vcfi fund i dec-shortversion

8/14/2019 VCFI Fund I Dec-Shortversion

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CONFIDENTIAL

DocumentDate

This report is solely for the use of client personnel. No part of it may becirculated, quoted, or reproduced for distribution outside the clientorganization without prior written approval from McKinsey & Company.This material was used by McKinsey & Company during an oralpresentation; it is not a complete record of the discussion.

Working Draft3/2004 5:15:30 PM Eastern Standard Time

4:24:16 PM Eastern Standard Time

Investing in diagnostics so vets can focus on pets

VCFI - Vets Can Focus, Investments LLCA strong investment opportunity in the

veterinary diagnostics industry


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2

Unit of measure

* FootnoteSource: Source

WorkingDraft-LastModified4/13/20045:15:30PM

Printed4/13/20044:24:16PM

Listening to opportunity knocking

Pet diagnostics ismirroring growth of human diagnosticMRI & CT industry-Minus the drawbacks!

Huge and increasingdemand at hospitals

Serendipity, timing-PetsDx Relationship


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3

Unit of measure



Printed4/13/20044:24:16PM

PetsDx success, more than doubling

Growth exceeding goalsMRI/CT Centers more thandoubling projections

Centers breakingeven at 12 months

Collocations start withguaranteed volume

2009 revenue growth continues

PetsDx Growth

($ thousands)


4/154

Unit of measure



Printed4/13/20044:24:16PM

Blue ocean business opportunity

Pet care market is large($24 Billion in 2006) andgrowing (7% annually)

Fragmented marketplaceNo single entity accounts for more than5% of the Vet hospital industry

Competition is limited, lowquality & unorganized


5/155

Unit of measure



Printed4/13/20044:24:16PM

Demand for veterinary diagnostics

Recession resistantOn average, pet owners surveyedwould spend $688 if their pet had a75% chance of being cured

Diagnostics critical andbecoming more so..Diagnostics becoming standard,increasing vet specialization, and

convenient availability shouldincrease procedure volumes

* Sources: American Veterinary Medical Association (AVMA), theAmerican Animal Hospital Association (AAHA), and the Association of American Veterinary Medical Colleges (AAVMC)


6/156

Unit of measure



Printed4/13/20044:24:16PM

Per-site modeled projections for full center

Key assumptions (1 st full year)

RevenuesInitial pricing per study $1,050MRI volume (EOY)CT volume (EOY)Growth rate 13%-33%

CostsStaffing per site 4 FTEsSalaries (fully loaded) $260,000Capital costs (debt financed) $375,000

Service contracts $100,000Variable costs $15,000

Net Sales 1,406(Cost of Goods Sold) (46)

Gross profit 1,360

Operating expensesSalaries & benefits (372)Office expenses (rent, equip,office supplies, insurance,etc.) (190)Service contracts (scanner) (100)Depreciation (85)TOTAL OP EXPENSES (747)

Net income 613

EBITDA 701

Projected Y5 Income Statement(1 st site only 000s)

* Full-service centers assume we handle all staffing, including veterinarian;limited sites assume sharing of staff with partners

35/month18/month

* limited centers plan on about initial volume


7/157

Unit of measure



Printed4/13/20044:24:16PM

Actual Monthly Volume Trends trailing 12 mo.

Center 10-08 11-08 12-08 1-09 2-09 4-09 5-09 6-09 7-09 8-09 9-09 10-09 11/09

Center 1 (full) 85.5 73.5 62 69 90.5 88 69.5 90 83 87.5 77.5 56 59

Center 2 (full) 52 53.5 36.5 35.5 50 69 49 45.5 60.5 34 53 52 56

Center 3(limited)

n/a n/a n/a 12.5 7 14 16 11.5 20.5 18.5 18.5 16 20.5

Center 4(limited)

n/a n/a n/a 1 9 8.5 6 8.5 13.5 9.5 10 5.5 13

All center totals

137.5 127 98.5 104.5 140.5 157 118.5 135.5 177.5 149.5 159 129.5 148.5

Slowdown months highlighted, seasonality suggested; Very strong months in green

Surprising sustained volumes during anticipated downtime - around thanksgivingSustained growth - with minimal marketing efforts in place, opportunity to raise volumes

Volumes being reported and reviewed daily

Marketing efforts just now ramping up

By aggregated procedure volume


8/158

Unit of measure



Printed4/13/20044:24:16PM

Projected Quarterly Net Income of PetsDx Full Diagnostic Center

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

500,000

600,000

Qtr 1-1

Qtr 1-2

Qtr 1-3

Qtr 1-4

Qtr 2-1

Qtr 2-2

Qtr 2-3

Qtr 2-4

Qtr 3-1

Qtr 3-2

Qtr 3-3

Qtr 3-4

Qtr 4-1

Qtr 4-2

Qtr 4-3

Qtr 4-4

Qtr 5-1

Qtr 5-2

Qtr 5-3

Qtr 5-4

Qtr 6-1

Qtr 6-2

N e

t I n c o

Conservative Case

Projected Case

Actual Case

Optimistic Case

Cash flow from a PetsDx diagnostic center

Breakevenvolume

(


9/159

Unit of measure



Printed4/13/20044:24:16PM

Projected Profit Distributions from PetsDX Operating LLC to VCFI Fund I

(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

Qtr 1-1

Qtr 1-2

Qtr 1-3

Qtr 1-4

Qtr 2-1

Qtr 2-2

Qtr 2-3

Qtr 2-4

Qtr 3-1

Qtr 3-2

Qtr 3-3

Qtr 3-4

Qtr 4-1

Qtr 4-2

Qtr 4-3

Qtr 4-4

Qtr 5-1

Qtr 5-2

Qtr 5-3

Qtr 5-4

Qt6-1

Conservative Case

Projected Case

Actual Case

Optimistic Case

Quarterly profit distributions from a PetsDxdiagnostic center to VCFI, Fund I

Initial investment in new full center of $220k

Principal returned(Optimistic and

actual Case)

Principal returned(Projected case)

Principal returned(Conservative Case)

Breakeven volume is hitand distributions begin


10/1510

Unit of measure



Printed4/13/20044:24:16PM

VCFI Fund I raising up to $1.3MTotal investment receives 60% of fund valueVCFI parent company retains 40% of fund valueInvestors get first out distribution rightsPreferred terms for >$500k commitment

Minimum investment of $50,000 $50,000 translates into 2.31% of total VCFI Fund I equity interest $100,000 already committed

Right of first refusal in VCFI Fund II* Distributions anticipated to start in year 2

Investors overview


11/1511

Unit of measure



Printed4/13/20044:24:16PM

Investors return projections

INVESTMENT: $1.3M Optimistic Actual Case

Based on currentgrowth to date

Pro-forma Projections Conservative

Ramp ( months to breakeven @ 59 scans) 1239% ann. Growth

1235% ann. growth

1825% ann. growth

24(20% ann. growth)

Distributions to Investors - year 2 453,000 568,000 146,000 20,000

Distributions to Investors - year 3 1,325,000 967,000 833,000 134,000

Distributions to Investors - year 4 1,403,000 1,036,000 711,000 587,000

Distributions to Investors - year 5 2,136,000 1,724,000 841,000 665,000

Distributions to Investors - year 6(with exit)

48,983,000 29,434,000 10,885,000 4,497,000

LP Exit by selling centers(ebitda Multiple)

15x 10x 7.5x 5x

Annualized (IRR) returns with no exit 78% 68% 38% 13%

Annualized (IRR) returns with exit 135% 115% 73% 40%

* Estimates only* Optimistic scenario accounts for marcom expenses in yr 2* First out investor distributions included

* Does not include variability of actual timing of center launches


12/1512

Unit of measure



Printed4/13/20044:24:16PM

Investment structure: VCFI Model

VCFI, LLC

InvestmentManagement

Company

VCFI Fund I

$1,300,000

Membership Interests60% Investors40% VCFI LLC

(future)VCFI Fund II

TBDFor investment in

PetsDx centers 6-10

PetsDx

Center 1

PetsDxCenter 2

PetsDx

Center 3

PetsDxCenter 4

PetsDx

Center 5

Investors Rightof First RefusalTo participate

First Out distributionsof cash flow & gains

for VCFI Fund I Investors

Capital

Qualifiedcenter

Y/N

Diligence

Invest $Monitor

advisorysupport


13/1513

Unit of measure



Printed4/13/20044:24:16PM

Exit strategy: investment returns

Healthy cash flow distributionsFlows begin year 2, growing so that per center earnsover $700k per year to investors by end of year 5

Exit multiples (5-to-15 x EBITDA)Largest public, VCA Antech (NASDAQ: WOOF), hasrevenue of $1.01 billion, market cap of $3.2 billion,enterprise value $3.55 billion, 431 centers, EBITDAof $217MM. At 431 centers, VCA has 2% of market.

Several exit options & candidates:Petwatch, WOOF, IDXX, Rollups, (or be Acquirer)


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14

Unit of measure


W

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Management Matchup

PetsDx Management : Ex-Navy Seals

Currie P. Crookston, CEO Director of Marketing , Medrad

Deep experience in human MRI and diagnosticimaging market,

business development Pet Specific IP development solved coil problem

MBA - U.S. Naval Academy, Virginia U.S. Navy SEAL

Glenn P. Matamoros, President McKinsey & Company, Engagement Manager

Experienced in optimization of healthcare serviceoperations

strategy and product development

MBA - The Wharton School U.S. Navy SEAL

VCFI Managers: Entrepreneurs Michael Beirne Co-Manager

The Acceleration Group, Founder Global Angel Investor network

Serial Entrepreneur Founder of businesses inecommerce, security, web tech, and others

CEO & Exec Coach CEO of up to 100employees; has coached/facilitated 100s of CEOs

Private Equity Investor - Investments includereal estate, retail, service, technology

BSME, Engineer, Univ. TX; US Army Officer MIT Entrepreneurial Masters Program

Tom Heffernan Co-Manager MMR MRI Imaging Board member- led much

of expansion of MRI Scanning enterprise from2 to 23 Facilities

ZOE, CEO - Retail service chain CFO & Advisor to several companies Serial Entrepreneur & Investor BA, UConn; US Army Officer


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Unit of measure


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orkingDraft-LastModified4/13/20045:15:30PM

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Lets dig in to the details of how this works

We are happy to meet to get much more in the weedswith more detailed data, analysis, and strategic plans

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