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| VETS > SEC Filings for VETS > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
Business Strategy
Our objective is to deliver a broad scope of high-quality services to our
customers through a "hub and spoke" network of veterinary hospitals within
select local markets. Specifically, we offer, through specialty and emergency
hospitals ("hubs"), a wide range of medical, diagnostic and specialty-medical
services and use the traditional smaller general practices as "spokes" to feed
to the "hub" units patients requiring more specialized services than a general
practice is equipped to provide. We pursue the following strategies to achieve
our objectives:
[ ] recruit and retain top veterinary professionals;
[ ] provide high quality veterinary care to our customers;
[ ] pursue acquisitions of additional veterinary hospitals, with a focus on continuing to develop "hub and spoke" networks that will improve customer service;
[ ] increase veterinary hospital visits through advertising, market positioning, consumer education, wellness programs and branding;
[ ] increase veterinary hospital margins through same-store revenue growth and cost savings realized through consolidated purchasing arrangements for high volume items such as food and medical supplies and generally lower costs through economies of scale;
[ ] increase veterinary hospital productivity through professional development and training, integration of performance data collection systems, application of productivity standards to previously under-managed operations and removal of administrative burdens from veterinary professionals; and
[ ] capture valuation arbitrage differentials between individual practice value and larger consolidated enterprise value.
Seasonality
The practice of veterinary medicine is subject to seasonal fluctuation. In
particular, demand for veterinary services is slightly higher during the warmer
months because pets spend a greater amount of time outdoors where they are more
likely to be injured and are more susceptible to disease and parasites. In
addition, use of veterinary services may be affected by levels of flea
infestation, heartworm and ticks, and the number of daylight hours. The
seasonality we experience at our clinics varies throughout the year depending on
the geographic region of those locations. Our clinics in the desert region of
California experience their highest sales volume in the winter months. However,
revenue may be impacted significantly from quarter to quarter by natural
disasters, such as earthquakes, landslides and fires, and other factors
unrelated to such adverse events, such as changing economic conditions.
Overview of Our Financial Results
(Results discussed relate to continuing operations unless stated otherwise)
Fiscal 2008 was a year of great changes and challenges for the Company.
Following the completion of the Merger, we developed and expanded our management
team and began to focus on operational initiatives within our animal hospitals.
In response to the challenges resulting from the current recessionary-like
economy, we centralized purchasing and made efforts to align our staff costs
appropriately.
We have also continued to monitor the operational challenges at some of our
hospitals and have implemented new plans to improve our overall financial
performance at those hospitals. In the fourth quarter of 2008, management made
the decision and completed the closure of our South Bay facility, which had
incurred a permanent reduction in revenues from increased competition and the
loss of key veterinarians.
Additionally, to streamline operations, we merged six of our animal hospitals
into three during the year and we believe these efforts will generate positive
future results through reduction in duplicate costs.
We acquired Valley Animal Medical Center ("Valley Animal") on July 1, 2008,
which now gives the Company a significant position and an enhancement in its
"hub and spoke" strategy in the Coachella Valley region in California.
Net revenue and net loss per share are key measurements of our financial
results. For the year 2008, net revenue was $68.3 million, an increase of 13.3%
over net revenues in 2007. The net loss for 2008 of $19.4 million was a increase
of $7.1 million, or 57.1%, over 2007. Basic and diluted net loss per share was
$(0.83) for the year ended December 31, 2008 versus $(3.00) at December 31,
2007.
The revenue increase in 2008 from 2007 was primarily due to the acquisition
of five veterinary hospitals during the first quarter of 2007 and one
acquisition in the third quarter of 2008. The increase in net loss and loss per
share was primarily a result of expenses associated with relocating the
Company's headquarters from San Jose, California to Brentwood, Tennessee,
developing a new executive and corporate staff in Brentwood, and recognizing the
loss related to the impairment of goodwill and intangible assets. Additionally,
the Company incurred increased interest expense as a result of one-time charges
taken in conjunction with pre-paying the Fifth Street loans.
For the year ended December 31, 2007, net revenue was $60.3 million, an
increase of 245.6% over 2006. Revenues increased primarily due to the purchase
of fourteen hospitals in 2006 and the additional 5 hospitals acquired in the
first quarter of 2007. Basic and diluted net loss per share was $(3.00) for the
year ended December 31, 2007 versus a loss of $(0.53) at December 31, 2006. The
net loss for the year ended December 31, 2007 was $12.4 million, an increase
from 2006 of 561.9%, primarily as a result of expenses associated with the
merger with Echo and the increased expenses associated with expanding the animal
hospital administrative operations to support the increased acquisitions.
Cash used in operations for 2008 was $11.7 million compared to cash used in
2007 of $2.6 million. The use of cash in 2008 was primarily due to the pay down
of approximately $10.0 million of working capital deficit of PVGI on the date of
the Merger. Cash used in investing activities during 2008 was principally for
the acquisition of Valley Animal on July 1, 2008 and for purchases of property
and equipment for our various animal hospitals. Cash provided from financing
activities was principally from the $36.4 million of net proceeds from the IPO
that were received as a result of the merger with PVGI, which was partially
offset by the $16.2 million payoff of the Fifth Street loans.
Cash used in operations for 2007 was $2.6 million compared to cash used
during 2006 of $0.9 million. The use of cash in 2007 was due primarily to the
increase in corporate selling, general, and administrative expenses attributable
to professional expenses associated with the merger with Echo, and in the
increased expenses associated with developing the corporate staff. The principal
use of our cash for investing activities was for the acquisition of six
veterinary hospitals during the year, including the South Bay facility. Cash was
provided from financing activities principally by the issuance of $14.9 million
from the loans with Fifth Street and $13.6 million from the issuance of Series B
convertible stock.
We had a working capital deficit of $7.2 million at December 31, 2008 as
compared to working capital deficit of $10.0 million at December 31, 2007. The
December 31, 2008 working capital was favorably impacted by the $36.4 million of
net proceeds received from the Merger.
Results of Our Operations
Fiscal year 2008 compared to fiscal year 2007
(in millions, except percentages)
Revenue
Continuing Operations:
For The Years Ended
December 31,
%
2008 2007 Change
Revenue $ 68.3 $ 60.3 13.3 %
|
Revenues increased $8.0 million, or 13.3%, during 2008 as compared to 2007. The revenue increase was due to having twelve months of revenue in 2008 from the five veterinary hospitals acquired in the first quarter of 2007 (not including South Bay) as well as six months of results from Valley Animal, which was acquired in July 2008, as summarized below:
Comparative Analysis
%
2008 2007 Change
Same-store revenue (1) $ 37.5 $ 37.5 (0.2 )%
Net acquired revenue (2) 30.8 22.8 35.5 %
Total $ 68.3 $ 60.3 13.3 %
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(1) Same-store revenue was calculated using animal hospital operating results for the animal hospitals that we owned as of January 1, 2007.
(2) Net acquired revenue represents the revenue from those five animal hospitals acquired after January 1, 2007 (not including South Bay). Fluctuations in net acquired revenue occurred due to the volume, size and timing of acquisitions.
Same-store revenues remained fairly consistent year over year, with a slight decrease in overall foot traffic to our clinics; however, revenue per invoice slightly increased, which partially offset the decrease in foot traffic.
Discontinued Operations:
For The Years Ended
December 31,
%
2008 2007 Change
Revenue $ 1.3 $ 2.2 (42.0) %
|
Revenues decreased $0.9 million, or 42.0%, during 2008 as compared to 2007.
The revenue decrease was primarily due to a loss of key veterinarians coupled
with increased competition in the area of South Bay. Management made the
decision to close South Bay in the fourth quarter of 2008. See Note 17 in the
notes to the consolidated financial statements for further discussion on South
Bay.
Direct Costs
Continuing Operations:
For The Years Ended
December 31,
%
2008 2007 Change
Total direct costs $ 64.5 $ 56.5 14.3 %
Gross Margin as a percentage of total net revenue
from continuing operations 5.5 % 6.4 %
|
Direct costs increased $8.1 million, or 14.3%, in 2008 as compared to 2007
primarily due to the Company having a full twelve months of direct costs
incurred in 2008 related to the 5 acquisitions that were made in the first
quarter of 2007 (not including South Bay) and to the acquisition of Valley
Animal, which was purchased in July 2008.
Same-store direct costs decreased $0.8 million year over year partially as a
result of the Company centralizing its purchasing of medical and pet supplies
during 2008, which allowed the Company to begin realizing advantageous pricing
from economies of scale. Further decreasing same-store direct costs was a
decrease in hospital staff costs as the Company merged six of its existing
animal hospitals into three locations, which allowed the Company to avoid
certain duplicative costs within hospitals in similar geographic regions.
Discontinued Operations:
For The Years Ended
December 31,
%
2008 2007 Change
Total direct costs $ 1.9 $ 2.6 (29.2) %
Gross Margin as a percentage of net revenue from
discontinued operations (43.4 )% (17.7) %
|
Direct costs from discontinued operations decreased $0.8 million, or 29.2%, in 2008 as compared to 2007. The decrease in direct costs year over year was primarily due to the timing of the closure of the facility, which occurred in early November 2008. Further reducing direct costs were lower payroll costs after the loss of key veterinarians in 2007, lower cost of goods sold due to the centralization of purchasing in 2008, and no amortization expense from intangible assets being incurred in 2008 since the Company recorded a one-time impairment charge in 2007 to write-off the full value of the intangible assets.
Selling, General and Administrative
For The Years Ended
December 31,
%
2008 2007 Change
Selling, general and administrative $ 19.0 $ 12.7 50.1 %
As a percentage of total net revenue from
continuing operations 27.9 % 21.0 %
|
The increase is selling, general and administrative of $6.4 million or 49.9%
for 2008 over 2007, was largely due to the $4.6 million one-time impairment
charge recorded for goodwill and intangibles at two of our hospitals. Further
increasing our expenses were duplicative staff costs incurred during the first
quarter of 2008 as the Company moved its headquarters to Brentwood, Tennessee
from San Jose, California, the build-out of the Company's infrastructure as a
result of the Merger and our public company reporting responsibilities, the
$0.5 million non-cash impairment charges taken in the third and fourth quarter
of 2008 related to the Assets Held for Sale, and increased non-cash stock
compensation expense, offset by the substantial decrease in professional fees
that were largely incurred in 2007 in preparation for the Merger.
In 2007, the Company also had recorded a $3.7 million one-time impairment
charge for the goodwill and intangibles assets at South Bay, which has been
recorded in the loss from discontinued operations in the accompanying
consolidated statement of operations.
Interest income
For The Years Ended
December 31,
%
2008 2007 Change
Interest income $ 0.3 $ 0.1 192 %
As a percentage of total net revenues from
continuing operations 0.5 % 0.2 %
|
Interest income in 2008 was $0.3 million compared to $0.1 million in 2007,
resulting from larger cash balances on hand at banking institutions in the first
half of 2008 as a direct result of the $36.4 million in net proceeds received
through the Merger in January 2008.
Interest Expense
For The Years Ended
December 31,
%
2008 2007 Change
Interest expense $ 4.6 $ 3.8 18.4 %
As a percentage of total net revenues from
continuing operations 6.7 % 6.4 %
|
Interest expense increased by $0.7 million in 2008 compared to 2007, which
was primarily attributable to one-time charges incurred in 2008 related to the
Company paying off all loans with Fifth Street in June 2008, including a
$1.4 million charge to interest expense to eliminate the debt discounts
associated with the loans, a $0.2 million charge related to the write-off of the
debt amendment costs incurred in February 2008, and a $0.2 million charge to
interest expense resulting from a prepayment penalty that was incurred on the
payoff of the $12 million loan. These costs were partially offset by lower
interest expense in 2008 on the outstanding principal of the Fifth Street loans
themselves due to the payoff in June 2008 as well as lower interest expense
incurred on the convertible notes that were outstanding as of 2007, as
approximately $8.3 million of the outstanding notes were converted to common
stock in conjunction with the Merger.
Fiscal year 2007 compared to fiscal year 2006
(in millions, except for percentages)
Revenue
Continuing Operations:
For The Years Ended
December 31,
%
2007 2006 Change
Revenue $ 60.3 $ 17.4 246 %
|
Revenues increased $42.9 million, or 246%, during 2007 as compared to 2006. The revenue increase was primarily due to the revenues associated with the nineteen veterinary hospitals (not including South Bay) acquired subsequent to January 1, 2006 as summarized below:
Comparative Analysis
%
2007 2006 Change
Same-store revenue (1) $ 12.1 $ 11.3 7 %
Net acquired revenue (2) 48.2 6.1 690 %
Total $ 60.3 $ 17.4 246 %
|
(1) Same-store revenue were calculated using animal hospital operating results for the six animal hospitals that we owned for the full 12 months from the beginning of each applicable period.
(2) Net acquired revenue represents the revenue from those nineteen animal hospitals acquired on or after January 1, 2006. Fluctuations in net acquired revenue occurred due to the volume, size and timing of acquisitions.
Same-store revenue growth resulted from both increased visits and pricing.
Prices were reviewed periodically throughout the year for each hospital and
adjustments were made based on market considerations, demographics and our
costs.
Discontinued Operations:
For The Years Ended
December 31,
%
2007 2006 Change
Revenue $ 2.2 $ - - %
|
Revenues increased $2.2 million, during 2007 as compared to 2006. The revenue
increase was due to South Bay being acquired in February 2007.
Direct Costs
Continuing Operations:
For The Years Ended
December 31,
%
2007 2006 Change
Total direct costs $ 56.5 $ 15.5 264 %
Gross Margin as a percentage of total net revenue
from continuing operations 6.4 % 11.1 %
|
Direct costs increased $41.0 million, or 264%, in 2007 as compared to 2006. The increase in direct costs was primarily due to the costs associated with the nineteen veterinary hospitals acquired since January 1, 2006.
Discontinued Operations:
For The Years Ended
December 31,
%
2007 2006 Change
Total direct costs $ 2.6 $ - - %
Gross Margin as a percentage of net revenue from
discontinued operations (17.7) % - %
|
The increase in direct costs related to discontinued operations was due to South Bay being acquired in February 2007.
Selling, General and Administrative
For The Years Ended
December 31,
%
2007 2006 Change
Selling, general and administrative $ 12.7 $ 3.4 278 %
As a percentage of total net revenue from
continuing operations 21.0 % 18.9 %
|
Selling, general and administrative expenses increased by $9.3 million or
278% for 2007 compared to 2006, resulting primarily from increases in corporate
staff and costs of accounting fees associated with closing the Merger.
We expanded our corporate executive, administrative and accounting staff as a
result of the acquisitions that occurred during 2007. The increase in the
accounting staff, to a large part, was done through the use of temporary workers
and consultants, which resulted in a higher cost than if it had been done
through permanent staff. In total, the increase in the corporate salaries,
including benefits and the cost of consultants and temporary workers, was
$3.7 million over the comparable period in 2006.
In order to complete the Merger, we incurred professional fees expense for
the audits of twenty-one of our veterinary hospital for periods of up to three
years prior to our acquisition. The cost of the audits of our consolidated
results for 2004, 2005 and 2006 and the quarterly reviews of the 2007
consolidated results accounted for $3.2 million of the $9.3 million increase in
selling, general and administrative expenses over the comparable period in 2006.
In 2007, the company also had recorded a $3.7 million one-time impairment
charge for the goodwill and intangibles assets at South Bay, which has been
recorded in the loss from discontinued operations in the accompanying
consolidated statement of operations.
Interest income
For The Years Ended
December 31,
. . .
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