable economies of scale. We also will need to increase the capacity of our current systems to meet additional
demands.
Difficulties integrating new acquisitions may impose substantial costs and cause other problems for us.
Our success depends on our ability to timely and cost-effectively acquire, and integrate into our business, additional animal hospitals and
laboratories. Any difficulties in the integration process may result in increased expense, loss of customers and a decline in profitability. We expect to acquire 15 to 25 animal hospitals per year, however, based on the opportunity, the number could
be higher. Historically we have experienced delays and increased costs in integrating some hospitals primarily where we acquire a large number of hospitals in a single region at or about the same time. In these cases, our field management may spend
a predominant amount of time integrating these new hospitals
10
and less time managing our existing hospitals in those regions. During these periods, there may be less attention directed to marketing efforts or staffing issues. In these circumstances, we also
have experienced delays in converting the systems of acquired hospitals into our systems, which results in increased payroll expense to collect our results and delays in reporting our results, both for a particular region and on a consolidated
basis. These factors have resulted in decreased revenue, increased costs and lower margins. We continue to face risks in connection with our acquisitions including:
|
|
negative effects on our operating results; |
|
|
impairment of goodwill and other intangible assets; |
|
|
dependence on retention, hiring and training of key personnel, including specialists; and |
|
|
contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, an acquired business. |
The process of integration may require a disproportionate amount of the time and attention of our management, which may distract
managements attention from its day-to-day responsibilities. In addition, any interruption or deterioration in service resulting from an acquisition may result in a customers decision to stop using us. For these reasons, we may not
realize the anticipated benefits of an acquisition, either at all or in a timely manner. If that happens and we incur significant costs, it could have a material adverse impact on our business.
The carrying value of our goodwill could be subject to impairment write-downs.
At September 30, 2002, our balance sheet reflected $332.5 million of goodwill, which is a substantial portion of our total assets of $513.4 million at that date. We expect that the aggregate amount of goodwill on our balance sheet
will increase as a result of future acquisitions. We continually evaluate whether events or circumstances have occurred that suggest that the fair market value of each of our reporting units exceeds their carrying values. If we determine that the
fair market value of one of our reporting units does not exceed its carrying value, this may result in an impairment write-down of the goodwill for that reporting unit. The impairment write-down would be reflected as expense and could have a
material adverse effect on our results of operations during the period in which we recognize the expense. In 2002, an independent valuation group concluded that the fair value of our goodwill exceeded its carrying value and accordingly, as of that
date, there were no goodwill impairment issues. However, in the future we may incur impairment charges related to the goodwill already recorded or arising out of future acquisitions or as a result of the sale or closure of animal hospitals.
We require a significant amount of cash to service our debt and expand our business as planned.
We have, and will continue to have, a substantial amount of debt. Our substantial amount of debt requires us to dedicate a significant portion of
our cash flow from operations to pay down our indebtedness and related interest, thereby reducing the funds available to use for working capital, capital expenditures, acquisitions and general corporate purposes.
In October 2002, we borrowed $25.0 million in additional senior term C notes. These proceeds and cash on-hand were used to voluntarily repay the
entire outstanding principal amount on our 13.5% senior subordinated notes and $30.0 million in principal on our 15.5% senior notes. The following table details our debt balances at September 30, 2002 and the pro forma balances as if the additional
senior
11
term C notes were incurred and the voluntary repayment of our 13.5% senior subordinated notes and a portion of our 15.5% senior notes had occurred on September 30, 2002 (dollars in thousands):
|
|
As of September 30, 2002
|
|
|
|
Actual
|
|
|
Adjustment
|
|
|
Pro Forma
|
|
Senior term C notes |
|
$ |
142,703 |
|
|
$ |
25,000 |
|
|
$ |
167,703 |
|
13.5% senior subordinated notes |
|
|
15,000 |
|
|
|
(15,000 |
) |
|
|
|
|
9.875% senior subordinated notes |
|
|
170,000 |
|
|
|
|
|
|
|
170,000 |
|
15.5% senior notes |
|
|
66,715 |
|
|
|
(30,000 |
) |
|
|
36,715 |
|
Other |
|
|
1,658 |
|
|
|
|
|
|
|
1,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,076 |
|
|
|
|
|
|
|
376,076 |
|
Lessunamortized discount |
|
|
(7,242 |
) |
|
|
4,214 |
|
|
|
(3,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt obligations |
|
$ |
388,834 |
|
|
|
|
|
|
$ |
373,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our scheduled principal and interest payments
due by us for each of the years ending December 31, adjusted to reflect the impact of the no-fee swap agreement with Wells Fargo, which became effective November 29, 2002, the additional senior term C notes borrowed and the voluntary repayment of
our 13.5% senior subordinated notes and a portion of our 15.5% senior notes, which occurred in October 2002 (dollars in thousands):
|
|
2002
|
|
2003
|
|
2004
|
|
2005(1)
|
|
2006(1)
|
Long-term debt |
|
$ |
3,541 |
|
$ |
1,894 |
|
$ |
1,860 |
|
$ |
4,044 |
|
$ |
21,487 |
Fixed interest |
|
|
20,694 |
|
|
19,333 |
|
|
19,134 |
|
|
21,328 |
|
|
22,448 |
Variable interest |
|
|
7,714 |
|
|
6,966 |
|
|
7,698 |
|
|
10,614 |
|
|
11,313 |
Collar agreement |
|
|
2,340 |
|
|
|
|
|
|
|
|
|
|
|
|
PIK interest |
|
|
|
|
|
|
|
|
|
|
|
16,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,289 |
|
$ |
28,193 |
|
$ |
28,692 |
|
$ |
52,596 |
|
$ |
55,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We intend to use the proceeds from this offering to repay the entire outstanding principal amount of our 15.5% senior notes. If we repay the entire outstanding principal
amount of these notes, our future cash obligations as set forth in the table above will be reduced by $23.0 million in 2005 and $5.3 million in 2006. |
We have both fixed-rate and variable-rate debt. Our variable-rate debt is based on a variable-rate component plus a fixed margin. Our interest rate on the variable rate component of
our debt was approximately 1.89% for 2002. For purposes of the foregoing table, we have estimated the interest rate on the variable rate component of our debt to be 2.50%, 3.00%, 3.50% and 4.00% for years 2003 through 2006, respectively. Our
consolidated financial statements included in this prospectus discuss these variable-rate notes in more detail.
On November
7, 2002 we entered into a no-fee swap agreement with Wells Fargo Bank effective November 29, 2002 and expiring November 29, 2004. The agreement swaps monthly variable LIBOR rates for a fixed rate of 2.22% on a notional amount of $40.0 million. The
agreement qualifies for hedge accounting.
Through March 2005, interest on our 15.5% senior notes is payable semi-annually
and, at our option, in cash or by issuing additional 15.5% senior notes. After March 2005, interest is payable semi-annually, in cash. Any additional 15.5% senior notes are considered PIK interest and are reflected in the above table. These notes
have the same terms as the original notes except they mature in September 2005. We have issued additional 15.5% senior notes for all of our historical interest payments on the 15.5% senior notes and intend to continue doing so pending consummation
of this offering.
12
Our ability to make payments on our debt, and to fund acquisitions, will depend on our
ability to generate cash in the future. Insufficient cash flow could place us at risk of default under our debt agreements or could prevent us from expanding our business as planned. Our ability to generate cash is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations, our strategy to increase operating efficiencies may not be realized and future
borrowings may not be available to us under our senior credit facility in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. In order to meet our debt obligations, we may need to refinance all or a portion of
our debt. We may not be able to refinance any of our debt on commercially reasonable terms or at all.
Our debt instruments may adversely affect
our ability to run our business.
Our substantial amount of debt, as well as the guarantees of our subsidiaries and the
security interests in our assets and those of our subsidiaries, could impair our ability to operate our business effectively and may limit our ability to take advantage of business opportunities. For example, our indentures and senior credit
facility:
|
|
limit our funds available to repay the 15.5% senior notes and 9.875% senior subordinated notes; |
|
|
limit our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments and general
corporate purposes; |
|
|
limit our ability to dispose of our assets, create liens on our assets or to extend credit; |
|
|
make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business and economic conditions; |
|
|
limit our flexibility in planning for, or reacting to, changes in our business or industry; |
|
|
place us at a competitive disadvantage to our competitors with less debt; and |
|
|
restrict our ability to pay dividends, repurchase or redeem our capital stock or debt, or merge or consolidate with another entity. |
The terms of our indentures and senior credit facility allow us, under specified conditions, to incur further indebtedness, which would
heighten the foregoing risks. If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may
suffer.
Our failure to satisfy covenants in our debt instruments will cause a default under those instruments.
In addition to imposing restrictions on our business and operations, our debt instruments include a number of covenants relating to financial ratios
and tests. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants would result in a default under these
instruments. An event of default would permit our lenders and other debtholders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. Moreover, these lenders and other debtholders would have the
option to terminate any obligation to make further extensions of credit under these instruments. If we are unable to repay debt to our lenders, these lenders and other debtholders could proceed against our assets.
13
Due to the fixed cost nature of our business, fluctuations in our revenue could adversely affect our operating
income.
Approximately 57% of our expense, particularly rent and personnel costs, are fixed costs and are based in part
on expectations of revenue. We may be unable to reduce spending in a timely manner to compensate for any significant fluctuations in our revenue. Accordingly, shortfalls in revenue may adversely affect our operating income.
The significant competition in the companion animal health care services industry could cause us to reduce prices or lose market share.
The companion animal health care services industry is highly competitive with few barriers to entry. To compete successfully, we may be required to
reduce prices, increase our operating costs or take other measures that could have an adverse effect on our financial condition, results of operations, margins and cash flow. If we are unable to compete successfully, we may lose market share.
There are many clinical laboratory companies that provide a broad range of laboratory testing services in the same markets
we service. Our largest competitor for outsourced laboratory testing services is Idexx Laboratories, Inc. which currently competes or intends to compete in most of the same markets in which we operate. Also, Idexx and several other national
companies provide on-site diagnostic equipment that allows veterinarians to perform their own laboratory tests.
Our primary
competitors for our animal hospitals in most markets are individual practitioners or small, regional, multi-clinic practices. Also, regional pet care companies and some national companies, including operators of super-stores, are developing
multi-regional networks of animal hospitals in markets in which we operate. Historically, when a competing animal hospital opens in close proximity to one of our hospitals, we have reduced prices, expanded our facility, retained additional qualified
personnel, increased our marketing efforts or taken other actions designed to retain and expand our client base. As a result, our revenue may decline and our costs may increase.
We may experience difficulties hiring skilled veterinarians due to shortages that could disrupt our business.
As the pet population continues to grow, the need for skilled veterinarians continues to increase. If we are unable to retain an adequate number of skilled veterinarians, we may lose customers, our revenue may
decline and we may need to sell or close animal hospitals. As of September 30, 2002, there were 28 veterinary schools in the country accredited by the American Veterinary Medical Association. These schools graduate approximately 2,100 veterinarians
per year. There is a shortage of skilled veterinarians across the country, particularly in some regional markets in which we operate animal hospitals including Northern California. During these shortages in these regions, we may be unable to hire
enough qualified veterinarians to adequately staff our animal hospitals, in which event we may lose market share and our revenues and profitability may decline.
If we fail to comply with governmental regulations applicable to our business, various governmental agencies may impose fines, institute litigation or preclude us from operating in certain states.
The laws of many states 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. As of September 30, 2002 we operated 58 animal hospitals in 11 states with these laws, including 21 in New York. We may experience
difficulty in expanding our operations into other states with similar laws. Given varying and uncertain interpretations of the veterinary laws of each state, we may not be in compliance with restrictions on the corporate practice of veterinary
medicine in all states. A determination that we are in violation of
14
applicable restrictions on the practice of veterinary medicine in any state in which we operate could have a material adverse effect on us, particularly if we were unable to restructure our
operations to comply with the requirements of that state.
All of the states in which we operate impose various registration
requirements. To fulfill these requirements, we have registered each of our facilities with appropriate governmental agencies and, where required, have appointed a licensed veterinarian to act on behalf of each facility. All veterinarians practicing
in our clinics are required to maintain valid state licenses to practice.
Any failure in our information technology systems or disruption in
our transportation network could significantly increase testing turn-around time, reduce our production capacity and otherwise disrupt our operations.
Our laboratory operations depend, in part, on the continued and uninterrupted performance of our information technology systems and transportation network. Our growth has necessitated continued expansion and
upgrade of our information technology systems and transportation network. Sustained system failures or interruption in our transportation network or in one or more of our laboratory operations could disrupt our ability to process laboratory
requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. We could lose customers and revenue as a result of a system or transportation network failure.
Our computer systems are vulnerable to damage or interruption from a variety of sources, including telecommunications failures, electricity
brownouts or blackouts, malicious human acts and natural disasters. Moreover, despite network security measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems.
Despite the precautions we have taken, unanticipated problems affecting our systems could cause interruptions in our information technology systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any
failures in our systems.
In addition, over time we have significantly customized the computer systems in our laboratory
business. We rely on a limited number of employees to upgrade and maintain these systems. If we were to lose the services of some or all of these employees, it may be time-consuming for new employees to become familiar with our systems, and we may
experience disruptions in service during these periods.
Any substantial reduction in the number of available flights or
delays in the departure of flights will disrupt our transportation network and our ability to provide test results in a timely manner. In addition, our Test Express service, which services customers outside of major metropolitan areas, is dependent
on flight services in and out of Memphis and the transportation network of Federal Express. Any sustained interruption in either flight services in Memphis or the transportation network of Federal Express would result in increased turn-around time
for the reporting of test results to customers serviced by our Test Express service.
The loss of Mr. Robert Antin, our Chairman, President and
Chief Executive Officer, could materially and adversely affect our business.
We are dependent upon the management and
leadership of our Chairman, President and Chief Executive Officer, Robert Antin. We have an employment contract with Mr. Antin that may be terminated at the option of Mr. Antin. We do not maintain any key man life insurance coverage for Mr. Antin.
The loss of Mr. Antin could materially adversely affect our business.
15
Risks Associated with this Offering
Concentration of ownership among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.
At November 30, 2002, our executive officers, directors and principal stockholders beneficially owned, in the aggregate, approximately
47.2% of our outstanding common stock. Following this offering, these persons will own, in the aggregate, approximately 29.0% of our outstanding common stock. As a result, these stockholders are able to significantly affect our management, our
policies and all matters requiring stockholder approval. The directors supported by these stockholders will be able to significantly affect decisions relating to our capital structure, including decisions to issue additional capital stock, implement
stock repurchase programs and incur indebtedness. This concentration of ownership may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our other
stockholders to approve transactions that they may deem to be in their best interests.
Future sales of shares of our common stock in the public
market may depress our stock price and make it difficult for you to recover the full value of your investment in our shares.
If our existing stockholders sell substantial amounts of our common stock in the public market following this offering or if there is a perception that these sales may occur, the market price of our common stock could decline. Based
on shares outstanding as of September 30, 2002, upon completion of this offering we will have outstanding approximately 40,060,975 shares of common stock. Of these shares, 25,979,507 shares of common stock are freely tradable, without restriction,
in the public market, unless the shares offered in the offering are purchased by affiliates, 265,304 shares are eligible for sale in the public market at various times, subject to the restrictions of Rule 144 of the Securities Act of 1933, and
272,396 shares are eligible for sale in the public market subject to the restrictions of Rule 701 of the Securities Act of 1933. After the lockup agreements pertaining to this offering expire 90 days from the date of this prospectus unless waived,
an additional 2,053,548 shares of common stock will be freely tradable, without restriction, in the public market, 11,218,823 shares will be eligible for sale in the public market at various times, subject to the restrictions of Rule 144 of the
Securities Act of 1933, and 271,397 shares will be eligible for sale in the public market subject to the restrictions of Rule 701 of the Securities Act of 1933.
The price of our common stock may be volatile.
The stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices of securities. These fluctuations often have been unrelated or disproportionate to the operating performance of publicly traded companies. In the past, following periods
of volatility in the market price of a particular companys securities, securities class-action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is
often expensive to defend and may divert managements attention and resources from the operation of our business.
Political events and the
uncertainty resulting from them may have a material adverse effect on our operating results.
The terrorist attacks that
took place in the United States on September 11, 2001, along with the United States military campaign against terrorism in Afghanistan and elsewhere, ongoing violence in the Middle East and increasing speculation regarding future military
action against Iraq have created
16
many economic and political uncertainties, some of which may affect the markets in which we operate, our operations and profitability and your investment. The potential near-term and long-term
effect these attacks may have for our customers, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable and we may not be able to foresee
events that could have an adverse effect on our markets, our business or your investment.
Our stock price may be adversely affected because our
results of operations may fluctuate significantly from quarter to quarter.
Our operating results may fluctuate
significantly in the future. If our quarterly revenue and operating results fall below the expectations of securities analysts and investors, the market price of our common stock could fall substantially. Historically, after eliminating the effect
of acquisitions, we have experienced higher revenue in the second and third quarters than in the first and fourth quarters. The demand for our veterinary services is 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. Also, use of veterinary services may be affected by levels of infestation of fleas, heartworms and ticks, and the number of daylight hours. A substantial
portion of our costs are fixed and do not vary with the level of demand for our services. Therefore, net income for the second and third quarters at individual animal hospitals and veterinary diagnostic laboratories generally is higher than in the
first and fourth quarters.
Operating results also may vary depending on a number of factors, many of which are outside our
control, including:
|
|
changes in our pricing policies or those of our competitors; |
|
|
the hiring and retention of key personnel; |
|
|
wage and cost pressures; |
|
|
changes in fuel prices or electrical rates; |
|
|
costs related to acquisitions of technologies or businesses; and |
|
|
seasonal and general economic factors. |
Takeover defense provisions may adversely affect the market price of our common stock.
Various provisions of Delaware corporation law and of our corporate governance documents may inhibit changes in control not approved by our board of directors and may have the effect of depriving you of an opportunity to receive a
premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include:
|
|
a classified board of directors; |
|
|
a prohibition on stockholder action through written consents; |
|
|
a requirement that special meetings of stockholders be called only by our board of directors, the Chairman of our board of directors, our President or our Chief Executive
Officer; |
|
|
advance notice requirements for stockholder proposals and nominations; and |
|
|
availability of blank check preferred stock. |
17
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under
Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, and elsewhere in this prospectus are forward-looking statements.
We generally identify forward-looking statements in this prospectus using words like believe, intend, expect, estimate, may, should, plan, project,
contemplate, anticipate, predict, or similar expressions. These statements involve known and unknown risks, uncertainties, and other factors, including those described in the Risk Factors section, that
may cause our or our industrys actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking
statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan to publicly update or revise any forward-looking statements
after we distribute this prospectus, whether as a result of any new information, future events or otherwise.
We use market
data and industry forecasts and projections throughout this prospectus, which we have obtained from market research, publicly available information and industry publications. These sources generally state that the information they provide has been
obtained from sources believed to be reliable, but that the accuracy and completeness of such information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers experience in the industry and there is
no assurance that any of the projected amounts will be achieved. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.
You should rely only on the information contained in
this prospectus or any supplement and any information incorporated by reference in this prospectus or any supplement. We have not authorized anyone to provide you with any information that is different. If you receive any unauthorized information,
you must not rely on it. You should disregard anything we said in an earlier document that is inconsistent with what is included in or incorporated by reference in this prospectus. You should not assume that the information in this prospectus or any
supplement is current as of any date other than the date on the front page of this prospectus.
18
We expect to receive approximately $47.1 million in net proceeds, after deducting
underwriting discounts and commissions and estimated offering expenses payable by us, from the sale of shares of our common stock in this offering based on the sale of 3,300,000 shares at a public offering price of $15.25 per share. If the
underwriters exercise their over-allotment option in full, we expect our additional net proceeds to be approximately $7.2 million. We will not receive any proceeds from the sale of the shares by the selling stockholders in this offering.
We intend to use the net proceeds from this offering:
|
|
to repay the entire outstanding principal amount, or approximately $36.7 million, of our 15.5% senior notes due 2010 at a redemption price of 110% of the principal
amount, for an aggregate of $40.4 million, plus accrued and unpaid interest; and |
|
|
for general corporate purposes. |
If the underwriters exercise their over-allotment option, any additional net proceeds received by us will be used for general corporate purposes. We will not receive any proceeds from the sale of the shares by the selling
stockholders pursuant to the exercise of the over-allotment option.
Pending application of the net proceeds as described
above, we intend to invest the net proceeds in short-term investment grade securities.
19
PRICE RANGE OF OUR COMMON STOCK
Since November 21, 2001, our common stock has traded on The
Nasdaq Stock Markets National Market under the symbol WOOF. From September 20, 2000 through November 20, 2001, our common stock was not publicly traded. From March 19, 1993 through September 19, 2000, our common stock was traded on
the Nasdaq National Market under the symbol VCAI. The following table sets forth the range of high and low bid information per share for our common stock as quoted on the Nasdaq National Market for the periods indicated. The stock prices
for fiscal 2000 have been restated to reflect a fifteen-for-one stock split effected concurrent with the consummation of our recapitalization in September 2000.
|
|
High
|
|
Low
|
Fiscal 2002 by Quarter |
|
|
|
|
|
|
Fourth |
|
$ |
16.40 |
|
$ |
12.16 |
Third |
|
$ |
16.48 |
|
$ |
11.90 |
Second |
|
$ |
16.36 |
|
$ |
12.71 |
First |
|
$ |
14.62 |
|
$ |
11.65 |
|
Fiscal 2001 by Quarter |
|
|
|
|
|
|
Fourth (commencing November 21, 2001) |
|
$ |
12.45 |
|
$ |
8.83 |
|
Fiscal 2000 by Quarter |
|
|
|
|
|
|
Third (through September 19, 2000) |
|
$ |
0.99 |
|
$ |
0.90 |
Second |
|
$ |
0.93 |
|
$ |
0.83 |
First |
|
$ |
0.96 |
|
$ |
0.68 |
At December 31, 2002, the closing price of our common stock on the Nasdaq
National Market was $15.00, and at that date, there were approximately 97 holders of record of our common stock.
We have not paid cash dividends on our common stock, and we do not anticipate
paying cash dividends in the foreseeable future. In addition, our senior credit facility and the indentures governing our outstanding senior and senior subordinated notes place limitations on our ability to pay dividends or make other distributions
in respect of our common stock. Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our board of directors and will depend on our results of operations,
financial condition, capital requirements and other factors deemed relevant by the board of directors, including the General Corporation Law of the State of Delaware, which provides that dividends are only payable out of surplus or current net
profits.
20
The following table sets forth our capitalization as of September 30, 2002:
|
|
on an as adjusted basis to reflect transactions that occurred in October 2002; and |
|
|
on a pro forma as adjusted basis to reflect transactions that occurred in October 2002 and this offering at a public offering price of $15.25 per share and the intended
application of the net proceeds therefrom. |
|
|
As of September 30, 2002
|
|
|
|
Actual
|
|
|
As adjusted (1)
|
|
|
Pro forma as adjusted (2)
|
|
|
|
(dollars in thousands) |
|
Total debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility: |
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility (3) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Senior term C notes (4) |
|
|
142,703 |
|
|
|
167,703 |
|
|
|
167,703 |
|
13.5% senior subordinated notes due 2010 |
|
|
15,000 |
|
|
|
|
|
|
|
|
|
9.875% senior subordinated notes due 2009 |
|
|
170,000 |
|
|
|
170,000 |
|
|
|
170,000 |
|
15.5% senior notes due 2010 |
|
|
66,715 |
|
|
|
36,715 |
|
|
|
|
|
Other debt |
|
|
1,658 |
|
|
|
1,658 |
|
|
|
1,658 |
|
Unamortized discount |
|
|
(7,242 |
) |
|
|
(3,028 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
388,834 |
|
|
|
373,048 |
|
|
|
339,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, 75,000,000 shares authorized, 36,760,975 shares issued and outstanding, actual and as adjusted; 75,000,000 shares
authorized and 40,060,975 shares issued and outstanding, pro forma as adjusted (5) |
|
|
37 |
|
|
|
37 |
|
|
|
41 |
|
Additional paid-in capital |
|
|
188,865 |
|
|
|
188,865 |
|
|
|
235,995 |
|
Notes receivable from stockholders |
|
|
(240 |
) |
|
|
(240 |
) |
|
|
(240 |
) |
Accumulated deficit |
|
|
(123,429 |
) |
|
|
(129,004 |
) |
|
|
(133,401 |
) |
Accumulated comprehensive loss |
|
|
(319 |
) |
|
|
(319 |
) |
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
64,914 |
|
|
|
59,339 |
|
|
|
102,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
453,748 |
|
|
$ |
432,387 |
|
|
$ |
441,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The as adjusted data are presented as if (a) the issuance of $25.0 million in additional senior term C notes under our senior credit facility; (b) the repayment of the
entire outstanding principal amount of our 13.5% senior subordinated notes; and (c) the repayment of $30.0 million in principal of our 15.5% senior notes, each of which occurred in October 2002, had occurred at September 30, 2002.
|
(2) |
The pro forma as adjusted data are presented as if (a) this offering and the application of the net proceeds therefrom; (b) the issuance of $25.0 million in additional
senior term C notes under our senior credit facility; (c) the repayment of the entire outstanding principal amount of our 13.5% senior subordinated notes; and (d) the repayment of $30.0 million in principal of our 15.5% senior notes, each of which
occurred in October 2002, had occurred at September 30, 2002. |
(3) |
The revolving credit facility provides for borrowings of up to $50.0 million, $7.5 million of which was drawn in December 2002 and is outstanding.
|
(4) |
On August 29, 2002, we repaid our senior term A and senior term B notes with the proceeds acquired from the issuance of senior term C notes, which bear a lower interest
rate than the weighted average interest rate for the senior term A and senior term B notes. See Description of Certain Indebtedness for additional information. |
(5) |
Share information is based on the number of shares outstanding as of September 30, 2002, and: |
|
|
excludes 1,955,901 shares of common stock issuable upon exercise of outstanding options under our stock incentive plans, at a weighted average exercise price of $9.95 per
share; |
|
|
excludes 650,000 shares available for future issuance under our stock incentive plans; and |
|
|
assumes no exercise of the underwriters over-allotment option. |
21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Our selected historical consolidated financial
data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 were derived from our audited financial statements. Our financial statements for each of the fiscal years ended December 31, 2001, 2000 and 1999 were audited by KPMG LLP. Our
financial statements for each of the fiscal years ended December 31, 1998 and 1997 were audited by Arthur Andersen LLP. Our selected historical consolidated financial data for the nine months ended September 30, 2002 and 2001 have been derived from
our unaudited interim financial statements and include, in the opinion of management, all adjustments necessary for a fair presentation of our financial position and operating results for these periods and as of those dates. Our results for the
interim periods are not necessarily indicative of our results for a full years operations. You should read the following information together with Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and related notes. Our audited consolidated financial statements for the years ended December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and our
unaudited condensed, consolidated financial statements as of the nine months ended September 30, 2002 and 2001 are included in this prospectus.
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
|
|
(dollars in thousands, except per share amounts) |
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory revenue |
|
$ |
116,911 |
|
|
$ |
101,855 |
|
|
$ |
134,711 |
|
|
$ |
119,300 |
|
|
$ |
103,282 |
|
|
$ |
89,896 |
|
|
$ |
68,997 |
|
Animal hospital revenue |
|
|
225,383 |
|
|
|
207,665 |
|
|
|
272,113 |
|
|
|
240,624 |
|
|
|
217,988 |
|
|
|
191,888 |
|
|
|
165,848 |
|
Other revenue (1) |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
2,000 |
|
|
|
925 |
|
|
|
5,100 |
|
|
|
5,100 |
|
|
|
5,764 |
|
Intercompany |
|
|
(6,902 |
) |
|
|
(5,655 |
) |
|
|
(7,462 |
) |
|
|
(6,162 |
) |
|
|
(5,810 |
) |
|
|
(5,845 |
) |
|
|
(4,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
336,892 |
|
|
|
305,365 |
|
|
|
401,362 |
|
|
|
354,687 |
|
|
|
320,560 |
|
|
|
281,039 |
|
|
|
235,913 |
|
Direct costs |
|
|
226,749 |
|
|
|
213,454 |
|
|
|
283,226 |
|
|
|
254,890 |
|
|
|
232,493 |
|
|
|
209,380 |
|
|
|
178,630 |
|
Selling, general and administrative |
|
|
25,893 |
|
|
|
30,365 |
|
|
|
38,633 |
|
|
|
27,446 |
|
|
|
23,622 |
|
|
|
19,693 |
|
|
|
17,676 |
|
Depreciation and amortization |
|
|
9,330 |
|
|
|
19,121 |
|
|
|
25,166 |
|
|
|
18,878 |
|
|
|
16,463 |
|
|
|
13,132 |
|
|
|
11,199 |
|
Agreement termination costs |
|
|
|
|
|
|
|
|
|
|
17,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2000 remediation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,839 |
|
|
|
|
|
|
|
|
|
Other operating and non-cash items |
|
|
(80 |
) |
|
|
8,745 |
|
|
|
9,079 |
|
|
|
|
|
|
|
(1,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
75,000 |
|
|
|
33,680 |
|
|
|
27,706 |
|
|
|
19,205 |
|
|
|
47,016 |
|
|
|
38,834 |
|
|
|
28,408 |
|
Net interest expense |
|
|
30,541 |
|
|
|
32,387 |
|
|
|
42,918 |
|
|
|
19,892 |
|
|
|
9,449 |
|
|
|
8,832 |
|
|
|
7,411 |
|
Other (income) expense, net |
|
|
(159 |
) |
|
|
233 |
|
|
|
168 |
|
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest, provision for income taxes and extraordinary item |
|
|
44,618 |
|
|
|
1,060 |
|
|
|
(15,380 |
) |
|
|
(2,487 |
) |
|
|
37,567 |
|
|
|
30,002 |
|
|
|
20,997 |
|
Minority interest in income of subsidiaries |
|
|
1,360 |
|
|
|
1,104 |
|
|
|
1,439 |
|
|
|
1,066 |
|
|
|
850 |
|
|
|
780 |
|
|
|
424 |
|
Provision for income taxes |
|
|
18,092 |
|
|
|
6,741 |
|
|
|
445 |
|
|
|
2,199 |
|
|
|
14,360 |
|
|
|
12,954 |
|
|
|
9,347 |
|
Extraordinary loss on early extinguishment of debt (net of taxes) |
|
|
2,001 |
|
|
|
|
|
|
|
10,159 |
|
|
|
2,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in carrying amount of redeemable preferred stock |
|
|
|
|
|
|
15,583 |
|
|
|
19,151 |
|
|
|
5,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
23,165 |
|
|
$ |
(22,368 |
) |
|
$ |
(46,574 |
) |
|
$ |
(13,802 |
) |
|
$ |
22,357 |
|
|
$ |
16,268 |
|
|
$ |
11,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.63 |
|
|
$ |
(1.27 |
) |
|
$ |
(2.39 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.04 |
|
Diluted earnings (loss) per share |
|
$ |
0.63 |
|
|
$ |
(1.27 |
) |
|
$ |
(2.39 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.07 |
|
|
$ |
0.05 |
|
|
$ |
0.04 |
|
Shares used for computing basic earnings (loss) per share |
|
|
36,744 |
|
|
|
17,643 |
|
|
|
19,509 |
|
|
|
234,055 |
|
|
|
315,945 |
|
|
|
305,250 |
|
|
|
294,390 |
|
Shares used for computing diluted earnings (loss) per share |
|
|
37,088 |
|
|
|
17,643 |
|
|
|
19,509 |
|
|
|
234,055 |
|
|
|
329,775 |
|
|
|
329,100 |
|
|
|
315,195 |
|
22
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
|
|
(dollars in thousands) |
|
Other Financial Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (2) (3) |
|
$ |
84,330 |
|
|
$ |
70,892 |
|
|
$ |
89,505 |
|
|
$ |
73,526 |
|
|
$ |
64,445 |
|
|
$ |
51,966 |
|
|
$ |
39,607 |
|
Adjusted EBITDA margin (4) |
|
|
25.0 |
% |
|
|
23.2 |
% |
|
|
22.3 |
% |
|
|
20.7 |
% |
|
|
20.1 |
% |
|
|
18.5 |
% |
|
|
16.8 |
% |
Adjusted laboratory EBITDA (5) |
|
$ |
43,734 |
|
|
$ |
35,264 |
|
|
$ |
45,561 |
|
|
$ |
38,827 |
|
|
$ |
32,273 |
|
|
$ |
24,215 |
|
|
$ |
20,142 |
|
Adjusted laboratory EBITDA margin (5) |
|
|
37.4 |
% |
|
|
34.6 |
% |
|
|
33.8 |
% |
|
|
32.5 |
% |
|
|
31.2 |
% |
|
|
26.9 |
% |
|
|
29.2 |
% |
Adjusted animal hospital EBITDA (6) |
|
$ |
49,472 |
|
|
$ |
43,159 |
|
|
$ |
53,658 |
|
|
$ |
42,985 |
|
|
$ |
37,237 |
|
|
$ |
31,975 |
|
|
$ |
23,243 |
|
Adjusted animal hospital EBITDA margin (6) |
|
|
22.0 |
% |
|
|
20.8 |
% |
|
|
19.7 |
% |
|
|
17.9 |
% |
|
|
17.1 |
% |
|
|
16.7 |
% |
|
|
14.0 |
% |
Net cash provided by operating activities |
|
$ |
60,838 |
|
|
$ |
49,316 |
|
|
$ |
57,104 |
|
|
$ |
60,054 |
|
|
$ |
38,467 |
|
|
$ |
27,123 |
|
|
$ |
22,674 |
|
Net cash used in investing activities |
|
|
(29,700 |
) |
|
|
(30,331 |
) |
|
|
(36,202 |
) |
|
|
(47,679 |
) |
|
|
(13,676 |
) |
|
|
(19,474 |
) |
|
|
(16,368 |
) |
Net cash used in financing activities |
|
|
(5,883 |
) |
|
|
(5,873 |
) |
|
|
(24,318 |
) |
|
|
(12,476 |
) |
|
|
(23,148 |
) |
|
|
(18,554 |
) |
|
|
(16,045 |
) |
Capital expenditures |
|
|
13,405 |
|
|
|
9,929 |
|
|
|
13,481 |
|
|
|
22,555 |
|
|
|
21,803 |
|
|
|
11,678 |
|
|
|
7,241 |
|
|
Balance Sheet Data (at period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
32,358 |
|
|
$ |
23,631 |
|
|
$ |
7,103 |
|
|
$ |
10,519 |
|
|
$ |
10,620 |
|
|
$ |
8,977 |
|
|
$ |
19,882 |
|
Net working capital |
|
|
(6,176 |
) |
|
|
2,175 |
|
|
|
(2,574 |
) |
|
|
5,289 |
|
|
|
9,605 |
|
|
|
6,694 |
|
|
|
(4,454 |
) |
Total assets |
|
|
513,380 |
|
|
|
501,227 |
|
|
|
468,521 |
|
|
|
483,070 |
|
|
|
426,500 |
|
|
|
393,960 |
|
|
|
386,089 |
|
Total debt |
|
|
388,834 |
|
|
|
371,365 |
|
|
|
384,332 |
|
|
|
362,749 |
|
|
|
161,535 |
|
|
|
159,787 |
|
|
|
173,875 |
|
Total redeemable preferred stock |
|
|
|
|
|
|
170,205 |
|
|
|
|
|
|
|
154,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
64,914 |
|
|
|
(97,946 |
) |
|
|
39,764 |
|
|
|
(81,310 |
) |
|
|
231,229 |
|
|
|
202,685 |
|
|
|
180,851 |
|
(1) |
Other revenue includes consulting fees of $1.5 million for each of the nine months ended September 30, 2002 and 2001, and consulting fees of $2.0 million, $925,000, $5.1
million, $5.1 million and $4.7 million for the years ended December 31, 2001, 2000, 1999, 1998 and 1997. For the year ended December 31, 1997, other revenue also includes revenue from our pet product joint venture; we transferred the control of the
joint venture to our joint venture partner in February 1997. |
(2) |
EBITDA is operating income before depreciation and amortization. Adjusted EBITDA for the 2001 and 2000 periods represents EBITDA adjusted to exclude non-cash compensation
and management fees paid pursuant to our management services agreement with Leonard Green & Partners, which was terminated in November 2001. Adjusted EBITDA for the 2001 periods also excludes agreement termination costs and write-down of assets.
Adjusted EBITDA for the 2000 period also excludes recapitalization costs. Adjusted EBITDA for the 1999 period represents EBITDA adjusted to exclude Year 2000 remediation expense and other non-cash operating items. No adjustments were made to the
EBITDA calculations for 2002. |
EBITDA and adjusted EBITDA are not measures of financial performance under
generally accepted accounting principles, or GAAP. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or
as a measure of profitability or liquidity. We believe EBITDA is a useful measure of our operating performance as it reflects earnings before the impact of items that may change from period to period for reasons not directly related to our
operations, such as the depreciation and amortization, interest and taxes and other non-operating or non-recurring items. EBITDA also is an important component of the financial ratios included in our debt covenants and provides us with a measure of
our ability to service our debt and meet capital expenditure requirements from our operating results. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.
The calculation of EBITDA and adjusted EBITDA is shown below (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
Year Ended December 31,
|
|
|
2002
|
|
2001
|
|
2001
|
|
2000
|
|
1999
|
|
|
1998
|
|
1997
|
Operating income |
|
$ |
75,000 |
|
$ |
33,680 |
|
$ |
27,706 |
|
$ |
19,205 |
|
$ |
47,016 |
|
|
$ |
38,834 |
|
$ |
28,408 |
Depreciation and amortization |
|
|
9,330 |
|
|
19,121 |
|
|
25,166 |
|
|
18,878 |
|
|
16,463 |
|
|
|
13,132 |
|
|
11,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
84,330 |
|
|
52,801 |
|
|
52,872 |
|
|
38,083 |
|
|
63,479 |
|
|
|
51,966 |
|
|
39,607 |
Management fees (a) |
|
|
|
|
|
1,860 |
|
|
2,273 |
|
|
620 |
|
|
|
|
|
|
|
|
|
|
Agreement termination costs |
|
|
|
|
|
|
|
|
17,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization costs |
|
|
|
|
|
|
|
|
|
|
|
34,268 |
|
|
|
|
|
|
|
|
|
|
Year 2000 remediation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,839 |
|
|
|
|
|
|
|
Other non-cash operating items (b) |
|
|
|
|
|
16,231 |
|
|
16,808 |
|
|
555 |
|
|
(1,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
84,330 |
|
$ |
70,892 |
|
$ |
89,505 |
|
$ |
73,526 |
|
$ |
64,445 |
|
|
$ |
51,966 |
|
$ |
39,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Management fees were paid pursuant to our management services agreement and are included in selling, general and administrative expense in our statements of operations.
Effective November 27, 2001, the parties terminated the management services agreement. |
23
|
(b) |
Other non-cash operating items include a write-down of assets of $8.6 million and non-cash compensation of $1.4 million included in direct costs and $6.2 million
included in selling general and administrative expense for the nine months ended September 30, 2001; a write-down of assets of $9.2 million and non-cash compensation of $1.4 million included in direct costs and $6.2 million included in selling,
general and administrative expense for the year ended December 31, 2001; non-cash compensation of $103,000 included in direct costs and $452,000 included in selling, general and administrative expense for the year ended December 31, 2000; reversal
of restructuring charges of $1.9 million for the year ended December 31, 1999. |
(3) |
Adjusted EBITDA is the sum of adjusted laboratory EBITDA, adjusted animal hospital EBITDA and other revenue, less corporate selling, general and administrative expense,
excluding non-cash compensation and management fees and including the effect of gain (loss) on sale of assets. For the year ended December 31, 1997, adjusted EBITDA also includes EBITDA of our pet products joint venture of $168,000.
|
The calculation of adjusted EBITDA is shown below (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
Adjusted laboratory EBITDA |
|
$ |
43,734 |
|
|
$ |
35,264 |
|
|
$ |
45,561 |
|
|
$ |
38,827 |
|
|
$ |
32,273 |
|
|
$ |
24,215 |
|
|
$ |
20,142 |
|
Adjusted animal hospital EBITDA |
|
|
49,472 |
|
|
|
43,159 |
|
|
|
53,658 |
|
|
|
42,985 |
|
|
|
37,237 |
|
|
|
31,975 |
|
|
|
23,243 |
|
Other revenue |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
2,000 |
|
|
|
925 |
|
|
|
5,100 |
|
|
|
5,100 |
|
|
|
4,700 |
|
Corporate selling, general and administrative expense (a) |
|
|
(10,456 |
) |
|
|
(8,906 |
) |
|
|
(11,832 |
) |
|
|
(9,211 |
) |
|
|
(10,165 |
) |
|
|
(9,324 |
) |
|
|
(8,646 |
) |
Gain (loss) on sale of assets |
|
|
80 |
|
|
|
(125 |
) |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pet products joint venture EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
84,330 |
|
|
$ |
70,892 |
|
|
$ |
89,505 |
|
|
$ |
73,526 |
|
|
$ |
64,445 |
|
|
$ |
51,966 |
|
|
$ |
39,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Corporate selling, general and administrative expense excludes non-cash compensation of $771,000 and management fees of $1.9 million for the nine months ended September
30, 2001, non-cash compensation of $771,000 and management fees of $2.3 million for the year ended December 31, 2001; and non-cash compensation of $56,000 and management fees of $620,000 for the year ended December 31, 2000. Management fees were
paid pursuant to our management services agreement. Effective November 27, 2001, the parties terminated the management services agreement. |
(4) |
Adjusted EBITDA margin is calculated by dividing adjusted EBITDA by total revenue. |
(5) |
Adjusted laboratory EBITDA excludes non-cash compensation of $4.3 million for the nine months ended September 30, 2001, and non-cash compensation of $4.3 million and
$311,000 for the years ended December 31, 2001 and 2000. Adjusted laboratory EBITDA margin is calculated by dividing adjusted laboratory EBITDA by laboratory revenue. |
(6) |
Adjusted animal hospital EBITDA excludes non-cash compensation of $2.6 million for the nine months ended September 30, 2001, and non-cash compensation of $2.6 million and
$188,000 for the years ended December 31, 2001 and 2000. Adjusted animal hospital EBITDA margin is calculated by dividing adjusted animal hospital EBITDA by animal hospital revenue. |
24
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategies
for our business, includes forward-looking statements that involve risks and uncertainties. You should review the Risk Factors section of this prospectus for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained in this prospectus.
Overview
We operate a leading animal health care services company and operate the largest networks of veterinary diagnostic
laboratories and free-standing, full-service animal hospitals in the United States. Our network of veterinary diagnostic laboratories provides sophisticated testing and consulting services used by veterinarians in the detection, diagnosis,
evaluation, monitoring, treatment and prevention of diseases and other conditions affecting animals. Our animal hospitals offer a full range of general medical and surgical services for companion animals. We treat diseases and injuries, offer
pharmaceutical products and perform a variety of pet wellness programs, including routine vaccinations, health examinations, diagnostic testing, spaying, neutering and dental care.
Our company was formed in 1986 by Robert Antin, Arthur Antin and Neil Tauber, who have served since our inception as our Chief Executive Officer, Chief Operating Officer and Senior
Vice President of Development, respectively. During the 1990s, we established a premier position in the veterinary diagnostic laboratory and animal hospital markets through both internal growth and acquisitions. By 1997, we achieved a critical mass,
building a laboratory network of 12 laboratories servicing animal hospitals in all 50 states and completing acquisitions for a total of 160 animal hospitals. At September 30, 2002, our laboratory network consisted of 19 laboratories serving all 50
states and our animal hospital network consisted of 225 animal hospitals in 33 states. We primarily focus on generating internal growth to increase revenue and profitability. In order to augment internal growth, we may selectively acquire
laboratories and intend to acquire approximately 15 to 25 animal hospitals per year, depending upon the attractiveness of candidates and the strategic fit with our existing operations.
The following table summarizes our growth in facilities for the periods presented:
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
Laboratories: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
16 |
|
|
15 |
|
|
15 |
|
|
13 |
|
|
12 |
|
Acquisitions and new facilities |
|
3 |
|
|
|
|
|
1 |
|
|
3 |
|
|
3 |
|
Relocated into laboratories operated by us |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
19 |
|
|
15 |
|
|
16 |
|
|
15 |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospitals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
214 |
|
|
209 |
|
|
209 |
|
|
194 |
|
|
168 |
|
Acquisitions |
|
18 |
|
|
18 |
|
|
21 |
|
|
24 |
|
|
39 |
|
Relocated into hospitals operated by us |
|
(7 |
) |
|
(10 |
) |
|
(13 |
) |
|
(8 |
) |
|
(11 |
) |
Sold or closed |
|
|
|
|
(3 |
) |
|
(3 |
) |
|
(1 |
) |
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
225 |
|
|
214 |
|
|
214 |
|
|
209 |
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned at end of period |
|
167 |
|
|
161 |
|
|
160 |
|
|
157 |
|
|
149 |
|
Managed at end of period |
|
58 |
|
|
53 |
|
|
54 |
|
|
52 |
|
|
45 |
|
25
We were a publicly traded company from 1991 until September 2000, when we completed a
recapitalization with an entity controlled by Leonard Green & Partners. The recapitalization was completed in a financial market that we believed did not adequately value companies of our size and type because the markets focus and
attention was largely on technology and Internet-based companies. The recapitalization was financed by:
|
|
the contribution of $155.0 million by a group of investors led by Leonard Green & Partners; |
|
|
borrowings of $250.0 million under a $300.0 million senior credit facility; |
|
|
the issuance of an aggregate of $100.0 million of 15.5% senior notes; and |
|
|
the issuance of an aggregate of $20.0 million of 13.5% senior subordinated notes. |
Our subsequent performance and the changing market dynamics supported the determination by our board of directors to re-enter the public sector. On November 27, 2001, we consummated
our initial public offering. As a result of this offering and the underwriters exercise of their over-allotment option, we issued 17,370,000 shares of common stock and received net proceeds of $161.5 million. Concurrent with the consummation
of our initial public offering, our wholly owned subsidiary issued $170.0 million of senior subordinated notes. We applied the net proceeds from the offering and the sale of the senior subordinated notes, plus cash on hand, as follows:
|
|
redeemed all of our outstanding series A and series B redeemable preferred stock for $173.8 million; |
|
|
repaid $100.0 million of our senior term A and B notes; |
|
|
repaid $59.1 million in principal of our 15.5% senior notes due 2010, at a redemption price of 110%, plus accrued and unpaid interest; and
|
|
|
repaid $5.0 million in principal of our 13.5% senior subordinated notes due 2010, at a redemption price of 110%, plus accrued and unpaid interest.
|
In subsequent transactions, we:
|
|
repaid our senior term A and senior term B notes with the proceeds acquired from the issuance of senior term C notes, which bear a lower interest rate than the weighted
average interest rate for the senior term A and senior term B notes; |
|
|
repaid $15.0 million, the entire outstanding principal amount, of our 13.5% senior subordinated notes due 2010, at a redemption price of 110%, plus accrued and unpaid
interest; and |
|
|
repaid $30.0 million in principal amount of our 15.5% senior notes due 2010, at a redemption price of 110%, plus accrued and unpaid interest.
|
Basis of Reporting
General
Our discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We report our operations in three segments: laboratory, animal hospital and corporate. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
26
Revenue Recognition
Revenue is recognized only after the following criteria are met:
|
|
there exists adequate evidence of the transaction; |
|
|
delivery of goods has occurred or services have been rendered; and |
|
|
the price is not contingent on future activity and collectibility is reasonably assured. |
Laboratory Revenue
A portion of laboratory revenue is
intercompany revenue that was generated by providing laboratory services to our animal hospitals. Laboratory internal revenue growth is calculated using laboratory revenue as reported, adjusted to exclude, for those laboratories that we did not own
for the entire period presented, an estimate of revenue generated by these newly acquired laboratories subsequent to the date of our purchase. We calculate this estimate of revenue for each newly acquired laboratory using an historical twelve-month
revenue figure (in some cases on an annualized basis) provided to us by the seller of the acquired laboratory, which amount is increased by our laboratory revenue growth rate for the prior year. In calculating the laboratory revenue growth rate for
the year in which the acquisition occurred, we exclude from the reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a fraction representing the portion of the year that we owned the
related facility. In calculating the laboratory revenue growth rate for the year following the acquisition, we exclude from our reported laboratory revenue the estimated annual revenue attributable to newly acquired laboratories multiplied by a
fraction representing the portion of the year that we did not own the facility. To determine our laboratory internal revenue growth rate for the applicable period, we compare our laboratory revenue net of estimated laboratory revenue of newly
acquired laboratories, to our laboratory revenue as reported for the prior comparable period. We believe this fairly presents our laboratory internal revenue growth for the periods presented. Our calculation may not be comparable to similarly titled
measures by other companies, however, any differences in calculations or errors in estimates used would not have a material effect on our laboratory internal growth rates presented in this prospectus.
Laboratory revenue is presented net of discounts. Some discounts, such as those given to clients for prompt payment, are applied to clients
accounts in periods subsequent to the period the revenue was recognized. These discounts which are not yet applied to clients accounts are estimated and deducted from revenue in the period the related revenue was recognized. These estimates
are based upon historical experience. Errors in estimates would not have a material effect on our financial statements.
Animal Hospital
Revenue
Animal hospital revenue is comprised of revenue of the animal hospitals that we own and the management fees
of animal hospitals that we manage. Certain states prohibit business corporations from providing or holding themselves out as providers of veterinary medical care. In these states, we enter into arrangements with a veterinary medical group that
provides all veterinary medical care, while we manage the administrative functions associated with the operation of the animal hospitals and we own or lease the hospital facility. In return for our services, the veterinary medical group pays us
management fees. We do not consolidate the operations of animal hospitals that we manage. However, for purposes of calculating same-facility revenue growth in our animal hospitals, we use the combined revenue of animal hospitals owned and managed
for the entire periods presented. Same-facility revenue growth includes revenue generated by customers referred from relocated or combined animal hospitals.
27
Other Revenue
Other revenue is comprised of consulting fees from Heinz Pet Products relating to the marketing of its proprietary pet food.
Direct Costs
Laboratory direct costs are comprised of all
costs of laboratory services, including salaries of veterinarians, technicians and other non-administrative, laboratory-based personnel, facilities rent, occupancy costs and supply costs. Animal hospital direct costs are comprised of all costs of
services and products at the hospitals, including salaries of veterinarians, technicians and all other hospital-based personnel employed by the hospitals we own, facilities rent, occupancy costs, supply costs, certain marketing and promotional
expenses and costs of goods sold associated with the retail sales of pet food and pet supplies. Direct costs do not include salaries of veterinarians, technicians and certain other hospital-based personnel employed by the hospitals we manage. As a
result, our direct costs are lower as a percentage of revenue than if we had consolidated the operating results of the animal hospitals we manage into our operating results.
Selling, General and Administrative
Our selling, general and
administrative expense is divided between our laboratory, animal hospital and corporate segments. Laboratory selling, general and administrative expense consists primarily of sales and administrative personnel and selling, marketing and promotional
expense. Animal hospital selling, general and administrative expense consists primarily of field management and administrative personnel, recruiting and certain marketing expenses. Corporate selling, general and administrative expense consists of
administrative expense at our headquarters, including the salaries of corporate officers, professional expense, rent and occupancy costs.
EBITDA and Adjusted EBITDA
EBITDA is operating income before depreciation and amortization.
Adjusted EBITDA for the 2001 and 2000 periods represents EBITDA adjusted to exclude non-cash compensation and management fees paid pursuant to our management services agreement with Leonard Green & Partners, which was terminated in November
2001. Adjusted EBITDA for the 2001 periods also excludes agreement termination costs and write-down of assets. Adjusted EBITDA for the 2000 period also excludes recapitalization costs. Adjusted EBITDA for the 1999 period represents EBITDA adjusted
to exclude Year 2000 remediation expense and other non-cash operating items. No adjustments were made to the EBITDA calculations for 2002.
EBITDA and adjusted EBITDA are not measures of financial performance under generally accepted accounting principles, or GAAP. EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. We believe EBITDA is a useful measure of our operating performance as it reflects earnings before the impact of
items that may change from period to period for reasons not directly related to our operations, such as depreciation and amortization, interest and taxes and other non-operating or non-recurring items. EBITDA is also an important component of the
financial ratios included in our debt covenants and provides us with a measure of our ability to service our debt and meet capital expenditure requirements from our operating results. Our calculation of EBITDA may not be comparable to similarly
titled measures reported by other companies.
Non-Cash Compensation
Certain stock options granted in 2000 qualified as variable stock options. Related to these variable stock options, we recorded non-cash compensation of approximately $7.6 million in
the nine
28
months ended September 30, 2001 and the year ended December 31, 2001, and $555,000 in the year ended December 31, 2000. Non-cash compensation is included in laboratory direct costs and in
laboratory, animal hospital and corporate selling, general and administrative expense. In August 2001, all of these options were exercised.
Software Development Costs
We frequently research, develop and implement new software to be
used internally, or enhance our existing internal software. We develop the software using our own employees and/or outside consultants. Most costs associated with the development of new software are expensed as incurred, particularly in the
preliminary planning stages and the post-implementation and training stages. Costs related directly to the software design, coding, testing and installation are capitalized. Costs related to upgrades or enhancements of existing systems are
capitalized if the modifications result in additional functionality.
Critical Accounting Policies and Significant Estimates
Under accounting principles generally accepted in the United States, management is required to make assumptions and estimates that
directly impact our consolidated financial statements and related disclosures. Because of the uncertainties inherent in making assumptions and estimates, actual results in future periods may differ significantly from our assumptions and estimates.
Management bases its assumptions and estimates on historical experience and on various other factors believed to be reasonable under the circumstances. The following represent what management believes are the critical accounting policies most
affected by significant management estimates and judgments.
Workers Compensation Expense
On October 8, 2001, we entered into a one-year workers compensation insurance policy with a $250,000 per-occurrence deductible and a stop-loss
aggregate deductible of $4.7 million. We have determined that $3.9 million is a reasonable estimate of expected claims losses under this policy and we accrued for these losses over the twelve-month period ended September 30, 2002. In determining
this estimate, in conjunction with the insurance carrier, we reviewed our five-year history of total claims losses, ratio of losses to premiums paid, payroll growth and the current risk control environment. We are pre-funding estimated claims losses
to the insurance carrier of approximately $2.9 million.
Impairment of Goodwill
Goodwill relates to acquisitions and represents the purchase price paid and liabilities assumed in excess of the fair market value of tangible assets acquired. Under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, we are required to allocate our goodwill to identifiable reporting units, which are then tested for impairment using a
two-step process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not
necessary and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires a hypothetical allocation of the fair value of the reporting unit to the reporting
units assets and liabilities as if the unit were just purchased by the company at the fair value price. In this hypothetical purchase, the excess of the fair value of the reporting unit over its re-evaluated, marked-to-market net assets would
be the new basis for the reporting units goodwill and a write-down to this new value would be recognized as an expense.
29
We have determined that we have two reporting units, laboratory and animal hospital. We
hired independent valuation experts to estimate the fair market value of these reporting units. The independent valuation experts concluded that the estimated value for each reporting unit is greater than the carrying amount of the net assets for
those reporting units. Therefore, no impairment issues existed, and the second step of the test was not necessary. We plan to perform a valuation of our reporting units in the fourth quarter of each year or upon significant changes in our business
environment.
Impairment of Long-lived Assets
We adopted SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets on January 1, 2002. Under SFAS No. 144, we will continually evaluate whether events, circumstances or net losses at
the entity level have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of these assets may not be recoverable. When factors indicate that these assets should be
evaluated for possible impairment, we will estimate the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the long-lived assets in question. If that estimate is less than the carrying value of the assets
under review, we will recognize an impairment loss equal to that difference.
Legal Settlements
We are a party to various legal proceedings. Although we cannot determine the ultimate disposition of these proceedings, we can use judgment to
reasonably estimate our liability for legal settlement costs that may arise as a result of these proceedings. Based on our prior experience, the nature of the current proceedings, and our insurance policy coverage for such matters, we have accrued
$900,000 as of September 30, 2002 for legal settlements as part of other accrued liabilities.
Results of Operations
The following table sets forth components of our statements of operations data expressed as a percentage of revenue for the indicated
periods:
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2001
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory |
|
34.7 |
% |
|
33.4 |
% |
|
33.6 |
% |
|
33.6 |
% |
|
32.2 |
% |
Animal hospital |
|
66.9 |
|
|
68.0 |
|
|
67.8 |
|
|
67.8 |
|
|
68.0 |
|
Other |
|
0.4 |
|
|
0.5 |
|
|
0.5 |
|
|
0.3 |
|
|
1.6 |
|
Intercompany |
|
(2.0 |
) |
|
(1.9 |
) |
|
(1.9 |
) |
|
(1.7 |
) |
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
|
100.0 |
|
Direct costs |
|
67.3 |
|
|
69.9 |
|
|
70.6 |
|
|
71.9 |
|
|
72.5 |
|
Selling, general and administrative |
|
7.7 |
|
|
9.9 |
|
|
9.6 |
|
|
7.6 |
|
|
7.4 |
|
Depreciation and amortization |
|
2.7 |
|
|
6.3 |
|
|
6.3 |
|
|
5.4 |
|
|
5.1 |
|
Agreement termination costs |
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
Write-down and (gain) loss on sale of assets |
|
|
|
|
2.9 |
|
|
2.2 |
|
|
|
|
|
|
|
Recapitalization costs |
|
|
|
|
|
|
|
|
|
|
9.7 |
|
|
|
|
Year 2000 remediation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
Reversal of restructuring charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
22.3 |
|
|
11.0 |
|
|
6.9 |
|
|
5.4 |
|
|
14.7 |
|
Net interest expense |
|
9.0 |
|
|
10.6 |
|
|
10.7 |
|
|
5.6 |
|
|
2.9 |
|
Other expense, net |
|
|
|
|
0.1 |
|
|
|
|
|
0.5 |
|
|
|
|
Minority interest |
|
0.4 |
|
|
0.3 |
|
|
0.4 |
|
|
0.3 |
|
|
0.3 |
|
Provision for income taxes |
|
5.4 |
|
|
2.2 |
|
|
0.1 |
|
|
0.6 |
|
|
4.5 |
|
Extraordinary loss on early extinguishment of debt, net of taxes |
|
0.6 |
|
|
|
|
|
2.5 |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
6.9 |
% |
|
(2.2 |
)% |
|
(6.8 |
)% |
|
(2.4 |
)% |
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
The following table is a summary of the components of operating income by segment for the
nine months ended September 30, 2002 and 2001 and the last three fiscal years (dollars in thousands):
|
|
Laboratory
|
|
Animal Hospital
|
|
Corporate
|
|
|
Inter- company Eliminations
|
|
|
Total
|
|
|
Nine Months Ended September 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
116,911 |
|
$ |
225,383 |
|
$ |
1,500 |
|
|
$ |
(6,902 |
) |
|
$ |
336,892 |
|
Direct costs |
|
|
65,545 |
|
|
168,106 |
|
|
|
|
|
|
(6,902 |
) |
|
|
226,749 |
|
Selling, general and administrative |
|
|
7,632 |
|
|
7,805 |
|
|
10,456 |
|
|
|
|
|
|
|
25,893 |
|
Depreciation and amortization |
|
|
2,138 |
|
|
6,166 |
|
|
1,026 |
|
|
|
|
|
|
|
9,330 |
|
Gain on sale of assets |
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
41,596 |
|
$ |
43,306 |
|
$ |
(9,902 |
) |
|
$ |
|
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
101,855 |
|
$ |
207,665 |
|
$ |
1,500 |
|
|
$ |
(5,655 |
) |
|
$ |
305,365 |
|
Direct costs |
|
|
61,566 |
|
|
157,543 |
|
|
|
|
|
|
(5,655 |
) |
|
|
213,454 |
|
Selling, general and administrative |
|
|
9,305 |
|
|
9,523 |
|
|
11,537 |
|
|
|
|
|
|
|
30,365 |
|
Depreciation and amortization |
|
|
3,457 |
|
|
10,829 |
|
|
4,835 |
|
|
|
|
|
|
|
19,121 |
|
Write-down and loss on sale of assets |
|
|
|
|
|
|
|
|
8,745 |
|
|
|
|
|
|
|
8,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
27,527 |
|
$ |
29,770 |
|
$ |
(23,617 |
) |
|
$ |
|
|
|
$ |
33,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
134,711 |
|
$ |
272,113 |
|
$ |
2,000 |
|
|
$ |
(7,462 |
) |
|
$ |
401,362 |
|
Direct costs |
|
|
81,996 |
|
|
208,692 |
|
|
|
|
|
|
(7,462 |
) |
|
|
283,226 |
|
Selling, general and administrative |
|
|
11,434 |
|
|
12,323 |
|
|
14,876 |
|
|
|
|
|
|
|
38,633 |
|
Depreciation and amortization |
|
|
4,657 |
|
|
14,491 |
|
|
6,018 |
|
|
|
|
|
|
|
25,166 |
|
Agreement termination costs |
|
|
|
|
|
|
|
|
17,552 |
|
|
|
|
|
|
|
17,552 |
|
Write-down and gain on sale of assets |
|
|
|
|
|
|
|
|
9,079 |
|
|
|
|
|
|
|
9,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
36,624 |
|
$ |
36,607 |
|
$ |
(45,525 |
) |
|
$ |
|
|
|
$ |
27,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
119,300 |
|
$ |
240,624 |
|
$ |
925 |
|
|
$ |
(6,162 |
) |
|
$ |
354,687 |
|
Direct costs |
|
|
72,662 |
|
|
188,390 |
|
|
|
|
|
|
(6,162 |
) |
|
|
254,890 |
|
Selling, general and administrative |
|
|
8,122 |
|
|
9,437 |
|
|
9,887 |
|
|
|
|
|
|
|
27,446 |
|
Depreciation and amortization |
|
|
4,472 |
|
|
12,167 |
|
|
2,239 |
|
|
|
|
|
|
|
18,878 |
|
Recapitalization costs |
|
|
|
|
|
|
|
|
34,268 |
|
|
|
|
|
|
|
34,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
34,044 |
|
$ |
30,630 |
|
$ |
(45,469 |
) |
|
$ |
|
|
|
$ |
19,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
103,282 |
|
$ |
217,988 |
|
$ |
5,100 |
|
|
$ |
(5,810 |
) |
|
$ |
320,560 |
|
Direct costs |
|
|
64,234 |
|
|
174,069 |
|
|
|
|
|
|
(5,810 |
) |
|
|
232,493 |
|
Selling, general and administrative |
|
|
6,775 |
|
|
6,682 |
|
|
10,165 |
|
|
|
|
|
|
|
23,622 |
|
Depreciation and amortization |
|
|
4,234 |
|
|
10,472 |
|
|
1,757 |
|
|
|
|
|
|
|
16,463 |
|
Year 2000 remediation expense |
|
|
|
|
|
|
|
|
2,839 |
|
|
|
|
|
|
|
2,839 |
|
Reversal of restructuring charges |
|
|
|
|
|
|
|
|
(1,873 |
) |
|
|
|
|
|
|
(1,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
28,039 |
|
$ |
26,765 |
|
$ |
(7,788 |
) |
|
$ |
|
|
|
$ |
47,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Nine Months Ended September 30, 2002 and 2001 (unaudited)
Revenue
The following table
summarizes our revenue (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
% Change
|
|
Laboratory |
|
$ |
116,911 |
|
|
$ |
101,855 |
|
|
14.8 |
% |
Animal hospital |
|
|
225,383 |
|
|
|
207,665 |
|
|
8.5 |
% |
Other |
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
Intercompany |
|
|
(6,902 |
) |
|
|
(5,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
336,892 |
|
|
$ |
305,365 |
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory Revenue
Laboratory revenue increased $15.1 million, or 14.8% for the nine months ended September 30, 2002 compared to the same prior-year period. The components of internal revenue growth
were sales volume, which contributed 5.7%, and average price per requisition, which contributed 9.1%. The increase in sales volume and average price per requisition primarily was the result of continued emphasis on selling our pet health and
wellness programs and implementation of a price increase for most tests in February 2002.
Animal Hospital Revenue
The following table summarizes our animal hospital revenue as reported and the combined revenue of animal hospitals that we owned and managed, had
we consolidated the operating results of the animal hospitals we managed into our operating results (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
% Change
|
|
Animal hospital revenue as reported |
|
$ |
225,383 |
|
|
$ |
207,665 |
|
|
8.5 |
% |
Less: Management fees paid to us by veterinary medical groups |
|
|
(33,713 |
) |
|
|
(28,270 |
) |
|
|
|
Add: Revenue of animal hospitals managed |
|
|
61,501 |
|
|
|
52,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined revenue of animal hospitals owned and managed |
|
$ |
253,171 |
|
|
$ |
231,975 |
|
|
9.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospital revenue as reported increased $17.7 million, or 8.5%, for the
nine months ended September 30, 2002 compared to the same prior-year period. This increase in animal hospital revenue resulted from the acquisition of animal hospitals and same-facility revenue growth.
Combined revenue of animal hospitals that we owned and managed increased $21.2 million, or 9.1% for the nine months ended September 30, 2002
compared to the same prior-year period. This increase is primarily the result of same-facility growth of 3.6%, or $7.9 million, and net acquired revenue of $13.3 million. Net acquired revenue is from the change in revenue that results from the
hospitals that are acquired, sold or closed on or subsequent to January 1, 2001. Same-facility revenue growth was primarily due to increases in the average amount spent per visit and revenue generated by customers referred from relocated or combined
animal hospitals.
32
Discussions in medical literature suggest that small animals may not require as many or as
frequent vaccinations as is currently accepted practice. Any reduction in the number of visits to our hospitals resulting from less frequent vaccinations will negatively impact our ability to continue to achieve same-facility revenue growth rates
consistent with our current levels. In addition, products and supplies that we currently sell are becoming available in other distribution channels that may adversely affect our sales and the number of client visits to our hospitals.
Direct Costs
The
following table summarizes our direct costs and our direct costs as a percentage of applicable revenue (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
% Change
|
|
Laboratory |
|
$ |
65,545 |
|
|
56.1 |
% |
|
$ |
61,566 |
|
|
60.4 |
% |
|
6.5 |
% |
Animal hospital |
|
|
168,106 |
|
|
74.6 |
% |
|
|
157,543 |
|
|
75.9 |
% |
|
6.7 |
% |
Intercompany |
|
|
(6,902 |
) |
|
|
|
|
|
(5,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs |
|
$ |
226,749 |
|
|
67.3 |
% |
|
$ |
213,454 |
|
|
69.9 |
% |
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory Direct Costs
Laboratory direct costs increased $4.0 million, or 6.5%, for the nine months ended September 30, 2002 compared to the same prior-year period. Laboratory direct costs as percentages
of laboratory revenue was 56.1% and 60.4% for the nine months ended September 30, 2002 and 2001. However, laboratory direct costs for the nine months ended September 30, 2001 includes non-cash compensation of $1.4 million. Excluding non-cash
compensation, laboratory direct costs as a percentage of laboratory revenue would have been 59.1% for the nine months ended September 30, 2001. The current year decrease in laboratory direct costs as a percentage of laboratory revenue as compared to
the same prior-year period primarily was attributable to additional operating leverage gained on increases in laboratory revenue.
Animal
Hospital Direct Costs
The following table summarizes our animal hospital direct costs as reported and the combined
direct costs of animal hospitals owned and managed had we consolidated the operating results of the animal hospitals we managed into our operating results (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
% Change
|
|
Animal hospital direct costs as reported |
|
$ |
168,106 |
|
|
74.6 |
% |
|
$ |
157,543 |
|
|
75.9 |
% |
|
6.7 |
% |
Add: Direct costs of animal hospitals managed |
|
|
61,501 |
|
|
|
|
|
|
52,580 |
|
|
|
|
|
|
|
Less: Management fees charged by us to veterinary medical groups |
|
|
(33,713 |
) |
|
|
|
|
|
(28,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined direct costs of animal hospitals owned and managed |
|
$ |
195,894 |
|
|
77.4 |
% |
|
$ |
181,853 |
|
|
78.4 |
% |
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined direct costs of animal hospitals owned and managed increased $14.0
million, or 7.7% for the nine months ended September 30, 2002. Combined direct costs of animal hospitals owned and
33
managed as a percentage of animal hospital revenue decreased to 77.4% for the nine months ended September 30, 2002 from 78.4% for the prior year period.
Animal hospital direct costs as reported increased $10.6 million, or 6.7%, for the nine months ended September 30, 2002 compared to the same
prior-year period. Animal hospital direct costs as reported as a percentage of animal hospital revenue decreased to 74.6% for the nine months ended September 30, 2002 from 75.9% for the prior-year period.
The decrease in animal hospital direct costs as a percentage of animal hospital revenue during this period primarily was attributable to additional
operating leverage gained on increases in animal hospital revenue, because most of the costs associated with this business do not increase proportionately with increases in the volume of services rendered.
Selling, General and Administrative Expense
The following table summarizes our selling, general and administrative expense (SG&A) and our expense as a percentage of applicable revenue (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
% Change
|
Laboratory |
|
$ |
7,632 |
|
6.5% |
|
$ |
9,305 |
|
9.1% |
|
(18.0)% |
Animal hospital |
|
|
7,805 |
|
3.5% |
|
|
9,523 |
|
4.6% |
|
(18.0)% |
Corporate |
|
|
10,456 |
|
3.1% |
|
|
11,537 |
|
3.8% |
|
(9.4)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A |
|
$ |
25,893 |
|
7.7% |
|
$ |
30,365 |
|
9.9% |
|
(14.7)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory SG&A
Laboratory SG&A for the nine months ended September 30, 2002 decreased $1.7 million, or 18.0%, compared to the same prior-year period. However, laboratory SG&A includes
non-cash compensation of $2.9 million for the nine months ended September 30, 2001. If non-cash compensation were excluded from the nine months ended September 30, 2001, current period laboratory SG&A would have increased $1.2 million, or 18.6%,
compared to the same prior-year period. Prior-year period laboratory SG&A would have been 6.3% of laboratory revenue as compared to 6.5% for the nine months ended September 30, 2002.
The increase in laboratory SG&A in 2002 as compared to 2001, as adjusted to exclude non-cash compensation, was primarily due to the salaries associated with new sales
representatives, an increase in commission payments to sales representatives due to increased sales, additional marketing costs incurred on our pet health and wellness programs and an increase in legal costs in 2002.
Animal Hospital SG&A
Animal
hospital SG&A for the nine months ended September 30, 2002 decreased $1.7 million, or 18.0%, compared to the same prior-year period. However, animal hospital SG&A includes non-cash compensation of $2.6 million for the nine months ended
September 30, 2001. If non-cash compensation were excluded for the nine months ended September 30, 2001, current period animal hospital SG&A would have increased $842,000 or 12.1%, compared to the same prior-year period. Prior-year period animal
hospital SG&A would have been 3.4% of animal hospital revenue as compared to 3.5% for the nine months ended September 30, 2002.
34
The increase in animal hospital SG&A in 2002 as compared to 2001, as adjusted to
exclude non-cash compensation, primarily was due to the salaries associated with the addition of regional medical directors and an increase in legal costs in 2002.
Corporate SG&A
Corporate SG&A for the nine months ended September 30, 2002
decreased $1.1 million or 9.4%, compared to the same prior-year period. However, corporate SG&A for the nine months ended September 30, 2001 includes non-cash compensation of $771,000 and management fees of $1.9 million paid pursuant to our
management agreement with Leonard Green & Partners that was terminated in November 2001. If non-cash compensation and management fees were excluded from the nine months ended September 30, 2001, current year corporate SG&A would have
increased $1.6 million, or 17.4%, compared to the same prior-year period. Prior-year period corporate SG&A would have been 2.9% as a percentage of total revenue as compared to 3.1% for the nine months ended September 30, 2002.
The increase in corporate SG&A in 2002 as compared to 2001, as adjusted to exclude non-cash compensation and management fees, was
primarily due to the fees associated with increased professional services and insurance costs as a result of becoming a publicly-traded company and accounting fees incurred in connection with changing our external auditors from Arthur Andersen LLP
to KPMG LLP.
Adjusted EBITDA
The following table summarizes our adjusted EBITDA and our adjusted EBITDA as a percentage of applicable revenue (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
% Change
|
|
Laboratory adjusted EBITDA (1) |
|
$ |
43,734 |
|
|
37.4 |
% |
|
$ |
35,264 |
|
|
34.6 |
% |
|
24.0 |
% |
Animal hospital adjusted EBITDA (2) |
|
|
49,472 |
|
|
22.0 |
% |
|
|
43,159 |
|
|
20.8 |
% |
|
14.6 |
% |
Other revenue |
|
|
1,500 |
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
Corporate selling, general and administrative(3) |
|
|
(10,456 |
) |
|
|
|
|
|
(8,906 |
) |
|
|
|
|
|
|
Gain (loss) on sale of assets |
|
|
80 |
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted EBITDA |
|
$ |
84,330 |
|
|
25.0 |
% |
|
$ |
70,892 |
|
|
23.2 |
% |
|
19.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
For the nine months ended September 30, 2001, laboratory EBITDA was adjusted to exclude non-cash compensation of $4.3 million. No adjustments were made in 2002.
|
(2) |
For the nine months ended September 30, 2001, animal hospital EBITDA was adjusted to exclude non-cash compensation of $2.6 million. No adjustments were made in 2002.
|
(3) |
For the nine months ended September 30, 2001, corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $771,000 and
management fees of $1.9 million. No adjustments were made in 2002. |
Depreciation and Amortization
Depreciation and amortization expense decreased $9.8 million, or 51.2%, for the nine months ended September 30, 2002, compared to the
same prior-year period.
The decrease is primarily related to our implementation of SFAS No. 142, the result of which was
that we no longer amortized goodwill as of January 1, 2002. For a detailed discussion of SFAS No. 142, see New Accounting Pronouncements. For the nine months ended September 30, 2001 we had $6.9 million of goodwill amortization expense.
Additionally, in November 2001, we terminated non-
35
competition agreements with members of senior management. For the nine months ended September 30, 2001, we had expense related to the amortization of non-competition agreements of $3.9 million.
Net Interest Expense
Net interest expense decreased $1.9 million, or 5.7%, to $30.5 million for the nine months ended September 30, 2002 from $32.4 million for the nine months ended September 30, 2001.
The decrease in net interest expense primarily was due to the effect of decreasing interest rates on our variable-rate obligations, and the
refinancing of a portion of our higher-yield, fixed-rate debt with lower-yield, fixed-rate debt.
Other (Income) Expense
Other (income) expense consisted of non-cash gains or losses on a hedging instrument resulting from changes in the
time value of our collar agreement.
Provision for Income Taxes
Our effective income tax rate for each period can vary from the statutory rate primarily due to the non-deductibility for income tax purposes of certain items. In 2001, our effective
income tax rate varied from the statutory rate primarily due to the non-deductibility of the amortization of a portion of goodwill, the recognition of non-cash compensation and the write-down of zero-tax-basis assets. In 2002, our effective income
tax rate is comparable to the statutory rate.
Minority Interest in Income of Subsidiaries
Minority interest in income of subsidiaries represents our partners proportionate share of net income generated by our subsidiaries that we do
not wholly own. The increase in minority interest for the nine months ended September 30, 2002 was the result of a change in the aggregate proportionate ownership percentages of the subsidiaries, primarily due to an increase in the number of
partnerships.
Increase in Carrying Amount of Redeemable Preferred Stock
The holders of our series A redeemable preferred stock and our series B redeemable preferred stock were entitled to receive dividends at a rate of 14% and 12%, respectively. The
dividends not paid in cash compounded quarterly. The dividends earned during the nine months ended September 30, 2001 were added to the liquidation preference of the preferred stock. In November 2001, we redeemed all of the outstanding series A and
series B redeemable preferred stock using proceeds from our initial public offering together with cash on hand.
Extraordinary Loss on Early
Extinguishment of Debt
On August 29, 2002 we refinanced our senior credit facility by borrowing $143.1 million in
senior term C notes and used these proceeds to pay the entire outstanding principal amount on the senior term A and B notes. In conjunction with that transaction, we wrote off $3.4 million in deferred financing costs as an extraordinary loss on
early extinguishment of debt that provided a related tax benefit of $1.4 million.
36
Years Ended December 31, 2001, 2000 and 1999
Revenue
The following table summarizes our revenue for the
years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
2001
|
|
2000
|
Laboratory |
|
$ |
134,711 |
|
|
$ |
119,300 |
|
|
$ |
103,282 |
|
|
12.9% |
|
15.5% |
Animal hospital |
|
|
272,113 |
|
|
|
240,624 |
|
|
|
217,988 |
|
|
13.1% |
|
10.4% |
Other |
|
|
2,000 |
|
|
|
925 |
|
|
|
5,100 |
|
|
|
|
|
Intercompany |
|
|
(7,462 |
) |
|
|
(6,162 |
) |
|
|
(5,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
401,362 |
|
|
$ |
354,687 |
|
|
$ |
320,560 |
|
|
13.2% |
|
10.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory Revenue
Laboratory revenue increased $15.4 million, or 12.9%, for the year ended December 31, 2001, compared to the year ended December 31, 2000, which increased $16.0 million, or 15.5%,
compared to the year ended December 31, 1999. The increase in laboratory revenue for the year ended December 31, 2001, compared to the comparable prior period primarily was due to internal growth of 12.5%. This internal laboratory revenue growth
resulted from the increase in the overall number of tests and requisitions and an increase in the average revenue per requisition. These increases were primarily the result of the continued emphasis on selling our pet health and wellness programs
and the implementation of a price increase for most tests in February 2001. The increase in laboratory revenue for the year ended December 31, 2000, compared to the comparable prior period primarily was due to internal growth of 12.6%. This internal
laboratory revenue growth also resulted from an increase in the overall number of tests and requisitions and an increase in the average revenue per requisition. These increases primarily were due to the development and sale of new programs, the
implementation of a price increase for most tests in February 2000 and the continued growth of our Test Express business.
Animal Hospital
Revenue
The following table summarizes our animal hospital revenue as reported and the combined revenue
of animal hospitals that we owned and managed had we consolidated the operating results of the animal hospitals we manage into our operating results for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
2001
|
|
2000
|
Animal hospital revenue as reported |
|
$ |
272,113 |
|
|
$ |
240,624 |
|
|
$ |
217,988 |
|
|
13.1% |
|
10.4% |
Less: Management fees paid to us by veterinary medical groups |
|
|
(37,770 |
) |
|
|
(31,133 |
) |
|
|
(30,202 |
) |
|
|
|
|
Add: Revenue of animal hospitals managed |
|
|
71,591 |
|
|
|
60,380 |
|
|
|
42,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined revenue of animal hospitals owned and managed |
|
$ |
305,934 |
|
|
$ |
269,871 |
|
|
$ |
230,615 |
|
|
13.4% |
|
17.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospital revenue increased $31.5 million, or 13.1%, for the year ended
December 31, 2001, compared to the year ended December 31, 2000, which increased $22.6 million, or 10.4%, compared to the year ended December 31, 1999. The increase in animal hospital revenue for the year ended December 31, 2001, as compared to the
comparable prior period resulted primarily from the acquisition of 21 animal hospitals that we owned, managed or relocated into other hospitals owned by us subsequent to December 31, 2000. Similarly, the increase for the year ended December 31,
2000, as compared to the comparable prior period resulted primarily from the acquisition of 24 animal
37
hospitals that we owned, managed or relocated into other hospitals owned by us subsequent to December 31, 1999. The increase in animal hospital revenue for the year ended December 31, 2001 also
was due to same-facility revenue growth of 5.0%, and the increase in animal hospital revenue for the year ended December 31, 2000 also was due to same-facility revenue growth of 7.0%. Same-facility revenue growth in both years primarily was due to
increases in the average amount spent per visit and revenue generated by clients referred from our relocated animal hospitals.
Other Revenue
Other revenue increased $1.1 million for the year ended December 31, 2001 compared to the year ended December 31, 2000,
which decreased $4.2 million compared to the year ended December 31, 1999. Our consulting agreement with Heinz Pet Products expired February 1, 2000. Under this agreement we had received monthly consulting fees of $425,000 from February 1997 through
January 2000. We entered into a new agreement with Heinz Pet Products effective October 1, 2000 that provides for monthly consulting fees of approximately $167,000 over a term of 24 months ending September 2002. Consequently, for the year ended
December 31, 2001, other revenue includes consulting fees for the entire year as compared to an aggregate of four months for the year ended December 31, 2000 and for the year ended December 31, 1999.
Direct Costs
The following
table summarizes our direct costs and our direct costs as a percentage of applicable revenue for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
% Change
|
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
2001
|
|
|
2000
|
|
Laboratory |
|
$ |
81,996 |
|
|
60.9 |
% |
|
$ |
72,662 |
|
|
60.9 |
% |
|
$ |
64,234 |
|
|
62.2 |
% |
|
12.8 |
% |
|
13.1 |
% |
Animal hospital |
|
|
208,692 |
|
|
76.7 |
% |
|
|
188,390 |
|
|
78.3 |
% |
|
|
174,069 |
|
|
79.9 |
% |
|
10.8 |
% |
|
8.2 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany |
|
|
(7,462 |
) |
|
|
|
|
|
(6,162 |
) |
|
|
|
|
|
(5,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct costs |
|
$ |
283,226 |
|
|
70.6 |
% |
|
$ |
254,890 |
|
|
71.9 |
% |
|
$ |
232,493 |
|
|
72.5 |
% |
|
11.1 |
% |
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory Direct Costs
Laboratory direct costs increased $9.3 million, or 12.8%, for the year ended December 31, 2001 compared to the year ended December 31, 2000, which increased $8.4 million, or 13.1%,
compared to the year ended December 31, 1999. Laboratory direct costs as a percentage of laboratory revenue was 60.9% for each of the years ended December 31, 2001 and 2000, which decreased from 62.2% for the year ended December 31, 1999. Laboratory
direct costs include non-cash compensation of $1.4 million and $103,000 for the years ended December 31, 2001 and 2000. Laboratory direct costs excluding non-cash compensation as a percentage of laboratory revenue decreased to 59.8% for the year
ended December 31, 2001 and from 60.8% for the year ended December 31, 2000. The decreases in laboratory direct costs as a percentage of laboratory revenue during these periods primarily were attributable to increases in laboratory revenue combined
with operating leverage associated with our laboratory business.
38
Animal Hospital Direct Costs
The following table summarizes our animal hospital direct costs as reported and the combined direct costs of animal hospitals that we owned and managed had we consolidated the
operating results of the animal hospitals we manage into our operating results for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
2001
|
|
2000
|
|
1999
|
|
% Change
|
|
|
$
|
|
|
% of Revenue
|
|
$
|
|
|
% of Revenue
|
|
$
|
|
|
% of Revenue
|
|
2001
|
|
2000
|
Animal hospital direct costs as reported |
|
$ |
208,692 |
|
|
76.7% |
|
$ |
188,390 |
|
|
78.3% |
|
$ |
174,069 |
|
|
79.9% |
|
10.8% |
|
8.2% |
Add: Direct costs of animal hospitals managed |
|
|
71,591 |
|
|
|
|
|
60,380 |
|
|
|
|
|
42,829 |
|
|
|
|
|
|
|
Less: Management fees charged by us to veterinary medical groups |
|
|
(37,770 |
) |
|
|
|
|
(31,133 |
) |
|
|
|
|
(30,202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined direct costs of animal hospitals owned and managed |
|
$ |
242,513 |
|
|
79.3% |
|
$ |
217,637 |
|
|
80.6% |
|
$ |
186,696 |
|
|
81.0% |
|
11.4% |
|
16.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal hospital direct costs increased $20.3 million, or 10.8%, for the year
ended December 31, 2001 compared to the year ended December 31, 2000, which increased $14.3 million, or 8.2%, compared to the year ended December 31, 1999. Animal hospital direct costs as a percentage of animal hospital revenue decreased to 76.7%
for the year ended December 31, 2001 from 78.3% for the year ended December 31, 2000, which decreased from 79.9% for the year ended December 31, 1999. The decreases in animal hospital direct costs as a percentage of animal hospital revenue during
these periods primarily were attributable to the increase in revenue combined with the operating leverage associated with the animal hospital business, as most of the costs associated with this business do not increase proportionately with increases
in the volume of services rendered. The decrease in animal hospital direct costs as a percentage of animal hospital revenue for the year ended December 31, 2000 as compared to 1999 was also attributable to a reduction in some of our obligations to
the animal hospitals we manage which reduced our costs, together with a corresponding reduction in our management fees.
Selling, General and
Administrative Expense
The following table summarizes our selling, general and administrative expense
(SG&A) and expense as a percentage of applicable revenue for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
2001
|
|
2000
|
|
1999
|
|
% Change
|
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
$
|
|
% of Revenue
|
|
2001
|
|
2000
|
Laboratory |
|
$ |
11,434 |
|
8.5% |
|
$ |
8,122 |
|
6.8% |
|
$ |
6,775 |
|
6.6% |
|
40.8% |
|
19.9% |
Animal hospital |
|
|
12,323 |
|
4.5% |
|
|
9,437 |
|
3.9% |
|
|
6,682 |
|
3.1% |
|
30.6% |
|
41.2% |
Corporate |
|
|
14,876 |
|
3.7% |
|
|
9,887 |
|
2.8% |
|
|
10,165 |
|
3.2% |
|
50.5% |
|
(2.7)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative |
|
$ |
38,633 |
|
9.6% |
|
$ |
27,446 |
|
7.7% |
|
$ |
23,622 |
|
7.4% |
|
40.8% |
|
16.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory SG&A
Laboratory SG&A for the year ended December 31, 2001 increased $3.3 million, or 40.8%, compared to the year ended December 31, 2000, which increased $1.3 million, or 19.9%,
compared to the year ended December 31, 1999. The increase in laboratory SG&A for the year ended
39
December 31, 2001 compared to the comparable prior period primarily was due to $2.9 million of non-cash compensation, as well as an increase in commission payments to sales representatives,
which was caused by an increase in sales. Excluding non-cash compensation, laboratory SG&A as a percentage of laboratory revenue was 6.4% and 6.6% in 2001 and 2000. The increase in laboratory SG&A for the year ended December 31, 2000
compared to the comparable prior period primarily was due to an increase in commission payments to sales representatives, which was caused by an increase in sales, and salaries attributable to new sales representatives.
Animal Hospital SG&A
Animal
hospital SG&A for the year ended December 31, 2001 increased $2.9 million, or 30.6% compared to the year ended December 31, 2000, which increased $2.8 million, or 41.2%, compared to the year ended December 31, 1999. The increase in animal
hospital SG&A for the year ended December 31, 2001 compared to the comparable prior period primarily was due to $2.6 million of non-cash compensation. Excluding non-cash compensation, animal hospital SG&A as a percentage of revenue was 3.6%
and 3.8% in 2001 and 2000. The increase in animal hospital SG&A for the year ended December 31, 2000 primarily was attributable to salaries associated with new personnel hired in connection with the expansion of our management and administrative
infrastructure to support the additional number of animal hospitals we owned and managed.
Corporate SG&A
Corporate SG&A for the year ended December 31, 2001 increased $5.0 million, or 50.5%, compared to the year ended December 31, 2000. The increase
was primarily due to a $1.7 million increase in management fees paid, a $717,000 increase in corporate bonuses, an $845,000 increase in legal expense, a $716,000 increase in non-cash compensation and approximately $400,000 of salary increases at
corporate.
Corporate SG&A for the year ended December 31, 2000 decreased $278,000, or 2.7% compared to the year ended
December 31, 1999. This decrease was due to efficiencies realized in our information systems, accounting and finance departments that resulted from our systems upgrade.
Excluding non-cash compensation and management fees, corporate SG&A as a percentage of revenue was 2.9% and 2.6% in 2001 and 2000.
Adjusted EBITDA
The following
table summarizes our adjusted EBITDA and our adjusted EBITDA as a percentage of applicable revenue for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
% Change
|
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
$
|
|
|
% of Revenue
|
|
|
2001
|
|
|
2000
|
|
Laboratory adjusted EBITDA (1) |
|
$ |
45,561 |
|
|
33.8 |
% |
|
$ |
38,827 |
|
|
32.5 |
% |
|
$ |
32,273 |
|
|
31.2 |
% |
|
17.3 |
% |
|
20.3 |
% |
Animal hospital adjusted EBITDA (2) |
|
|
53,658 |
|
|
19.7 |
% |
|
|
42,985 |
|
|
17.9 |
% |
|
|
37,237 |
|
|
17.1 |
% |
|
24.8 |
% |
|
15.4 |
% |
Other revenue |
|
|
2,000 |
|
|
|
|
|
|
925 |
|
|
|
|
|
|
5,100 |
|
|
|
|
|
|
|
|
|
|
Corporate selling, general and administrative (3) |
|
|
(11,832 |
) |
|
|
|
|
|
(9,211 |
) |
|
|
|
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
Gain on sale of assets |
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjusted EBITDA |
|
$ |
89,505 |
|
|
22.3 |
% |
|
$ |
73,526 |
|
|
20.7 |
% |
|
$ |
64,445 |
|
|
20.1 |
% |
|
21.7 |
% |
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Laboratory EBITDA was adjusted to exclude non-cash compensation of $4.3 million and $311,000 for the years ended December 31, 2001 and 2000, respectively.
|
40
(2) |
Animal hospital EBITDA was adjusted to exclude non-cash compensation of $2.6 million and $188,000 for the years ended December 31, 2001 and 2000, respectively.
|
(3) |
Corporate selling, general and administrative expense was adjusted to exclude non-cash compensation of $771,000 and management fees of $2.3 million for the year ended
December 31, 2001, and non-cash compensation of $56,000 and management fees of $620,000 for the year ended December 31, 2000. |
Depreciation and Amortization
Depreciation and amortization expense increased $6.3 million,
or 33.3%, for the year ended December 31, 2001 compared to the year ended December 31, 2000, which increased $2.4 million, or 14.7%, compared to the year ended December 31, 1999. The increases in depreciation and amortization expense primarily were
due to the amortization over a three-year period of $15.6 million paid to our executives pursuant to non-competition agreements entered into in September 2000, the purchase of property and equipment and the acquisition of animal hospitals.
As a result of the implementation of SFAS No. 142, we will no longer amortize goodwill in 2002. For a detailed discussion
of SFAS No. 142, see New Accounting Pronouncements. This change, in conjunction with the termination of our non-competition agreements with members of senior management, will have the impact of lowering amortization expense in 2002 by
approximately $14.4 million.
Recapitalization Costs
We incurred $34.3 million of recapitalization costs for the year ended December 31, 2000 pertaining to our recapitalization in September 2000. These costs consisted of $24.1 million
associated with the buy-out of stock options held by employees, $1.2 million paid to our employees for services rendered in connection with our recapitalization, $7.6 million of professional fees and $1.4 million of other expense. We do not expect
any similar charges in 2002 or subsequent years.
Agreement Termination Costs
During the year ended December 31, 2001, we terminated non-competition agreements with four members of senior management and recorded a non-cash charge of $9.6 million. In
addition, we paid $8.0 million to terminate our management services agreement with Leonard Green & Partners. We do not expect any similar charges in 2002 or subsequent years.
Other Non-Cash Operating Items
Other non-cash operating items consisted
of $9.1 million write-down and loss on sale of assets for the year ended December 31, 2001. The write-down of assets primarily was attributable to the relocation of five of our animal hospitals into existing animal hospitals we operated, the
determination that goodwill was impaired at one of our existing animal hospitals and the write-down of real property available for sale to fair market value. Other non-cash operating items consisted of $1.9 million reversal of restructuring charges
pertaining to our 1996 and 1997 restructuring plans for the year ended December 31, 1999.
Net Interest Expense
Net interest expense increased $23.0 million, or 115.8%, to $42.9 million for the year ended December 31, 2001 from $19.9 million for the
year ended December 31, 2000, which represents an increase of $10.5 million, or 110.5%, from $9.4 million for the year ended December 31, 1999. The
41
increase in net interest expense in 2001 and 2000 primarily was due to debt we incurred in connection with the recapitalization in September 2000.
Other Expense, Net
Other
expense was $168,000 for the year ended December 31, 2001, consisting of a non-cash loss on a hedging instrument pertaining to the changes in the time value of our collar agreement. Other expense was $1.8 million for the year ended December 31,
2000, consisting of a $3.2 million gain on sale of our investment in Veterinary Pet Insurance, Inc. and a $5.0 million loss resulting from the write-down of our investment in Zoasis.com, Inc.
Provision for Income Taxes
Provision for income taxes was
$445,000, $2.2 million and $14.4 million for the years ended December 31, 2001, 2000 and 1999. Our effective income tax rate for each year varies from the statutory rate primarily due to the non-deductibility for income tax purposes of the
amortization of a portion of goodwill. In 2001, our effective income tax rate also was impacted by the write-down of zero tax basis assets and non-cash compensation.
Minority Interest
Minority interest in income of the consolidated subsidiaries was
$1.4 million, $1.1 million and $850,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Minority interest in income represents our partners proportionate share of net income generated by our subsidiaries that we do not
wholly own.
Increase in Carrying Amount of Redeemable Preferred Stock
The holders of our series A redeemable preferred stock and our series B redeemable preferred stock were entitled to receive dividends at a rate of 14% and 12%, respectively. The
dividends not paid in cash compounded quarterly. The dividends earned during 2001 and 2000 were added to the liquidation preference of the preferred stock. In November 2001, we redeemed all of the outstanding series A and series B redeemable
preferred stock.
Liquidity and Capital Resources
Our cash and cash equivalents increased to $32.4 million at September 30, 2002, from $7.1 million at December 31, 2001. The increase is primarily from $60.8 million provided by
operating activities offset by $29.7 million used in investing activities and $5.9 million used in financing activities. Cash and cash equivalents decreased to $7.1 million at December 31, 2001 from $10.5 million at December 31, 2000. The decrease
primarily resulted from $57.1 million provided by operating activities offset by $36.2 million used in investing activities and $24.3 million used in financing activities. Cash and cash equivalents decreased to $10.5 million at December 31, 2000
from $10.6 million at December 31, 1999. The decrease primarily resulted from $60.1 million provided by operating activities offset by $47.7 million used in investing activities and $12.5 million used in financing activities.
Net cash provided by operations for the nine months ended September 30, 2002 and 2001 was $60.8 million and $49.3 million, and for the
years ended December 31, 2001, 2000 and 1999 was $57.1 million, $60.1 million and $38.5 million. The increases during the nine months ended September 30, 2002 and the year ended December 31, 2000 were primarily attributable to increases in revenue
and operating margins. The decrease during the year ended December 31, 2001 was primarily attributable to approximately $4.8 million used in working capital activities.
42
Net cash used in investing activities for the nine months ended September 30, 2002 and 2001
was $29.7 million and $30.3 million, and for the years ended December 31, 2001, 2000 and 1999 was $36.2 million, $47.7 million and $13.7 million. In the nine months ended September 30, 2002 and 2001, and in the years ended December 31, 2001, 2000
and 1999, we used cash of $13.4 million, $9.9 million, $13.5 million, $22.6 million and $21.8 million for property and equipment additions. In these same periods, we used $15.1 million to acquire 18 animal hospitals, $18.1 million to acquire
18 animal hospitals, $20.9 million to acquire 21 animal hospitals, $16.5 million to acquire 24 animal hospitals and one laboratory and $15.2 million to acquire 39 animal hospitals and two laboratories. Also in these same periods, we used $2.7
million, $2.5 million, $3.4 million, $1.7 million and $0.9 million for contractual obligations related to prior year acquisitions. In the nine months ended September 30, 2002, we did not purchase any real estate in connection with our
acquisitions and in the nine months ended September 30, 2001, and the years ended December 31, 2001, 2000 and 1999, we used $675,000, $675,000, $1.8 million and $4.2 million to purchase real estate in connection with our acquisitions. During the
year ended December 31, 2000, we made payments in the aggregate amount of $15.6 million to four of our executives in connection with the recapitalization transaction.
Net cash of $5.9 million used in financing activities during the nine months ended September 30, 2002 is primarily the result of regularly-scheduled debt payments of $2.9
million and payments related to accrued financing costs of $3.4 million. In addition, we borrowed approximately $143.1 million in senior term C notes, and used the proceeds to repay all of our outstanding senior term A and B notes of $143.1 million.
Net cash of $5.9 million used in financing activities during the nine months ended September 30, 2001 is primarily the
result of regularly-scheduled debt payments of $3.7 million and payments related to accrued financing costs of $2.1 million.
Net cash of $24.3 million used in financing activities for the year ended December 31, 2001 primarily was related to our initial public offering on November 27, 2001. As a result of the initial public offering and the
underwriters exercise of their over-allotment option, we issued 17,370,000 shares of common stock and received net proceeds of approximately $161.5 million. Concurrent with our initial public offering, one of our wholly owned subsidiaries
issued $170.0 million of 9.875% senior subordinated notes. We applied the net proceeds from our initial public offering and our wholly owned subsidiarys concurrent note offering, plus cash on hand, as follows:
|
|
redeemed all of our outstanding series A and series B redeemable preferred stock for $173.8 million; |
|
|
repaid $100.0 million of our senior term A and B notes; |
|
|
repaid $59.1 million in principal of our 15.5% senior notes due 2010, at a redemption price of 110%, plus accrued and unpaid interest; |
|
|
repaid $5.0 million in principal of our wholly owned subsidiarys 13.5% senior subordinated notes due 2010, at a redemption price of 110%, plus accrued and unpaid
interest; and |
|
|
made deferred financing payments in the amount of approximately $4.4 million. |
Net cash of $12.5 million used in financing activities for the year ended December 31, 2000 primarily was related to our recapitalization transaction on September 30, 2000. We
received $149.2 million from the issuance of preferred stock, $14.4 million from the issuance of common stock, $1.1 million from the issuance of stock warrants and $356.7 million from the issuance of long-term debt. We primarily applied the net
proceeds from our recapitalization transaction as follows:
|
|
repaid long-term obligations in the amount of $172.9 million; |
|
|
repurchased common stock in the amount of $314.5 million; |
43
|
|
made deferred financing and recapitalization payments in the amount of approximately $44.1 million; and |
|
|
made non-competition payments in the aggregate amount of $15.6 million to four of our executive officers including: Robert L. Antin, our Chief Executive Officer,
President and founder; Arthur J. Antin, our Chief Operating Officer, Senior Vice President and founder; Neil Tauber, our Senior Vice President of Development and founder; and Tomas W. Fuller, our Chief Financial Officer. These payments are included
in investing activities. |
For the year ended December 31, 1999, cash used in financing activities was
$23.1 million, primarily for the repayment of long term debt.
Future Cash Requirements
We expect to fund our liquidity needs primarily from operating cash flows, cash on hand and, if needed, borrowings under our $50.0 million revolving
credit facility, $7.5 million of which is outstanding as of December 31, 2002. We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures and satisfy our scheduled principal and interest payments
under debt and capital lease obligations for at least the next 12 months. However, a significant portion of our cash requirements will be determined by the pace and size of our acquisitions.
In the fourth quarter of 2002, we used $4.9 million of cash for capital expenditures for land, buildings and equipment. Also in the fourth quarter of 2002, we used $7.4 million of
cash for the acquisition of seven animal hospitals and $2.4 million of cash for the acquisition of one laboratory. Estimated future uses of cash for 2003 include capital expenditures for land, buildings and equipment of approximately $18.0 million.
In addition, we intend to use available liquidity to continue our growth through the selective acquisition of animal hospitals, primarily for cash. We continue to examine acquisition opportunities in the laboratory field, which may impose additional
cash requirements. Our acquisition program contemplates the acquisition of 15 to 25 animal hospitals per year and a planned cash commitment of up to $30.0 million. However, we may purchase either fewer or greater number of facilities depending upon
opportunities that present themselves and our cash requirements may change accordingly. In addition, although we intend primarily to use cash in our acquisitions, we may use debt or stock to the extent we deem it appropriate.
In October 2002, we used $25.2 million of cash on hand and incurred additional borrowings of $25.0 million under our senior credit
facility to voluntarily repay the entire outstanding principal amount on our 13.5% senior subordinated notes and $30.0 million principal amount of our 15.5% senior notes, plus accrued and unpaid interest and prepayment premiums. See
Description of Certain Indebtedness for additional information.
Description of Indebtedness
Senior Credit Facility
In September
2000, we entered into a senior credit facility for $300.0 million of senior secured credit facilities, which included a $50.0 million revolving credit facility as well as senior term A and B notes. On August 29, 2002, we amended our senior credit
facility to refinance our existing senior term A and senior term B notes with an equal principal amount of senior term C notes, which bear a lower interest rate than the weighted average interest rate for the senior term A and B notes. In
conjunction with the transaction we wrote off $3.4 million in deferred financing costs as extraordinary loss on early extinguishment of debt, which provided a related tax benefit of $1.4 million.
Borrowings under our senior credit facility bear interest, at our option, on either the base rate, which is the higher of the administrative agents prime rate or the
Federal funds rate plus 0.5%, or the
44
adjusted eurodollar rate, which is the rate per annum obtained by dividing (1) the rate of interest offered to the administrative agent on the London interbank market by (2) a percentage equal to
100% minus the stated maximum rate of all reserve requirements applicable to any member bank of the Federal Reserve System in respect of eurocurrency liabilities. The base rate margins for the revolving credit facility range from 1.00%
to 2.25% per annum and the margin for the senior term C notes is 2.00%. The eurodollar rate margins for the revolving credit facility range from 2.00% to 3.25% per annum and the margin for the senior term C notes is 3.00%.
As of September 30, 2002, we had $142.7 million principal amount outstanding under our senior term C notes and we had not utilized our revolving
credit facility. In December 2002, we borrowed $7.5 million under our revolving credit facility. The senior term C notes mature in September 2008 and the revolving credit facility matures in September 2006.
Our senior credit facility contains certain financial covenants pertaining to interest coverage, fixed charge coverage and leverage ratios. In
addition, our senior credit facility has restrictions pertaining to capital expenditures, acquisitions and the payment of dividends on all classes of stock. We currently believe the most restrictive covenant is the fixed-charge coverage ratio, which
is calculated on a last twelve-month basis by dividing pro forma adjusted EBITDA by fixed charges. Fixed charges are defined as cash interest expense, scheduled principal payments on debt obligations, capital expenditures, management fees paid and
provision for income taxes. At September 30, 2002, we had a fixed charge coverage ratio of 1.50 to 1.00. Our senior credit facility requires a fixed-charge coverage ratio of no less than 1.10 to 1.00.
13.5% and 9.875% Senior Subordinated Notes
In September 2000, we issued $20.0 million principal amount of 13.5% senior subordinated notes due on September 20, 2010. As of September 30, 2002, the outstanding principal balance of our 13.5% senior subordinated notes was
$15.0 million. On October 24, 2002 we repaid the entire outstanding principal amount of these notes. See October 2002 Debt Prepayment below.
In November 2001, Vicar, our wholly owned subsidiary, issued $170.0 million principal amount of 9.875% senior subordinated notes due December 1, 2009, which were exchanged on June 13, 2002 for substantially
similar securities that are registered under the Securities Act. Interest on these senior subordinated notes is 9.875% per annum, payable semi-annually in arrears in cash. As of September 30, 2002, the outstanding principal balance of our 9.875%
senior subordinated notes was $170.0 million. We and each existing and future domestic wholly owned restricted subsidiary of Vicar have jointly and severally, fully and unconditionally guaranteed these notes. These guarantees are unsecured and
subordinated in right of payment to all existing and future indebtedness outstanding under the credit and guaranty agreement and any other indebtedness permitted to be incurred by Vicar under the terms of the indenture agreement for these notes.
15.5% Senior Notes
In September 2000, we issued $100.0 million principal amount of 15.5% senior notes due September 20, 2010. Interest on our senior notes is 15.5% per annum, payable semi-annually in arrears in cash or by issuance of additional senior
notes. We have issued $25.9 million in additional 15.5% senior notes to pay interest since the issue date. As of September 30, 2002, the outstanding principal balance of our 15.5% senior notes was $66.7 million. On October 24, 2002 we repaid $30.0
million principal amount on our 15.5% senior notes, plus accrued and unpaid interest and prepayment premiums. See October 2002 Debt Prepayment below. Upon the consummation of this offering, we intend to repay the entire outstanding
principal amount of these notes at a redemption price of 110% of the principal amount, for an aggregate of $40.4 million, plus accrued and unpaid interest.
45
Other Debt
We have secured seller notes, unsecured debt and capital leases which total $1.7 million at September 30, 2002.
October 2002 Debt Prepayment
On October 24, 2002 we repaid the entire outstanding principal amount
of our 13.5% senior subordinated notes and $30.0 million principal amount of our 15.5% senior notes, plus accrued and unpaid interest and prepayment premiums. We repaid these notes with funds from an additional $25.0 million of senior term C notes
issued under our senior credit facility and $25.2 million of cash on hand. For the next twelve months, this net reduction in debt and the lower effective interest rate will result in an estimated net annual pre-tax savings of approximately $5.0
million in interest expense calculated assuming a 5.0% rate on our variable senior term C notes and an opportunity cost of 1.5% for the cash used.
In connection with this repayment we expect to incur approximately $9.6 million of costs, including $4.8 million in prepayment premium and transaction costs, and $4.8 million in non-cash costs pertaining to the write-off of
unamortized discount and deferred financing costs associated with the debt retired. These charges will be recognized during the fourth quarter of 2002 as an extraordinary loss in the amount of approximately $5.5 million, net of income tax benefit.
Future Cash Obligations for Long-Term Debt, Interest and Operating Leases
The following table sets forth our scheduled principal, interest and other contractual annual cash obligations due by us for each of the years ending December 31, adjusted to reflect
the impact of the no-fee swap agreement with Wells Fargo, which became effective November 29, 2002, the additional senior term C notes borrowed and the voluntary repayment of all of our 13.5% senior subordinated notes and a portion of our 15.5%
senior notes, which occurred in October 2002 (dollars in thousands):
|
|
Total (1)
|
|
2002
|
|
2003
|
|
2004
|
|
2005(1)
|
|
2006(1)
|
|
Thereafter (1)
|
Long-term debt |
|
$ |
378,538 |
|
$ |
3,541 |
|
$ |
1,894 |
|
$ |
1,860 |
|
$ |
4,044 |
|
$ |
21,487 |
|
$ |
345,712 |
Fixed interest |
|
|
174,720 |
|
|
20,694 |
|
|
19,333 |
|
|
19,134 |
|
|
21,328 |
|
|
22,448 |
|
|
71,783 |
Variable interest |
|
|
55,020 |
|
|
7,714 |
|
|
6,966 |
|
|
7,698 |
|
|
10,614 |
|
|
11,313 |
|
|
10,715 |
Collar agreement |
|
|
2,340 |
|
|
2,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK interest |
|
|
16,610 |
|
|
|
|
|
|
|
|
|
|
|
16,610 |
|
|
|
|
|
|
Capital lease obligations |
|
|
79 |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
192,612 |
|
|
12,247 |
|
|
12,530 |
|
|
12,575 |
|
|
12,285 |
|
|
12,165 |
|
|
130,810 |
Other long-term obligations |
|
|
2,424 |
|
|
2,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
822,343 |
|
$ |
49,039 |
|
$ |
40,723 |
|
$ |
41,267 |
|
$ |
64,881 |
|
$ |
67,413 |
|
$ |
559,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We intend to use the proceeds from this offering to repay the entire outstanding principal amount of our 15.5% senior notes. If we repay the entire outstanding principal
amount of these notes, our future cash obligations will be reduced by $23.0 million in 2005, $5.3 million in 2006 and $55.9 million thereafter, for an aggregate reduction of $84.2 million. |
We have both fixed-rate and variable-rate debt. Our variable-rate debt is based on a variable-rate component plus a fixed margin. Our interest rate
on the variable rate component of our debt was approximately 1.89% for 2002. For purposes of the foregoing table, we have estimated the interest rate on the variable rate component of our debt to be 2.50%, 3.00%, 3.50% and 4.00% for years 2003
through 2006, respectively. Our consolidated financial statements included in this prospectus discuss these variable-rate notes in more detail.
Through March 2005, interest on our 15.5% senior notes is payable semi-annually and, at our option, in cash or by issuing additional 15.5% senior notes. After March 2005, interest is payable semi-annually, in cash. Any
additional 15.5% senior notes are considered paid-in-kind interest, commonly
46
referred to as PIK interest, and are reflected in the above table. These notes have the same terms as the original notes except they mature in September 2005. We have issued
additional 15.5% senior notes for all of our historical interest payments on the 15.5% senior notes and intend to continue doing so pending consummation of this offering.
Interest Rate Hedging Agreements
On November 13, 2000, we entered into a no-fee
interest rate collar agreement with Wells Fargo Bank effective November 15, 2000 and that expired on November 15, 2002. Our collar agreement was considered a cash flow hedge based on the London interbank offer rate, or LIBOR. Our collar agreement
paid out monthly, reset monthly and had a cap and floor notional amount of $62.5 million, with a cap rate of 7.5% and floor rate of 5.9%.
The actual cash paid by us as a result of LIBOR rates falling below the floor of our collar agreement is recorded as a component of earnings. For the nine months ended September 30, 2002, we made payments of $1.9 million that are
included in interest expense.
At September 30, 2002, the fair market value of our collar agreement was a net liability to
us of $326,000 and is included in other accrued liabilities on our balance sheet.
On November 7, 2002 we entered into a
no-fee swap agreement with Wells Fargo Bank effective November 29, 2002 and expiring November 29, 2004. The agreement swaps monthly variable LIBOR rates for a fixed rate of 2.22% on a notional amount of $40.0 million. The agreement qualifies for
hedge accounting.
We are considering entering into additional interest rate strategies to take advantage of the current
rate environment. We have not yet determined what those strategies will be or their possible impact.
New Accounting Pronouncements
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board, (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually, or whenever there is an indication of impairment. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 142 requires companies to allocate their goodwill to identifiable reporting units, which are then tested for impairment using a two-step
process detailed in the statement. The first step requires comparing the fair value of each reporting unit with its carrying amount, including goodwill. If that fair value exceeds the carrying amount, the second step of the process is not necessary
and there are no impairment issues. If that fair value does not exceed that carrying amount, companies must perform the second step that requires a hypothetical allocation of the fair value of the reporting unit to the reporting units assets
and liabilities as if the unit were just purchased by the company at the fair value price. In this hypothetical purchase, the excess of the fair value of the reporting unit over its re-evaluated, marked-to-market net assets would be the new basis
for the reporting units goodwill and a write down to this new value would be recognized as an expense.
We adopted
SFAS No. 142 on January 1, 2002. In doing so, we determined that we have two reporting units, Laboratory and Animal Hospital. On April 15, 2002, an independent valuation group
47
concluded that the fair value of our reporting units exceeded their carrying value and accordingly, as of that date, we concluded there were no goodwill impairment issues. We plan to perform a
valuation of our reporting units annually, or upon significant changes in our business environment.
As of September 30,
2002 our goodwill, net of accumulated amortization, was $332.5 million. As a result of the adoption of SFAS No. 142, we recorded no amortization of goodwill for the nine months ended September 30, 2002. We recorded $6.9 million in goodwill
amortization for the nine months ended September 30, 2001. We recorded $9.2 million, $8.3 million and $7.5 million in goodwill amortization for the fiscal years ended December 31, 2001, 2000 and 1999, respectively.
Goodwill Impairment Test
In
August 2002, the FASBs Emerging Issues Task Force (EITF) issued EITF Issue No. 02-13, Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB No. 142, Goodwill and Other Intangible Assets. EITF Issue No. 02-13 was
issued to provide guidance on how to account for deferred tax balances in determining a reporting units fair value, a reporting units carrying amount and the implied fair value of goodwill. The consensus in this issue will be applied
prospectively in performing either the first or second step of the impairment test required by SFAS No. 142 for tests performed after September 12, 2002. We do not expect the adoption of EITF Issue No. 02-13 to have a material impact on our
consolidated financial statements.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset retirement costs. We will adopt SFAS No. 143 in the first quarter of fiscal year 2003. We do not expect the adoption of SFAS No. 143 to have a material impact on our
consolidated financial statements.
Impairment of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which establishes one accounting model to be used for long-lived
assets to be disposed of by sale and broadens the presentation for discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of by
Sale, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (APB No. 30), Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We adopted SFAS No. 144 on January 1, 2002 without material impact on our financial statements.
We will continually evaluate whether events, circumstances or net losses at the entity level have occurred that indicate the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance of these assets may not be recoverable. When factors indicate that these assets should be evaluated for possible impairment, we will estimate the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the long-lived assets in question. If that estimate is less than the carrying value of the assets under review, we will recognize an impairment loss equal to that difference.
Gains and Losses from Extinguishment of Debt and Capital Leases
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, to be applied in fiscal years beginning
after May 15, 2002 with early adoption encouraged.
48
Under SFAS No. 145, gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria of APB No. 30. Under APB No. 30, events are considered extraordinary only if they possess a high degree of abnormality and are not likely to recur in the foreseeable future. Any gains or losses on
extinguishment of debt that do not meet the criteria of APB No. 30 shall be classified as a component of income from recurring operations. In addition, any gains or losses on extinguishment of debt that were classified as an extraordinary item in
prior periods presented that do not meet the criteria of APB No. 30 shall be reclassified as a component of income from recurring operations.
We will adopt SFAS No. 145 at the beginning of fiscal year 2003. As detailed in Footnote (5) to our financial statements, Extraordinary Loss on Early Extinguishment of Debt, we recognized extraordinary losses
related to the early extinguishment of debt of approximately $3.4 million, before taxes, in August 2002. We also expect to incur an additional extraordinary loss in the fourth quarter of 2002 related to the prepayment of debt in the amount of $9.3
million, before taxes. In addition, we recognized extraordinary losses related to the early extinguishment of debt, before taxes in the amount of approximately $17.2 million and $4.5 million during years 2001 and 2000, respectively. We do not
believe these losses on extinguishment of debt meet the criteria of APB No. 30 as we have historically participated in and may continue to participate in periodic debt refinancing. As a result of adopting SFAS No. 145, we will reclassify the losses
on extinguishment of debt from extraordinary losses to a component of income from recurring operations for filings subsequent to January 1, 2003. This reclassification will not impact net income.
SFAS No. 145 also amends SFAS No. 13, Accounting for Leases. Under SFAS No. 145, if a capital lease is modified such that it becomes an operating lease, a gain or loss
must be recognized similar to the accounting used for sale-leaseback transactions as provided in SFAS No. 28 and No. 98. At September 30, 2002, we had capital lease obligations of $43,000. Although the Company may enter into more capital leases,
management does not expect SFAS No. 145 to have a material impact on its financial statements.
Costs Associated with Exit or Disposal of
Activities
In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when a company is committed to future payment of those liabilities under a binding, legal obligation. SFAS No. 146 nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which required that exit and disposal costs be
recognized as liabilities when a company formalized its plan for exiting or disposing of an activity even if no legal obligation had been established.
SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, however early adoption is encouraged. Currently, we have no plans to exit or dispose of any of our business
activities that would require the use of SFAS No. 146 nor do we anticipate that SFAS No. 146 will change any of our business practices.
49
Quarterly Results
The following tables set forth selected unaudited quarterly results for the eleven quarters commencing January 1, 2000, and ending September 30, 2002. The quarterly financial data as of each period presented
below have been derived from our unaudited consolidated financial statements for those periods. Results for these interim periods are not necessarily indicative of our results for a full years operations. The quarterly financial data should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations and our consolidated financial statements and related notes included elsewhere in this
prospectus.
In dollars (in thousands, except per share amounts):
|
|
2002 Quarter Ended
|
|
|
2001 Quarter Ended
|
|
|
2000 Quarter Ended
|
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory |
|
$ |
38,650 |
|
|
$ |
40,604 |
|
|
$ |
37,657 |
|
|
$ |
32,856 |
|
|
$ |
33,471 |
|
|
$ |
35,707 |
|
|
$ |
32,677 |
|
|
$ |
28,469 |
|
|
$ |
30,105 |
|
|
$ |
31,921 |
|
|
$ |
28,805 |
|
Animal hospital |
|
|
78,118 |
|
|
|
78,621 |
|
|
|
68,644 |
|
|
|
64,448 |
|
|
|
70,531 |
|
|
|
72,780 |
|
|
|
64,354 |
|
|
|
57,908 |
|
|
|
63,449 |
|
|
|
63,472 |
|
|
|
55,795 |
|
Other |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
425 |
|
Intercompany |
|
|
(2,296 |
) |
|
|
(2,500 |
) |
|
|
(2,106 |
) |
|
|
(1,807 |
) |
|
|
(1,866 |
) |
|
|
(1,938 |
) |
|
|
(1,851 |
) |
|
|
(1,471 |
) |
|
|
(1,558 |
) |
|
|
(1,459 |
) |
|
|
(1,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
114,972 |
|
|
|
117,225 |
|
|
|
104,695 |
|
|
|
95,997 |
|
|
|
102,636 |
|
|
|
107,049 |
|
|
|
95,680 |
|
|
|
85,406 |
|
|
|
91,996 |
|
|
|
93,934 |
|
|
|
83,351 |
|
Adjusted EBITDA |
|
|
29,163 |
|
|
|
31,682 |
|
|
|
23,485 |
|
|
|
18,613 |
|
|
|
24,599 |
|
|
|
27,112 |
|
|
|
19,181 |
|
|
|
15,986 |
|
|
|
20,334 |
|
|
|
21,980 |
|
|
|
15,226 |
|
Operating income (loss) |
|
|
26,135 |
|
|
|
28,543 |
|
|
|
20,322 |
|
|
|
(5,974 |
) |
|
|
16,024 |
|
|
|
8,393 |
|
|
|
9,263 |
|
|
|
9,681 |
|
|
|
(19,075 |
) |
|
|
17,524 |
|
|
|
11,075 |
|
Net income (loss) |
|
|
7,035 |
|
|
|
10,495 |
|
|
|
5,635 |
|
|
|
(20,638 |
) |
|
|
2,024 |
|
|
|
(5,820 |
) |
|
|
(2,989 |
) |
|
|
(6,526 |
) |
|
|
(16,713 |
) |
|
|
8,436 |
|
|
|
6,392 |
|
Diluted earnings (loss) per share |
|
$ |
0.19 |
|
|
$ |
0.28 |
|
|
$ |
0.15 |
|
|
$ |
(0.97 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.65 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.02 |
|
|
$ |
0.02 |
|
In percentages of revenue:
|
|
2002 Quarter Ended
|
|
2001 Quarter Ended
|
|
2000 Quarter Ended
|
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
|
Dec. 31
|
|
Sep. 30
|
|
Jun. 30
|
|
Mar. 31
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laboratory |
|
33.6% |
|
34.6% |
|
36.0% |
|
34.2% |
|
32.6% |
|
33.3% |
|
34.1% |
|
33.3% |
|
32.7% |
|
34.0% |
|
34.6% |
Animal hospital |
|
68.0% |
|
67.1% |
|
65.5% |
|
67.1% |
|
68.7% |
|
68.0% |
|
|